(full report can be found on the below link)
Background and Purpose
Silver Standard, a Vancouver-BC based mining company, announced at the end of 2010 the sale of two mineral deposits (Snowfield and Brucejack) located in Northern British Columbia to Pretium Resources a new incorporated mining company in Vancouver-BC. Pretium agreed to pay Silver Standard CAD 450 million in exchange.
My report analyzes certain financial aspects of this project; primarily, valuating the mines using both discounted cash flow and real options analysis (Black-Scholes and binomial pricing models).
Conclusion
The valuation estimate of my analysis using DCF was higher than what Pretium paid Silver Standard; however, this estimate is highly sensitive to the subjective expectations of mineral prices and cost of capital and the acquisition price would have reflected subjective expectations of the two parties.
However, what my analysis shows that using real options analysis is more appropriate in valuating investments where significant uncertainty exists. Real options analysis better models the flexibility managers have in actively managing their investments, thus resulting in higher valuation estimates. My analysis shows that using real options almost doubled the valuation of the mines.
The full report can be found by clicking on the below link: