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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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Sunday, 14 August 11
SUPRAMAX CHARTER RATES SHARPLY UP - CAPT.REDDY
COALspot.com - The BDI ended positive with gains in Cape and Panamax index. The BDI was up by 1.50 pct and the cape and panamax index was up by almo ...
Saturday, 13 August 11
GMR HAS ENTERED INTO CSPA WITH GEMS TO ACQUIRE 30% STAKE
COALspot.com - GMR Infrastructure Investments (Singapore) Pte Ltd, a subsidiary of GMR Infrastructure, has signed conditional sale and purchase agre ...
Friday, 12 August 11
COAL MINERS WILL ALLOW TO CONSTRUCT MINE MOUTH POWER PLANT
COALspot.com - The government is set to draft a regulation to enable construction of steam-fired power plants (PLTU) by coal mining companies for th ...
Friday, 12 August 11
CAPESIZE DEMAND HELPS LIFTING OF DRY BULK MARKET - HELLENIC SHIPPING NEWS
The dry bulk market has recovered a small fraction of its lost ground this week, with higher returns as a result of increased capesize demand. This ...
Thursday, 11 August 11
INDO TAMBANGRAYA 1H NET PROFIT SOARS 53.09%
Coal miner PT Indo Tambangraya Megah Tbk (ITMG) today reported a 53.09% jump in net profit for the first 6 months of this year on the back of higher ...
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- Bangladesh Power Developement Board
- Georgia Ports Authority, United States
- Ind-Barath Power Infra Limited - India
- PTC India Limited - India
- Vedanta Resources Plc - India
- Simpson Spence & Young - Indonesia
- Manunggal Multi Energi - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Attock Cement Pakistan Limited
- Electricity Authority, New Zealand
- TeaM Sual Corporation - Philippines
- Timah Investasi Mineral - Indoneisa
- Grasim Industreis Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Borneo Indobara - Indonesia
- White Energy Company Limited
- Chamber of Mines of South Africa
- Vijayanagar Sugar Pvt Ltd - India
- Sakthi Sugars Limited - India
- Star Paper Mills Limited - India
- Sarangani Energy Corporation, Philippines
- Formosa Plastics Group - Taiwan
- Orica Mining Services - Indonesia
- Parliament of New Zealand
- Jaiprakash Power Ventures ltd
- Baramulti Group, Indonesia
- Bayan Resources Tbk. - Indonesia
- Indian Energy Exchange, India
- London Commodity Brokers - England
- McConnell Dowell - Australia
- IEA Clean Coal Centre - UK
- Mintek Dendrill Indonesia
- Siam City Cement - Thailand
- Siam City Cement PLC, Thailand
- Bhushan Steel Limited - India
- GVK Power & Infra Limited - India
- Anglo American - United Kingdom
- Bhoruka Overseas - Indonesia
- Australian Commodity Traders Exchange
- Mercator Lines Limited - India
- Interocean Group of Companies - India
- Indian Oil Corporation Limited
- Coalindo Energy - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Krishnapatnam Port Company Ltd. - India
- Indonesian Coal Mining Association
- CNBM International Corporation - China
- Commonwealth Bank - Australia
- India Bulls Power Limited - India
- Uttam Galva Steels Limited - India
- Bhatia International Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Power Finance Corporation Ltd., India
- Straits Asia Resources Limited - Singapore
- PNOC Exploration Corporation - Philippines
- Parry Sugars Refinery, India
- Ministry of Finance - Indonesia
- Ministry of Mines - Canada
- Lanco Infratech Ltd - India
- ASAPP Information Group - India
- Thai Mozambique Logistica
- Asmin Koalindo Tuhup - Indonesia
- Therma Luzon, Inc, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Coastal Gujarat Power Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Independent Power Producers Association of India
- European Bulk Services B.V. - Netherlands
- Orica Australia Pty. Ltd.
