Antamina Case Study

1. In what way is the development of a copper mine like Antamina a real option? In what way is the bidding structure put in place by the Peruvian government an option?
Real options represent the right but not the obligation to make investment decisions once uncertainties unfold. Real options include management flexibility which is the concept that management can change their decisions about a certain investment over time when a particular aspect of the investment uncertainty becomes known. In real options, an initial choice is followed by more choices as additional information becomes available. Real options give management the ability to invest, abandon or wait on their decisions about a certain investment. The main features that define real options are time, uncertainty and irreversibility.
Real options NPV = traditional NPV + real option value (investment commitment)
The bidding structure put in place by the Peruvian government was such that the bid winner was selected on the
Just like financial options, Antamina’s real option has maturity. The maturity of real option in Antamina case occurs at the end of two years of exploration of property when decision must be made about the development of the property. As in financial options, the value of the real option available in Antamina bidding depends on the volatility of future values which in case of Antamina is the present value of the future cash flows. Like financial options, Antamina’s real options include uncertainty about future value of the underlying asset/property. Similarly, as financial options have exercise prices, Antamina’s real option includes certain amount that must be invested in the project. However, financial options are for short term while the real option available in Antamina is for longer period of