Abstract

We present the results of implementing a real options model for valuing an investment project that expands production capacity and/or modifies unit costs of a copper mine. The model and its implementation addresses the three requirements we find necessary to increase the use of the real option methodology by the practitioner community: a user-acceptable stochastic model for commodity prices with mean reversion, a customized real asset model which includes the main managerial flexibilities of opening-closing production or delaying investments, and a user-friendly computer implementation. A case study shows that a significant fraction of investment value may be due to the flexibility of delaying investment, value that decreases as copper prices increase. Critical investment prices are analyzed.