Investment Valuation of Long-Term Coal Mining Project at Pit J Using Discounted Cash Flow Method

: Pit J is a new pit at Binungan 8 that will be developed to the west in 2024 and has a mine life of 9 years. The initial plan was to develop Pit J, which produced around 23 million tons of coal. However, there is a second alternative that can increase Pit J production to 28 million tons. Therefore, a project investment analysis of these two alternatives was conducted to determine which mining scheme to take and which is more profitable. This research uses a method of conducting investment valuation of the Pit J mine project, namely discounted cash flow (DCF). A deterministic approach using DCF was first conducted to determine the value of economic feasibility parameters, including net present value (NPV), internal rate of return (IRR), and payback period. This was followed by the identification of variables that most affect the NPV value through sensitivity analysis. Based on the research, both mining alternatives were declared financially feasible through the discounted cash flow method, with the first alternative having an NPV of 65.8 million USD, IRR of 60%, and a payback period of 4.77 years, while the second alternative resulted in an NPV of 88.4 million USD, IRR of 65%, and payback period 4.55 years. Sensitivity analysis shows that the variable change in Coal price is the most sensitive variable to the valuation of Pit J. Therefore, the second alternative is chosen as the best alternative to run.


INTRODUCTION
The introduction sets the stage for the thesis by providing an overview of the research topic, explaining its importance, and outlining the context.It presents the problem statement, clearly defining the issue the research aims to address, and lists the research objectives and questions.This chapter also discusses the study's scope and limitations and outlines the thesis's structure.
The need for electrical energy is still not separated from fossil fuel sources because coal accounted for 45% of global electrical energy in 2022, while renewable energy still reached 17% (Bolson et al., 2022;Kabeyi & Olanrewaju, 2022;Overland et al., 2022;Strielkowski et al., 2021).Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 The large value of investment and technology in creating renewable energy is one reason coal still prevails (Bulut & Muratoglu, 2018;Gallagher, 2014;Shakeel et al., 2016;Vidadili et al., 2017).
Based on data from the Ministry of Energy and Mineral Resources, in 2022, Indonesia's coal reserves will reach 33.37 billion tons, with the largest portion of reserves in East Kalimantan at as much as 41% (Afiffa & Warmadewanthi, 2024).It also encouraged the government to increase the coal production rate after the COVID-19 pandemic in 2021.Indonesia's 2023 coal production realization by the end of November met the annual target of 101%, or 703 million tons, while its sales realization, consisting of exports and domestic, reached 105%, or 725 million tons.PKP2B license PT BC will expire in 2025.However, PT BC still has the option to apply for a 2 x 10-year license extension to continue its activities.This option creates a new opportunity to extend the life of the Company's coal mine, especially in Pit J Binungan 8 until 2033, and is also the last pit that is still active in Binungan 8.
The development of the Pit J mine until 2032 creates a new challenge.In 2025, a creek will cross the progress of the mine area, so there are two options in the execution of the mine: not to cut the creek as alternative 1 or not to cut the creek as alternative 2.  The main concern in Pit J mining is managing water from mining activities because it affects the supporting facilities, such as water monitoring points (WMP), that will be made and the amount of coal reserves that will be mined.
This research aims to determine the feasibility and the best alternative for Pit J in the mining process until the end of LOM (Life of Mine) in 2032, as it has the largest coal reserves in Binungan 8 for the period 2023-2032.The research questions include the feasibility of the project, the most sensitive variables affecting the NPV, and the project's feasibility under extreme conditions of these variables.Valuation results must be accurate by considering internal and external conditions to determine mitigation measures for potential risks during the Pit J mining process.The research scope is to obtain the NPV from the Discounted Cash Flow (Deterministic) to determine the feasibility of the Pit J Binungan 8 coal mining project, with some limitations including the geological model version 0923 (September 2023), the assumption of no Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 environmental and social impacts, indicative company data due to confidentiality, working partners remaining the same until the end of the project in 2032, and no terminal value as all assets will be returned to the government.

