Evaluating Natural Resource Investments Using the Least–Squares Monte Carlo Simulation Approach∗

The idea that Monte Carlo simulation can not be applied to the pricing of options (real or financial) with early exercise features has been overridden in the light of new research results in the last decade. This paper attempts to contribute to this revived interest on Monte Carlo simulation valuation, by applying the proposed least–squares simulation method to the valuation of a hypothetical natural resource investment. Results seem to suggest that the Monte Carlo framework might be a natural way forward in the valuation of investments under multiple uncertainties and project–specific complexities. ∗Very preliminary. Please do not quote without permission. †Corresponding author, Department of Economics & Finance, University of Durham, 23–26 Old Elvet, Durham, DH1 3HY, United Kingdom. Phone: +44 (0)191 3346347. Fax: +44 (0)191 3747289. e-mail: [email protected]. ‡Department of Accounting & Finance, Management School, Lancaster University, Lancaster, LA1 4YX, United Kingdom. e-mail: [m.shackleton, r.wojakowski]@lancaster.ac.uk.