p-ISSN 2980-4868 | e-ISSN 2980-4841
https://ajesh.ph/index.php/gp
Investment
Valuation of Long-Term Coal Mining Project at Pit J Using Discounted Cash Flow
Method
Andhika
Indra Subroto1*, Taufik Faturohman2
1,2Institut
Teknologi Bandung, Bandung, West Java, Indonesia
Email: andhika_indra@sbm-itb.ac.id1*,
taufik.f@sbm-itb.ac.id2
ABSTRACT:
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.
Keywords: Discounted Cash Flow, Net
Present Value, Coal Price, Alternative, Pit J Binungan
8.
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%
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%
Figure 1. Coal Price (HBA) 2018-2023
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.
Figure 2. Pit J Design if Not to Cut the Creek
(Alternative 1)
Figure 3. Pit J Design if Cut the Creek (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 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
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.
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.
Figure 5. Pit J Production
Alternative 1 (without cut creek)
Figure 6. Pit J Production Alternative 2 (cut creek)
Direct coal sampling aims
to validate the quality of coal in the field. The quality parameters obtained
include ash, total moisture, sulfur, sodium, and HGI. This quality is essential
because it will determine the coal price adjustment used in calculating project
revenue.
Table 1. Coal Quality of
Pit J Binungan
8
|
Plt |
Desc |
Seam J |
Seam M |
Seam K |
Seam L |
|
- |
TM (ar) |
25,73 |
26,35 |
25,99 |
25,35 |
|
IM (adb) |
18, 31 |
15,84 |
15,99 |
17,83 |
|
|
Ash (adb) |
4,19 |
4,82 |
5,45 |
3,87 |
|
|
VM (adb) |
39,16 |
40,43 |
39,56 |
39,67 |
|
|
FC (adb) |
38,34 |
38,92 |
39,00 |
39,59 |
|
|
TSADB (adb) |
0,17 |
0,34 |
0,18 |
0,13 |
|
|
CV (adb) |
5.417 |
5.536 |
5.459 |
5.461,50 |
|
|
Na2O (%) |
2,18 |
1,23 |
2,35 |
3,38 |
|
|
AFT IDT RED (deg) |
1.175 |
1.268 |
1.167 |
1.171,36 |
|
|
AFT FLOW RED
(deg) |
1.272 |
1.393 |
1.261 |
1.248,88 |
|
|
Relative
Density |
1,33 |
1,34 |
1,35 |
1,32 |
|
|
Hardgrovability Index |
45 |
47 |
45 |
50,46 |
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
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
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.
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
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.
3. The payback period
method can reduce lost opportunity risk in the company. The shorter the payback
period, the smaller the lost opportunity risk, and vice versa.
4. The payback period
method represents the breakeven point. Projects with a longer life than the
payback period will generate profits for the company. Conversely, projects with
a shorter life than the payback period will be detrimental to the company.
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.
