bidding for antamina
Questions for Bidding for Anatamina
EGADE
LUIS MENDEZ
1. In what way is the development of a copper mine like Antamina a real option? In what way is the bidding structure put in place by the Peruvian government an option?
The mine had a valuable real option component, in the form of the right to develop the mine after completing exploration. The Peruvian government requested the bidders to state both the premium that they would pay and exercise price (development expenditure) they would set for this real option.
What is the correspondence between these real options and financial options?
Theoretically real options and financial options are very similar, however real options are usually solved through numerical methods (ex post) the binomial method or Monte Carlo simulation, since these methods allows more flexibility for setting up scenarios.
What other real options does the owner of Antamina have?
There are basically three options:
• Option to Abandon
• Option to Abandon at year 2 with penalty
• Option of Early Development
2. Conceptually, how would you build a real options model to value the Antamina project? What data and assumptions would you need?
Sources of Uncertainty (Variables)
Revenues:
Mine’s Life (approach = deterministic)
Future Prices of zinc and copper (approach = stochastic on years 0 to 2)
Quantity of Ore (Monte Carlo)
Costs:
Operations Expenses (Monte Carlo)
Capital Expenditures (Monte Carlo)
The spreadsheet, bid.xls, implements one model of the real options in Antamina. You should try to "figure out" how it works through reverse engineering.
According to the workbook intructions.
(1) "Summary" -- This worksheet takes as inputs the initial payment, the investment commitment, and the number of trials that the simulation is supposed to run for. Outputs: the amount of the bid, the NPVof the mine without the option to abandon (Section A) , the NPV of the mine with the option to abandon
EGADE
LUIS MENDEZ
1. In what way is the development of a copper mine like Antamina a real option? In what way is the bidding structure put in place by the Peruvian government an option?
The mine had a valuable real option component, in the form of the right to develop the mine after completing exploration. The Peruvian government requested the bidders to state both the premium that they would pay and exercise price (development expenditure) they would set for this real option.
What is the correspondence between these real options and financial options?
Theoretically real options and financial options are very similar, however real options are usually solved through numerical methods (ex post) the binomial method or Monte Carlo simulation, since these methods allows more flexibility for setting up scenarios.
What other real options does the owner of Antamina have?
There are basically three options:
• Option to Abandon
• Option to Abandon at year 2 with penalty
• Option of Early Development
2. Conceptually, how would you build a real options model to value the Antamina project? What data and assumptions would you need?
Sources of Uncertainty (Variables)
Revenues:
Mine’s Life (approach = deterministic)
Future Prices of zinc and copper (approach = stochastic on years 0 to 2)
Quantity of Ore (Monte Carlo)
Costs:
Operations Expenses (Monte Carlo)
Capital Expenditures (Monte Carlo)
The spreadsheet, bid.xls, implements one model of the real options in Antamina. You should try to "figure out" how it works through reverse engineering.
According to the workbook intructions.
(1) "Summary" -- This worksheet takes as inputs the initial payment, the investment commitment, and the number of trials that the simulation is supposed to run for. Outputs: the amount of the bid, the NPVof the mine without the option to abandon (Section A) , the NPV of the mine with the option to abandon