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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, 01 November 11
ATLAS RESOURCES SETS IPO AT RP1,500 - INSIDER STORIES
Insider Stories reported that, coal miner PT Atlas Resources Tbk has set its initial public offering (IPO) at Rp1,500 (approximately US$ 0.169) per ...
Tuesday, 01 November 11
DRY BULK MARKETS CORRECTION SPILLS OVER ONTO NEW WEEK - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market is losing steam, as evidenced by the falls experienced last week, which were also apparent at the beginning of the new week. A l ...
Monday, 31 October 11
CHINAS HUNGER FOR INDONESIAN COAL AT THREE YEAR-HIGH AS WINTER NEARS - JOSEPH KIRSCHKE
COALspot.com - Chinese demand for power-station coal from Indonesia has soared to its highest level in three years, as central heating plants and po ...
Saturday, 29 October 11
ATLAS RESOURCES SEALS US$95 MIO LOAN - INSIDER STORIES
Insider Stories reported that, coal producer PT Atlas Resources Tbk, that is controlled by Indonesian businessman Andre Abdi, has secured US$95 mill ...
Saturday, 29 October 11
INDONESIA TO INDIA FREIGHT LIKELY TO REMAIN SOFT
COALspot.com - The market continued to slow down and all segment were down this week.
The biggest drop was in the Cape Index down by 8.19 pct&nbs ...
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Showing 5001 to 5005 news of total 6871 |
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- Australian Coal Association
- TNB Fuel Sdn Bhd - Malaysia
- Kideco Jaya Agung - Indonesia
- IHS Mccloskey Coal Group - USA
- Ministry of Finance - Indonesia
- Electricity Generating Authority of Thailand
- Ind-Barath Power Infra Limited - India
- Medco Energi Mining Internasional
- Aboitiz Power Corporation - Philippines
- Mercuria Energy - Indonesia
- Sarangani Energy Corporation, Philippines
- Wood Mackenzie - Singapore
- Bank of Tokyo Mitsubishi UFJ Ltd
- IEA Clean Coal Centre - UK
- Meralco Power Generation, Philippines
- Energy Link Ltd, New Zealand
- Simpson Spence & Young - Indonesia
- Georgia Ports Authority, United States
- Independent Power Producers Association of India
- Iligan Light & Power Inc, Philippines
- Alfred C Toepfer International GmbH - Germany
- Globalindo Alam Lestari - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Heidelberg Cement - Germany
- Formosa Plastics Group - Taiwan
- Pendopo Energi Batubara - Indonesia
- Altura Mining Limited, Indonesia
- Coastal Gujarat Power Limited - India
- Romanian Commodities Exchange
- Kohat Cement Company Ltd. - Pakistan
- India Bulls Power Limited - India
- Bukit Makmur.PT - Indonesia
- Thiess Contractors Indonesia
- San Jose City I Power Corp, Philippines
- Binh Thuan Hamico - Vietnam
- Eastern Coal Council - USA
- Essar Steel Hazira Ltd - India
- Energy Development Corp, Philippines
- Kumho Petrochemical, South Korea
- ICICI Bank Limited - India
- Global Business Power Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- SN Aboitiz Power Inc, Philippines
- Africa Commodities Group - South Africa
- Manunggal Multi Energi - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Orica Australia Pty. Ltd.
- Riau Bara Harum - Indonesia
- Borneo Indobara - Indonesia
- Goldman Sachs - Singapore
- Star Paper Mills Limited - India
- Maharashtra Electricity Regulatory Commission - India
- GVK Power & Infra Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Bhushan Steel Limited - India
- Sree Jayajothi Cements Limited - India
- Rio Tinto Coal - Australia
- PTC India Limited - India
- Videocon Industries ltd - India
- Kalimantan Lumbung Energi - Indonesia
- London Commodity Brokers - England
- Commonwealth Bank - Australia
- Savvy Resources Ltd - HongKong
- Renaissance Capital - South Africa
- Dalmia Cement Bharat India
- Deloitte Consulting - India
- AsiaOL BioFuels Corp., Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- LBH Netherlands Bv - Netherlands
- PowerSource Philippines DevCo
- Jorong Barutama Greston.PT - Indonesia
- OPG Power Generation Pvt Ltd - India
- Krishnapatnam Port Company Ltd. - India
- ASAPP Information Group - India
- Parliament of New Zealand
- Maheswari Brothers Coal Limited - India
- Salva Resources Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Offshore Bulk Terminal Pte Ltd, Singapore
- MS Steel International - UAE
- Bukit Baiduri Energy - Indonesia
- Metalloyd Limited - United Kingdom
- Larsen & Toubro Limited - India
- Straits Asia Resources Limited - Singapore
- Agrawal Coal Company - India
- Economic Council, Georgia
- GN Power Mariveles Coal Plant, Philippines
