REAL OPTIONS VALUATION OF COAL MINING PROJECT USING BINOMIAL LATTICE MODEL

• Main Author: MARULI IKHSANI, SETIADY
• Format: Theses
• Language: Indonesia
• Subjects: Manajemen umum
• Online Access: https://digilib.itb.ac.id/gdl/view/53146
• Institution: Institut Teknologi Bandung

The coal mi ni ng industry i n ge neral requires large investme nts and also influenced by various risks and uncertai nties. Gurimbang Mine, as part of CCoW PT. Berau Coal, will comme nce the operation i n 2020 after three years postponed from t he origi nal plan. During t his delay period, various risks and uncertai nties and also situation of the Gurimbang project feasibility has changed and must be re-evaluate for feasibility. Also further evaluation has undertaken resulted i ncrease of potential coal to 106.79 million tonnes and will use as Base Scenario to comme nce the mi ne. However, the coal price continues to drop at the end of 2019 when t he construction progress. PT. Berau Coal’s Top Manage ment consider to evaluate the valuation of Gurimbang Mine to reduce the possibility of loss and the magni tude of profit and also return on capital can be estimated properly. The decrease production scenario has developed which are Medium Scenario that return to FS 2014 total production plan as 56.21 million tonnes and Low Scenario wi t h decrease the total production to 36.54 million tonnes. The existing met hod used by PT. Berau Coal to value of an asset is Discounted Cash Flow (DCF) valuation t hat relates the value of an asset to the present value of expected future cash flows on t hat asset by apply discount rate as a function of the riskiness of the estimated cash flows. Valuation i n finance is the process that links risk and return to determi ne the worth of an asset use the time value of money techniques as the basis of cash flow analysis, the lifeblood of the company. Real options valuation (ROV) wit h binomial lattices model is a modern met hodology as alternative met hod of strategic ma na gerial options for economic evaluation of certai n projects under uncertai nty and ma nage me nt ’s flexibility at differe nt points in ti me whic h t he asset price can move to one of two possible prices, up and down, depend on volatility measure. Coal price assumption previously was US $41/t and the update is US $33/t. DCF valuation wit h RADR 9.09% resulted the Low Scenario return the hi ghest NPV as US $11.28 million and IRR 26.61%. This NPV lower US $20.08 million compare to NPV in previous coal price assumption. While wit h ROV wit h binomial lattice model result US $67.80 million. From this result, show that DCF valuation tend to understate the value of assets and unable to properly capture the value that are uncertain at the time of the initial decision. DCF valuation ignores the option to mine 70.25 million tonnes of coal as the discrepancy Base Scenario and Low Scenario a nd the NPV resulted 6 times lower compare to ROV result. Strategic mana gerial flexibility as part of the ROV has undertaken to evaluate embedded options that are relevant to anticipate the decline of coal price. The hi ghest NPV resulted from Base Scenario wit h combini ng option to defer the investme nt for one year and abandon of the project that obtained US $68.86 million. The expanded value from ma na gerial flexibility obtained US $57.58 million whe n the initial coal price to comme nce the mi ne is between range US $18/t – US $34.3/t.