Ignoring Price-Jump Risk Can Lead to Overvaluation of Copper Mining Projects

According to the Public Relations Office of the University of Tehran, Dr. Behnam Aminrostamkolaee, a faculty member at the Faculty of Economics of the University of Tehran, citing his recent research on the valuation of mining projects, warned that conventional models ignore sudden jumps in metal prices and exchange rates and therefore present an overly optimistic picture of profitability. He added that using the jump-diffusion (MJD) model instead of the widely used geometric Brownian motion (GBM) model significantly reduces project value. Announcing this, the faculty member elaborated on his research findings on the valuation of mining projects.

He said: “In this study, we examined one of the blind spots in the real options valuation literature in the mining sector. Conventional approaches simulate the behavior of copper prices and exchange rates using the geometric Brownian motion (GBM) model, whereas this method ignores sudden shocks and discrete market jumps that are common in developing economies dependent on primary commodities.”

Noting that the research was conducted on the Sarcheshmeh copper mine project, he added: “Statistical analysis of copper price and dollar exchange rate data over the period 1392–1404 (2013–2025) confirmed the presence of significant jumps in both series. For this reason, we used the Merton jump-diffusion (MJD) framework to model continuous fluctuations and discrete shocks simultaneously, and solved the project valuation equation as a two-factor partial differential equation (PDE) using the Crank–Nicolson finite difference method.”

Referring to the results of the model comparison, Dr. Amin emphasized: “A comparison of valuation results under the GBM model and the deterministic net present value (NPV) method shows that incorporating jump risk systematically calculates project value lower than the GBM estimate. Sensitivity analysis with respect to jump intensity, magnitude, and volatility also indicates the significant economic impact of these shocks. In other words, disregarding jump risk can lead to overvaluation of mining projects.”

The faculty member further referred to the methodological distinction between his research and other studies, saying: “Unlike many previous studies that model operational decisions such as continuing operations or stopping extraction as endogenous control variables, we interpreted these decisions exogenously using the calculated value level. In addition, Monte Carlo simulation was used to determine the range of possible states, and solving the PDE provided the full project value level for decision analysis.”

It should be noted that statistical tests have confirmed the results of this research.

https://link.springer.com/article/10.1007/s10287-026-00582-5