Real Options Valuation in Gold Mining Projects under Multinomial Tree Approach

Abstract

Metal price, exchange rate, and operating costs are three of the most important sources of uncertainty in mining projects. In that sense, numerous research studies have been carried out to account for price uncertainty, while few others have incorporated the simultaneous effects of operating costs and price uncertainties. The purpose of this paper is to introduce the octanomial tree method to value an Australian gold mine project by adding three market uncertainties such as the gold spot price, USD/AUD exchange rate and the operative costs, under a multinomial tree approach. The proposed model combines the simplicity of the binomial tree model with the ability to deal efficiently with multiple uncertainties.