OPTION PREMIUMS IN MINERAL ASSET PRICING - ARE THEY IMPORTANT

Mineral assets consistently trade at market values greater than their discounted cash flow (DCF) values. One explanation is that DCF analysi s does not and cannot incorporate the asset value generated by asset m anagement under uncertainty. This paper surveys the attempts to empiri cally quantify the ''option premium'' associated with optimal mineral asset management. The option premium appears to explain at most half o f the observed gap between DCF value and marker value, and adds at mos t 3 percent to a mineral asset's gross worth. Asset management option premiums therefore harle only a second-order impact on mineral asset p ricing.