Strategic project evaluation for open pit mining ventures using real options and allied econometric techniques

Open pit mine operations are complex businesses that demand a constant assessment of risk. This is because the value of a mine project is typically influenced by many underlying economic and physical uncertainties, such as metal prices, metal grades, costs, schedules, quantities, and environmental issues, among others, which are not known with much certainty at the beginning of the project. Hence, mining projects present a considerable challenge to those involved in associated investment decisions, such as the owners of the mine and other stakeholders. In general terms, when an option exists to acquire a new or operating mining project, , the owners and stock holders of the mine project need to know the value of the mining project, which is the fundamental criterion for making final decisions about going ahead with the venture capital. However, obtaining the mine project’s value is not an easy task. The reason for this is that sophisticated valuation and mine optimisation techniques, which combine advanced theories in geostatistics, statistics, engineering, economics and finance, among others, need to be used by the mine analyst or mine planner in order to assess and quantify the existing uncertainty and, consequently, the risk involved in the project investment. Furthermore, current valuation and mine optimisation techniques do not complement each other. That is valuation techniques based on real options (RO) analysis assume an expected (constant) metal grade and ore tonnage during a specified period, while mine optimisation (MO) techniques assume expected (constant) metal prices and mining costs. These assumptions are not totally correct since both sources of uncertainty—that of the orebody (metal grade and reserves of mineral), and that about the future behaviour of metal prices and mining costs—are the ones that have great impact on the value of any mining project. Consequently, the key objective of this thesis is twofold. The first objective consists of analysing and understanding the main sources of uncertainty in an open pit mining project, such as the orebody (in situ metal grade), mining costs and metal price uncertainties, and their effect on the final project value. The second objective consists of breaking down the wall of isolation between economic valuation and mine optimisation techniques in order to generate a novel open pit mine evaluation framework called the ―Integrated Valuation / Optimisation Framework (IVOF)‖. One important characteristic of this new framework is that it incorporates the RO and MO valuation techniques into a single integrated process that quantifies and describes uncertainty and risk in a mine project evaluation process, giving a more realistic estimate of the project’s value. To achieve this, novel and advanced engineering and econometric methods are used to integrate financial and geological uncertainty into dynamic risk forecasting measures. The proposed mine valuation/optimisation technique is then applied to a real gold disseminated open pit mine deposit to estimate its value in the face of orebody, mining costs and metal price uncertainties.

Wastewater remediation options for prawn farms - Aquaculture Industry Development Initiative 2002-04.

There are many potential bioremediation approaches that may be suitable for prawn farms in Queensland. Although most share generally accepted bioremediation principles, advocacy for different methods tends to vary widely. This diversity of approach is particularly driven by the availability and knowledge of functional species at different localities around the world. In Australia, little is known about the abilities of many native species in this regard, and translocation and biosecurity issues prevent the use of exotic species that have shown potential in other countries. Species selected must be tolerant of eutrophic conditions and ecological shifts, because prawn pond nutrient levels and pathways can vary with different assemblages of autotrophic and heterotrophic organisms. Generally, they would be included in a constructed ecosystem because of their functional contributions to nutrient cycling and uptake, and to create nutrient sinks in forms of harvestable biomass. Wide salinity, temperature and water quality tolerances are also valuable attributes for selected species due to the sometimes-pronounced effects of environmental extremes, and to provide over-wintering options and adequate safety margins in avoiding mass mortalities. To practically achieve these bioremediation polycultures on a large scale, and in concert with the operations of a prawn farm, methods involving seed production, stock management, and a range of other farm engineering and product handling systems need to be reliably achievable and economically viable. Research funding provided by the Queensland Government through the Aquaculture Industry Development Initiative (AIDI) 2002-04 has enabled a number of technical studies into biological systems to treat prawn farm effluent for recirculation and improved environmental sustainability. AIDI bioremediation research in southern Queensland was based at the Bribie Island Aquaculture Research Centre (BIARC), and was conducted in conjunction with AIDI genetics and selection research, and a Natural Heritage Trust (NHT) funded program (Coast and Clean Seas Project No.717757). This report compilation provides a summary of some of the work conducted within these programs.

