Journal of the Southern African Institute of Mining and Metallurgy
On-line version ISSN 2411-9717
ERDEM, Ö; GüYAGüLER, T. and DEMIREL, N.. Uncertainty assessment for the evaluation of net present value: a mining industry perspective. J. S. Afr. Inst. Min. Metall. [online]. 2012, vol.112, n.5, pp. 405-412. ISSN 2411-9717.
The investment decisionmaking process in the insurance and finance industries is affected by new advances such as simulation techniques. These advances have improved the discounted cash flow method (DCF). In DCF, a dynamic and flexible model construction is not possible because it does not consider uncertain conditions. Each project should be evaluated taking into account the related uncertainties because the related uncertainties determine the characterization of the project. Related uncertainties can be processed in dynamic DCF, which is applicable to both financial and non-financial industries with different kind of uncertainties, such as power generation and petroleum projects. The dynamic DCF method can estimate net present value (NPV) while managing related project uncertainties with a simulation method like Monte Carlo Simulation. The simulation method is preferred because its output is unbiased. Therefore, a more realistic financial evaluation of the project can be concluded. In spite of the improvement of dynamic DCF, this project evaluation method is not used frequently in mining industry. However, the mining industry is ideally suited to this concept because it is highly dependent on estimations such as orebody size and ore grade. During the project evaluation stage, these uncertainties can be included with the dynamic DCF method. This study aims to contribute to increasing the usage of this method in mining projects. A copper reserve in Turkey is selected as a case study to apply uncertainty assessment for the evaluation of NPV.
Keywords : uncertainty; Monte Carlo simulation; net present value (NPV); probability.