Analysis Of Risk Sharing

INTRODUCTION The economic analysis (Chapter 3), the engineering studies (Chapter 10), the credit structure (and the consequential funding sources) - Chapter 11, and the overall feasibility structure for any venture are all directed to determining one major decision element: How much and how certain is the reward for taking these risks? Risk assessment is a surprisingly weak area of analysis and is usually addressed in a checklist fashion. It is much preferable to deal within a risk system so that the inevitable tradeoffs among risks are correctly made. DEFINITION The first step toward risk definition must be to ascertain all of the risks to which a project or a company is exposed; otherwise one will remain ignorant of the possibility of a financially crippling loss until it occurs. (Carter and Crockford, 1974). However, simply stating what "risk" is can lead to debate. For example, risk could be (adapted from Vaughan, 1982): -the chance of a loss - uncertainty of loss -possibility of loss - uncertainty -dispersion of actual from expected results - probability of an outcome different from the one expected - possibility of an occurrence of an undesirable contingency -a condition in which a possibility of a loss exists. For the minerals industry financier, the last definition is probably the most appropriate. However, from a mineral company's point of view the definition might well include the possibility of not achieving the expected financial return. RISK CLASSIFICATION Risk identification will be readily agreed as the all-important first step. There are five major "branches" of risk classification. These are: -Statistical -Modellers -Checklist -Project Financing -Insurance The Statistical set discovered probability theory and any risk discussion soon deteriorates into a mathematical jungle (Megill, 1977; Hartman, 1976; Reutlinger, 1970; and Pouliquen, 1970).Their use of terminology tells its own story: coin toss (binomial distribution), gamblers' ruin, delphi (oracle) techniques, monte-carlo simulations, random walks, etcetera. These techniques inadequately represent the judgements necessary in an increasingly complicated and interrelated world. The risk Modellers have turned to the computer to handle these inter-relationships but soon find barriers because of "simultaneity". Certainly the computer has its uses to conduct various analyses (marketed as "sensitivity" analyses) but very often one finds that this involves changing one or two variables at a time, all other things being equal. Unfortunately, in a modern and complex world all other things do not remain equal. The statisticians will, no doubt, jump to their own defence by citing this