The option to improve the recovery of a mill plant: when it should be exercised?

This article applies option pricing technique to determine the satisfactory gold price to exercise the option of improving the recovery of the processing plant at Red Lake gold mine, Canada. Based on option pricing technique, the satisfactory gold price to increase the recovery from 83% to 95% has been found to be US$225.7/oz. The results indicated that the satisfactory price is sensitive to both of the capital cost and the extra operating cost required to exercise the option. As these costs increase, the satisfactory gold price increases. In addition, the article discusses the effects of uncertainty of future gold prices on both of the satisfactory gold price and the decision rule for exercising the option. It has been found that the satisfactory gold price for exercising the option increases with uncertainty level. The decision rule obtained by applying option pricing technique is to exercise the option of improving the recovery if the discounted value of revenues equals or exceeds 2.05 times the discounted value of costs. The results indicated that this rule is not constant, but it is highly dependent on the uncertainty level of the future gold prices.