When making a decision on realization of the project of own iron-ore base creation by an iron and steel plant a new approach including all the money flow discounting method advantages and leveling the given method disadvantages is necessary. The best suited implement for this purpose is the Real Options Method. Let us assume that the plant managers planned the following Real Options: the final product change option; the project intensive growth option; the project scale reduction option; the abandonment option; the activity arrest option.
The final product change option supposes producing end products of further processing with a more added value, which is in good favour in the market and can bring a supplementary economic effect to the "MISW" JSC when using given products in its production at the unchanged volume of the iron ore mined. It is offered to recover metal front ore to direct-reduced iron (DRI). The implementation of the option reduces the investments pay-off period and increases profits of the "MISW" JSC; and when using DRI as part of burden material of the "MISW" JSC electro-steel furnace, the plant gets additional economic and technical advantages.
The project intensive growth option supposes that, in case of iron ore raw material demand increase in the world market and "MISW" JSC, the plant can expand the Prioskolsky field production capacity owing to heavy ore reserves without large capital expenditures. The option realization allows the "MISW" JSC to be more flexible, when programming the production plan.
The project scale reduction option is conditioned by the market demand for iron ore raw materials and their prices, the activity of business rivals and other factors´ influence. If the "MISW" JSC production volume is needed to be reduced due to the decrease in demand for steel, emergency or any other cause, the "MISW" JSC can be required to buy iron ore raw materials in the amount exceeding its demands according to the contract conditions. The "MISW" JSC possesses limited facilities to reduce iron ore raw materials acquisition from the SSGPO. Negative sequences can be reduced owing to the development of the Prioskolsky field. The project scale reduction is advisable to be carried out until the incremental cost reduction will positively influence the profit. The given fact allows intensifying the synergetic effect from the field development and increases the investment attractiveness of the "MISW" JSC. The implementation of the option allows the plant to be more flexible in the world´s unsteadiness, than in the presence of a long-term fixed contract with the iron ore raw materials supplier.
The abandonment option gives an opportunity for the organization to stop the project at the market conjunction deterioration. Thereat, it can sell out all the assets at its disposal, compensating a part of negative profits, or use them in other projects; that allows the organization to get definite compensation payments. Capital investments in the Prioskolsky deposit development can be divided into several stages. In connection with this, as yet at the stage of planning there is an opportunity to foresee the variant of waiving the project after every of theses stages. At the project implementation some liquid funds, which can be sold by the "MISW" JSC at the price of 80% from their original cost value, are used.
The activity arrest option is effective at an intense price cut in the market. Let us consider the variant of the Prioskolsky deposit activity arrest for 2 years upon the preparation step completion. Thereat, the plant pays out wages to the employees for the purpose of competent personnel retention.
After a detailed analysis of every of the options the computation of net present value (NPV) of every kind of Real Options is carried out and expert evaluation of its probability (P) is defined, then the Prioskolsky deposit development real value is defined by the Real Options Method.
Table 1. The Prioskolsky deposit development value by the Real Options Method
|
№ |
Factor name |
NPV |
Probability |
NPV with account of P |
|
|
Basic variant (25MIO.tons) |
6 446 |
|
|
|
1 |
final product change option |
82 786 |
30% |
24 836 |
|
2 |
project intensive growth option |
59 811 |
30% |
17 943 |
|
3 |
project scale reduction option |
2 010 |
10% |
201 |
|
4 |
abandonment option |
-4 672 |
15% |
-701 |
|
5 |
activity arrest option |
3 421 |
15% |
513 |
|
|
Total: |
|
100% |
42 792 |
Thus, one can calculate an additional value of the Prioskolsky deposit development by the Real Options Method. The introduction of Real Options into the investment project structure and their evaluation allowed increasing its attractiveness significantly. The value of Real Options is equal to 36 347 MIO rubles. So, the expanded net present value makes 42 792 MIO rubles.
The work was submitted to VI international scientific conference «Economics and Management», Thailand - Cambodia, February 18-28, 2009, came to the editorial office 13.12.2008.