Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

thevalueofanundevelopedreserveandthenconsiderhow
wecanextendthistolookatnaturalresourcecompaniesthat
have both developed and undeveloped reserves.


Undeveloped Reserves as Options


Inanaturalresourceinvestment,theunderlyingassetisthe
natural resourceand thevalueoftheasset isbased onthe
estimatedquantityandthepriceoftheresource.Thus,ina
goldmine,theunderlyingassetisthevalueoftheestimated
goldreservesinthemine,basedonthepriceofgold.Inmost
such investments, there is an initial cost associated with
developingtheresource;thedifferencebetweenthevalueof
theestimatedreservesandthecostofthedevelopmentisthe
profittotheowneroftheresource(seeFigure12.3).Defining
thecostofdevelopmentasXandtheestimatedvalueofthe
resourceasVmakesthepotentialpayoffonanaturalresource
option be the following:


FIGURE 12.3 Payoff from Developing Natural Resource
Reserves

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