An Integrated Valuation and Risk Modelling approach to Dynamic DCF and Real Options
April 20 to 22, 2022
Day 1 – Morning.
Introductory comments. A project valuation framework. Valuation fundamentals.
- Creating value in the natural resource industries
- Three elements of a valuation model
- Project structure – cash flow, design flexibility, stakeholders
- Project uncertainty – financial, technical, execution
- Measuring investment quality – NPV (DCF and real options), IRR, MIRR, PI
- Measuring investment risk – cash flow CoV, event probabilities, expected / conditional losses
- A technical / financial risk investment framework
Example: Blackwater Gold Project – a static investment analysis of the New Gold and Artemis design proposals
Day 1 – Afternoon.
Metal price models. Simulating metal prices.
- Characterizing commodity price uncertainty
- Financial market information vs metal price forecasts
- Stochastic price models for precious metals and base metals
- Rebuilding a corporate forecast as a stochastic price model
Example: Building a stochastic price model in Excel
- Converting a stochastic price model into Monte Carlo simulation
- Simulating metal prices with @Risk
Example: Building correlated gold and copper simulation models in Excel with @Risk
Example: Valuing a financing arrangement such as a sliding-scale NSR
Day 2 – Morning.
Analyzing projects with no flexibility.
- Modelling cash flows when there is no flexibility
- Summarizing project production and cash flow information
- Cash flow profiles
- Cumulative LOM cash flow streams
- Unit costs – mill feed, primary metal and equivalents
- Measuring risk exposure – calculating expected and conditional losses
Example: Blackwater Gold Project – dynamic investment analysis of the New Gold and Artemis design proposals
- Corporate income taxes as non-linear cash flows
Example: Blackwater Project – introducing corporate income tax
Day 2 – Afternoon.
Binomial techniques. Introduction to flexibility.
- Converting a simulation into a binomial tree
- Approximating a price process with a binomial tree
- Developing true and risk-adjusted probability price trees
Example: Building a binomial price tree in Excel
- Modelling flexible projects and types of flexibility
- Cash flow timing for flexible projects
Example: A simple binomial model valuing a mine with an abandonment option.
Day 3 – Morning.
Valuing flexible projects and assessing their risk.
- Impact of flexibility on economic benefit calculations
- Flexibility and risk exposure
- Problems with using the Black-Scholes equation to value project flexibility
- Using the Excel Binomial Real Options / DCF Valuation Add-in
Example: Blackwater Gold Project – the value and risk impact of early closure on the NewGold and Artemis designs
- Decisions trees and flexibility maps.
- Re-interpreting the Artemis Blackwater design as staged development
Example: Blackwater Gold Project – the value and risk impact of staged development on the NewGold and Artemis designs
Day 3 – Afternoon.
Valuing natural resource projects with flexibility.
- Guest lecture by Professor G Davis: Dynamic cash flow modelling in the mining industry
- Dynamic cash flow modelling frontiers – technical risk, exploration, risk management
- Course wrap-up.