The traditional use of discounted cash flow (DCF) methods for valuation in the natural resources, power generation and petrochemical industries, is now being supplanted by methods which have been used by the finance and insurance industries for some years.
Known as real options, these ideas about valuation and risk management expand upon conventional valuation methods to account for the unique cash flow risk characteristics of a project and provide additional decision tools and insights for valuing projects and exploring advanced risk modelling.
A course in these advanced valuation methods is being offered in Australia in October by Snowden Mining Industry Consultants in conjunction with real options expert Dr Michael Samis.
Dr Samis describes real options as "a framework that incorporates available project information more effectively and efficiently into the value calculation than the discounted cash flow approach to calculating project value."
"Since each project is unique, the cash flow risk profile of each will be different and thus each will require its own risk-adjustment in the value calculation," he explained.
"The real options method is able to easily pick up on changes in the cash flow risk profiles whereas the DCF technique does not."
Dr Samis will cover three main topics during the course.
· The first is the characteristics of the natural resource environments that influence project value, such as price uncertainty, operating leverage, management flexibility and basic natural resource taxation.
· The second is how to combine financial market information, finance theory and a detailed project description into a valuation model that determines risk-adjusted project value and provides an outline of operating strategy.
· The final topic is an investigation of investment decision situations in the mining and petroleum industries for which advanced valuation methods can provide new insights. These applications include trade-offs between high-cost and low-cost projects, capacity choice, multi-zone mining and satellite oil field development, and development deferral.
Dr Samis graduated in 1989 from the University of British Columbia with a B.A.Sc. in mining engineering and completed a a M.Sc. degree in mineral economics at the University of the Witwatersrand after working in both production and technical positions for several South African mines. He completed his Ph.D. in 2000 at the University of British Columbia's Department of Mining Engineering where his dissertation considered the interaction between project structure and uncertainty using real options techniques.
His professional experience includes the valuation of major capital investment projects with complex forms of management flexibility, educational seminars in industry forums discussing advanced valuation methods, and expert witness affidavits for business litigation involving real option valuation problems.
The five-day Advanced Valuation of Natural Resource Projects course will be run in Brisbane from 14-18 October and in Perth from 21-25 October.
For more information, visit the Training section of the Snowden website at www.snowden.com.au.
