A comparison of pricing models for mineral rights: Copper mine in China

Chang Xiao, Ionut Florescu and Jinsheng Zhou

Resources Policy, 2020, vol. 65, issue C

Abstract: Purchasing mineral rights to allow a corporation to extract minerals is a large investment and potentially very profitable. Generally, the assessment and valuation process is conducted by an official organization at the nation's governmental level. From a corporation perspective it is thus crucial to calculate an accurate value of the right to exploit a mineral product or what we call “mineral right”. In this work we compare three valuation methods and we compare their results in case of pricing a copper mine in China. We explain and apply the official valuation method based on a simple Discounted Cash Flow (DCF). We present what we believe is a more accurate valuation based on the term structure of future mineral prices: the so called modified Discounted Cash Flow (mDCF) method. Finally, we contrast with a method based on real options which considers the mineral right as a swaption. We implement two real options models: the classical Black model and a more modern Miltersen and Schwartz model. We highlight and discuss differences and commonalities between the three valuation methods. Finally, we make a recommendation for future financial reporting based what we learn from the three methods.

Keywords: Mineral rights; Mining valuation; Futures; Real options (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:65:y:2020:i:c:s0301420719300236

DOI: 10.1016/j.resourpol.2019.101546

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