Project Cash Flows At Risk In Strip Coal Mining

At present, discounted cash flow analysis is generally accepted as the preferred method of valuation of mine projects in surface coal mining. One of the major reasons for that is its ability to take into account the time effect of money over the life-of-mine. As a looking-forward method, it requires forecasts be made with regard to economic, technological, technical, geological, and environmental conditions that will prevail in the future. All forecasts are inherently uncertain as they are a function of the uncertainty of all variables of the discounted cash flows analysis. This indicates that the only alternative for modeling the uncertainty in the project evaluation is the development of adequate risk models to serve the decision-making process. The paper offers a model of project cash flows at risk in strip coal mining, which is an integrated corporate risk management solution. The model is based on a stochastic approach that provides the answer to the question about how large is the deviation between stochastic cash flows and the planned value (or that used in the budget) at each time step of the discounted cash flows analysis, that is due to the uncertainty in the model variables. A solution is worked out for the allowable range of the stochastic cash flows variation that determines the probability of achieving the planned value of a mine project. The Monte Carlo simulation technique is used to model the stochastic behavior of the project variables. A case study of an opencast coal mine project is provided to illustrate the applicability of the risk model. The results obtained provide a new understanding of the mine project risk as a component of the project discount rate.