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

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.