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System dynamic model; Monte Carlo simulation; metal mining; profitability analysis; Datar–Mathews method; real option valuation
This paper presents how a dynamic system model can be used together with the Datar–Mathews real option analysis method for investment analysis of metal mining projects. The focus of the paper is on analyzing a project from the point of view of the project owner. The paper extends the Datar–Mathews real option analysis method by combining it with a dynamic system model. The model employs a dynamic discount rate that changes as the debt-level of the project changes. A numerical case illustration of a nickel mining project is presented. The results show that using dynamic system models in real option analysis is not only possible with the Datar–Mathews method, but also that some previously identified problems of real option valuation can be avoided.
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