Table
2. Coal Revenue Calculation
|
Year of Operation |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flat IC13 price |
$/t |
80,31 |
80,31 |
80,32 |
80,33 |
80,34 |
80,35 |
80,36 |
80,37 |
80,38 |
||
|
Factor for ICI 3 to HBA |
x |
1,56 |
||||||||||
|
HBA price |
$/t |
125,28 |
125,29 |
125,30 |
125,31 |
125,32 |
125,33 |
125,34 |
125,35 |
125,36 |
||
|
DMO ceiling price |
$/t |
70 |
||||||||||
|
DMO HPB ICI3 Price |
$/t |
44,87 |
44,88 |
44,89 |
44,90 |
44,91 |
44,92 |
44,93 |
44,94 |
44,95 |
||
|
DMO proportion |
% |
25% |
||||||||||
|
ICI3 price after DMO
adjusted |
71,45 |
71,46 |
71,47 |
71,48 |
71,49 |
71,50 |
71,51 |
71,52 |
71,53 |
|||
|
Price Adjusment
- ICI3 price |
||||||||||||
|
CV Premium |
$/t |
- |
(4,21) |
(2,42) |
(3,44) |
(4,57) |
(6,89) |
(6,87) |
(6,86) |
(6,84) |
||
|
TS Premium / Discount |
$/t |
- |
- |
- |
- |
- |
- |
- |
- |
- |
||
|
Ash Penalty |
$/t |
- |
- |
- |
- |
- |
- |
- |
- |
- |
||
|
ICI3 Price Adjusment - Coal Quality |
$/t |
|
- |
(4,21) |
(2,42) |
(3,44) |
(4,57) |
(6,89) |
(6,87) |
(6,86) |
(6,84) |
|
|
Price Adjusment
- ICI3 price |
||||||||||||
|
CV Premium |
$/t |
- |
(2,35) |
(1,35) |
(1,92) |
(2,55) |
(3,85) |
(3,84) |
(3,83) |
(3,82) |
||
|
TS Premium / Discount |
$/t |
- |
- |
- |
- |
- |
- |
- |
- |
- |
||
|
Ash Penalty |
$/t |
- |
- |
- |
- |
- |
- |
- |
- |
- |
||
|
DMO HPB ICI 3Price Adjusment - Coal |
$/t |
|
- |
(2,35) |
(1,35) |
(1,92) |
(2,55) |
(3,85) |
(3,84) |
(3,83) |
(3,82) |
|
|
Export price - ICI3 price
adjusted |
$/t |
71,45 |
67,24 |
69,03 |
68,01 |
66,88 |
64,56 |
64,58 |
64,59 |
64,61 |
||
|
Domestic price - DMO
price adjusted |
$/t |
44,87 |
45,52 |
43,52 |
42,95 |
42,32 |
41,02 |
41,03 |
41,04 |
41,05 |
||
|
DMO proportion |
% |
25% |
||||||||||
|
Domestic Market |
mton |
- |
0,33 |
0,59 |
1,21 |
0,91 |
1,17 |
1,03 |
0,61 |
0,08 |
||
|
Export Market |
mton |
- |
0,98 |
1,78 |
3,64 |
2,74 |
3,51 |
3,24 |
1,84 |
0,24 |
||
|
Royalty rate - domestic |
% |
13,5% |
13,5% |
14,0% |
14,0% |
14,0% |
14,0% |
14,0% |
14,0% |
14,0% |
||
|
Royalty rate - export |
% |
13,5% |
13,5% |
28,0% |
28,0% |
28,0% |
28,0% |
28,0% |
28,0% |
28,0% |
||
|
Revenue Domestic |
USD M |
251 |
0,00 |
13,90 |
25,76 |
52,04 |
38,63 |
47,98 |
44,30 |
25,19 |
3,31 |
|
|
Revenue Export |
USD M |
1.189 |
0,01 |
65,97 |
122,60 |
247,22 |
183,14 |
226,52 |
209,19 |
118,93 |
15,65 |
|
|
Less: domestic royalty |
USD M |
(35) |
0,02 |
(1,88) |
(3,61) |
(7,29) |
(5,41) |
(6,72) |
(6,20) |
(3,53) |
(0,46) |
|
|
Less: export royalty |
USD M |
(323) |
0,03 |
(8,91) |
34,33) |
(69,22) |
(51,28) |
(63,43) |
(58,57) |
(33,30) |
(4,38) |
|
|
Net revenue |
USD M |
|
1.082 |
0,04 |
69,09 |
110,43 |
222,76 |
165,08 |
204,36 |
188,72 |
107,29 |
14,12 |
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.
Table
3. Capital Expenditures of Each Alternative
|
Capex |
Unit |
Alt 1 |
Alt 2 |
|
Infrastructure |
USD millions |
10,00 |
19,50 |
|
Sustainable |
USD millions |
2,39 |
5,66 |
|
Exploration |
USD millions |
4,17 |
5,90 |
|
Land |
USD millions |
0,71 |
1,01 |
|
Total |
USD millions |
17,27 |
32,07 |
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.
