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Tuesday, 13 September 11
CAPITAL COSTS OF INDIAN COAL MINING PROJECT - AN ANALYST VIEW
.jpg) By Mr Dipesh Dipu, Director - Consulting (Mining), Deloitte Touche Tohmatsu India Private Limited
The coal mining sector that has been opened partially through captive mining route has seen allocation of 208 coal blocks to private sector, government-owned power generation and other downstream companies. These coal blocks, however, have had limited success in terms of operationalisation on time and at budgeted costs. These have led to serious concerns for coal supplies for power generation sector in India.
One of the key concerns for the development of the coal mines in India has been the quantum of capital required which is the determinant of expected returns from investment perspective and the viability of the project in terms of affordability of power so generated. The capital costs for coal mining projects typically include costs of land, capital equipment and infrastructure to support mining and logistics. Project costs also include capitalised expenses for clearances and approvals that help the mining project take off.
Elements of Capital Costs
Cost of land typically means the cost of acquiring surface rights for coal bearing land for which allocation has been made by the appropriate authority. The recent social concerns that have generated a lot of debate in the country centre on the cost of land which the companies are willing to pay for acquiring surface rights. The recent trends indicate that the land values head northwards since the time of announcement of a project, which makes it challenging to estimate the cost of land. In states that have vast coal resources, the land acquisition issues have been observed to be acute. In Talcher and IB Valley coalfields of Orissa, for example, there are a large number of coal blocks proposed with massive capacities. In these coalfields, it may therefore be expected that land costs will be relatively higher for the coal mining projects. Costs of mining equipment largely dominate the project costs, although due to higher costs of land acquisitions, its proportions are likely to be revised downward. The costs of equipment, typically, are functions of geological characteristics, technology, mine design and requirement of coal processing. Equipment costs also include costs of electricity supply features, drainage systems, environmental management systems, surveillance systems and several others. The costs of construction of coal handling plants and railway siding are parts of support systems for evacuation of coal and if the coal project is relatively farther from the nearest railhead, the costs will be higher. For pit-head power project, the costs include the conveying system from mine to the coal handling system of the power project.
Key Determinants of Capital Costs
Technology is a key determinant of capital cost. Underground coal mining and surface (or opencast) mining has different requirements. In the underground mining methods, there are variants such as bord and pillar, longwall, shortwall and variants for thick seam mining such as horizontal slicing and inclined slicing; sub-level caving and others. The accesses to coal seams are made either through inclines (surface drifts) or vertical shafts, each of which may have substantially different capital cost. In surface mining methods, equipment selection largely determines the project costs - shovel-dumper combinations, dragline, bucket wheel excavators are mostly used in India. The geo-technical parameters like dip and strike length, inclination of seams, thickness of overburden layer, and stripping ratio are indicators of specifications of equipment required, which, in turn, indicate the capital costs.
Equipment selection, therefore, is at the core of the determination of capital costs. In surface mining, the equipment selection takes into account the geological features such as partings between coal seams and expected bench heights. These impact the selection of size of shovels and matching dumper sizes. In such cases, the natural economies of scale need not work and hence, the capital costs per tonne of production versus capacity or size of excavators is a non-linear function.
Apart from the excavators and hauling equipment, capital cost of surface mines also depend on size and number of drilling machines, which, in turn, are dependent on the hardness of the rock. For blasting, the use of site mix slurries or site mix emulsion explosives can eliminate the need to maintain a magazine at mine project and thus, lower the capital costs. Relatively softer rock formation, such as those of lignite, the drilling blasting processes may be replaced by continuous mining system as bucket wheel excavator. Rock fragmentation and the requirement of crushing (including secondary crushing and sizing) will determine the additional equipment required that have a direct bearing on capital costs.
Hydrological characteristics of mine indicate the requirement of drainage and pump capacities. These may be significant where the water tables are high and may have large capital costs required to keep the working faces prevented from being inundated.
Estimates
According to estimates, investments needed in surface coal mining in India are in the range of INR 1500-2100 (approximately US$ 31.65 - 44.30) per tonne of rated capacity. For example, investment in a one million tonne per annum capacity mine is expected to be INR 210 crore (approximately US$ 44.295 million). This estimation is based on a stripping ratio of 4:1 and appropriate adjustments can be made for projects that have higher or lower stripping ratios. This, however, is as good as only an estimate and for the purpose of evaluations and investment decision making purposes, nothing can substitute a detailed plan, including equipment selection and fleet size determination.
For underground mining, the estimates are in the range of INR 1900-2800 (approximately US$ 40.07 - 59.05) per tonne of rated capacity. These are estimated for project that are shallow (within 150 meters depth) and are worked with semi-mechanized bord and pillar mining methods.