Finnish Short-Term Stock Returns

Functioning capital markets are a crucial part of a competitive economy since they provide the mechanisms to allocate resources. In order to be well functioning a capital market has to be efficient. Market efficiency is defined as a market where prices at any time fully reflect all available information. Basically, this means that abnormal returns cannot be predicted since they are dependent on future, presently unknown, information. The debate of market efficiency has been going on for several decades. Most academics today would probably agree that financial markets are reasonably efficient since virtually nobody has been able to achieve continuous abnormal positive returns. However, it is clear that a set of return anomalies exists, although they are apparently to small to enable substantial economic profit. Moreover, these anomalies can often be attributed to market design. The motivation for this work is to expand the knowledge of short-term trading patterns and to offer some explanations for these patterns. In the first essay the return pattern during the day is examined. On average stock prices move during two time periods of the day, namely, immediately after the opening and around the formal close of the market. Since stock prices, on average, move upwards these abnormal returns are generally positive and cause the distinct U-shape of intraday returns. In the second essay the results in the first essay are examined further. The return pattern around the former close is shown to partly be the result of manipulative action by market participants. In the third essay the focus is shifted towards trading patterns of the underlying stocks on days when index options and index futures on the stocks expire. Generally no expiration day effect was found. However, some indication of an expiration day effect was found when a large amount of open in- or at-the-money contracts existed. Also, the effects were likelier to be found for shares with high index-weight but fairly low trading volume. Last, in the forth essay the attention is turned to the behaviour of different tax clienteles around the dividend ex-day. Two groups of investors showed abnormal trading behaviour. Domestic non-financial investors, especially domestic companies, showed a dividend capturing behaviour, i.e. buying cum-dividend and selling ex-dividend shares. The opposite behaviour was found for foreign investors and domestic financial institutions. The effect was more notable for high yield, high volume stocks.

Three Essays on the Volatility of Finnish Stock Returns (summary section only)

First, in Essay 1, we test whether it is possible to forecast Finnish Options Index return volatility by examining the out-of-sample predictive ability of several common volatility models with alternative well-known methods; and find additional evidence for the predictability of volatility and for the superiority of the more complicated models over the simpler ones. Secondly, in Essay 2, the aggregated volatility of stocks listed on the Helsinki Stock Exchange is decomposed into a market, industry-and firm-level component, and it is found that firm-level (i.e., idiosyncratic) volatility has increased in time, is more substantial than the two former, predicts GDP growth, moves countercyclically and as well as the other components is persistent. Thirdly, in Essay 3, we are among the first in the literature to seek for firm-specific determinants of idiosyncratic volatility in a multivariate setting, and find for the cross-section of stocks listed on the Helsinki Stock Exchange that industrial focus, trading volume, and block ownership, are positively associated with idiosyncratic volatility estimates––obtained from both the CAPM and the Fama and French three-factor model with local and international benchmark portfolios––whereas a negative relation holds between firm age as well as size and idiosyncratic volatility.

Risk Minimizing Option Pricing for a Class of Exotic Options in a Markov-Modulated Market

We address risk minimizing option pricing in a regime switching market where the floating interest rate depends on a finite state Markov process. The growth rate and the volatility of the stock also depend on the Markov process. Using the minimal martingale measure, we show that the locally risk minimizing prices for certain exotic options satisfy a system of Black-Scholes partial differential equations with appropriate boundary conditions. We find the corresponding hedging strategies and the residual risk. We develop suitable numerical methods to compute option prices.

