Justification techniques for information technology infrastructure in mining

Abstract

Information-based technologies are seen as a key source of future productivity improvements in mines. An important trend in information technology (IT) is the integration of data that can lead to improvements in a multitude of strategic and tactical functions. These information technology infrastructure (ITI) investments are difficult to justify financially because many of the advantages are derived from subsequent projects that improve flexibility, quality, and operational control. ITI enables the option to invest in subsequent projects but rarely provides immediate benefits. Other industries have adopted the use of real-options pricing methods as an empirically proven method to quantify the financial value of these enabling investments. Real-options pricing models are based on the mathematics developed to value financial options in stock markets. One of the simplest option pricing models is the Black-Scholes option pricing method (BSOPM). Other option pricing models commonly used in ITI justification include the Growth and Compound option models. They have been used to justify data warehouse development. Data warehouses are large databases that integrate data from sources throughout the company, and re-structure the data to facilitate analysis and modelling along integrated business processes. Data warehouses in themselves do not add value to the company; however, they can be used in other business improvement projects that can result in positive outcomes. The BSOPM is used in this paper to value the investment in a data warehouse. Although there are many other option-pricing models and option types, the BSOPM was used to illustrate this example due to its simplicity so as to introduce the mineral industry to this application. Including a more accurate measurement of the value of these investment options increases the insight of justification packages, especially when dealing with complex systems such as ITI.