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MINE in Streaming, 15.04.2020
@sdabocconi
Prof. Andrea Sommariva - Dott. Mattia Pianorsi
SPACE ECONOMY EVOLUTION LABORATORY
THE ECONOMICS OF MOON MINING
2
3
WHY DID WE CHOOSE TO
ANALYZE THE ICE AS
MAIN DRIVER FOR
BOOSTING THE SPACE
ECONOMY BEYOND THE
EARTH ORBIT?
4
RESEARCH PROJECT
OBJECTIVE
We try to answer:
# Whether space resource utilization by solely private market
is sustainable
# And what type of public-private partnerships are appropriate
to enable the development of a space private-sector market.
METHODOLOGY
Based on the data derived from Prof. Sowers’ “Commercial Lunar
Propellant Architecture” model, we applied
# The Net Present Value (NPV) to assess the economic
sustainability of the project
# And the Monte Carlo simulation to tackle the uncertainties
linked to this business.
5
RESEARCH OUTLINE
We focus on defining a model that encompasses three blocks:
1 ECONOMIC MODEL
It involves four steps:
# Identification of commercial uses of Lunar ice;
# Exploration and prospecting of Lunar ice;
# Development of Lunar mining infrastructures;
# Production of commercial goods (propellant).
2 BUSINESS MODEL
It concerns the identification of two business strategies
that can be implemented by private ventures:
# A private strategy
# A public-private partnership strategy
And the evaluation of their financial feasibility.
3 RISK MODEL
It models the probability of different outcomes of the two business
strategies that cannot easily be predicted due to the intervention of
random variables.
It is used to understand the impact of risk and uncertainty not fully
captured by the financial evaluation.
RE
SE
AR
CH
CO
NT
RIU
TIO
N
6
BUSINESS MODEL
STRUCTURE OF THE MARKET
1 EXPLORER
# Reserve definition: location, amount
and quality of the ice (exploration);
# Mining and recovering technologies
rendering (prospecting).
1 MINER
# Mining technologies development
# Production stages:
# Build phase;
# Plateau phase;
# Decline phase.
STRUCTURE OF THE COMPANY
PRIVATE MODEL
A vertically-integrated private company operates in the
exploration, prospecting, and mining activities .
PRIVATE-PUBLIC PARTNERSHIP MODEL
It involves public investments on a exploration mission
aimed at establishing proven reserves of ice at lunar poles.
Once proven, a vertically-integrated private company will
undertake a prospecting mission to identify extraction
technologies and an extraction demo, followed by
investments in mining activities and the production of
propellant.
STRATEGY EVALUATION
METHOD
We assume that the business strategy
# Private model
# Public-private partnership model
that maximizes the value of the
company, is considered as the best
option to pursue.
7
BUSINESS MODEL
1 NET PRESENT VALUE
# The net present value (NPV) is a financial methodology
for measuring value creation;
# The NPV is defined as
# The present values of all cash flows on the project,
including the initial investment
# With the cash flows being discounted at the appropriate
hurdle rate which represents the required return of investors
(time value of money).
# From a financial standpoint, and if forecasts are correct,
an investment with positive NPV is worth making since
it will create value.
# The NPV is
# where Fn are the cash flows generated by the project, r is
the applied discounting rate and n is the number of years for
which the security is discounted. C0 are the initial investments.
The evaluation of vertical integration
and private-public partnership
strategies requires the use
of two methodologies:
𝐹𝑛
(1 + 𝑟)𝑛− 𝐶0
𝑁
𝑛=1
8
BUSINESS MODEL
2 DECISION TREE ANALYSIS (DTA)
# Analyzing uncertainties in the exploration (assessment of ice
deposits, phase 1, and assessment of recovering technologies,
phase 2) of ice deposits;
# Estimating probabilities of success (p) and failure (1-p) with the
exploration (phase 1) and assessment (phase 2) of ice deposits;
# Discounting the contingent payoffs or discounted cash flows (v)
by probabilities, net of the investment requirements.
The evaluation of vertical integration
and private-public partnership
strategies requires the use
of two methodologies:
EXPLORATION PROSPECTING
9
BUSINESS MODEL PUBLIC-PRIVATE PARTNERSHIP MODEL
BUSINESS MODEL
KE
Y A
SS
UM
PT
ION
S
PRIVATE MODEL
Exploring, prospecting and mining company Prospecting and mining company
DTA PROBABILITY
Success and failure probabilities
of the exploration activity
associated with the two phases.