Table
4. Contractor Mining Rate
|
Overburden Removal |
Tier
based on price |
48 |
52 |
60 |
|
|
|
Overburden charge rate |
$/bcm |
1,500 |
1,569 |
1,688 |
|
|
Waste Fuel Ratio |
Lt/bcm |
0,82 |
0,82 |
0,82 |
|
|
Contract Waste Ditstance |
kn |
1,30 |
1,30 |
1,30 |
|
|
Waste Overhaul Rate |
$/bcm/km |
0,29 |
0,30 |
0,31 |
|
|
Waste Overdistance
Fuel Ratio |
lt/bcm/km |
0,24 |
0,24 |
0,24 |
|
Coal Getting |
|
||||
|
|
Coal getting charge Rate |
$/bcm |
2,12 |
2,15 |
2,15 |
|
|
Coal Fuel Ratio |
Lt/bcm |
0,85 |
0,85 |
0,85 |
|
|
Contract Coal Distance |
kn |
13,00 |
13,00 |
13,00 |
|
|
Coal Overhaul Rate |
$/bcm/km |
0,09 |
0,09 |
0,09 |
|
|
Coal Overdistance
Fuel Ratio |
lt/bcm/km |
0,04 |
0,04 |
0,04 |
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.
Table
5. Other Cost Assumptions
|
Processing and Handling
Cost |
|
|
|
|
|
|
||
|
Processing Cost |
unit |
value |
|
|
|
Coal crushing |
$/t |
0,35 |
|
|
Coal treatment, fuel
& lubrication |
$/t |
0,14 |
|
|
Repair maintenance |
$/t |
,22 |
|
|
Lab analysis and others |
$/t |
0,03 |
|
Hauling to Port |
|
||
|
|
haul to port - rate excl fuel |
$/ton/km |
0,04 |
|
|
coal haulafe
to port fuel ratio (FR) |
lt/ton/km |
0,02 |
|
Barging |
|
||
|
|
coal barging - rate exc fuel |
$/ton |
0,54 |
|
|
coal barging fuel ratio
(FR) |
$/ton |
0,47 |
|
|
Trans-shipping |
|
|
|
|
Transhipment |
$/ton |
1,52 |
|
|
stevedoring,
Superintending |
$/ton |
0,54 |
|
|
|
||
|
Other cost |
|
||
|
|
Employee cost |
$/bcm |
- |
|
Others G&A |
Lt/bcm |
1,90 |
|
|
Selling expence |
kn |
0,03 |
|
|
Selling commision |
$/bcm/km |
1,50% |
|
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.
Table
6. Assets Depreciation Scenario
|
Year |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
||||||||||
|
Alternatif 1 |
|
|||||||||||||||||||
|
Infrastructure |
USD M |
4,00 |
2,00 |
4,00 |
- |
- |
- |
- |
- |
- |
- |
|||||||||
|
Sustainable |
USD M |
- |
0,13 |
0,24 |
0,48 |
0,37 |
0,47 |
0,43 |
0,25 |
0,03 |
- |
|||||||||
|
Exploration |
USD M |
0,50 |
0,77 |
0,77 |
0,73 |
0,70 |
0,70 |
- |
- |
- |
- |
|||||||||
|
Land |
USD M |
0,11 |
0,30 |
0,30 |
- |
- |
- |
- |
- |
- |
- |
|||||||||
|
Depreciation |
USD M |
- |
0,98 |
1,73 |
1,94 |
2,15 |
2,44 |
2,59 |
2,71 |
2,74 |
- |
|||||||||
|
|
|
|||||||||||||||||||
|
Alternatif 1 |
|
|||||||||||||||||||
|
Infrastructure |
USD M |
5,00 |
2,50 |
12,00 |
- |
- |
- |
- |
- |
- |
- |
|||||||||
|
Sustainable |
USD M |
- |
0,26 |
0,57 |
1,07 |
0,84 |
1,04 |
0,96 |
0,59 |
0,28 |
0,05 |
|||||||||
|
Exploration |
USD M |
0,50 |
0,77 |
0,77 |
1,61 |
0,70 |
1,56 |
- |
- |
- |
- |
|||||||||
|
Land |
USD M |
0,11 |
0,30 |
0,60 |
- |
- |
- |
- |
- |
- |
- |
|||||||||
|
Depreciation |
USD M |
- |
1,05 |
2,79 |
3,17 |
3,43 |
3,95 |
4,19 |
4,39 |
4,52 |
4,57 |
|||||||||
Project Cashflow
Calculating
each component, including revenue, operating cost, CAPEX, tax, and
depreciation, will produce a project cash flow, as illustrated in Table IV.6.
