Summary

The objective of this article is to highlight the importance of real options for the valuation of natural resources and to introduce a new valuation methodology. We estimate the value of a natural resource using the cash flows generated by its current assets and two options-the option to expand production when prices are high, and the option to scale it down when prices are low. We show that the option to expand production accessing a new reserve of the same size increases the value of the firm by as much as 60 percent. In turn, the option to scale down production when prices are low ...