A Case Study of Pt. Berau Coal

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Investment Project Analysis Pit CACD Block 8 Using Discounted Cash Flow (DCF): A Case Study of Pt. Berau Coal

Pandu Zea Ardiansyah^1*, Raden Aswin Rahadi², Maurys Irwan³

1 Mine Operation Superintendent Dept Binungan Mine Operation, PT Berau Coal, Indonesia

2 Supervisor, Master of Business Administration Lecturer, Bandung Institute of Technology, Indonesia

3 Mine Plan Senior Manager, PT Berau Coal, Indonesia

*Corresponding Author: [email protected], [email protected]

Accepted: 15 January 2023 | Published: 31 January 2023

DOI:https://doi.org/10.55057/ijbtm.2022.4.4.13

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Abstract: PT Berau Coal which is located in Berau Regency, East Kalimantan Province.

Pit C2 Block 8 Binungan Mining Operation Area 2 PT Berau Coal is a coal mining operation area with multi-seam characteristics with a slope of coal seams at intervals of 40 – 60 degrees.

The characteristics of coal deposits are one of the considerations in the formation of coal mining designs in collaboration with other disciplines, including geotechnical, hydrology, safety and environment, as well as other aspects. PT Berau Coal faces several challenges, risks and uncertainties such as fluctuations in coal prices, production capacity, mining costs and related legal aspects. Therefore, mining planning and strategy must be carried out carefully until PT Berau Coal's mining permit expires in 2025. Financial assessment must accommodate the risks and uncertainties that exist to overcome the weaknesses of the DCF method. The monte carlo symulation method serves as an alternative for creating dynamic quantitative models for mining projects. In this method, the discounted risk factor is applied directly to variables of uncertain sources, such as coal prices, to improve accuracy. Therefore, evaluating long- term mine planning at PT Berau Coal using scenario analysis and Monte Carlo simulation is useful for making better decisions in production, investment and resource allocation schemes. With the results of a financial evaluation of NPV DCF 38mio USD, NPV Monte Carlo 40mio USD, IRR 51%, PI 4.12, and PBP 2.28 years PT Berau Coal will consider and make a decision whether to continue the project considering several risks or cancel the investment and not continue mining in Pit C2.

Keywords: discounted cash flow (DCF), net present value (NPV), internal rate of return (IRR), profitability index (PI), Monte Carlo, Extension of PKP2B

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1. Introduction

Company Profile

PT Berau Coal, the main operating subsidiary of the Company, owns a 118,400 ha mining concession area located in the Berau Regency, approximately 300 kilometers north of Samarinda, the capital city of the East Kalimantan province. The concession area is based on a letter from the Ministry of Energy and Mineral Resources No. 178.K/40.00/DJG/205 dated 7 April 2005 and valid until 2025.

PT Berau Coal has 3 main Mining Operations that are already operating, namely Lati Mine Operation (LMO), Sambarata Mine Operation (SMO), Binungan Mine Operation (BMO).

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There is also still a stage of development / initial operations, namely Prapatan Mine Operation (PMO) and Gurimbang Mine Operation (GMO). The potential areas that are still possible to be developed are on the east side of the concession area of SMO and BMO, namely Punan and Binungan Block 9 & 10.

Figure 1: Concession Area PT Berau Coal

From the Binungan mine the coal is blended to produce the brands of Ebony and Mahoni/Mahoni-B. Total mineable coal resources delineated to-date in Binungan Blocks 1-4, Block 5, 6, 7, & 8 are in excess of 1.954 million tonnes. From there it is transported over on all weather road, a distance of 28 kilometres, to the Suaran coal terminal where it is blended into the product stockpile. It is then loaded into barges.

Volatility Coal Price

The conflict between Russia and Ukraine seems to be a blessing for domestic coal producers.

This tension triggers an increase in the prices of mining commodities, including minerals and coal or mineral and coal.

ICE Newcastle trade data shows that coal prices have skyrocketed to 400 U SD per tonne.

Meanwhile, the domestic Reference Coal Price (HBA) is set in Q1 2022, up to 200 USD per tonne. This figure rose 15 USD per tonne from the beginning of the year which was 188.38 USD per ton.