# Phase 1: success of the acquisition,
development and testing of the exploration
technology, and in the identification
of the location of one (or more) ice
reservoir(s) on the moon is equal to 50%;
# Phase 2: success of testing the quality and
quantity of the ice, and performing
a demo extraction procedure is equal to 60%.
# Phase 2: success of testing the quality and
quantity of the ice, and performing
a demo extraction procedure is equal
to 60%.
FREE CASH FLOW
Derived, computed
and projected from
# Revenues
# Costs
# Investments
# Revenues based on studies by the colorado
school of mines (CSM);
# Operating costs based on the CSM work;
# Investments based on the CSM work.
# Revenues based on studies by
the colorado school of mines (CSM);
# Operating costs based on the CSM work;
# Investments based on the CSM work.
COST OF CAPITAL
Rate of return required
by the project’s investors.
# 20%
# The riskiness of the exploring and the mining
company is the simple average between
the two identified discount factors
of stand-alone companies.
# 17%
# Estimated with the Capital Asset Pricing
Model (CAPM);
# Plus an additional premium to estimate
the risk/return for the mining activity
on the Moon.
10
NET PRESENT VALUE
VOLUME
Moon
100 MT/yr prop
LEO
1,260 MT/yr prop
EML 1
280 MT/yr prop
1,640 MT/yr propellant production on the Moon
GEO
LEO
LLO
EML 1
HALO
• LEO: Low Earth Orbit
• GEO: Geosynchronous Orbit
• EML 1: Earth-Moon
Lagrangian point
• LS: Lunar Surface
11
NET PRESENT VALUE
PRICE
Pricing fuel on the Moon:
# Assumption of complete knowledge of the missions;
# Average price moon surface = ∑ demand orbit
total demand x price orbit;
# The orbits are LEO, EML1, lunar surface.
PRICE OF PROPELLANTS ($/kg)
DELIVERED
FROM EARTH
DELIVERED
FROM LUNAR SURFACE
TO LEO 4,000 3,750
TO EML 1 12,000 7,500
TO LUNAR SURFACE 36,000 500
WEIGHTED AVERAGE PRICE n/m 1,482
12
NET PRESENT VALUE
COSTS
Costs of exploration and mining development
INVESTMENT COSTS (million of dollars)
EXPLORING HARDWARE DEVELOPMENT AND LAUNCH COSTS 455
MINING HARDWARE DEVELOPMENT AND LAUNCH COSTS 4,044
OPERATING COSTS (million of dollars)
EXPLORING HARDWARE DEVELOPMENT AND LAUNCH COSTS 245
MINING HARDWARE DEVELOPMENT AND LAUNCH COSTS 2,058
SUBLIMATION OPTIMAL CONDUCTING RODS OR HEATING ELEMENTS
ICE REGOLITH
SECONDARY OPTICS
IMPERMEABLE TENT WITH
REFLECTIVE INNER SURFACE
CONCENTRATED SUNLIGHT FROM
CRATER RIM
COLD TRAP
ICE HAULER
COLD TRAP
ICE HAULER
NOT TO SCALE
13
NET PRESENT VALUE
RESULTS
The results of the deterministic NPV for both private model
and public-private partnership case.
NPV (in billion of dollars) AND IRR (%)
PRIVATE
MODEL
PUBLIC-PRIVATE PARTNERSHIP
MODEL
NET PRESENT VALUE -0,04 1.84
INTERNAL RATE OF RETURN 19.3% 30%
# They indicate that the net present value of the private model
is negative (thus not acceptable as project), while the NPV
of the private-public partnership model case is positive.
# As the internal rate of return of the private model is below
the discount rate, it is a further indication of the non-profitability
of the strategy. On the contrary, the internal rate of return
of the private-public partnership model is much higher that the
discount rate, confirming a high profitability of these investments.
14
RISK MODEL
The estimates of investment
and operational costs and revenues
of the Colorado School of Mines
model are highly uncertain.
A risk model evaluates the exposure
of the ventures to the factors that
could lower their profits and lead
them to fail.