Business models change contribution to capital costs
At a high level, project costs remain more or less unchanged, irrespective of ownerships and financing pattern. However, for the project developers, the project costs are not nearly as significant parameters as are the equity investments and returns thereof. The business models now being contemplated and implemented substantially reduces the equity investment and causes the owner of the coal mine to focus on alternative investments such as, those in power generation capacity building. Contract mining is fast catching up in India as the preferred mode for development and operations of mines. The business model of hiring contract mining companies for overburden removal and even mineral winning is not a recent innovation. There are a number of new projects being planned through contract routes. Even the traditional mining companies like, the Coal India Limited and SCCL have been contracting out their mining operations. The scope of work in many cases involves the contract mining company to use their own equipment to carry on mining activities, which reduces the capital expenditure requirement of the coal mine owner.
In a total outsourcing model, the owners contract out all the processes including statutory approvals and clearances, land acquisition, mine development and operations. The recently floated tenders of a few state government owned power utilities are proponents of this model. The prospective bidders for the contract mining projects are expected to conduct their own geo-technical assessments, study the feasibilities and bid for the long term contract. The owner pays for all of these as the coal is mined and delivered to the owner. This model reduces the capital expenditure required by the owner for the coal mine development to nearly negligible.
Other business model is that of equipment leasing, which reduces the initial capital cost substituting the same by a more manageable lease rentals. The finance and operating types of leases help the mining project to have substantially lower cash outflows at the beginning of the project and help match the revenues with the costs when the mine starts the production of coal.
Capital Cost Management
Costs form a part of the decision-making process and cannot be used as a stand-alone decision-making tool. For this reason, there are several frameworks that can be used as a decision-making tool for surface and underground mining projects. These frameworks incorporate thinking obtained from viewing costs as a holistic entity. Strategic Cost Management (SCM) provides the thinking behind viewing costs as a strategic issue. Life Cycle Costing (LCC) suggests making use of the Net Present Value (NPV) approach to account for the use of the capital equipment. The LCC approach incorporates a tool into the framework that ensures that the cost of technology (capital) is accounted for over its lifetime.
Costing is the processing of expenditures to calculate their cost to each project. A typical and an ideal cost management profile is given below:
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As costs increase, performance gets impaired. When cost reduction is periodically initiated, it often results in a temporary cull of capabilities, directly impacting on future ability to deliver performance. Where cost reductions are achieved, performance often recovers temporarily, only for focus on proactive cost management to be lost, and for costs to begin to increase again. Without specific cost management action, this cycle can continue indefinitely.
It must be observed that the ability to influence project success and enhance value is greatest at the start of project evaluation and rapidly declines as a project advances towards implementation. In the same instance, the cost of change dramatically increases throughout each project evaluation stage. This suggests that the quality of the decision making in the early stages of project evaluation, primarily focused at capital costs, is critical to an optimal project outcome.
Cost Escalations and Indices
In coal mining projects, capital costs are dynamic and are inflated when the projects get delayed. Cost indexes provide a means of adjusting out-dated capital and operating cost information for the effects of inflation due to such delays. They are based on statistical averages of costs for specific items and time periods. There are the composite indexes for capital and operating costs for each of surface and underground coal mining and coal processing (preparation) operations, which are calculated taking into account several projects done in the past as well as taking economic indices into account. Indexes for specific cost centres, e.g., labour, equipment, transportation, fuel, explosives, tires, electric power, natural gas, and industrial chemicals are available, which are being used by the industry and the regulators to allow prudent escalations in the capital and the operating costs.
The above analysis was originally published on Infraline.
The views and opinions / conclusion expressed on this analysis is purely the writers’ own.
About Dipesh Dipu
Dipesh Dipu works as Director with Deloitte in the Energy and Resources consulting practice of the firm and anchors the Firm’s initiative in the mining and metals sectors. He is a mining engineering graduate from Indian School of Mines and is a Chartered Financial Analyst (CFA).
He has also done executive program in business management from Indian Institute of Management Calcutta. Dipesh has recently been awarded the Abheraj Baldota Gold Medal for the Young Mining Engineer of the Year 2007 by the Mining Engineers’ Association of India in recognition of his contributions in the improvement of mining industry in India.
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Wednesday, 19 October 11
ADARO ACQUIRES BUKIT ENIM ENERGI - INSIDER STORIES
Insider Stories reported that, Coal miner PT Adaro Energy Tbk, via its subsidiary dubbed PT Alam Tri Abadi, today revealed a 46% stake takeover of a ...
