Risk of commodity price, production cost and time to build in resource economics

Kuangyuan Zhang, Richard Olawoyin, Antonio Nieto, Andrew Nathan Kleit

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

Real option theory has been extensively applied to natural resource extraction modeling and risk management, which proves to be a significantly more powerful method than the traditional ones such as discounted cash flows. This research attempts to extend a proposed real option model based on optimized price threshold strategy for gold mining operations. Besides exploring the risk from commodity price, the research also examines the effects of a declining stochastic production costs, due to technology innovation in the long term. The extended real option model further examines how the time to build a gold mine can impact the optimized price threshold strategy. Sensitivity analysis and numerical evidence show that, (1) innovation in mining technology will boost the mine’s profitability and also shift the optimized price threshold; (2) mining operators can hedge a significant level of risk by treating time to build properly. Further discussions are provided on mining investment strategy and policy implication for resource extraction.

Original languageEnglish (US)
Pages (from-to)2521-2544
Number of pages24
JournalEnvironment, Development and Sustainability
Volume20
Issue number6
DOIs
StatePublished - Dec 1 2018

All Science Journal Classification (ASJC) codes

  • Geography, Planning and Development
  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

Fingerprint Dive into the research topics of 'Risk of commodity price, production cost and time to build in resource economics'. Together they form a unique fingerprint.

Cite this