- Dalmia Cement Bharat India
- Latin American Coal - Colombia
- Global Green Power PLC Corporation, Philippines
- Oldendorff Carriers - Singapore
- Kaltim Prima Coal - Indonesia
- The State Trading Corporation of India Ltd
- Deloitte Consulting - India
- Energy Link Ltd, New Zealand
- Videocon Industries ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Iligan Light & Power Inc, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Carbofer General Trading SA - India
- Mjunction Services Limited - India
- Xindia Steels Limited - India
- Salva Resources Pvt Ltd - India
- Eastern Energy - Thailand
- Sindya Power Generating Company Private Ltd
- Kideco Jaya Agung - Indonesia
- Aditya Birla Group - India
- Energy Development Corp, Philippines
- Central Java Power - Indonesia
- Gujarat Electricity Regulatory Commission - India
- TNB Fuel Sdn Bhd - Malaysia
- Australian Coal Association
- Antam Resourcindo - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Singapore Mercantile Exchange
- Cigading International Bulk Terminal - Indonesia
- Chettinad Cement Corporation Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Planning Commission, India
- Rashtriya Ispat Nigam Limited - India
- Kobexindo Tractors - Indoneisa
- Economic Council, Georgia
- OPG Power Generation Pvt Ltd - India
- Romanian Commodities Exchange
- Directorate Of Revenue Intelligence - India
- Global Business Power Corporation, Philippines
- Cement Manufacturers Association - India
- GAC Shipping (India) Pvt Ltd
- Sical Logistics Limited - India
- Global Coal Blending Company Limited - Australia
- Petrochimia International Co. Ltd.- Taiwan
- Kapuas Tunggal Persada - Indonesia
- Coal and Oil Company - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Kumho Petrochemical, South Korea
- Toyota Tsusho Corporation, Japan
- Essar Steel Hazira Ltd - India
- Agrawal Coal Company - India
- Tata Chemicals Ltd - India
- Sree Jayajothi Cements Limited - India
- Kepco SPC Power Corporation, Philippines
- AsiaOL BioFuels Corp., Philippines
- Leighton Contractors Pty Ltd - Australia
- Karaikal Port Pvt Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Vizag Seaport Private Limited - India
- Malabar Cements Ltd - India
- SMG Consultants - Indonesia
- Pendopo Energi Batubara - Indonesia
- IHS Mccloskey Coal Group - USA
- Petron Corporation, Philippines
- Indogreen Group - Indonesia
- Gujarat Sidhee Cement - India
- Thiess Contractors Indonesia
- Meenaskhi Energy Private Limited - India
- The Treasury - Australian Government
- Meralco Power Generation, Philippines
- Samtan Co., Ltd - South Korea
- Kartika Selabumi Mining - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Jindal Steel & Power Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Semirara Mining Corp, Philippines
- Wilmar Investment Holdings
- Renaissance Capital - South Africa
- San Jose City I Power Corp, Philippines
- Tamil Nadu electricity Board
- Asia Pacific Energy Resources Ventures Inc, Philippines
- South Luzon Thermal Energy Corporation
- Medco Energi Mining Internasional
- Altura Mining Limited, Indonesia
- Bharathi Cement Corporation - India
- Heidelberg Cement - Germany
- VISA Power Limited - India
- PowerSource Philippines DevCo
- Eastern Coal Council - USA
- Port Waratah Coal Services - Australia
- Electricity Generating Authority of Thailand
- Posco Energy - South Korea
- Barasentosa Lestari - Indonesia
- Standard Chartered Bank - UAE
- SN Aboitiz Power Inc, Philippines
- Riau Bara Harum - Indonesia
- Bulk Trading Sa - Switzerland
- Sinarmas Energy and Mining - Indonesia
- Intertek Mineral Services - Indonesia
- Maheswari Brothers Coal Limited - India
- Makarim & Taira - Indonesia
- Edison Trading Spa - Italy
- ICICI Bank Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- International Coal Ventures Pvt Ltd - India
- MS Steel International - UAE
- The University of Queensland
- Trasteel International SA, Italy
- Ambuja Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Rio Tinto Coal - Australia
- Bukit Baiduri Energy - Indonesia
- Price Waterhouse Coopers - Russia
- Ministry of Transport, Egypt
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- SMC Global Power, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Globalindo Alam Lestari - Indonesia
- Indo Tambangraya Megah - Indonesia
- Minerals Council of Australia
- LBH Netherlands Bv - Netherlands
- Banpu Public Company Limited - Thailand
- Bahari Cakrawala Sebuku - Indonesia
- Sojitz Corporation - Japan
- Metalloyd Limited - United Kingdom
- CIMB Investment Bank - Malaysia
- GMR Energy Limited - India
- Mercuria Energy - Indonesia
- Indika Energy - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Ceylon Electricity Board - Sri Lanka
- Billiton Holdings Pty Ltd - Australia
- New Zealand Coal & Carbon
- Wood Mackenzie - Singapore
- Africa Commodities Group - South Africa
- Aboitiz Power Corporation - Philippines
- Larsen & Toubro Limited - India
- Merrill Lynch Commodities Europe
- Central Electricity Authority - India
- Madhucon Powers Ltd - India
- Binh Thuan Hamico - Vietnam
- Goldman Sachs - Singapore
- Savvy Resources Ltd - HongKong
- Marubeni Corporation - India
- PetroVietnam Power Coal Import and Supply Company
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