Real Options Analysis of a Coal Mining Project

Abstract In 2021, PT ABC planned to open a new pit, namely Pit XYZ. Currently, PT ABC uses the Discounted Cash Flow method to determine the economic feasibility of Pit XYZ. However, this method does not accommodate changes in coal commodity prices which fluctuate over time. A real options (RO) analysis was performed in this study to obtain the value of the option to abandon the Pit XYZ project plan of PT ABC. This study used NPV parameters as the underlying asset, with an NPV value of US $105,126,304.47, coal price volatility of 30.60%, a risk-free rate of 3.42%, and a mine life of 5 years. The results of the RO analysis show an Expanded NPV of US $105,126,313.05, which exceeds the value of the DCF analysis results. Therefore, PT ABC is advised to carry out the project as planned. However, upon the occurrence of a significant economic downturn, where the project value drops to US $6,031,721.79, it would be best for the company to halt the opening of Pit XYZ.