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