Advances in finance theory and risk management have had an important influence on investment decision-making in the finance and insurance industries. Non-financial industries, such as power generation and pharmaceuticals, are now applying these concepts through the real option valuation approach to obtain new insights about project economics, risk and operating policy. Mining and petroleum projects are ideally suited to make use of these techniques and many firms in the industry are beginning to incorporate real options into their project valuation process.

This three-day course in using real options to value and manage natural resource projects will teach you how to:

· Use this new method of analysis to develop a consistent valuation approach that can differentiate projects by their unique cash flow risk characteristics.

· Understand how important elements of project structure, such as management flexibility and operating costs, influence value and management decisions under uncertainty.

· Move from using the rigid conventional discounted cash flow method of valuing an investment to the real options approach that more fully represents the variability of the mining and petroleum environment.

· Build confidence with practical examples so you can adapt these methods to a wide range of projects.

There are three main course topics:

1) How characteristics of the natural resource environment influences project value. These include mineral price uncertainty, operating leverage, and management flexibility.

2) How to combine financial market information, finance theory, and a detailed project description into a valuation model that determines objective risk-adjusted project value and provides an outline of operating strategy. This includes discussions on the risk-adjustment information carried within mineral forward prices; the concepts that allow a dynamic project environment to be represented within a valuation model, the use of Monte Carlo simulation to model mineral price uncertainty and value non-flexible projects, and the use of binomial trees to demonstrate the valuation calculations for management flexibility.

3) An investigation of investment decision situations in the mining and petroleum industries for which these methods are not feasible or appropriate. Applications discussed on the course include the trade-offs between high-cost and low-cost projects, capacity choice, multi-zone mining and satellite reserve development, and the deferral of lease development.

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Day 1 - Morning. A conceptual mine valuation model. Valuation fundamentals. Financial instruments
Introductory comments. The role of project valuation. Three elements of a valuation model. Project structure. Project uncertainty. Valuation numerics – DCF and real options. Review of valuation fundamentals. Financial markets and instruments.

Day 1 - Afternoon. Forward contracts. Price uncertainty models. Monte Carlo simulation.
Forward prices, DCF and real options. Why mining production is like forward contracts. Example: Valuing an operating mine as a portfolio of forward contracts and bonds. Output price equations. Developing expected and risk-adjusted price forecasts with Monte Carlo simulation. Example: Building a forward price curve and valuing a project with Monte Carlo simulation.

Day 2 - Morning. Price process estimation. Valuing cash flows with no flexibility.
Estimating price process parameters. Introduction to real options. A simple example of discounting differences between real options and DCF. Demonstration of discounting effects for a high- and low-cost mining project. Example: SAGD project with two design alternatives. Differential discounting effect on design. Design decisions: Capital versus operating costs. Design decisions: Capacity choice. Example: Valuing a heap leach versus a satellite reserve project. Summary of differential discounting.

Day 2 - Afternoon. Building binomial price state trees for valuing non-linear payoffs. Flexibility.
The relationship between Monte Carlo and binomial techniques. Approximating a price process with a binomial tree. Developing a true probability price tree. Example: Building a true probability price tree. State prices and a risk-adjusted probability tree. Calculating (replicating) state prices with forward prices. Developing a risk-adjusted probability tree. Example: Building a risk-adjusted price tree on a spreadsheet. Using state prices to value non-linear project payoffs. Example: Valuing equity and government claims to a closing oil field with state prices. Overview of management flexibility in project valuation.

Day 3 - Morning. Introduction to valuing cash flows from projects with flexibility.
A simple binomial example of valuing a mine with an abandonment option. Early models of management flexibility: The Black and Scholes model. Building a project valuation model for a flexible project. Using the Excel Binomial Real Options / DCF Valuation Add-in. Early closure at marginal project. Example: A marginal mine closure decision.

Day 3 - Afternoon. Valuing cash flows from natural resource projects with flexibility.
Restructuring a project in low mineral price environments. Example: Selective zone closure. Restructuring a project in high mineral price environments. Example: Sequential or parallel development at a two-zone mine. Deferring development of a mineral lease. Example: Valuing a mineral lease. New frontiers in the valuation of energy and petroleum projects. Course summary.

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Participants do not require advanced mathematical skills to understand and apply the course material. However, they should be familiar with:

· Basic statistical concepts such as expected value, variance, and standard deviation.

· Constructing a discounted cash flow valuation.

· Introductory financial concepts such as the time value of money and risk-adjusted discounting.

The course is designed for managers and analysts associated with the mining and petroleum industries who are evaluating or managing projects or are assessing investment risk.

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Dr. Michael Samis began his mining career in South Africa where he worked in production, planning and valuation positions at several gold and coal mines. While in South Africa, he completed a M.Sc. degree in mineral economics that focused on using real options to analyse project financing proposals for marginal gold mines. In 2000, he completed his Ph.D. at the University of British Columbia where his research considered the interaction between geological structure, capital and operating costs, management flexibility and project uncertainty. His professional valuation experience includes valuing major projects with complex forms of management flexibility from exploration programs through to late-stage capital investments. He develops and leads professional development courses discussing the use of real options to value and manage natural resource projects, and has provided expert witness affidavits for business litigation involving natural resource valuation problems. Dr. Samis is the Director of Financial Services (Mining and Metals) for Mining and Metals Consulting Group at AMEC E&C Incorporated, an Adjunct Professor for the Department of Mining Engineering at Laval University, and is registered as a Professional Engineer in Ontario, Canada.

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