An Integrated Valuation and Risk Modelling approach to Dynamic DCF and Real Options

October 23 – 25, 2024

Golden, CO

2024 Course Outline

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, PI
• Measuring investment risk – cash flow CoV, event probabilities, expected / conditional losses
• A technical / financial risk investment framework

Example: Copper World Project – a static investment analysis of the Copper World project
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

Day 2 – Morning.      

Analyzing projects with no flexibility. Non-linear cash flows.

• 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: Copper World Project– dynamic investment analysis of a long-life copper project
  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.   

Introduction to flexibility. Binomial techniques. Least squares analysis of flexible cash flows

• 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
• Least squares approach to simulating flexible cash flows

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: Copper World Project – the value and risk impact of early closure at Copper World
• 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.

Example: Blackwater Gold Project – the value and risk impact of early closure on the NewGold and Artemis designs

• Dynamic cash flow modelling frontiers – technical risk and exploration
• Dynamic cash flow modelling frontiers – project finance
• Course wrap-up