Stoval - For: A Stochastic Mine Evaluation Computer Program ? Information

Investment in minerals development usually entails big financial outlays. which will remain at risk for a long time before the venture can begin to generate a return cash flow. Before 'committing himself to such a venture the investor would be wise to carefully examine the possible consequences of his exposure to risk. In this context risk is defined in multiple terms, which relate the magnitude of possible loss with the probability that such loss may occur--normally the probability will decrease as the amount of possible loss increases. The analysis of risk is an essential component of the decision making process, especially so in the case of low grade high tonnage mining ventures where a very real possibility exists that future unfavorable circumstances may lead to losses that could cripple or ruin even the richest corporation. Wells (1979) postulates a rationale for making the investment decision under uncertainty based on the comparison of two independent risk criteria: 1) the risk inherent in the venture represented by the negative portion of the cumulative distribution of the net present value (NPV), as derived by a stochastic evaluation procedure, 2) the limits of risk the decision maker is willing to accept, taking account of the financial capacity-of the 'firm to absorb various levels of future cash shortfall should the venture prove disappointing. The chance the investor would be prepared to accept can be expected to decrease as the amount of the possible shortfall increases. The limits of acceptable risk are-defined by a curve called the "LL-curve" which can be directly compared with the cumu¬lative NPV curve. A positive investment decision is implied if the limits of acceptable risk are not exceeded.