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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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Tuesday, 11 April 23
OIL RISES ON CHINA STIMULUS EXPECTATIONS, WEAKER DOLLAR - REUTERS
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Chinese businesses have posted a strong rebound in sales revenue since the beginning of this year in the latest signal of an improving economy.
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Sunday, 09 April 23
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Thursday, 06 April 23
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Sunday, 26 March 23
EUROPE’S RUSH TO LNG COULD TURN INTO 'WORLD’S MOST EXPENSIVE AND UNNECESSARY INSURANCE POLICY'- CNBC
Europe’s rapid buildout of liquefied natural gas infrastructure is on track to far exceed demand by the end of the decade, according to new r ...
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Showing 111 to 115 news of total 6871 |
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- Bhushan Steel Limited - India
- Samtan Co., Ltd - South Korea
- Coal and Oil Company - UAE
- Vedanta Resources Plc - India
- Interocean Group of Companies - India
- Global Green Power PLC Corporation, Philippines
- VISA Power Limited - India
- Deloitte Consulting - India
- Romanian Commodities Exchange
- Orica Australia Pty. Ltd.
- Xindia Steels Limited - India
- The State Trading Corporation of India Ltd
- PTC India Limited - India
- Eastern Energy - Thailand
- Petron Corporation, Philippines
- Bukit Makmur.PT - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Thiess Contractors Indonesia
- Cement Manufacturers Association - India
- Rio Tinto Coal - Australia
- Directorate General of MIneral and Coal - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Port Waratah Coal Services - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Electricity Generating Authority of Thailand
- Formosa Plastics Group - Taiwan
- Sindya Power Generating Company Private Ltd
- Agrawal Coal Company - India
- Heidelberg Cement - Germany
- Economic Council, Georgia
- Maharashtra Electricity Regulatory Commission - India
- Altura Mining Limited, Indonesia
- Aboitiz Power Corporation - Philippines
- SN Aboitiz Power Inc, Philippines
- New Zealand Coal & Carbon
- Power Finance Corporation Ltd., India
- Anglo American - United Kingdom
- Latin American Coal - Colombia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Madhucon Powers Ltd - India
- Barasentosa Lestari - Indonesia
- Ceylon Electricity Board - Sri Lanka
- PNOC Exploration Corporation - Philippines
- Kideco Jaya Agung - Indonesia
- Bulk Trading Sa - Switzerland
- Ambuja Cements Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Georgia Ports Authority, United States
- Toyota Tsusho Corporation, Japan
- Coastal Gujarat Power Limited - India
- International Coal Ventures Pvt Ltd - India
- The University of Queensland
- Antam Resourcindo - Indonesia
- CNBM International Corporation - China
- Vizag Seaport Private Limited - India
- Kepco SPC Power Corporation, Philippines
- Kumho Petrochemical, South Korea
- ASAPP Information Group - India
- TNB Fuel Sdn Bhd - Malaysia
- Ministry of Transport, Egypt
- India Bulls Power Limited - India
- Timah Investasi Mineral - Indoneisa
- Baramulti Group, Indonesia
- Riau Bara Harum - Indonesia
- Global Business Power Corporation, Philippines
- MS Steel International - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Indonesian Coal Mining Association
- Edison Trading Spa - Italy
- Makarim & Taira - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Semirara Mining and Power Corporation, Philippines
- SMC Global Power, Philippines
- Straits Asia Resources Limited - Singapore
- Maheswari Brothers Coal Limited - India
- Wilmar Investment Holdings
- Metalloyd Limited - United Kingdom
- Kartika Selabumi Mining - Indonesia
- Binh Thuan Hamico - Vietnam
- Thai Mozambique Logistica
- Tata Chemicals Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Petrochimia International Co. Ltd.- Taiwan
- Larsen & Toubro Limited - India
- Ind-Barath Power Infra Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Carbofer General Trading SA - India
- Salva Resources Pvt Ltd - India
- Borneo Indobara - Indonesia
- Indo Tambangraya Megah - Indonesia
- Marubeni Corporation - India
- Singapore Mercantile Exchange
- Globalindo Alam Lestari - Indonesia
