Projected Outcomes of Exploration Programs Based on Current Program Status and the Impact of Prospects Under Consideration
Authors: Kinchen A.L. 
Published: December 2007

Projected Outcomes of Exploration Projected Outcomes of Exploration Programs Based on Current Programs Based on Current Program Status and the Impact of Program Status and the Impact of Prospects Under Consideration Prospects Under Consideration 13783

This paper is concerned with projection of the probable outcome of an exploration program at any time on the basis of the status of committed projects, whether or not their outcomes are known, and the characteristics of available prospects. On the basis of the projected outcome at any time, a course of action can be determined that could decrease exposure to loss or could increase expected return. Risk/return characteristics of additional prospects are identified to meet the appropriate objective.

Quantification of the probabilities of various outcomes is limited to reasonably simple computations such as the determination of "gambler's ruin" (the probability that the outcome of the program will be a total disaster). While in some cases this may provide insight, more useful information might be obtained, such as the projected probability of meeting a specific objective or the possibility of breaking even with currently committed, available, and expected prospects. Methods are presented to estimate these probabilities. The Appendix describes the mathematics involved in the procedures.

Introduction

Management of exploration portfolios concerns selection of prospects and allocation of capital. These decisions are constrained by the amount of capital, the level of acceptable risk, and the availability of prospects. The manager is faced with changing conditions during the period of a program. At the beginning, the total budget for the program. At the beginning, the total budget for the program is known, but only a few of the prospects that will program is known, but only a few of the prospects that will be reviewed are available for evaluation. Eventually, the outcomes of earlier projects will be known and their impact on the outcome of the program will be fixed. Toward the end of the program, the level of remaining capital and the outcomes of earlier prospects will dominate selection and allocation.

The purpose of this paper is to present a technique that addresses two shortcomings that are sometimes present in current risk-analysis techniques when applied to allocation of capital in an operating budget.

Established goals are monitored with units that are comfortable for the manager (assuming that he has a basic understanding of the quantification of uncertainty with assigned probabilities). Goals can be defined in clear, unambiguous terms. The impact of a project under review on the ultimate outcome of the program can be projected.

Similarly, projections can be made of the impact of the collection of currently committed projects on that outcome. In other words, "How am I doing" and "what should I do with my remaining uncommitted capital to do better?"

A primary difficulty with risk analysis or risk control lies in the interpretation of the quantities that are generated. The understanding of utiles, risk-adjusted dollars, or certainty-equivalent value is obscure at best and incomprehensible at worst. The quantities compared and the decisions reached by these approaches may be valid and consistent, but do not provide a framework for communication, even within a single organization of managers, accountants, financial officers or analysts, geologists, engineers, explorationists, and other professionals.

Management of an operating program involves selection of projects (prospects) and allocation of resources to each. projects (prospects) and allocation of resources to each. Risk Control

The control of risk is the reduction of the probability of an unpleasant outcome. The unpleasant outcome can take the form of a total loss of money, failure to break even, failure to meet an established goal, etc. Note that the word unpleasant has a subjective connotation. As with all approaches to risk analysis and control, certain parameters must be defined, either implicitly or explicitly, that reflect the risk attitude of the person or group that is exposed to the possibility of the unpleasantness. In this approach, the parameter is a confidence level required to meet specific goals. Unlike other approaches, notably the preference-theory approaches, this subjective parameter preference-theory approaches, this subjective parameter can be changed as external conditions change without introducing any inconsistency with previous work and analysis.

Several tools are available (although limited in use) that provide a readily understandable measure of some of the provide a readily understandable measure of some of the factors associated with management and allocation of capital in situations where uncertainty is a major factor.

JPT

P. 461