Monte Carlo-Integrated Valuation of Call Options in Leasehold Solid Mineral Property Development in Nigeria

Abstract

The existing closed-form models for the valuation of call options in solid mineral land use/development; (including the Samuelson-McKean model) often feature deterministic inputs and outputs that inadequately account for the dynamics of risk and uncertainty. Consequently, the objective of this paper is to evaluate the Monte Carlo-integrated valuation of call options in the development and use of leasehold solid mineral landed properties in Nigeria using appropriate mathematical models and simulations. The simulated future value (FV) of the call option in the case of a barite-endowed mineral property was put at N138,376,422.92 with a standard deviation of N32,235,981.11 and significant at p<0.05. The Monte Carlo simulation indicated 49.41% chance of the mining operator realizing FV of call option between N48,115,676.82 and N139,887,676.70 in order to justify the commencement of development and production activities on the leasehold solid mineral property with effect from the valuation date. However, for a mining operator with 19.25% cost of capital, FV below the N48,115,676.82 threshold might warrant the postponement of development and production activities. The Monte Carlo-integrated valuation provided insights regarding input variables that a mining operator should address with caution, in pursuit of sustainable profit from the mineral land use decision. This dimension of development appraisal provides robust answers to the appropriate timing and operation of mineral land use decisions, based on the assessment of the mining operator's profit under the conditions of risk and uncertainty.

Keywords

• Call options valuation; Development; Land use decision; Monte Carlo; Solid mineral property