Investment Feasibility Assessment Of A Nickel Mining Project Under Nickel Price Uncertainty Using Discounted Cash Flow And Real Option Valuation With A Cox–Ross–Rubinstein Binomial Lattice Model

Abstract

Investment decisions in nickel mining projects are exposed to uncertainty, particularly fluctuations in nickel prices, which can affect expected project cash flows and investment timing. Conventional discounted cash flow (DCF) valuation provides a static assessment of project feasibility but does not explicitly capture managerial flexibility to postpone investment under changing market conditions. This study evaluates the feasibility of a nickel mining project by integrating DCF and real option valuation (ROV) under nickel price uncertainty. Historical nickel price data for 2021–2025 are used to characterize market price uncertainty, while a Cox–Ross–Rubinstein (CRR) binomial lattice model is applied to value the option to defer investment using risk-neutral probabilities and backward induction. The DCF analysis yields a net present value (NPV) of IDR 207.83 billion, an internal rate of return (IRR) of 61%, and a discounted payback period (DPP) of 1.77 years. The real options analysis produces an incremental option value of IDR 113.01 billion, resulting in an Expanded Net Present Value (ENPV) of IDR 320.84 billion, equivalent to approximately 54.37% above the DCF NPV. Sensitivity analysis of the nickel price indicates that the DCF NPV remains positive under a ±10% variation in the assumed nickel price, with estimated NPVs of IDR 115.16 billion, IDR 207.83 billion, and IDR 300.47 billion for the low, base, and high scenarios, respectively. These results indicate that the project remains economically feasible within the tested nickel-price range. At the same time, the real options approach provides additional value by incorporating the modeled flexibility to defer investment. However, the ROV and ENPV results remain conditional on the CRR parameters and the sources of uncertainty explicitly incorporated into the model.

Keywords: nickel mining; discounted cash flow; real options valuation; nickel price uncertainty; Cox–Ross–Rubinstein binomial lattice