RESEARCH METHODS
This chapter describes the research design, explaining and justifying the chosen approach (Creswell & Poth, 2016;DePoy & Gitlin, 2019;Hennink et al., 2020;Leavy, 2022).It details the population and sample, including sampling techniques and sample size.The data collection methods section outlines the tools and procedures for gathering data.The data analysis techniques are explained, and the methods and software used are specified.
The Research Design begins by identifying the problem being discussed in this research related to the Investment Valuation of Pit J Binungan 8.The next research step is a literature review related to financial modeling, including theories and frameworks such as steps in valuation using deterministic and probabilistic methods.The literature review results are used as a reference in analyzing the current business situation at PT BC, especially the Pit J Binungan 8 coal mining project, which consists of internal analysis (related to resources) and external analysis related to coal price uncertainty.The next step is to collect the required primary and secondary data, which will be utilized in data analysis in the form of a financial valuation of the Pit J mining project.The valuation results will be used as a reference for the recommendations in making Pit J Binungan 8 mining decisions.The study uses Primary data in the form of in-depth interviews about each alternative's production plan and coal quality sampling.At the same time, a particular company report obtains secondary data related to coal price history and production cost.

In-Dept Interview
Interviews were conducted directly between the author and the mine planner to discuss the sustainability of the Pit J coal mining project and whether it will continue until 2032.The interview results are in the form of two mine development alternatives, namely by cutting the creek or without cutting the creek, which is planned to be implemented in 2025 or 2026.Pit J's production plan relates to the two alternatives described in this business issue research, divided into two schemes if Pit J's mine progress cuts across the creek and does not cut across the creek.

Data Analysis Method
All available data will be analyzed using financial models to obtain valuation results that can be used to make project feasibility decisions.Data analysis is started by discounted cashflow valuation as the deterministic method, which includes calculating net present value, internal rate of return, and payback period.

Free Cash Flow
Free cash flow or project cash flow is the amount of cash a company generates after deducting expenditures to maintain or expand its assets.It measures a company's ability to generate cash after meeting its operating obligations and capital expenditures.Investors often use free cash flow to assess a company's financial health and ability to pay dividends, pay off debt, or make new investments.

Weighted Average Cost of Capital (WACC) Calculations
According to Gitman et al. (2015), WACC represents the blended cost of various sources of capital, incorporating the proportionate weights of equity, debt, and preferred stock in the firm's capital structure.Gitman and Zutter emphasize that WACC is a crucial metric for discounting future cash flows in capital budgeting decisions, ensuring that the cost of capital reflects the firm's overall financing mix.The formula considers the cost of equity, the cost of debt adjusted for taxes, and the cost of preferred stock.WACC theory posits that this composite rate is the minimum return required by the firm to satisfy investors and creditors, providing a benchmark Asian Journal of Engineering, Social and Health Volume 3, No. 8 August 2024 for evaluating the attractiveness of investment opportunities and guiding financial decisionmaking in maximizing shareholder value.The WACC formula is expressed as follows:

Discounted Cash Flow Method
Many businesses use net present value (NPV) in capital budgeting and investment planning to evaluate the investment projects' long-term profitability.The NPV computation is used to get the present value of a future stream of payments.The net present value (NPV) of a project is determined, according to Gitman et al. (2015), by subtracting the initial investment (CF0) from the project's present value of cash inflows (CFt), which is then discounted at a rate equivalent to the company's cost of capital (r).If the NPV is positive, the project should be approved.Otherwise, the project should be rejected if the NPV is negative.
Internal rate of return (IRR) is the rate of return on investment (in percent) when the Net Present Value is equal to zero or the rate of return on investment when the sum of Present Worth is positive and Present Worth is negative.The IRR value can be used to determine the feasibility of an investment by comparing the IRR value with the WACC (i*) set by the company.The investment is economically feasible if the IRR value exceeds the WACC.Conversely, the investment is not economically feasible if the IRR is less than WACC.

