Option valuation of real assets: Application to a copper mine with operating flexibility

Abstract Managerial flexibility adds value to a project, but this gain is seldom considered, because traditional evaluation methods cannot measure it. Operating flexibility, for example to save costs taking advantage of price developments, operates as an option. Contingent claims analysis, a technique based on financial option theory, takes advantage of the option-like behaviour of managerial flexibility to estimate its value. We apply this technique to a copper project comprising mining, leaching and electrowinning processes, which shows the flexibility to modify the cut off grade strategy each time copper prices change unexpectedly, following an intertemporal cut off grade optimizing model.