This is a note about Real Option Analysis (“ROA”) always improving project value.
The result from a ROA is the Expanded Net Present Value
(“ENPV”) which is equal to the traditional NPV, named the Base case NPV, plus
the additional value of all identified operational and managerial strategies or
options that can be implemented over the Life of Mine (“LOM”).
That is, by definition ROA will in general either provide a
better value than the Base case NPV or the same value – in case no options are
seen to increase project value over time.
Sometimes, however, experience has shown that after running a
ROA "IN" the resulting ENPV is either similar or less than the Base
case NPV. These results may suggest that the ROA did not have an effect on the
value of the project, even it reduced the value of the mine project.
Then, the mandatory questions are why these outcomes happen
and how to interpret them.
This white paper will analyse and answer these questions
from a realistic viewpoint.