- Siam City Cement PLC, Thailand
- Attock Cement Pakistan Limited
- Kobexindo Tractors - Indoneisa
- Sojitz Corporation - Japan
- Renaissance Capital - South Africa
- Bhatia International Limited - India
- Banpu Public Company Limited - Thailand
- Sree Jayajothi Cements Limited - India
- Medco Energi Mining Internasional
- Africa Commodities Group - South Africa
- Billiton Holdings Pty Ltd - Australia
- Energy Link Ltd, New Zealand
- South Luzon Thermal Energy Corporation
- Asmin Koalindo Tuhup - Indonesia
- Indogreen Group - Indonesia
- Sical Logistics Limited - India
- Trasteel International SA, Italy
- Orica Mining Services - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Videocon Industries ltd - India
- Bayan Resources Tbk. - Indonesia
- LBH Netherlands Bv - Netherlands
- Jindal Steel & Power Ltd - India
- Oldendorff Carriers - Singapore
- GN Power Mariveles Coal Plant, Philippines
- IEA Clean Coal Centre - UK
- San Jose City I Power Corp, Philippines
- SMG Consultants - Indonesia
- Parry Sugars Refinery, India
- Sakthi Sugars Limited - India
- GAC Shipping (India) Pvt Ltd
- Electricity Authority, New Zealand
- Iligan Light & Power Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Grasim Industreis Ltd - India
- IHS Mccloskey Coal Group - USA
- Jaiprakash Power Ventures ltd
- Central Electricity Authority - India
- White Energy Company Limited
- Gujarat Sidhee Cement - India
- Bangladesh Power Developement Board
- Chamber of Mines of South Africa
- Gujarat Electricity Regulatory Commission - India
- Tamil Nadu electricity Board
- Standard Chartered Bank - UAE
- Ministry of Mines - Canada
- Kapuas Tunggal Persada - Indonesia
- The Treasury - Australian Government
- Siam City Cement - Thailand
- Merrill Lynch Commodities Europe
- Krishnapatnam Port Company Ltd. - India
- GMR Energy Limited - India
- Indika Energy - Indonesia
- Malabar Cements Ltd - India
- Goldman Sachs - Singapore
- Independent Power Producers Association of India
- Cigading International Bulk Terminal - Indonesia
- Essar Steel Hazira Ltd - India
- Eastern Coal Council - USA
- CIMB Investment Bank - Malaysia
- Jorong Barutama Greston.PT - Indonesia
- Parliament of New Zealand
- Mintek Dendrill Indonesia
- Leighton Contractors Pty Ltd - Australia
- Australian Coal Association
- Wood Mackenzie - Singapore
- Commonwealth Bank - Australia
- Meralco Power Generation, Philippines
- TeaM Sual Corporation - Philippines
- Sarangani Energy Corporation, Philippines
- Semirara Mining Corp, Philippines
- Savvy Resources Ltd - HongKong
- ICICI Bank Limited - India
- Indian Energy Exchange, India
- Planning Commission, India
- Therma Luzon, Inc, Philippines
- Minerals Council of Australia
- Kaltim Prima Coal - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Intertek Mineral Services - Indonesia
- Uttam Galva Steels Limited - India
- Mjunction Services Limited - India
- European Bulk Services B.V. - Netherlands
- Aditya Birla Group - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Directorate Of Revenue Intelligence - India
- Bukit Asam (Persero) Tbk - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- GVK Power & Infra Limited - India
- Australian Commodity Traders Exchange
- Karbindo Abesyapradhi - Indoneisa
- Simpson Spence & Young - Indonesia
- Mercuria Energy - Indonesia
- Lanco Infratech Ltd - India
- Ministry of Finance - Indonesia
- Star Paper Mills Limited - India
- London Commodity Brokers - England
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Price Waterhouse Coopers - Russia
- Mercator Lines Limited - India
- PowerSource Philippines DevCo
- Central Java Power - Indonesia
- Pendopo Energi Batubara - Indonesia
- Bharathi Cement Corporation - India
- Rashtriya Ispat Nigam Limited - India
- Bhoruka Overseas - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Posco Energy - South Korea
- Chettinad Cement Corporation Ltd - India
- Indian Oil Corporation Limited
- Bank of Tokyo Mitsubishi UFJ Ltd
- McConnell Dowell - Australia
- Alfred C Toepfer International GmbH - Germany
- AsiaOL BioFuels Corp., Philippines
- Energy Development Corp, Philippines
- Coalindo Energy - Indonesia
- Global Coal Blending Company Limited - Australia
- Bukit Baiduri Energy - Indonesia
- OPG Power Generation Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- Meenaskhi Energy Private Limited - India
- Dalmia Cement Bharat India
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