The document discusses various methods to reduce risk in mineral exploration from political, economic, and informational sources. It outlines approaches such as (1) involving investors unlikely to face expropriation to reduce political risk, (2) using hedging and multi-commodity sales to mitigate economic risks from price fluctuations, and (3) applying Bayesian analysis and sequential development to minimize risks from prior informational uncertainties.
The document discusses various methods to reduce risk in mineral exploration from political, economic, and informational sources. It outlines approaches such as (1) involving investors unlikely to face expropriation to reduce political risk, (2) using hedging and multi-commodity sales to mitigate economic risks from price fluctuations, and (3) applying Bayesian analysis and sequential development to minimize risks from prior informational uncertainties.
The document discusses various methods to reduce risk in mineral exploration from political, economic, and informational sources. It outlines approaches such as (1) involving investors unlikely to face expropriation to reduce political risk, (2) using hedging and multi-commodity sales to mitigate economic risks from price fluctuations, and (3) applying Bayesian analysis and sequential development to minimize risks from prior informational uncertainties.
The document discusses various methods to reduce risk in mineral exploration from political, economic, and informational sources. It outlines approaches such as (1) involving investors unlikely to face expropriation to reduce political risk, (2) using hedging and multi-commodity sales to mitigate economic risks from price fluctuations, and (3) applying Bayesian analysis and sequential development to minimize risks from prior informational uncertainties.
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Examining
Risk in Exploration
Amrita Oza Nabilla 12115007
Andika Satria Pradana 12115064
Risk Reduction from Political and Security Sources – The risk of investment or personnel loss because of instability of a government can be the key factor in an exploration decision. As pointed out in an article in the Mining Journal (13 March 1998), there are countries where the government has ceased to function or where the government is unable to maintain law and order. Expropriation may be a risk in some countries. – Among the ways to reduce political or security risk are to involve investors who are unlikely to be expropriated, to avoid countries where the risk is high, or to require a high rate of return on an investment. A high rate of return translates into a short payback period—thus shortening the exposure period and, if there are many independent investments, reduces the average risk of loss. Risk Reduction from Economic Sources – >>Most risk of failure for economic or technical reasons stems from : << – commodity prices being lower than expected, – ore reserves being lower than estimated, – costs being higher than estimated, – beneficiation difficulties like poor recovery, – currency exchange rates, or – delayed development. Risk Reduction from Economic Sources : 1. Error Estimation – 1. For large low-grade deposits, errors in grade estimates are a major source of risk. Reliability of grade and tonnage ore-reserve estimates is typically a func- tion of the amount of information gathered. If actual grades or tonnage are below certain values, the deposit will be uneconomic; that is, there will be economic loss. Drilling more holes both decreases the expected value of the deposit and reduces the uncertainty of the value of the deposit. The marginal benefit of obtaining more information to reduce the risk of a bad investment must be balanced against the costs in money and time of gathering additional information (Mackenzie, 1994). Risk Reduction from Economic Sources : 2. Price Variation Risk Reduction from Economic Sources : 2. Price Variation (2) – Variation of prices during the mine's life can be controlled effectively by hedging. Thus, for some or all of the mine's future output, a contract is agreed to for the sale to a specific customer for a fixed price. In addition to such forward sales, various options contracts may be bought and sold in a hedge strategy. When prices fall after the agreement, the seller is viewed as wise, but the converse also is true both the buyer and the seller have reduced uncertainty for a price. Risk Reduction from Economic Sources : 2. Price Variation (3) – Another method of reducing risk associated with metal price variability is to seek mineral deposits which contain multiple metals in the hope that when one metal price declines, the other metal prices may move higher. Risk Reduction from Economic Sources : 3. Sequential Mine Planning – Although not part of exploration, it is possible to reduce the risk of loss in mining by sequentially developing and expanding a mine—thus reducing the capital exposed at early stages and reducing the present value of that risked capital. This strategy also might be effective where there is risk of loss because of governmental instability. Risk Reduction by Use of Prior Info and Learning
– D = a deposit of size X or larger exists;
– d = a deposit of size X or larger does not exist; – B = a deposit of size X or larger is found; and – b = a deposit of size X or larger is not found. Risk Reduction by Use of Prior Info and Learning – The probability of missing a deposit given that it exists can be considered the risk and be represented as SUMMARY
– Risk Reduction from :
– A. Political and Security Sources : Involve Investor who are unlikely to be expropriated. – B. Economic Sources : Hedging, Multi-Commodity Selling, and Capital Exposure. – C. Prior Info and Learning : Bayes Method Analysis.