Figure 2: Volatility Coal Price (2011-2021)

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The problem is when the supply (gas) is interrupted it will allow the reuse of their power plant.

This caused the coal reference price (HBA) to increase significantly. HBA is the price obtained from the average index of Indonesia Coal Index (ICI), Newcastle Export Index (NEX), Globalcoal Newcastle Index (GCNC), and Platt's 5900 in the previous month, with quality equivalent to 6322 kcal/kg GAR calories, Total Moisture 8 percent, Total Sulfur 0.8 percent, and Ash 15 percent.

2. Literature Review and Research Methodology Uncertainty of contract extension for PKP2B permit holders

The business certainty of the holders of the Coal Mining Concession Work Agreement (PKP2B) is threatened by the delayed revision process of the Minerba Law.The unfinished discussion of the Draft Amendment to Law Number 4 of 2009 concerning Mineral and Coal Mining (UU Minerba) could have an impact on the business certainty of PKP2B holders. In the next few years there will be a number of first-generation PKP2Bs whose contracts will expire. However, the mechanism and conditions for the extension of the operation are still not regulated in detail. It is planned that the mechanism for the extension of the PKP2B operation and all of its provisions will be regulated in the Amendment to the Sixth Government Regulation (PP) No.23 of 2010 concerning the Implementation of Mineral and Coal Business Activities. To date, these changes have not been established. This is because the addendum or amendment to PP No.23/2010 is required to comply with the Minerba Law whose revisions have not yet been completed.

Discounted Cash Flow Method

The DCF method is commonly used to evaluate mining projects. Techniques from DCFM estimate future new cash flows generated during the project life cycle using estimated annual values of production and economic variables, such as future mineral commodity prices, production quantities, ore grades, recovery rates, consumption prices, and labor. This forecast is used to construct an annual project whose expected new cash flows are equal to revenues minus capital and operating costs, government taxes, royalties, corporate income taxes, transportation costs, insurance, and other deductions. Then this expected value of cash flow is used to calculate the project's Net Static Present Value (NPV) as an indication of the feasibility of a project. The calculation of the NPV requires estimating the net annual cash flows and then discounting each annual cash flow for the effects of the uncertainty value and time to determine the present value of the cash flows.

Monte Carlo

Monte Carlo Simulation, also known as the Monte Carlo Method or a multiple probability simulation, is a mathematical technique, which is used to estimate the possible outcomes of an uncertain event. The Monte Carlo Method was invented by John von Neumann and Stanislaw Ulam during World War II to improve decision making under uncertain conditions. It was named after a well-known casino town, called Monaco, since the element of chance is core to the modeling approach, similar to a game of roulette.

Unlike a normal forecasting model, Monte Carlo Simulation predicts a set of outcomes based on an estimated range of values versus a set of fixed input values. In other words, a Monte Carlo Simulation builds a model of possible results by leveraging a probability distribution, such as a uniform or normal distribution, for any variable that has inherent uncertainty. It, then, recalculates the results over and over, each time using a different set of random numbers

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between the minimum and maximum values. In a typical Monte Carlo experiment, this exercise can be repeated thousands of times to produce a large number of likely outcomes.

Monte Carlo Simulations are also utilized for long-term predictions due to their accuracy. As the number of inputs increase, the number of forecasts also grows, allowing you to project outcomes farther out in time with more accuracy. When a Monte Carlo Simulation is complete, it yields a range of possible outcomes with the probability of each result occurring.

3. Business Solution

Target Production

Based on calculation from Mine Plan Department of PT Berau Coal, life of mine (LoM) of Binungan Mine Operation 2 (BMO2) Pit CACD from 2022 until 2026 as total volume overburden removal 141.757.000 BCM (Bank Cubic Meter) and coal getting 15.825.000 MT (Metric Ton). Stripping ratio (SR) or ratio between volume of overburden removal and coal getting is 8,96 BCM/MT. Despite of many business situations that have been explained before, there is still room to do valuation of schemes used to optimize CACD pit LOM. This research will input parameters swing price coal, unexpected additional operating cost, depreciation, royalty, and tax to do sensitivity analysis. Besides that, engineering adjustment and possibility of PKP2B extension as complexity and ambiguity aspect have made three possible scenario that can be chosen to happen in the future.

