Towards sustainable mining (Part I): Valuing investment opportunities in the mining sector

Reliance on classical valuation methods such as the net present value (NPV) has often resulted in controversial asset valuations in the mining sector. An alternative method, termed decoupled net present value (DNPV), is used to evaluate mining investment opportunities. The proposed valuation method decouples the time value of money from the risk associated with the project providing a consistent valuation method free from the problems typically associated with the application of NPV. Market risks (e.g., commodity prices, foreign exchange) can be systematically combined with non-market risks (e.g., effect on operations of climate change and/or large earthquakes). More importantly, DNPV allows seamless integration of project risk assessment performed by technical experts and risk management implemented by business executives into the financial evaluation of the project. A simplified mining investment project is analyzed using traditional techniques and compared with the proposed DNPV. The example includes a discussion about how valuation is affected by climate change and earthquake risks, and how investment in resilience and adaption can be incorporated in the proposed analysis.