∑ 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑾𝒐𝒓𝒕𝒉 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = ∑ 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑾𝒐𝒓𝒕𝒉 𝑪𝒐𝒔𝒕
The payback period is the time (in years) required by a project's income to return the value of the investment/capital that has been invested in the project.Investments with short payback periods are preferred over investments with long payback periods because short payback periods indicate that the investment can generate income quickly throughout its life so that investment costs can be replaced quickly as well, high liquidity levels, fast investment return rates, and lower investment risk levels.The analysis of the payback period method is explained by Gentry (2016) as follows: 1.The method is simple and easy to calculate.2. It can be controlled by considering the level of investment risk.Investments with a high level of risk must have a payback period as soon as possible to reduce the risk effect.

RESULTS AND DISCUSSION
Coal Price and Revenue Pit J Binungan 8 mining project revenue is obtained by multiplying the coal price by the amount of coal sold.In addition, according to the explanation of royalties in Chapter III, the revenue obtained earlier will be reduced by the sales royalty to get net revenue.The assumptions used are 25% domestic sales with a fixed 14% royalty and 75% export sales with a royalty percentage adjusting to the current year's reference coal price (HBA).
The coal price used refers to the index used by PT BC, namely Indonesia Coal Index class 3 (ICI3), according to the quality of Binungan 8 coal, which has a calorific value of 5000 GAR.The following are the results of the calculation of Pit J Net Revenue.

Capital Expenditures
Preparation for Pit J mining operations begins in 2023 with several investment categories: Infrastructure, Sustainability, Exploration, and Land.Infrastructure includes a water monitoring point (WMP), creek diversion, and construction of an access road to the mine.The land itself includes land acquisition to the government because the Pit J area includes the KHDTK area and payment of land residents own.Operational Expenses PT BC conducts the mining process by appointing other parties, such as mining contractors, from the mining process in the pit, coal processing, and other indirectly related work activities.In each phase of activity, there are different mining contractors based on their respective expertise.
Mining costs consist of the scope of work involved in overburden removal, coal getting, and transportation.The work value per unit of material mined is influenced by the transportation distance from the loading front to the disposal or coal stockpile.The transportation distance also affects the variable fuel used.The mining cost parameters described previously are divided into several tiers according to the price of coal used.Other operating costs include coal processing at the coal processing plant (CPP) in the form of coal reduction activities up to 50 mm in size, coal handling in the form of coal transportation to the port, and coal loading to the barge to the transhipment point, and general and administrative costs.Other costs assume the current contract value used by PT BC.

Tax and Depreciation
PT BC applies a tax of 45% during the Coal Contract of Work until 2025, after which it changes to 22% when its mining license is extended by 2 x 10 years with IUPK status.The IUPK status is also subject to non-tax state revenue (PNBP) of 10% under PP No. 15 of 2022, with a proportion of 4% for the central government and 6% for the local government.
Depreciation uses the straight-line method during the mining process, with no salvage value, because all used assets will be given to the government at the end of the mining period.PT BC does not register intangible assets, so there is no amortization.Weighted Average Cost of Capital of The Project PT BC self-finances its mining operations so that the funding proportion is 100% equity and 0% debt.Therefore, the WACC value will equal the cost of equity (Ke) used.The cost of equity calculation uses the capital asset pricing model method, using the following data assumptions.As of Jan 2028 11% The following is the calculation of the cost of equity:  =   −    = 6,59% − 2.07% = 4,52%    () =  +  * ( − )    () = 4,52% + 0,9778 * (11% − 4,52%) = 11,07% Since PT BC has 100% funding sources from equity, the WACC used is 11.07%.