Table 7. Project Cash Flow Pit J Bin 8
|
Aternative 1 |
|||||||||||||||||||||
|
Parameter |
Total |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
||||||||||
|
Revenue |
1.081,85 |
- |
69,09 |
110,43 |
222,76 |
165,08 |
204,36 |
188,72 |
107.29 |
14,12 |
|
||||||||||
|
Operating Expenses |
(848,32) |
0,44 |
(59,79) |
(141,88) |
(199,22) |
(132,07) |
(144,41) |
(114,89) |
(53,78) |
(2,72) |
|
||||||||||
|
Capital Expenditures |
(17,27) |
(4,61) |
(3,20) |
(5,31) |
(1,21) |
(1,07) |
(1,17) |
(0,43) |
(0,25) |
(0,03) |
|
||||||||||
|
EBITDA |
216,25 |
(4,17) |
6,10 |
(36,76) |
22,32 |
31,95 |
58,78 |
73,39 |
53,27 |
11,36 |
- |
||||||||||
|
Depreciation |
(17,27) |
- |
(0,98) |
(1,73) |
(1,94) |
(2,15) |
(2,44) |
(2,59) |
(2,71) |
(2,74) |
|
||||||||||
|
Amortization |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
||||||||||
|
EBT |
198,98 |
(4,17) |
5,12 |
(38,49) |
20,39 |
29,80 |
56,34 |
70,81 |
50,56 |
8,62 |
- |
||||||||||
|
Tax Paid |
(49,64) |
- |
(3,78) |
- |
- |
(4,52) |
(13,11) |
(16,02) |
(10,94) |
(1,26) |
|
||||||||||
|
EAT |
149,33 |
(4,17) |
1,33 |
(38,49) |
20,39 |
25,27 |
43,23 |
54,79 |
39,62 |
7,36 |
- |
||||||||||
|
Government Retribution |
(20,10) |
- |
- |
- |
(2,67) |
(2,77) |
(4,65) |
(5,68) |
(3,88) |
(0,45) |
|
||||||||||
|
Add back Depretitation |
17,27 |
- |
0,98 |
1,73 |
1,94 |
2,15 |
2,44 |
2,59 |
2,71 |
2,74 |
|
||||||||||
|
Cash flow |
146,51 |
(4,17) |
2,31 |
(36,76) |
19,65 |
24,65 |
41,02 |
51,69 |
38,45 |
9,65 |
- |
||||||||||
|
Aternative 2 |
|||||||||||||||||||||
|
Parameter |
Total |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
||||||||||
|
Revenue |
1.273,88 |
- |
69,09 |
133,09 |
246,01 |
190,31 |
226,86 |
209,91 |
128,01 |
60,37 |
10,23 |
||||||||||
|
Operating Expenses |
(956,18) |
0,54 |
(59,83) |
(162,06) |
(212,52) |
(139,32) |
(149,03) |
(120,98) |
(72,88) |
(34,43) |
(5,68) |
||||||||||
|
Capital Expenditures |
(32,07) |
(5,61) |
(3,83) |
(13,94) |
(2,68) |
(1,54) |
(2,60) |
(0,96) |
(0,59) |
(0,28) |
(0,05) |
||||||||||
|
EBITDA |
285,62 |
(5,07) |
5,43 |
(42,91) |
30,82 |
49,45 |
75,23 |
87,97 |
54,55 |
25,67 |
4,50 |
||||||||||
|
Depreciation |
(32,07) |
- |
(1,05) |
(2,79) |
(3,17) |
(3,43) |
(4,19) |
(4,19) |
(4,39) |
(4,52) |
(4,57) |
||||||||||
|
Amortization |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
||||||||||
|
EBT |
253,55 |
(5,07) |
4,38 |
(45,70) |
27,64 |
46,02 |
71,28 |
83,78 |
50,16 |
21,14 |
(0,08) |
||||||||||
|
Tax Paid |
(65,15) |
- |
(3,75) |
- |
- |
(10,75) |
(18,95) |
(18,95) |
(10,62) |
(4,32) |
(0,06) |
||||||||||
|
EAT |
188,41 |
(5,07) |
0,63 |
(45,70) |
27,64 |
35,27 |
54,60 |
64,83 |
39,54 |
16,82 |
