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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, 08 November 11
COAL MINER ABM INVESTAMA PLANS $290M PUBLIC OFFERING - JG
The Jakarta Globe reported that, ABM Investama, an Indonesian coal miner controlled by the Hamami family, plans to raise as much as Rp 2.6 trillion ...
Monday, 07 November 11
CHINA'S COAL IMPORTS STEAM AHEAD
Chinese seaborne coal imports have grown greatly in recent years, up from 39.2mt in 2008 to 167.7mt in 2010, with the result that China became a net ...
Saturday, 05 November 11
DEMAND SLUMP THREATENS MORE PAIN FOR BULK VESSELS - VISTAAR
COALspot.com - The market continued to fall with BDI dropping below 2,000 points by around 10 pct and closing at 1817 points. The cape index also co ...
Saturday, 05 November 11
BERAU STARTS TO EXPLORE BINUNGAN SITE - INSIDER STORIES
Insider Stories reported that, coal miner PT Berau Coal, a 90% owned subsidiary of PT Berau Coal Energy Tbk (BRAU), is busy to hold exploration in B ...
Friday, 04 November 11
INDIAN IRON ORE MARKET REMAINS DEAD - FEARNLEYS
Handy
The Atlantic market kept its strong position from last week. Even with fewer fixtures reported. Fronthauls still around 25k, wit ...
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- Petrochimia International Co. Ltd.- Taiwan
- Timah Investasi Mineral - Indoneisa
- GMR Energy Limited - India
- Ministry of Transport, Egypt
- Jaiprakash Power Ventures ltd
- Chamber of Mines of South Africa
- Leighton Contractors Pty Ltd - Australia
- Indika Energy - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- IEA Clean Coal Centre - UK
- San Jose City I Power Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Mjunction Services Limited - India
- SMC Global Power, Philippines
- Xindia Steels Limited - India
- Posco Energy - South Korea
- Krishnapatnam Port Company Ltd. - India
- Coastal Gujarat Power Limited - India
- Wood Mackenzie - Singapore
- Orica Mining Services - Indonesia
- Standard Chartered Bank - UAE
- Electricity Authority, New Zealand
- India Bulls Power Limited - India
- Riau Bara Harum - Indonesia
- The State Trading Corporation of India Ltd
- Dalmia Cement Bharat India
- PTC India Limited - India
- Renaissance Capital - South Africa
- Binh Thuan Hamico - Vietnam
- Directorate Of Revenue Intelligence - India
- Rio Tinto Coal - Australia
- Heidelberg Cement - Germany
- Ministry of Finance - Indonesia
- Jindal Steel & Power Ltd - India
- Oldendorff Carriers - Singapore
- Karaikal Port Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- ICICI Bank Limited - India
- GVK Power & Infra Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Alfred C Toepfer International GmbH - Germany
- Indo Tambangraya Megah - Indonesia
- Siam City Cement PLC, Thailand
- Altura Mining Limited, Indonesia
- Grasim Industreis Ltd - India
- Africa Commodities Group - South Africa
- Port Waratah Coal Services - Australia
- Directorate General of MIneral and Coal - Indonesia
- Marubeni Corporation - India
- Mercator Lines Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Karbindo Abesyapradhi - Indoneisa
- Bukit Asam (Persero) Tbk - Indonesia
- Barasentosa Lestari - Indonesia
- Salva Resources Pvt Ltd - India
- Bhatia International Limited - India
- Thiess Contractors Indonesia
- LBH Netherlands Bv - Netherlands
- VISA Power Limited - India
- Siam City Cement - Thailand
- CNBM International Corporation - China
- Madhucon Powers Ltd - India
- Global Business Power Corporation, Philippines
- Romanian Commodities Exchange
- New Zealand Coal & Carbon
- Sindya Power Generating Company Private Ltd
- GN Power Mariveles Coal Plant, Philippines
- Vizag Seaport Private Limited - India
- Semirara Mining and Power Corporation, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- European Bulk Services B.V. - Netherlands
- Eastern Energy - Thailand
- Bank of Tokyo Mitsubishi UFJ Ltd
- Borneo Indobara - Indonesia
- Mintek Dendrill Indonesia
- Savvy Resources Ltd - HongKong
- Central Java Power - Indonesia
- Anglo American - United Kingdom
- Global Green Power PLC Corporation, Philippines
- The University of Queensland
- Formosa Plastics Group - Taiwan
- Videocon Industries ltd - India
- Baramulti Group, Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Price Waterhouse Coopers - Russia
- Iligan Light & Power Inc, Philippines
- Sojitz Corporation - Japan
- Star Paper Mills Limited - India
- Kumho Petrochemical, South Korea
- CIMB Investment Bank - Malaysia
- Rashtriya Ispat Nigam Limited - India
