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Stochastic Analysis As A Risk-assessment Technique In Mineral Projects Evaluation


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P. Sa»uga & J. Kicki


Stochastic analysis as a risk-assessment technique in mineral projects evaluation P. Saluga1 & J. Kicki1, 2 1 Polish Academy of Sciences, Minerals & Energy Research Institute, Cracow, Poland, 2 University of Mining & Metallurgy, Cracow, Poland. Abstract The aim of Monte Carlo simulation is to provide the probability distribution of possible outcomes. The simulation can be used as a computational method for mineral project evaluation. The input for the analysis consists of a distribution of values for each uncertain variable in discounted cash flow analysis. Thus the probability distributions reflect the uncertainty of some variables and the risk incorporated in project analysis. During simulation values are randomly selected and then combined to determine the value of the project given that combination. A computer program using the Monte Carlo method can then be applied to generate hundreds of variations of cash flows, giving the same number of possible NPVs of the project. These NPVs, when displayed graphically, yield the expected project value and an explicit demonstration of the uncertainty associated with that value. It yields results for multiple attributes: amount of maximum loss, amount of maximum gain, and amount of expected gain. Thus stochastic simulations are shown to be useful in several aspects of project evaluation. 1 A model of discounted cash flow Under the discounted cash flow model, the value of a project consists of the value of future cash flows (or other net revenues), less the required capital expenditures (costs). \“Cash flow” is an accounting term, representing the balance of all cash revenues minus cash operating and current capital investments, as of the end of the fiscal year. It represents the volume of monetary after-tax assets in cash