The application of the concept of Real Options in the valuation of natural resources (mining, oil, gas) is historical and central. It is mainly based on the high volatility of raw material prices and the operational flexibility of the extraction sites.

The main applications identified are:

1. Dynamic capacity management (Opening/closing)

It is the most relevant and documented application. It views the mine or the oil well not as a continuous-flow asset, but as a flexible production option.

• The “Mothballing” option: When the price of the raw material falls below the cost of extraction, the company has the option to temporarily close the site. It stops producing at a loss while paying maintenance costs to keep the mine in a state of recovery.
• Economic arbitrage: The decision to close or reopen depends not only on the immediate margin (Price – Cost), but also on the volatility of prices. High volatility justifies keeping a mine open (even with a low current loss) to retain the option to profit from a future price rebound.
• The abandonment option: If the price falls too low and the hope of a rebound no longer covers the maintenance costs, the company exercises the abandonment option (permanent closure).

2. Valuation of reserves (Asset valuation)

Real options are used to determine the market value of a mine or oil field, including divestitures.

• Valuation of reserves: The model makes it possible to estimate the value of proven and probable reserves by integrating the flexibility of future extraction in the face of market price variability.
• Financial analogy: In this sector, valuation often uses continuous-time models (such as Black & Scholes or geometric Brownian motion) because there are financial markets (spot and futures) for commodities, providing the necessary volatility data.

3. Sequential development (Exploration and Investment)

Although less detailed than capacity management in the section dedicated to natural resources, the principle of phased investment applies to exploration.

• The initial investment in the exploration or development of a mine can be seen as the purchase of an option to start production later if market conditions are favourable.

Application limitations

The sources note an important limitation: although theoretically robust, these models often assume that prices follow a random march (Brownian motion). However, over the very long term (more than 10 years), the statistical validity of this model for nature reserves is disputed. This is why, for financial reporting (e.g. oil reserves), companies often prefer a classic discounted cash flow (DCF) approach with several price scenarios rather than the pure optional approach.