Tuesday, 18 October 11
INDONESIAN PRESIDENT APPOINTS JERO WACIK AS NEW MINISTER OF ENERGY & MINERAL RESOURCES
COALspot.com - Jero Wacik has been appointed as minister of energy and mineral resources of Indonesia replacing Darwin Saleh and Prof. Widjajono Par ...
Tuesday, 18 October 11
DELTA DUNIA MAKMUR HAS PRODUCED 3.0 MILLION TONS OF COAL LAST MONTH
COALspot.com - PT. Delta Dunia Makmur, wholly owned subsidiary, PT Bukit Makmur Mandiri Utama (BUMA), Delta Dunia Makmur has removed 1.4 million bcm ...
Monday, 17 October 11
KOWEPO TO BUY 260,000 MT BITUMINOUS COAL
COALspot.com - KOWEPO has issued a spot tender for 260,000MT of minimum 5,600kcal/kg NAR Bituminous Coal.
The tender document also mentioned tha ...
Monday, 17 October 11
CAPESIZE SHIPPING COSTS CLIMB TO 10-MONTH HIGH ON ORE IMPORTS
The cost to hire capesize vessels climbed to a 10-month high as rising imports of iron ore to China boosted demand for the ships.Monthly iron-ore sh ...
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Showing 5026 to 5030 news of total 6871 |
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- Truba Alam Manunggal Engineering.Tbk - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Sindya Power Generating Company Private Ltd
- TNB Fuel Sdn Bhd - Malaysia
- Iligan Light & Power Inc, Philippines
- Oldendorff Carriers - Singapore
- Minerals Council of Australia
- Madhucon Powers Ltd - India
- White Energy Company Limited
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Manunggal Multi Energi - Indonesia
- European Bulk Services B.V. - Netherlands
- Petrochimia International Co. Ltd.- Taiwan
- Rashtriya Ispat Nigam Limited - India
- Heidelberg Cement - Germany
- Makarim & Taira - Indonesia
- Formosa Plastics Group - Taiwan
- Gujarat Electricity Regulatory Commission - India
- Goldman Sachs - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- SMG Consultants - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- GAC Shipping (India) Pvt Ltd
- Directorate Of Revenue Intelligence - India
- Coastal Gujarat Power Limited - India
- Eastern Coal Council - USA
- Krishnapatnam Port Company Ltd. - India
- Alfred C Toepfer International GmbH - Germany
- Singapore Mercantile Exchange
- ICICI Bank Limited - India
- Sical Logistics Limited - India
- Bukit Makmur.PT - Indonesia
- Pendopo Energi Batubara - Indonesia
- Planning Commission, India
- Kepco SPC Power Corporation, Philippines
- Bangladesh Power Developement Board
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Orica Mining Services - Indonesia
- Baramulti Group, Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Metalloyd Limited - United Kingdom
- Siam City Cement PLC, Thailand
- Vizag Seaport Private Limited - India
- PowerSource Philippines DevCo
- Mintek Dendrill Indonesia
- Holcim Trading Pte Ltd - Singapore
- SN Aboitiz Power Inc, Philippines
- ASAPP Information Group - India
- Toyota Tsusho Corporation, Japan
- Xindia Steels Limited - India
- Riau Bara Harum - Indonesia
- Meralco Power Generation, Philippines
- Ministry of Transport, Egypt
- The University of Queensland
- Kobexindo Tractors - Indoneisa
- Global Coal Blending Company Limited - Australia
- PTC India Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- GVK Power & Infra Limited - India
- McConnell Dowell - Australia
- Anglo American - United Kingdom
- Indian Oil Corporation Limited
- Salva Resources Pvt Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Vijayanagar Sugar Pvt Ltd - India
- Interocean Group of Companies - India
- Australian Commodity Traders Exchange
- Savvy Resources Ltd - HongKong
- Independent Power Producers Association of India
- Karaikal Port Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Thiess Contractors Indonesia
- Bhushan Steel Limited - India
- London Commodity Brokers - England
- Australian Coal Association
- TeaM Sual Corporation - Philippines
- The Treasury - Australian Government
- Orica Australia Pty. Ltd.