Macro-economic analysis of forestry options on carbon sequestration in India

The forestry sector provides a number of climate change mitigation options. Apart from this ecological benefit, it has significant social and economic relevance. Implementation of forestry options requires large investments and sustained long-term planning. Thus there is a need for a detailed analysis of forestry options to understand their implications on stock and flow of carbon, required investments, value of forest wealth, contribution to GNP and livelihood, demand management, employment and foreign trade. There is a need to evaluate the additional spending on forestry by analysing the environmental (particularly carbon abatement), social and economic benefits. The biomass needs for India are expected to increase by two to three times by 2020. Depending upon the forest types, ownership patterns and land use patterns, feasible forestry options are identified. It is found among many supply options to be feasible to meet the 'demand based needs' with a mix of management options, species choices and organisational set up. A comparative static framework is used to analyze the macro-economic impacts. Forestry accounts for 1.84% of GNP in India. It is characterized by significant forward industrial linkages and least backward linkage. Forestry generates about 36 million person years of employment annually. India imports Rs. 15 billion worth of forest based materials annually. Implementation of the demand based forestry options can lead to a number of ecological, economic and institutional changes. The notable ones are: enhancement of C stock from 9578 to 17 094 Mt and a net annual C-sequestration from 73 to 149 Mt after accounting for all emissions; a trebling of the output of forestry sector from Rs. 49 billion to Rs. 146 billion annually; an increase in GDP contribution of forestry from Rs. 32 billion to Rs. 105 billion over a period of 35 years; an increase in annual employment level by 23 million person years, emergence of forestry as a net contributor of foreign exchange through trading of forestry products; and an increase in economic value of forest capital stock by Rs. 7260 billion with a cost benefit analysis showing forestry as a profitable option. Implementation of forestry options calls for an understanding of current forest policies and barriers which are analyzed and a number of policy options are suggested. (C) 1997 Elsevier Science B.V.

German Eel Model (GEM II) for describing eel, Anguilla anguilla (L.), stock dynamics in the river Elbe system

The eel, Anguilla anguilla (L.), stock of the river Elbe severely decreased during the last decades. Detailed knowledge of the stock dynamics in freshwater and especially of the impact factors is necessary to take effective measures for stock conservation and improvement. The dynamics of the eel stock are modelled based on immigration, stocking, natural mortality and mortalities caused by fishing, angling, cormorants and hydropower plants. The model estimates the number of emigrating eel. Moreover, it enables to study the sensitivity of the estimates related to the uncertainty of the source data of the different influencing factors. The model may be used to develop management strategies and to assess the effi ciency of different management options. Zusammenfassung Der Aalbestand im Elbesystem ist in den letzten Jahrzehnten stark zur

Forecasting stock index volatility : comparing implied volatility and the intraday high-low price range

The intraday high–low price range offers volatility forecasts similarly efficient to high-quality implied volatility indexes published by the Chicago Board Options Exchange (CBOE) for four stock market indexes: S&P 500, S&P 100, NASDAQ 100, and Dow Jones Industrials. Examination of in-sample and out-of-sample volatility forecasts reveals that neither implied volatility nor intraday high–low range volatility consistently outperforms the other.

Nonparametric tail risk, macroeconomics and stock returns: predictability and risk premia

This paper proposes a new novel to calculate tail risks incorporating risk-neutral information without dependence on options data. Proceeding via a non parametric approach we derive a stochastic discount factor that correctly price a chosen panel of stocks returns. With the assumption that states probabilities are homogeneous we back out the risk neutral distribution and calculate five primitive tail risk measures, all extracted from this risk neutral probability. The final measure is than set as the first principal component of the preliminary measures. Using six Fama-French size and book to market portfolios to calculate our tail risk, we find that it has significant predictive power when forecasting market returns one month ahead, aggregate U.S. consumption and GDP one quarter ahead and also macroeconomic activity indexes. Conditional Fama-Macbeth two-pass cross-sectional regressions reveal that our factor present a positive risk premium when controlling for traditional factors.

Assessing dynamics of forced livestock movements, livelihoods and future development options for pastoralists/agro-pastoralists in Ruvuma and Lindi Regions, in the Southern Tanzania