Table 1: Target Production

Description Unit Value

OB BCM 141.757.000

Coal Exposed Ton 15.386.000

Coal Getting Ton 15.825.000

Mining Strip Ratio BCM/Ton 9,21

Contract Strip Ratio BCM/Ton 8,96

Opening Inventory Ton 439.000

Closing Inventory Ton -

Waste Distance m 2.660

Coal Distance m 31.161

TM % ar 21,48

IM % adb 15,25

Ash % adb 5,40

VM % adb 38,97

FC % adb 40,81

TSadb % 0,72

CVADB Kcal/Kg adb 5.609,31

CVAR Kcal/Kg arb 5.184,06

Na2O % 8,63

AFTDef deg 1.106

AFTFlow deg 1.221

RD 1,32

HGI 47,75

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Implementation Plan

Table 2: Production Profile Scenario 1

Description Unit 2022 2023 2024 2025 2026 Value

Scenario 1

OB BCM 37.714.000 37.224.000 36.955.000 25.654.000 4.210.000 141.757.000 Coal Exposed Ton 3.203.000 3.953.000 3.548.000 3.856.000 826.000 15.386.000 Coal Getting Ton 3.104.000 3.953.000 3.608.000 3.795.000 1.365.000 15.825.000 Mining Strip Ratio BCM/Ton 11,77 9,42 10,42 6,65 5,10 9,21 Contract Strip Ratio BCM/Ton 12,15 9,42 10,24 6,76 3,08 8,96 Opening Inventory Ton 439.000 538.000 538.000 478.000 539.000 439.000 Closing Inventory Ton 538.000,00 538.000,00 478.000,00 539.000,00 - -

Waste Distance m 3.891 2.350 2.250 2.010 1.950 2.660

Coal Distance m 31.267 30.430 31.360 31.400 31.850 31.161

Scenario 1 → Carry out mining scenarios until 2026 according to the long-term plan until the end of mine life (LOM) with detailed annual mining production as besides.

This scenario does not consider the possibility of not extending the PKP2B permit from PT Berau Coal, as the holder of the PKP2B Volume 1 permit. So that it can carry out mining until 2026.

Description Unit 2022 2023 2024 2025 Value

Scenario 2

OB BCM 37.714.000 37.224.000 36.955.000 25.654.000 137.547.00 0 Coal Exposed Ton 3.203.000 3.953.000 3.548.000 3.856.000 14.560.000 Coal Getting Ton 3.104.000 3.953.000 3.608.000 3.795.000 14.460.000

Mining Strip Ratio BCM/Ton 11,77 9,42 10,42 6,65 9,45

Contract Strip Ratio

BCM/Ton 12,15 9,42 10,24 6,76 9,51

Opening Inventory Ton 439.000 538.000 538.000 478.000 439.000 Closing Inventory Ton 538.000,00 538.000,00 478.000,00 539.000,00 -

Waste Distance m 3.891 2.350 2.250 2.010 2.682

Coal Distance m 31.267 30.430 31.360 31.400 28.414

Scenario 2 → The mining scenario until 2025 is because the central government does not extend PT Berau Coal's PKP2B permit with the same sequence as scenario 1, so that in 2026 Pit CACD does not carry out the mining process, details of mining production per year until 2025 are besides. This scenario occurs if PT Berau Coal is immature in considering permits for continuation of the mining business from the central government, so that the mining plan stops in 2025.

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Scenario 3 → Resequencing mining so that the end of mine life reaches 2025, by spreading the production target in 2026 to the previous year. So that the mining production target remains according to plan, what is of concern is the additional effort in the mining process which will affect production costs, while the details of mining production in scenario 3 are as above. This scenario was proposed to management due to the presence of 4 VUCA elements in the future mining process, namely Volatility, Uncertainty, Complexity, Ambiguity that occur in coal commodities and held by PT Berau Coal.