Discounted Cash Flow of The Project
The discounted cashflow calculation uses cashflow data for each production alternative discounted using a WACC of 11.07% to obtain the project's net present value.Sensitivity Analysis of The Project Sensitivity analysis was conducted by changing the value of one of the variables in the economic valuation to understand further the variables that most affect the economics of the Pit J mine.Changes in variable values ranged from -20% to +20% to determine changes in project NPV.Scenario Analysis of The Project Scenario analysis uses the three most influential variables in sensitivity analysis, namely coal price, production achievement, and mining cost, to identify each alternative's best and worst scenarios.It requires historical data, and if assumed data is used, it must be based on organizational agreements or technical recommendations.

Business Solution
The results of the project value valuation using discounted cash flow show that both technical alternatives for mining Pit J Binungan 8 are feasible because they have a positive economic value.Alternative 2 of Pit J has better economic value parameters with an NPV of 88.4 USD million, an IRR of 65%, and a payback period of 4.55 years.
Sensitivity analysis of several variables that affect the NPV value of the Pit J Binungan 8 project shows that the price of coal is the most influential variable.Because the coal variable cannot be controlled and is uncertain for long-term projects, the price is modeled with coal forward using stochastic methods statically and dynamically.

Implementation Plan & Justification
The implementation plan refers to Alternative 2's baseline plan starting in 2022 and ending in 2032.Implementation will be divided into stages: planning, work area preparation, and mining to post-mining reclamation.The detailed implementation plan will be explained in Table IV.17.

CONCLUSION
Based on the analysis using the discounted cash flow method, the two technical alternatives for Pit J Binungan 8 are feasible, as they have a positive net present value (NPV).Alternative 1 has an NPV of 65.8 million USD, an internal rate of return (IRR) of 60%, and a payback period of 4.77 years.Alternative 2 has an NPV of 88.4 million USD, an IRR of 65%, and a payback period of 4.55 years.Coal price is the most sensitive variable affecting NPV.Scenario analysis shows that the worst-case scenario occurs when coal prices drop during the COVID-19 pandemic, and the best-case scenario occurs during the Russia-Ukraine aggression that increases coal demand in Europe.The NPV of the base alternative for the worst-case scenario is -118.4 million USD and for the best-case scenario is 471.3 million USD.The NPV of the high alternative for the worst-case scenario is -120.7 million USD and for the best-case scenario is 556.6 million USD.Alternative 2 is recommended for the Pit J Binungan 8 mining plan.
The recommendations are divided into two perspectives: practical/managerial implications for stakeholders as outlined in the proposed implementation plan and suggestions for future research.Given that coal prices are highly sensitive and uncontrollable, it is recommended to project coal prices dynamically to assess long-term price uncertainty risks.This is important as coal prices affect various aspects such as heavy equipment service provider contract rates and royalties when PT BC's license status changes to IUPK.Additionally, the company is advised to use probabilistic methods like Monte Carlo and real options for project economic evaluation, as well as other optional modelling methods like fuzzy payoff or binomial lattice for future research.

Figure 2 .
Figure 2. Pit J Design if Not to Cut the Creek (Alternative 1)

Figure
Figure 4. Research Design Data Collection MethodThe study uses Primary data in the form of in-depth interviews about each alternative's production plan and coal quality sampling.At the same time, a particular company report obtains secondary data related to coal price history and production cost.In-Dept InterviewInterviews were conducted directly between the author and the mine planner to discuss the sustainability of the Pit J coal mining project and whether it will continue until 2032.The interview results are in the form of two mine development alternatives, namely by cutting the creek or without cutting the creek, which is planned to be implemented in 2025 or 2026.Pit J's production plan relates to the two alternatives described in this business issue research, divided into two schemes if Pit J's mine progress cuts across the creek and does not cut across the creek.

Figure
Figure 5. Pit J Production Alternative 1 (without cut creek)

Table 5 . Other Cost Assumptions Processing and Handling Cost Asian
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