Option Premiums in Mineral Asset Pricing: Are They Important?

Graham Davis

Land Economics, 1996, vol. 72, issue 2, 167-186

Abstract: Mineral assets consistently trade at market values greater than their discounted cash flow (DCF) values. One explanation is that DCF analysis does not and cannot incorporate the asset value generated by asset management under uncertainty. This paper surveys the attempts to empirically quantify the "option premium" associated with optimal mineral asset management. The option premium appears to explain at most half of the observed gap between DCF value and market value, and adds at most 3 percent to a mineral asset's gross worth. Asset management option premiums therefore have only a second-order impact on mineral asset pricing.

Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:uwp:landec:v:72:y:1996:i:2:p:167-186

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