(0,14) |
||||||||||
|
Government Retribution |
(25,55) |
- |
- |
- |
(3,71) |
(3,89) |
(5,91_ |
(6,72) |
(3,77) |
(1,53) |
(0,02) |
||||||||||
|
Add back Depretitation |
32,07 |
- |
1,05 |
2,79 |
3,17 |
3,43 |
3,95 |
4,19 |
4,39 |
4,52 |
4,57 |
||||||||||
|
Cash flow |
194,92 |
(5,07) |
1,68 |
(42,91) |
27,11 |
34,81 |
52,64 |
62,30 |
40,16 |
19,81 |
4,41 |
||||||||||
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.
Table 8. Data Assumptions for Cost of
Equity
|
Parameter |
References |
Period |
Value |
|
Country Risk |
10 years government bond
yield |
As of Jan
2024 |
6,59% |
|
Default spread |
Damodaran |
As of Jan
2025 |
2,07% |
|
Beta |
Using similar risk
company (PEFINDO) |
As of Jan
2026 |
0,9778 |
|
Mothly market of Return |
as JKE monthly changes |
As of Jan
2027 |
0,89% |
|
Market rate of Return
(Rm) |
Calculation of JKSE
Changes on Jan 2024 |
As of Jan
2028 |
11% |
The
following is the calculation of the cost of equity:
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.
Table 9. Discounted Cash Flow
Valuation of Pit J
|
Parameter |
unit |
Alt 1 |
Alt 2 |
|
NPV |
USD M |
65,8 |
88,4 |
|
IRR |
% |
60 |
65 |
|
Payback Period |
years |
4,77 |
4,55 |
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.
Table
10. Sensitivity Analysis of Alternative 1
|
Sensitivity table - NPV |
-20% |
20% |
|
|
Coal Price |
$65,78 |
5,59 |
124,38 |
|
|
|
-20% |
20% |
|
Royalty Cost |
$65,78 |
94,17 |
37,09 |
|
-20% |
20% |
||
|
Brent Price |
$65,78 |
81,18 |
50,35 |
|
|
|
-20% |
20% |
|
Mining
Cost |
$65,78 |
97,70 |
33,36 |
|
-20% |
20% |
||
|
Production
Achievement |
$65,78 |
20,28 |
110,47 |
|
|
|
-20% |
20% |
|
General &
admin cost |
$65,78 |
69,84 |
61,73 |
|
-20% |
20% |
||
|
Capital
Expenditures |
$65,78 |
67,81 |
63,75 |
Table
10. Sensitivity Analysis of Alternative 2
|
Sensitivity table - NPV |
-20% |
20% |
|
|
Coal Price |
$88,37 |
19,34 |
156,03 |
|
|
|
-20% |
20% |
|
Royalty Cost |
$88,37 |
121,38 |
54,99 |
|
-20% |
20% |
||
|
Brent Price |
$88,37 |
105,02 |
71,52 |
|
|
|
-20% |
20% |
|
Mining
Cost |
$88,37 |
123,83 |
51,46 |
|
-20% |
20% |
||
|
Production
Achievement |
$88,37 |
33,17 |
142,52 |
|
|
|
-20% |
20% |
|
General &
admin cost |
$88,37 |
93,04 |
83,67 |
|
-20% |
20% |
||
|
Capital Expenditures |
$88,37 |
92,03 |
84,64 |
Scenario
Analysis of The Project
Scenario
analysis uses the three most influential variables in sensitivity analysis,
namely coal price, production achievement, and mining cost, to identify each
alternative's best and worst scenarios. It requires historical data, and if
assumed data is used, it must be based on organizational agreements or
technical recommendations.
