Can Royalties Payments in the Mining Sector Be Taken as Options

In the case of the Republic of Guinea, royalties payments are expressed in terms of the grade of Alumina, a taxation coefficient on each metric ton of bauxite and the three-month price of Aluminum at the London Metal Exchange (LME). In this work, we have examined the royalty's formula and found it to be identical to the options formula used in financial engineering. Options are financial derivatives used to protect investors against risky fluctuations of stocks and they are issued only to stock holders. Options were priced for the first time by using the Black-Scholes stochastic differential equation. Because of the mathematical similarity of the royalty's formula with the options formula priced by the Black-Scholes stochastic differential equation, we opted to replacing the price of Aluminum at the London Metal Exchange with the call options pricing formula. Now, instead of having the price of Aluminum as an index price, we had the price of Aluminum to be governed by the Black-Scholes stochastic differential equation which will make revenues from royalties to fluctuate as the price of Aluminum fluctuates.