Using Real Options To Manage Technical Risk In Life Of Mine Planning: Application At Chuquicamata Underground Copper Mine, Chile

Traditional risk quantification methods provide little information on the sources of risk, and tend to produce static over-conservative evaluations, which do not account for changes in the performance of the project. Capital investment decisions for large mining projects require of more complex risk evaluation models, that include the value of flexibility and the different risk levels associated with uncertainty on project variables (price, grade, dilution, production rates, among many other). In this context, Real Option Valuation (ROV) methods have proven potential to quantify the risk associated with such variables and integrate alternative scenarios and management strategies into the evaluation process. In this paper, a risk quantification model is developed, which successfully quantifies the risk associated to dilution, as a function of production rate. This model is then validated in a case study on the Chuquicamata Underground Mining Project.