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Real Options Valuation of Coal Mining Project Using Binomial Lattice Model

Ikhsani, Setiady and Nainggolan, Yunieta (2021) Real Options Valuation of Coal Mining Project Using Binomial Lattice Model. In: The 3rd International Conference on Business and Banking Innovations, 6 & 7 March 2021, Surabaya.

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Abstract

GMB Mine coal project has postponed from 2016 and plan to commence in 2020 with total potential coal 106.79 million tonnes as Base Scenario. However, the coal price continues to drop to US$33/t. The decrease production scenarios have developed to reduce the possibility of loss and also return on capital can be estimated properly. The existing method is Discounted Cash Flow valuation compare to Real options valuation with binomial lattices model that gives flexibility using options. DCF valuation with RADR 9.09% resulted the Low Scenario as the highest NPV as US$11.28 million. While ROV with binomial lattice model result US$67.80 million. This result show that DCF valuation tend to understate the value of assets and unable to properly capture the value that are uncertain at the initial decision. Strategic managerial flexibility has undertaken to evaluate embedded options that are relevant to anticipate the decline of coal price. The highest NPV resulted Base Scenario with combining option to defer the investment for one year and abandon the project that obtained US$68.86 million. The expanded value from managerial flexibility obtained US$57.58 million if the initial coal price to commence the mine is between range US$18/t – US$34.3/t. Keywords: Real options valuation, Binomial lattice, Discounted cash flow, Managerial flexibility

Item Type: Conference or Workshop Item (Paper)
Subjects: 600 - TECHNOLOGY > 658 - GENERAL MANAGEMENT > 658.15 - FINANCIAL MANAGEMENT
Divisions: ICOBBI (International Conference of Business and Banking Innovations)
Depositing User: Perpustakaan Universitas Hayam Wuruk Perbanas Surabaya
Date Deposited: 11 Aug 2021 05:46
Last Modified: 11 Aug 2021 19:50
URI: http://eprints.perbanas.ac.id/id/eprint/3967

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