- Ind-Barath Power Infra Limited - India
- Merrill Lynch Commodities Europe
- Aditya Birla Group - India
- Economic Council, Georgia
- Thai Mozambique Logistica
- Mercuria Energy - Indonesia
- Larsen & Toubro Limited - India
- London Commodity Brokers - England
- Australian Coal Association
- Central Electricity Authority - India
- Indogreen Group - Indonesia
- Globalindo Alam Lestari - Indonesia
- Chettinad Cement Corporation Ltd - India
- Aboitiz Power Corporation - Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Goldman Sachs - Singapore
- Billiton Holdings Pty Ltd - Australia
- Indonesian Coal Mining Association
- Maharashtra Electricity Regulatory Commission - India
- Vedanta Resources Plc - India
- Samtan Co., Ltd - South Korea
- Coal and Oil Company - UAE
- Sakthi Sugars Limited - India
- Interocean Group of Companies - India
- Jorong Barutama Greston.PT - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Banpu Public Company Limited - Thailand
- Latin American Coal - Colombia
- Meenaskhi Energy Private Limited - India
- Power Finance Corporation Ltd., India
- Cigading International Bulk Terminal - Indonesia
- Straits Asia Resources Limited - Singapore
- Bangladesh Power Developement Board
- Electricity Generating Authority of Thailand
- Eastern Coal Council - USA
- Holcim Trading Pte Ltd - Singapore
- Makarim & Taira - Indonesia
- PNOC Exploration Corporation - Philippines
- The Treasury - Australian Government
- Semirara Mining Corp, Philippines
- Energy Link Ltd, New Zealand
- IHS Mccloskey Coal Group - USA
- Parry Sugars Refinery, India
- Wilmar Investment Holdings
- Sarangani Energy Corporation, Philippines
- Indian Oil Corporation Limited
- Energy Development Corp, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Bayan Resources Tbk. - Indonesia
- OPG Power Generation Pvt Ltd - India
- Toyota Tsusho Corporation, Japan
- Manunggal Multi Energi - Indonesia
- Commonwealth Bank - Australia
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- Gujarat Sidhee Cement - India
- Miang Besar Coal Terminal - Indonesia
- Cement Manufacturers Association - India
- Independent Power Producers Association of India
- Uttam Galva Steels Limited - India
- Tamil Nadu electricity Board
- Asmin Koalindo Tuhup - Indonesia
- Petron Corporation, Philippines
- Kartika Selabumi Mining - Indonesia
- Parliament of New Zealand
- Bukit Baiduri Energy - Indonesia
- Maheswari Brothers Coal Limited - India
- Simpson Spence & Young - Indonesia
- PowerSource Philippines DevCo
- Georgia Ports Authority, United States
- Sree Jayajothi Cements Limited - India
- Pendopo Energi Batubara - Indonesia
- Malabar Cements Ltd - India
- TeaM Sual Corporation - Philippines
- Carbofer General Trading SA - India
- Trasteel International SA, Italy
- Bulk Trading Sa - Switzerland
- Singapore Mercantile Exchange
- Therma Luzon, Inc, Philippines
- Sinarmas Energy and Mining - Indonesia
- Ambuja Cements Ltd - India
- Kobexindo Tractors - Indoneisa
- Bharathi Cement Corporation - India
- Attock Cement Pakistan Limited
- Metalloyd Limited - United Kingdom
- Bahari Cakrawala Sebuku - Indonesia
- Kaltim Prima Coal - Indonesia
- Essar Steel Hazira Ltd - India
- SN Aboitiz Power Inc, Philippines
- Kepco SPC Power Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- GAC Shipping (India) Pvt Ltd
- International Coal Ventures Pvt Ltd - India
- Australian Commodity Traders Exchange
- Edison Trading Spa - Italy
- Kalimantan Lumbung Energi - Indonesia
- Global Coal Blending Company Limited - Australia
- Deloitte Consulting - India
- Coalindo Energy - Indonesia
- Bhushan Steel Limited - India
- Gujarat Electricity Regulatory Commission - India
- AsiaOL BioFuels Corp., Philippines
- Orica Australia Pty. Ltd.
- Agrawal Coal Company - India
- Tata Chemicals Ltd - India
- MS Steel International - UAE
- Intertek Mineral Services - Indonesia
- Meralco Power Generation, Philippines
- Sical Logistics Limited - India
- SMG Consultants - Indonesia
- Antam Resourcindo - Indonesia
- Medco Energi Mining Internasional
- South Luzon Thermal Energy Corporation
- Bhoruka Overseas - Indonesia
- Indian Energy Exchange, India
- ASAPP Information Group - India
- Lanco Infratech Ltd - India
- Kideco Jaya Agung - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Planning Commission, India
- Minerals Council of Australia
- White Energy Company Limited
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- McConnell Dowell - Australia
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