Analyzing reproduction of correlations in Monte Carlo simulations: application to mine project valuation

Abstract

Monte Carlo (MC) simulations are extensively used to assess risk in mining ventures; however, the correlation between the inputs used to build the models is often overlooked. We observed how value-at-risk (VaR) of a mining venture was affected by running MC simulations, using two different input correlation methods: Spearman's rank correlation and copulas using Kendall's tau. The goal was to compare different correlation approaches on risk analysis associated with uncertain parameters of mining ventures and uncover which one would yield the most accurate result. Three case studies were carried out to compare correlation structures. Modelling the input variable correlations was better achieved using copulas since they were able to capture a wider range of correlations that did not make any linearity assumptions. In the case study based on MC simulations, the impact of the input correlation choice on the VaR was rather severe with an approximate 9% difference between the results obtained with Spearman's correlations and the Normal copula correlations.

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