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Abstract
When a mining company begins extraction from a finite resource, it does so in the presence of numerous uncertainties. One key uncertainty is the future price of the commodity being extracted, since a large enough drop in price can make a resource no longer cost-effective to extract, resulting in the mine being closed down. By specifying a stochastic price process, and implementing a financial-type model which leads to the use of partial differential equations, this paper creates the framework for efficiently capturing the probability of a mine remaining open throughout its planned extraction period, and derives the associated expected lifetime of extraction. An approximation to the abandonment price is described, which enables a closedform solution to be derived for the probability of operational success and expected lifetime. This approximation compares well with the full solution obtained using a semi-Lagrangian numerical technique. © 2011 The Royal Society.
Original language | English |
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Pages (from-to) | 244-263 |
Number of pages | 19 |
Journal | Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences |
Volume | 467 |
Issue number | 2125 |
DOIs | |
Publication status | Published - 8 Jan 2011 |
Keywords
- Feynman-Kac
- Finite resource valuations
- Real options
- Stochastic partial differential equations
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Dive into the research topics of 'The expected lifetime of an extraction project'. Together they form a unique fingerprint.Projects
- 1 Finished
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SPRIng: Sustainability Assessment of Nuclear Power: An Integrated Approach
Azapagic, A., Anderson, K., Butler, G., French, G., Howell, S. & Stoker, G.
1/03/08 → 31/07/11
Project: Research