Risk and Real Option Analyses in Exploration Project Portfolio Selection

By Dr. Luis A. Martínez Tipe, PhD Director General & Principal Researcher, CAIDTech Originally published: December 16, 2017

The exploration project portfolio selection ("EPPS") is a progression of "go-no-go" decisions based on successive evaluations of relevant experience and company information. Traditionally, one of the first questions asked by the corporate office of a mining company before beginning an EPPS campaign is: What size deposit (referring to tons of ore and metal grade) should be discovered to constitute an economic deposit for the company's project portfolio? An economic mineral project must generally meet both the minimum acceptable size and minimum profitability criteria when evaluated in a specific set of economic / mining conditions. These criteria are specific to each company and can have significant effects on the exploration economy. "R&O Analytics" has developed an advanced process which is based on both quantitative risk analysis and real options analysis.

Figure 1 – Left: Minimum frontier to select projects based on their expected size (mineral resource) - the size of a mining exploration project can be measured by the total anticipated LOM income of a deposit (where the size of a deposit and the extraction rate determine the mine's useful life). 

Figure 1 – Right: Minimum frontier to select projects based on their expected profitability. The profitability condition is determined by the corporate cost of capital and can be measured by rate of return.

Figure 2 – Minimum area frontier to select exploration projects accomplishing both minimum size and minimum profitability.

Figure 3 - But, this region or feasible domain is based on expected or average values. So, what would happen if these values are not realized over time?

Figure 4 - Run a quantitative risk analysis 

Figure 5 – Classify/rank projects based on uncertainty

Figure 6 - Apply different processes and techniques, e.g., real options analysis, to re-classify projects based on their potential and risk.

Any comments are welcome. Would you be interested in attending to a course/workshop about this topic? For more information about this process feel free to write to: contact@randoanalytics.com Editor's note: This article was written in 2017. Since then, CAIDTech has developed and applied the probabilistic frameworks described here across multiple mine projects in Latin America and Australia, integrating geological variability, operational dynamics and economic uncertainty into a single quantitative model. Learn more at [caidtechnology.com]