Poster (EARTH)

[PE1-054] Evaluation of Rare Earth Element and Gold Deposits in Mongolia using Real Option Analysis

○Sambuudorj Erdenebat¹, Tsuyoshi Adachi¹ (1. Akita University)

Keywords:Uncertainty, Investment decision, Binomial tree modeling, Stochastic process

When valuing mineral resource project using traditional valuation methid the most important factor of the project such as costs and production rate remaining constant over lifetime irrespective of whether the commodity price increases or decreases. This is the biggest failure of traditional valuation method, especially in the current turbulent changing economic environment. Consequently, traditional valuation method is becoming less important in the extractive industry due to its inherent restriction. On the other hand Real Option valuation method has been taking into account, which can assess risk in the future from many aspects, is able to help to make decisions for investment projects.
The aim of this study investigates proper evaluation method for mineral resource projects through evaluating rare earth element and gold deposit in Mongolia considering economic uncertainty. In this research evaluation of Khotgor's REE and Ereen's gold mine project has been conducted using Real Option Valuation method which shows much greater value than DCF value. The difference between the Real Option Analysis and the Net present Value represents the value of operating or management flexibility, and that difference depends on the uncertainty level and the project profitabiliy. The value has been obtained through using Binomial tree midel which clearly illustrate a graphically stochastic characteristic of gold and rare earth element. The most famous option valuation method, Black-Sholes is utilized to examine the final result. The final result of this research intended to find out decision making whether to invest in those deposits, to wait for investment or to cancel it