Title: Comparative analysis of discounted cash flow and real options techniques on a gold mining project

Authors: Amtenge Penda Shivute

Addresses: Department of Civil and Mining Engineering, University of Namibia, Namibia

Abstract: This study investigates the effectiveness of two valuation techniques, discounted cash flow (DCF) and real options analysis (ROA), in assessing the economic viability of mineral projects. While DCF is a widely used method, its deterministic nature and neglect of uncertainty and managerial flexibility pose limitations. In contrast, ROA incorporates uncertainty and managerial flexibility, offering a more comprehensive approach to valuation. This research applies both techniques to an underground mining project with two extraction scenarios. Results reveal that ROA consistently provides higher net present values (NPVs) compared to DCF, highlighting the significance of considering uncertainty and managerial flexibility in project valuation. Specifically, scenario 1 demonstrates an NPV increase from US$9.60 million (DCF) to US$17.34 million (ROA), while scenario 2 shows an NPV increase from US$11.35 million (DCF) to US$21.52 million (ROA). These findings underscore the importance of employing ROA to value flexibility and make informed investment decisions.

Keywords: discounted cash flow; DCF; net present value; NPV; real options analysis; ROA; binomial lattice; flexibility.

DOI: 10.1504/IJMME.2024.138731

International Journal of Mining and Mineral Engineering, 2024 Vol.15 No.1, pp.91 - 109

Received: 20 Jun 2023
Accepted: 08 Nov 2023
Published online: 29 May 2024 *

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