The study that aimed at understanding the dynamics of forced livestock movements and pastoral livelihood and development options was conducted in Lindi and Ruvuma regions, using both formal and informal approaches. Data were collected from 60 randomly selected Agro-pastoralists/Pastoralists and native farmers using a structured questionnaire. Four villages were involved; two in Lindi region (Matandu and Mkwajuni) and the other two in Ruvuma region (Gumbiro and Muhuwesi). Data were analyzed using descriptive statistics of SPSS to generate means and frequencies. The results indicate that a large number of animals moved into the study area following the eviction order of the government in Ihefu wetlands in 2006/2007. Lindi region was earmarked by the government to receive all the evicted pastoralists. However, by 2008 only 30% of the total cattle that were expected to move into the region had been received. Deaths of many animals on transit, selling of the animals to pay for transportation and other costs while on transit and many pastoralists settling in Coastal and Ruvuma regions before reaching their destinations were reported to be the reasons for the discrepancy observed. To mitigate anticipated conflicts between farmers and pastoralists, Participatory Land Use Management (PLUM) plans were developed in all the study villages in order to demarcate village land area into different uses, including grazing, cropping, settlement and forests. Land units for grazing were supposed to be provided with all necessary livestock infrastructures (dips, charcoal dams, livestock markets and stock routes). However, the land use plans were not able to prevent the anticipated conflicts because most of the livestock infrastructures were lacking, the land use boundaries were not clearly demarcated and there was limited enforcement of village by-laws, since most had not been enacted by the respective district councils. Similarly, the areas allocated for grazing were inadequate for the number of livestock available and thus the carrying capacity exceeded. Thus, land resource-based conflicts between farmers and pastoralists were emerging in the study areas for the reason that most of the important components in the PLUM plans were not in place. Nevertheless, the arrival of pastoralists in the study areas had positive effects on food security and growth of social interactions between pastoralists and farmers including marriages between them. Environmental degradations due to the arrival of livestock were also not evident. Thus, there is a need for the government to purposely set aside enough grazing land with all necessary infrastructures in place for the agro-pastoral/pastoral communities in the country.

A note on execution costs for stock index futures: Information versus liquidity effects

This paper examines execution costs and the impact of trade size for stock index futures using price-volume transaction data from the London International Financial Futures and Options Exchange. Consistent with Subrahmanyam [Rev. Financ. Stud. 4 (1991) 11] we find that effective half spreads in the stock index futures market are small compared to stock markets, and that trades in stock index futures have only a small permanent price impact. This result is important as it helps to better understand the success of equity index products such as index futures and Exchange Traded Funds. We also find that there is no asymmetry in the post-trade price reaction between purchases and sales for stock index futures across various trade sizes. This result is consistent with the conjecture in Chan and Lakonishok [J. Financ. Econ. 33 (1993) 173] that the asymmetry surrounding block trades in stock markets is due to the high cost of short selling and the general reluctance of traders to short sell on stock markets. (C) 2004 Elsevier B.V. All rights reserved.

Time domain decomposition for European options in financial modelling

Finance is one of the fastest growing areas in modern applied mathematics with real world applications. The interest of this branch of applied mathematics is best described by an example involving shares. Shareholders of a company receive dividends which come from the profit made by the company. The proceeds of the company, once it is taken over or wound up, will also be distributed to shareholders. Therefore shares have a value that reflects the views of investors about the likely dividend payments and capital growth of the company. Obviously such value will be quantified by the share price on stock exchanges. Therefore financial modelling serves to understand the correlations between asset and movements of buy/sell in order to reduce risk. Such activities depend on financial analysis tools being available to the trader with which he can make rapid and systematic evaluation of buy/sell contracts. There are other financial activities and it is not an intention of this paper to discuss all of these activities. The main concern of this paper is to propose a parallel algorithm for the numerical solution of an European option. This paper is organised as follows. First, a brief introduction is given of a simple mathematical model for European options and possible numerical schemes of solving such mathematical model. Second, Laplace transform is applied to the mathematical model which leads to a set of parametric equations where solutions of different parametric equations may be found concurrently. Numerical inverse Laplace transform is done by means of an inversion algorithm developed by Stehfast. The scalability of the algorithm in a distributed environment is demonstrated. Third, a performance analysis of the present algorithm is compared with a spatial domain decomposition developed particularly for time-dependent heat equation. Finally, a number of issues are discussed and future work suggested.

An evaluation of carbon offset supplementation options for beef production systems on coastal speargrass in central Queensland, Australia

