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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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Thursday, 14 July 11
INDO GOVT. SETS JULY COAL REFERENCE PRICE AT US$ 118.24 PER TON
COALspot.com - The Ministry of Energy & Mineral Resources of Indonesia sets coal spot price benchmark for July 2011 at US$ 118.24 per ton, US$ 0 ...
Thursday, 14 July 11
DRY BULK MARKET KEEPS FALLING ON WEAK CAPESIZE SENTIMENT - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market kept on retreating on Wednesday, with the Baltic Dry Index (BDI) falling to 1,383 points, from 1,411 of the previous day. Capesi ...
Thursday, 14 July 11
UNITED TRACTORS BUYS DUTA SEJAHTERA - INSIDER STORIES
Insider Stories reported that, PT United Tractors Tbk (UNTR), via a wholly-owned subsidiary PT Tuah Turangga Agung, will acquire PT Duta Sejahtera a ...
Wednesday, 13 July 11
ANOTHER FIRMER WEEK FOR THE CAPES - BRS
Barry Rogliano Salles reported that, there were mixed results for the dry bulk market this week: the Capesize and Panamax markets performed well gai ...
Tuesday, 12 July 11
INDONESIAN MINERS PLAN $70M INVESTMENT TO UPGRADE QUALITY OF COAL - THE JAKARTA GLOBE
One of the leading english language news paper in indonesia, the Jakarta globe reported that, as the government implements a ban on the export of po ...
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Showing 5191 to 5195 news of total 6871 |
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- Agrawal Coal Company - India
- Mercator Lines Limited - India
- Eastern Coal Council - USA
- Antam Resourcindo - Indonesia
- Sinarmas Energy and Mining - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Ministry of Transport, Egypt
- VISA Power Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Bayan Resources Tbk. - Indonesia
- Central Electricity Authority - India
- Bangladesh Power Developement Board
- CIMB Investment Bank - Malaysia
- Carbofer General Trading SA - India
- European Bulk Services B.V. - Netherlands
- Malabar Cements Ltd - India
- Uttam Galva Steels Limited - India
- Orica Australia Pty. Ltd.
- Georgia Ports Authority, United States
- Asmin Koalindo Tuhup - Indonesia
- Karaikal Port Pvt Ltd - India
- SMC Global Power, Philippines
- Global Coal Blending Company Limited - Australia
- Economic Council, Georgia
- Makarim & Taira - Indonesia
- Wilmar Investment Holdings
- Romanian Commodities Exchange
- Cement Manufacturers Association - India
- SMG Consultants - Indonesia
- The State Trading Corporation of India Ltd
- Electricity Authority, New Zealand
- Medco Energi Mining Internasional
- Intertek Mineral Services - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- White Energy Company Limited
- Africa Commodities Group - South Africa
- Leighton Contractors Pty Ltd - Australia
- Indonesian Coal Mining Association
- Meenaskhi Energy Private Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- IHS Mccloskey Coal Group - USA
- Bharathi Cement Corporation - India
- PowerSource Philippines DevCo
- Samtan Co., Ltd - South Korea
- Ministry of Finance - Indonesia
- Baramulti Group, Indonesia
- Jaiprakash Power Ventures ltd
- Independent Power Producers Association of India
- Riau Bara Harum - Indonesia
- Toyota Tsusho Corporation, Japan
- Gujarat Mineral Development Corp Ltd - India
- Renaissance Capital - South Africa
- Price Waterhouse Coopers - Russia
- Wood Mackenzie - Singapore
- Ceylon Electricity Board - Sri Lanka
- Commonwealth Bank - Australia
- Vizag Seaport Private Limited - India
- Global Business Power Corporation, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- OPG Power Generation Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Kobexindo Tractors - Indoneisa
- Bhoruka Overseas - Indonesia
- Latin American Coal - Colombia
- IEA Clean Coal Centre - UK
- Siam City Cement - Thailand
- Timah Investasi Mineral - Indoneisa
- Banpu Public Company Limited - Thailand
- Electricity Generating Authority of Thailand
- Orica Mining Services - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Gujarat Electricity Regulatory Commission - India
- Kepco SPC Power Corporation, Philippines
- Videocon Industries ltd - India
- Standard Chartered Bank - UAE
- Bukit Baiduri Energy - Indonesia
- Tata Chemicals Ltd - India
- Sarangani Energy Corporation, Philippines
- India Bulls Power Limited - India
- CNBM International Corporation - China
- Larsen & Toubro Limited - India
- Kideco Jaya Agung - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Star Paper Mills Limited - India
- Australian Commodity Traders Exchange
- Barasentosa Lestari - Indonesia
