Bidding for Antamina case Harvard Case Solution & Analysis

Bidding for Antamina Case Solution

Real options analysis is a valuable analytical tool that allows the manager to quantify the level of flexibility. The right to develop a copper deposit is a classic real option, where the interested firms are asked to bid the amount as they are willing to pay cash up-front to get the right to develop the mineral resource. Moreover, it is an obligation for the company otherwise it will have to pay the penalty. The government’s main focus is not to sell the property but to expand the business by real option in which the government requires premium and commitment as well.

bidding for antamina case solution

bidding for antamina case solution

The bidding structure by Peruvian government is a real option because the winner of the bidding right to develop a property is a call option.The decision could be made after the end of two years. Moreover, the government offers companies the option of initial investment of $17.5 with investment commitment of 5 years, which simply shows that the company is privatizing not only to raise cash but to expand the industry. The government’s main aim is to maintain and develop the sector by attracting large companies.

The correspondence between real and financial options is that in the real option, the company has the obligation to develop and in financial option, the company looks for profit as it neither considers development or growth.

Other real options are the option to abandon that the company must Abandon the project, which is a put option that indicates the company can sell its project without the conditions, and that the company has an option of early development alone as well. Both options will be considered however, the option to develop seems to be suitable for the company.

Building of Real option model to value the Antamina project:

To value Antamina project, we use Monte Carlo simulation method, which is implemented by the spread sheet program.First of all,the European style of this option is feasible for Monte Carlo approach and its transparency allows the users to see assumptions and workings of valuation model. Moreover, it allows varying both optimal amounts of investment and the mine life based on the discovery of ore.

We value the winning bidder’s right to develop as a call option treating the developed mine as the underlying asset and development expense as the exercise price of this option, where the leverage comes from operating leverage, and the traded underlying is the set of a forward contract on copper and zinc. By mapping the underlying asset into traded assets, we can use the risk-neutral methodology.

Data and Assumptions:

Over here,S = value of the underlying asset, X= Exercise price, T= time until the option exercises, Standard deviation or dividends paid by the underlying asset. Lastly, R= risk-free rate.

  1. Focus on investment timing option and ignoring any operating option.
  2. The probability distribution of ore quantity can be adequately characterized.
  3. The risk-free discount rate is used.
  4. Project estimates gathered are representative.
  5. Copper and zinc process follow a diffusion process.......................................This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.

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