- Siam City Cement - Thailand
- Wilmar Investment Holdings
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PetroVietnam Power Coal Import and Supply Company
- Leighton Contractors Pty Ltd - Australia
- Ministry of Mines - Canada
- PNOC Exploration Corporation - Philippines
- Indo Tambangraya Megah - Indonesia
- Kobexindo Tractors - Indoneisa
- GMR Energy Limited - India
- Interocean Group of Companies - India
- Timah Investasi Mineral - Indoneisa
- South Luzon Thermal Energy Corporation
- Kapuas Tunggal Persada - Indonesia
- Trasteel International SA, Italy
- Rashtriya Ispat Nigam Limited - India
- Global Coal Blending Company Limited - Australia
- Jindal Steel & Power Ltd - India
- Bhatia International Limited - India
- Indonesian Coal Mining Association
- Ambuja Cements Ltd - India
- Aditya Birla Group - India
- Ministry of Transport, Egypt
- Bahari Cakrawala Sebuku - Indonesia
- GAC Shipping (India) Pvt Ltd
- Tamil Nadu electricity Board
- Pipit Mutiara Jaya. PT, Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- TeaM Sual Corporation - Philippines
- Vizag Seaport Private Limited - India
- Bhoruka Overseas - Indonesia
- Sindya Power Generating Company Private Ltd
- Sojitz Corporation - Japan
- Indika Energy - Indonesia
- Cement Manufacturers Association - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Standard Chartered Bank - UAE
- Asmin Koalindo Tuhup - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Mintek Dendrill Indonesia
- Minerals Council of Australia
- Jaiprakash Power Ventures ltd
- Xindia Steels Limited - India
- Barasentosa Lestari - Indonesia
- Therma Luzon, Inc, Philippines
- Bayan Resources Tbk. - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Central Java Power - Indonesia
- Parry Sugars Refinery, India
- Edison Trading Spa - Italy
- Samtan Co., Ltd - South Korea
- VISA Power Limited - India
- Petron Corporation, Philippines
- Indian Oil Corporation Limited
- Marubeni Corporation - India
- Miang Besar Coal Terminal - Indonesia
- Bharathi Cement Corporation - India
- Planning Commission, India
- Mjunction Services Limited - India
- The University of Queensland
- SMC Global Power, Philippines
- Semirara Mining Corp, Philippines
- Sakthi Sugars Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Uttam Galva Steels Limited - India
- Attock Cement Pakistan Limited
- Gujarat Sidhee Cement - India
- Kartika Selabumi Mining - Indonesia
- SMG Consultants - Indonesia
- CIMB Investment Bank - Malaysia
- The State Trading Corporation of India Ltd
- Merrill Lynch Commodities Europe
- Thai Mozambique Logistica
- CNBM International Corporation - China
- International Coal Ventures Pvt Ltd - India
- Grasim Industreis Ltd - India
- McConnell Dowell - Australia
- Indian Energy Exchange, India
- Madhucon Powers Ltd - India
- Makarim & Taira - Indonesia
- Directorate Of Revenue Intelligence - India
- Bulk Trading Sa - Switzerland
- Eastern Energy - Thailand
- White Energy Company Limited
- Coal and Oil Company - UAE
- Central Electricity Authority - India
- Mercator Lines Limited - India
- Tata Chemicals Ltd - India
- Siam City Cement PLC, Thailand
- Banpu Public Company Limited - Thailand
- Antam Resourcindo - Indonesia
- Toyota Tsusho Corporation, Japan
- Baramulti Group, Indonesia
- Oldendorff Carriers - Singapore
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Port Waratah Coal Services - Australia
- Electricity Authority, New Zealand
- Ceylon Electricity Board - Sri Lanka
- Kepco SPC Power Corporation, Philippines
- Carbofer General Trading SA - India
- Sical Logistics Limited - India
- Bangladesh Power Developement Board
- Vedanta Resources Plc - India
- Singapore Mercantile Exchange
- The Treasury - Australian Government
- Chamber of Mines of South Africa
- Karaikal Port Pvt Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Coalindo Energy - Indonesia
- Malabar Cements Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Lanco Infratech Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Latin American Coal - Colombia
- Posco Energy - South Korea
- New Zealand Coal & Carbon
- Holcim Trading Pte Ltd - Singapore
- Semirara Mining and Power Corporation, Philippines
- Australian Commodity Traders Exchange
- Global Green Power PLC Corporation, Philippines
- Orica Mining Services - Indonesia
- Chettinad Cement Corporation Ltd - India
- Price Waterhouse Coopers - Russia
- Anglo American - United Kingdom
- Intertek Mineral Services - Indonesia
- Indogreen Group - Indonesia
- Power Finance Corporation Ltd., India
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