Real Option Analysis Of A coal mining Project
Rizki Amalia (a*), Rini Novrianti Sutardjo Tui (a), Aryanti Virtanti Anas (a), Andhika Baharuddin (a), Febri Saputra T. (a), Tasyah Shafira(a)

a) Mining Engineering Department, Faculty of Engineering, Hasanuddin University
Jalan Poros Malino Km.6 Bontomarannu, Gowa, Sulawesi Selatan 92171, Indonesia
*rizkiamalia[at]unhas.ac.id

Abstract

In 2021, PT ABC plans to open a new pit, namely Pit XYZ. Currently, PT ABC uses the Discounted Cash Flow method to determine the economic feasibility of Pit XYZ. However, this method does not accommodate changes in coal commodity prices, which continue to fluctuate over time. The aim of this research is to conducting real option (RO) analysis to obtain the option value with the option to abandon in pit XYZ project of PT ABC. The analysis was conducted using NPV parameters as the basic asset, with a value of US 105,126,304.47, coal price volatility of 30.60%, a risk-free rate of 3.42%, and a mine life of 5 years. The results of the ROV show an Expanded NPV of US 105,126,313.05, which exceeds the value of the DCF analysis results. It is recommended that PT ABC continue developing the project as planned. Conversely, if the economic situation worsens and the project^s value falls to US -6,031,721.79, it would be optimal for the company to halt the opening of pit XYZ.

Keywords: Coal- Price Volatility- Discounted Cash Flow- Real Option Valuation

Topic: Mineral and Energy Regulation and Economics