The Impact of Variability of Selected Geological and Mining Parameters on the Value and Risks of Projects in the Hard Coal Mining Industry

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Abstract

The paper attempts to assess the impact of variability of selected geological (deposit) parameters on the value and risks of projects in the hard coal mining industry. The study was based on simulated discounted cash flow analysis, while the results were verified for three existing bituminous coal seams.

The Monte Carlo simulation was based on nonparametric bootstrap method, while correlations between individual deposit parameters were replicated with use of an empirical copula. The calculations take into account the uncertainty towards the parameters of empirical distributions of the deposit variables. The Net Present Value (NPV) and the Internal Rate of Return (IRR) were selected as the main measures of value and risk, respectively.

The impact of volatility and correlation of deposit parameters were analyzed in two aspects, by identifying the overall effect of the correlated variability of the parameters and the indywidual impact of the correlation on the NPV and IRR. For this purpose, a differential approach, allowing determining the value of the possible errors in calculation of these measures in numerical terms, has been used.

Based on the study it can be concluded that the mean value of the overall effect of the variability does not exceed 11.8% of NPV and 2.4 percentage points of IRR. Neglecting the correlations results in overestimating the NPV and the IRR by up to 4.4%, and 0.4 percentage point respectively. It should be noted, however, that the differences in NPV and IRR values can vary significantly, while their interpretation depends on the likelihood of implementation.

Generalizing the obtained results, based on the average values, the maximum value of the risk premium in the given calculation conditions of the „X“ deposit, and the correspondingly large datasets (greater than 2500), should not be higher than 2.4 percentage points. The impact of the analyzed geological parameters on the NPV and IRR depends primarily on their co-existence, which can be measured by the strength of correlation. In the analyzed case, the correlations result in limiting the range of variation of the geological parameters and economics results (the empirical copula reduces the NPV and IRR in probabilistic approach). However, this is due to the adjustment of the calculation under conditions similar to those prevailing in the deposit.

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