- Bukit Makmur.PT - Indonesia
- Dalmia Cement Bharat India
- Deloitte Consulting - India
- Oldendorff Carriers - Singapore
- Bulk Trading Sa - Switzerland
- Posco Energy - South Korea
- Parliament of New Zealand
- Altura Mining Limited, Indonesia
- Tamil Nadu electricity Board
- Chettinad Cement Corporation Ltd - India
- Rio Tinto Coal - Australia
- Sakthi Sugars Limited - India
- Minerals Council of Australia
- Coastal Gujarat Power Limited - India
- Goldman Sachs - Singapore
- GAC Shipping (India) Pvt Ltd
- Coalindo Energy - Indonesia
- Binh Thuan Hamico - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- ICICI Bank Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Planning Commission, India
- Ambuja Cements Ltd - India
- Kartika Selabumi Mining - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Vedanta Resources Plc - India
- New Zealand Coal & Carbon
- PTC India Limited - India
- Port Waratah Coal Services - Australia
- Mjunction Services Limited - India
- AsiaOL BioFuels Corp., Philippines
- Eastern Energy - Thailand
- Meralco Power Generation, Philippines
- Heidelberg Cement - Germany
- Indogreen Group - Indonesia
- Iligan Light & Power Inc, Philippines
- The University of Queensland
- Indo Tambangraya Megah - Indonesia
- Sical Logistics Limited - India
- Global Green Power PLC Corporation, Philippines
- Coal and Oil Company - UAE
- Pendopo Energi Batubara - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Savvy Resources Ltd - HongKong
- McConnell Dowell - Australia
- Kapuas Tunggal Persada - Indonesia
- Formosa Plastics Group - Taiwan
- SN Aboitiz Power Inc, Philippines
- Indian Energy Exchange, India
- Mercuria Energy - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Mintek Dendrill Indonesia
- Kumho Petrochemical, South Korea
- Singapore Mercantile Exchange
- MS Steel International - UAE
- Edison Trading Spa - Italy
- Aditya Birla Group - India
- International Coal Ventures Pvt Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- LBH Netherlands Bv - Netherlands
- Power Finance Corporation Ltd., India
- Central Java Power - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Marubeni Corporation - India
- Directorate Of Revenue Intelligence - India
- Bahari Cakrawala Sebuku - Indonesia
- GMR Energy Limited - India
- Lanco Infratech Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indian Oil Corporation Limited
- Rashtriya Ispat Nigam Limited - India
- Grasim Industreis Ltd - India
- ASAPP Information Group - India
- Krishnapatnam Port Company Ltd. - India
- Essar Steel Hazira Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Attock Cement Pakistan Limited
- Australian Coal Association
- Sindya Power Generating Company Private Ltd
- Xindia Steels Limited - India
- Sojitz Corporation - Japan
- Manunggal Multi Energi - Indonesia
- The Treasury - Australian Government
- Metalloyd Limited - United Kingdom
- Anglo American - United Kingdom
- Karbindo Abesyapradhi - Indoneisa
- Ministry of Mines - Canada
- Kohat Cement Company Ltd. - Pakistan
- Bhatia International Limited - India
- Sree Jayajothi Cements Limited - India
- Billiton Holdings Pty Ltd - Australia
- PNOC Exploration Corporation - Philippines
- Thai Mozambique Logistica
- Neyveli Lignite Corporation Ltd, - India
- Madhucon Powers Ltd - India
- Energy Development Corp, Philippines
- Alfred C Toepfer International GmbH - Germany
- Holcim Trading Pte Ltd - Singapore
- Maheswari Brothers Coal Limited - India
- Therma Luzon, Inc, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Indika Energy - Indonesia
- GVK Power & Infra Limited - India
- Aboitiz Power Corporation - Philippines
- Jindal Steel & Power Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Straits Asia Resources Limited - Singapore
- Interocean Group of Companies - India
- Chamber of Mines of South Africa
- TeaM Sual Corporation - Philippines
- San Jose City I Power Corp, Philippines
- Parry Sugars Refinery, India
- Petron Corporation, Philippines
- Salva Resources Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Semirara Mining Corp, Philippines
- Borneo Indobara - Indonesia
- Siam City Cement PLC, Thailand
- Thiess Contractors Indonesia
- Energy Link Ltd, New Zealand
- Merrill Lynch Commodities Europe
- Simpson Spence & Young - Indonesia
- Gujarat Sidhee Cement - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Globalindo Alam Lestari - Indonesia
- Ind-Barath Power Infra Limited - India
- London Commodity Brokers - England
- Trasteel International SA, Italy
- Bhushan Steel Limited - India
- Miang Besar Coal Terminal - Indonesia
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