An Option Approach to Mining Investment Decisions

In this paper we apply continuous-time option pricing theory (Dixit 8 Pindyck 1994) to show how to obtain an optimal investment rule for a mining project which requires sequential in- vestments. The application per se is to some extent very simple. The main purpose of the paper, however, is to draw the attention of mining people to how the option pricing theory may be used to capital investment decisions. This topic in economics is quite new but is attracting a lot of attention.