Anything that threatens a company’s
ability to meet its target or achieve its
financial goals is called business
risk.
BU
SIN
ES
S R
ISK
Business risk is associated
with the overall operation of a
business entity.
These are things that impair its
ability to provide investors and
stakeholders with adequate
returns.
TY
PE
S O
F B
US
INE
SS
RIS
KS
Strategic risk
Compliance risk
Financial risk
Operational risk
1
2
3
4
IMP
AC
TS
Revenues
Operating costs
Investments
1
2
3
that reflect on the variability
of expected cash flows of
the company and,
subsequently, on the NPV.
ME
TH
OD
OL
OG
Y
The NPV approach assumes
that there is only a possible
outcome given its deterministic
input values.
The Monte Carlo simulation
considers the factors of the
business risk that can lead to
future and unprecedented
events (i.e. lower revenues or
higher costs).
15
RISK MODEL
SIMULATION
PUBLIC-PRIVATE PARTNERSHIP MODEL
Assumes that both cost and revenue variables
are distributed as lognormal random variables,
with median values equal to the yearly revenues and costs
in the deterministic model.
Replicates 5,000 times the following steps.
At each iteration we calculated a new free cash flow:
# a new value of the total costs of investments are extracted
from the above lognormal distribution;
# yearly operative costs, and depreciation are computed
using the same percentages of the total expenditures
as in the deterministic model;
# revenues are extracted year by year from the above
lognormal distribution;
# discounted free cash flow to firm (FCFF) for each year
of the project.
1
2
16
RISK MODEL
RESULTS
PUBLIC-PRIVATE PARTNERSHIP MODEL
NET PRESENT VALUE DISTRIBUTION NET PRESENT VALUE DESCRIPTIVE STATISTICS
.00
.02
.04
.06
.08
.10
.12
-400 0 400 800 1,200 1,600 2,000 2,400 2,800 3,200
Rela
tive
Freq
uenc
y
5% and 95% quantiles in red, deterministic value in blue
Miner’s NPV at 17% discount rate (mln $)
Mean 1,867
Median 1,889
Maximum 3,171
Minimum -91
Std. Dev. 409
5% quantile 1,166
Probabilistic 1,843
95% quantile 2,526
17
RISK MODEL
RESULTS
PUBLIC-PRIVATE PARTNERSHIP MODEL
NET PRESENT VALUE FOR DIFFERENT DISCOUNT RATES NET PRESENT VALUE AND INTERNAL RATE OF RETURN
DESCRIPTIVE STATISTICS
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42
RATE %
V@R 5% 95 quantile NPV
NPV
Discount rate = 17%
IRR
NPV = 0
5% percentile 1,166 23%
Deterministic 1,843 29%
95% percentile 2,526 37%
18
CONCLUSIONS
The analysis rejects the vertical integration model as it produces a negative NPV:
# The company as a whole takes on the uncertainties derived from the entire exploration phase,
which negatively affect the value of the expected cash flows.
# The longer exploration period also extends the span of time without revenues
that are in turn reduced due to the value time of money.
The private-public partnership model produces positive a NPV, provided a successful completion of a prospecting
mission by government. The Montecarlo simulation shows that the private company faces almost 100% probability
of positive NPVs and of IRR much above the 17% discount rate indicating a high profitability of the model.
A final question is why governments should undertake prospecting missions at the lunar poles.
# Prospecting missions on the Moon by governments should occur if and only if their return exceeds the opportunity
costs. Returns are based on expectations of higher revenues such as taxes, higher employment and growth ,
all events that would happen here on Earth.
# Based on the discounted tax revenues generated by the private-public partnership model, the return is about 6%
per year. The opportunity costs consist of reduced consumption and displaced private capital. However,
lunar poles prospecting mission not only crowed in private investments by improving their returns through reduction
of prospecting costs and risks, but also increase consumption in the medium term through higher private
investments and increase in employment.
1
2
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SDA BOCCONI FLIES HIGHER IN EUROPE WE ARE N. 3 in Europe
European B-Schools Rankings 2019 - Financial Times
SPACE ECONOMY EVOLUTION LABORATORY
# Prof. Andrea Sommariva
# Dott. Mattia Pianorsi