- Straits Asia Resources Limited - Singapore
- Bulk Trading Sa - Switzerland
- South Luzon Thermal Energy Corporation
- Carbofer General Trading SA - India
- Aboitiz Power Corporation - Philippines
- Grasim Industreis Ltd - India
- Petron Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Central Electricity Authority - India
- Bharathi Cement Corporation - India
- Barasentosa Lestari - Indonesia
- Price Waterhouse Coopers - Russia
- Aditya Birla Group - India
- Siam City Cement - Thailand
- Deloitte Consulting - India
- Rio Tinto Coal - Australia
- Essar Steel Hazira Ltd - India
- Malabar Cements Ltd - India
- Globalindo Alam Lestari - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Thai Mozambique Logistica
- Kalimantan Lumbung Energi - Indonesia
- SMC Global Power, Philippines
- Sakthi Sugars Limited - India
- Banpu Public Company Limited - Thailand
- Intertek Mineral Services - Indonesia
- Kumho Petrochemical, South Korea
- Eastern Energy - Thailand
- Sree Jayajothi Cements Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Chamber of Mines of South Africa
- Miang Besar Coal Terminal - Indonesia
- Indo Tambangraya Megah - Indonesia
- New Zealand Coal & Carbon
- PNOC Exploration Corporation - Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Vedanta Resources Plc - India
- Commonwealth Bank - Australia
- Therma Luzon, Inc, Philippines
- Bhoruka Overseas - Indonesia
- Simpson Spence & Young - Indonesia
- Dalmia Cement Bharat India
- VISA Power Limited - India
- Altura Mining Limited, Indonesia
- Kaltim Prima Coal - Indonesia
- Jindal Steel & Power Ltd - India
- Samtan Co., Ltd - South Korea
- Larsen & Toubro Limited - India
- Standard Chartered Bank - UAE
- Neyveli Lignite Corporation Ltd, - India
- Energy Link Ltd, New Zealand
- Tamil Nadu electricity Board
- International Coal Ventures Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Antam Resourcindo - Indonesia
- Coal and Oil Company - UAE
- AsiaOL BioFuels Corp., Philippines
- Timah Investasi Mineral - Indoneisa
- Indonesian Coal Mining Association
- Ministry of Finance - Indonesia
- Marubeni Corporation - India
- Global Business Power Corporation, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Ambuja Cements Ltd - India
- Mercuria Energy - Indonesia
- IHS Mccloskey Coal Group - USA
- Bayan Resources Tbk. - Indonesia
- LBH Netherlands Bv - Netherlands
- Maheswari Brothers Coal Limited - India
- Leighton Contractors Pty Ltd - Australia
- Sinarmas Energy and Mining - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Lanco Infratech Ltd - India
- The State Trading Corporation of India Ltd
- Jaiprakash Power Ventures ltd
- Wilmar Investment Holdings
- Maharashtra Electricity Regulatory Commission - India
- Electricity Generating Authority of Thailand
- Agrawal Coal Company - India
- IEA Clean Coal Centre - UK
- Romanian Commodities Exchange
- Bhatia International Limited - India
- Kideco Jaya Agung - Indonesia
- Medco Energi Mining Internasional
- San Jose City I Power Corp, Philippines
- Attock Cement Pakistan Limited
- Wood Mackenzie - Singapore
- Semirara Mining Corp, Philippines
- Coalindo Energy - Indonesia
- Mercator Lines Limited - India
- GMR Energy Limited - India
- Latin American Coal - Colombia
- Star Paper Mills Limited - India
- Sarangani Energy Corporation, Philippines
- Videocon Industries ltd - India
- Tata Chemicals Ltd - India
- CNBM International Corporation - China
- Indian Energy Exchange, India
- Asmin Koalindo Tuhup - Indonesia
- Indogreen Group - Indonesia
- Bukit Baiduri Energy - Indonesia
- Power Finance Corporation Ltd., India
- Ministry of Mines - Canada
- Bank of Tokyo Mitsubishi UFJ Ltd
- MS Steel International - UAE
- Cement Manufacturers Association - India
- Meenaskhi Energy Private Limited - India
- Georgia Ports Authority, United States
- Central Java Power - Indonesia
- Edison Trading Spa - Italy
- Merrill Lynch Commodities Europe
- Chettinad Cement Corporation Ltd - India
- OPG Power Generation Pvt Ltd - India
- Borneo Indobara - Indonesia
- Uttam Galva Steels Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Mjunction Services Limited - India
- Electricity Authority, New Zealand
- Cigading International Bulk Terminal - Indonesia
- Indika Energy - Indonesia
- Trasteel International SA, Italy
- Renaissance Capital - South Africa
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Parliament of New Zealand
- Binh Thuan Hamico - Vietnam
- Posco Energy - South Korea
- India Bulls Power Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Sojitz Corporation - Japan
- Semirara Mining and Power Corporation, Philippines
- Ind-Barath Power Infra Limited - India
- Gujarat Sidhee Cement - India
- Global Green Power PLC Corporation, Philippines
- Africa Commodities Group - South Africa
- Economic Council, Georgia
- Parry Sugars Refinery, India
- Energy Development Corp, Philippines
- CIMB Investment Bank - Malaysia
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