Table 11. Scenario Analysis of
Alternative 1
|
Input
Variable |
Corresponding
Input |
||||
|
Mostliikely |
Worst |
Remark |
Best |
Remark |
|
|
Coal Index Price
(US$/ton) ICI3 |
80,31 |
36,40 |
Lowest Price period
2020-2023 |
180,84 |
Higest price periode 2020-2023 |
|
Production Achievement
(%) |
100% |
-10% |
Lowest production
achievement in Binungan 8 (2020) |
5% |
Maximum production increased
(RKAB policy) |
|
Mining Cost changes (%) |
0,00 |
7% |
Cost increased 7% |
-10% |
Cost decreased 10% |
|
Project Financial Performance |
|||||
|
PV (million US$) |
65,8 |
-118,4 |
471,3 |
||
|
IRR% |
60% |
-44,40% |
877% |
||
|
PBR (Years) |
4,77 |
0 |
1,12% |
||
Table
12. Scenario Analysis of Alternative 2
|
Input
Variable |
Corresponding
Input |
||||
|
Mostliikely |
Worst |
Remark |
Best |
Remark |
|
|
Coal Index Price
(US$/ton) ICI3 |
80,31 |
36,40 |
Lowest Price period
2020-2023 |
180,84 |
Higest price periode 2020-2023 |
|
Production Achievement
(%) |
100% |
-10% |
Lowest production
achievement in Binungan 8 (2020) |
5% |
Maximum production
increased (RKAB policy) |
|
Mining Cost changes (%) |
0,00 |
7% |
Cost increased 7% |
-10% |
Cost decreased 10% |
|
Project Financial Performance |
|||||
|
PV (million US$) |
88,4 |
-20,7 |
556,6 |
||
|
IRR% |
65% |
- |
742% |
||
|
PBR (Years) |
4,55 |
0- |
1,15% |
||
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
Table 13. Implementation Plan for Pit J Alternative 2
|
Stage |
Activities |
DIC |
Year |
||||||||||
|
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
|||
|
Mine Plan |
Mine Scheduling |
Mine Plan |
|
|
|
|
|
|
|
|
|
|
|
|
Feasibility study |
Mine Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
Site Preparation |
Socialization and society engagement |
External |
|
|
|
|
|
|
|
|
|
|
|
|
Land Acquisition |
Legal |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Permit |
License |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment mobilization |
Mine Contractor |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exploration |
Geology |
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure construction |
Civil Infrastructure |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining Activities |
Land clearing |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
Top soil removal |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
OB removal |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal Getting |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal Hauling |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal Processing |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal barging and transhipment |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation |
Mine Operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
CRS |
External |
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Mining Activities |
Revegetation |
Environment |
|
|
|
|
|
|
|
|
|
|
|
|
Mine Closure |
Mine Closure |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment demobilization |
Mine Contractor |
|
|
|
|
|
|
|
|
|
|
|
|
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.
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|
Andhika Indra Subroto, Taufik Faturohman (2024) |
|
First
publication right: Asian Journal of
Engineering, Social and Health (AJESH) |
|
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article is licensed under: |