In 2014, the Australian Government implemented the Emissions Reduction Fund to offer incentives for businesses to reduce greenhouse gas (GHG) emissions by following approved methods. Beef cattle businesses in northern Australia can participate by applying the 'reducing GHG emissions by feeding nitrates to beef cattle' methodology and the 'beef cattle herd management' methods. The nitrate (NO3) method requires that each baseline area must demonstrate a history of urea use. Projects earn Australian carbon credit units (ACCU) for reducing enteric methane emissions by substituting NO3 for urea at the same amount of fed nitrogen. NO3 must be fed in the form of a lick block because most operations do not have labour or equipment to manage daily supplementation. NO3 concentrations, after a 2-week adaptation period, must not exceed 50 g NO3/adult animal equivalent per day or 7 g NO3/kg dry matter intake per day to reduce the risk of NO3 toxicity. There is also a 'beef cattle herd management' method, approved in 2015, that covers activities that improve the herd emission intensity (emissions per unit of product sold) through change in the diet or management. The present study was conducted to compare the required ACCU or supplement prices for a 2% return on capital when feeding a low or high supplement concentration to breeding stock of either (1) urea, (2) three different forms of NO3 or (3) cottonseed meal (CSM), at N concentrations equivalent to 25 or 50 g urea/animal equivalent, to fasten steer entry to a feedlot (backgrounding), in a typical breeder herd on the coastal speargrass land types in central Queensland. Monte Carlo simulations were run using the software @risk, with probability functions used for (1) urea, NO3 and CSM prices, (2) GHG mitigation, (3) livestock prices and (4) carbon price. Increasing the weight of steers at a set turnoff month by feeding CSM was found to be the most cost-effective option, with or without including the offset income. The required ACCU prices for a 2% return on capital were an order of magnitude higher than were indicative carbon prices in 2015 for the three forms of NO3. The likely costs of participating in ERF projects would reduce the return on capital for all mitigation options. © CSIRO 2016.

Informed options trading prior to takeovers - Does the regulatory environment matter?

We investigate the prevalence of informed options trading prior to takeover announcements, when the legal prohibition against insider trading is strictest. Although insider trading laws apply equally to the options and stock markets, the options market is considerably more transparent than the equity market, which makes insider trading in options more easily detectable. We find that privately informed investors trade in the options market prior to takeover announcements; however, their transactions are limited to liquid call options and options with high inherent leverage. Furthermore, we find that prior to takeover announcements, informed investors trade on their private information in the options market only when a SEC investigation of insider trading is unlikely to occur. Our results suggest that even prior to takeover announcements informed investors are attracted to the options market, which increases profit making potential due the greater leverage it affords, although they trade in a way which minimizes the likelihood of detection.

Techno-economic analysis of three HVAC retrofitting options

Accounting for around 40% of the total final energy consumption, the building stock is an important area of focus on the way to reaching the energy goals set for the European Union. The relatively small share of new buildings makes renovation of existing buildings possibly the most feasible way of improving the overall energy performance of the building stock. This of course involves improvements on the climate shell, for example by additional insulation or change of window glazing, but also installation of new heating systems, to increase the energy efficiency and to fit the new heat load after renovation. In the choice of systems for heating, ventilation and air conditioning (HVAC), it is important to consider their performance for space heating as well as for domestic hot water (DHW), especially for a renovated house where the DHW share of the total heating consumption is larger. The present study treats the retrofitting of a generic single family house, which was defined as a reference building in a European energy renovation project. Three HVAC retrofitting options were compared from a techno-economic point of view: A) Air-to-water heat pump (AWHP) and mechanical ventilation with heat recovery (MVHR), B) Exhaust air heat pump (EAHP) with low-temperature ventilation radiators, and C) Gas boiler and ventilation with MVHR. The systems were simulated for houses with two levels of heating demand and four different locations: Stockholm, Gdansk, Stuttgart and London. They were then evaluated by means of life cycle cost (LCC) and primary energy consumption. Dynamic simulations were done in TRNSYS 17. In most cases, system C with gas boiler and MVHR was found to be the cheapest retrofitting option from a life cycle perspective. The advantage over the heat pump systems was particularly clear for a house in Germany, due to the large discrepancy between national prices of natural gas and electricity. In Sweden, where the price difference is much smaller, the heat pump systems had almost as low or even lower life cycle costs than the gas boiler system. Considering the limited availability of natural gas in Sweden, systems A and B would be the better options. From a primary energy point of view system A was the best option throughout, while system B often had the highest primary energy consumption. The limited capacity of the EAHP forced it to use more auxiliary heating than the other systems did, which lowered its COP. The AWHP managed the DHW load better due to a higher capacity, but had a lower COP than the EAHP in space heating mode. Systems A and C were notably favoured by the air heat recovery, which significantly reduced the heating demand. It was also seen that the DHW share of the total heating consumption was, as expected, larger for the house with the lower space heating demand. This confirms the supposition that it is important to include DHW in the study of HVAC systems for retrofitting.