Valuation with Simulation of Options on and in a System. Capital Investment and Engineering Flexibility in the development of the Antamina mine (Peru)

Transcription

1 Valuation with Simulation of Options on and in a System Capital Investment and Engineering Flexibility in the development of the Antamina mine (Peru) Michael Benouaich Slide 1 of 16 Note This presentation is based on the case developed by Peter Tufano and Alberto Moel from the Harvard Business School. It contains simplifications. The figures appearing here differ from those presented by Tufano and Moel. They reflect the assumptions of the authors of this presentation about the treatment of uncertainty and the cash flows projection. Michael Benouaich Slide 2 of 16

2 Project Description: Antamina State-owned copper and zinc mine in Peru, ~480km (300miles) north of Lima Privatization in 1996: call for bids. Small upfront payment + promise to develop Little reliable geological information Geological study to take two years, start after the bidding, be available before construction Proceed with development if survey suggested the mine could be developed economically Michael Benouaich Slide 3 of 16 Project Time Line Develop: CapX (years 2-5) Close mine Bid & Win Explore (years 0-2) Year 2 Walk away Produce Metal (year 5-closure) Michael Benouaich Slide 4 of 16

3 Sources of Uncertainty Revenues Mine s life Future prices of zinc and copper Quantity of ore Costs Operation expenses Capital Expenditures Uncertainty treatment Deterministic Stochastic process (Lattice, Years 0-2) Probability distributions Monte Carlo simulation Michael Benouaich Slide 5 of 16 Monte Carlo Simulation 1. Probability values for significant factors 2. Random selection of factors according to their pdf 3. Determine NPV for each combination 4. Repeat process and obtain NPV distribution Michael Benouaich Slide 6 of 16

4 Sources of Uncertainty Price and quantity uncertainty prevails only during the first two years Price risk is assumed to be eliminated in year 2 by entering forward contracts to sell the output of the mine All other sources of uncertainty are modeled in the Monte Carlo simulation after year 2 Simulation result: Realization of expected NPV Michael Benouaich Slide 7 of 16 Results: Base Case No Options Crystal Ball Student Edition Not for Commercial Use 10,000 Trials.046 Forecast: NPV (base case) Frequency Chart Mean = $ = $550 M ($1,092.85) $ $2, $4, $6, Michael Benouaich Slide 8 of 16

5 Simulation Results: Option to Abandon Crystal Ball Student Edition Not for Commercial Use 10,000 Trials.046 Forecast: NPV (base case) Frequency Chart Mean = $ = $ ($1,092.85) $ $2, $4, $6, Certainty is 75.61% from $0.00 to $6, Michael Benouaich Slide 9 of 16 Valuation: Option to Abandon Option to abandon: $819 - $550 = $269 million Michael Benouaich Slide 10 of 16

6 Engineering Flexibility Add flexibility, add value? Starting engineering study earlier and faster would allow you to shorten construction to two years and ramp up production faster What would you pay for this option? Michael Benouaich Slide 11 of 16 Simulation Results: Early Development Crystal Ball Student Edition Not for Commercial Use 10,000 Trials.046 Forecast: NPV (early development) Frequency Chart Mean = $ = $ ($1,160.61) $ $2, $4, $6, Michael Benouaich Slide 12 of 16

7 Valuation: Option for Early Development Early Development Option (alone): $567 - $550 = $17 million Would easily justify several million $ spent early on design work This real option would in fact be compounded with the option to abandon Generally not additive! Michael Benouaich Slide 13 of 16 Simulation Results: Both Options Crystal Ball Student Edition Not for Commercial Use 10,000 Trials.046 Forecast: NPV (early development) Frequency Chart Mean = $ = $836 ($947.79) $ $2, $4, $5, Certainty is 76.09% from $0.00 to $5, Michael Benouaich Slide 14 of 16

8 Valuation: Both Options Together Value of both Options together: $ 836- $550 = $286 million Incremental Value of Early Development Option : $ 836- $819 = $17 million Appears additive, but actually a difference. In this case rounded out and insignificant Michael Benouaich Slide 15 of 16 References Tufano, P., Moel, A., (1997) Bidding for Antamina, Harvard Business School Case number , Rev. Sept. 15. Tufano, P., Moel, A., (2000) Bidding for the Antamina Mine Valuation and Incentives in a Real Option Context, in Project Flexibility, Agency, and Competition, edited by Brennan, M. and Trigeorgis, L., Oxford University Press Hertz, D. (1979) Risk Analysis in Capital Investment, Harvard Business Review September-October, pp Michael Benouaich Slide 16 of 16