Sensitivity Analysis

Figure 3: Sensitivity Analysis from Each Parameter

The goal of this sensitivity analysis is to determine the probability that certain variables will have an effect on the project's value if they are changed. The difference between each of these conditions lies in the eleven parameters. The eleven parameters in each condition have different values based on the underlying assumptions for each condition.

The difference of Upside +20% and Downside -20% from the base condition for each variable becomes a reference. The percentage represents the company's standard practice. The following table and tornado chart summarize the results of the sensitivity analysis As shown in the table beside, of the eleven risk parameters related to the NPV values, the most significant sensitivity to the NPV value is the coal index price, mining cost, and capital expenditure (CAPEX). The next step is to create a scenario for calculating the NPV with the basic, worst, and best cases by entering the actual historical data from 4 parameters that are very sensitive to the NPV value from the sensitivity analysis that was made previously.

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Scenario Analysis

Table 5: Scenario Analysis

Parameter Worst NPV Baseline NPV Best NPV ABS +20% -20%

Coal Price -20% 142.125.337 0% 36.157.727 20% - 64.591.472 206.716.809 - 100.749.200 105.967.609 Mining Cost -20% - 59.901.007 0% 36.157.727 20% 105.899.262 165.800.269 69.741.535 - 96.058.735

CAPEX -20% 47.960.299 0% 36.157.727 20% 23.875.093 24.085.206 - 12.282.635 11.802.571

Royalty -20% 43.421.701 0% 36.157.727 20% 28.893.753 14.527.948 - 7.263.974 7.263.974

Tax -20% 38.551.121 0% 36.157.727 20% 34.208.075 4.343.046 - 1.949.653 2.393.393

From the results of the sensitivity analysis made, there are 5 parameters that are very sensitive to the NPV value. When the 5 parameters are entered in the actual history numbers, it becomes 3 scenarios, namely baseline, worst, and best case with NPV values that will look like the following.

Monte Carlo Analysis

Figure 4: Monte Carlo Analysis

Table 5: Static Descriptive of Monte Carlo Analysis

Mean 39935434,44

Standard Error 1090010,201

Median 42999463,58

Standard Deviation 34469149,07

Skewness -0,524733755

Range 230913442,4

Minimum -100910327,6

Maximum 130003114,8

Sum 39935434441

Count 1000

As we can see on the table above, the mean or average of NPV across the simulation is around 39.9 million USD with maximum value of 130 million USD and minimum value of NPV is - 100 million USD. The mean or average NPV is the revenue from this cost efficiency project

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with amount 39.9 million USD in present value and this value raises within the standard deviation. The best possibility of this project could generate revenue up to 130 million USD, and the worst possibility still generate revenue of -100 million USD to PT Berau Coal if all variables which take effect for cash flow do not meet or under expectation.

4. Conclusion

In accordance with the analysis in the previous chapter, it can be concluded that:

Table 5: Valuation Parameters of Each Scenario

Table 6: Scenario Analysis

1) DCF) valuation has an NPV value > 0 which is $38.7 Million, IRR > Discount rate is 61%

of the 11.31% discount rate and the Payback period is 2.82 years, shorter than the project period, which is 4 years.

2) The results of the sensitivity analysis carried out, the parameters that have a very large influence on the NPV value > 20% are Coal Index Price Changes, Mining Cost, CAPEX, Royalty, and Tax.

3) Three parameters that have a huge influence on the NPV value, a scenario analysis is carried out by entering the actual historical numbers of these 3 parameters, so that the Pit CACD mining scenario is the worst and best scenario. Where in the worst-case scenario the NPV value is - $64 Million and in the best scenario the NPV value is $142 Million.

Recommendations

There are 2 recommendations in the final project, namely recommendations for companies and recommendation for research.

1) Recommendation For Company

Based on the results of the valuation in this final project, it is recommended to the company in this case PT. Berau Coal to carry out mining at Pit CACD Block 8 with implemented scenario 3 as an alternative to support the production achievement of PT. Berau Coal while still paying attention to parameters that can affect the NPV value internally and speed up production from base options 5 years production to 4 years production with results economic criteria NPV, IRR and Payback Period show better.

Detailing of the engineering plan from the construction of infrastructure by the assembling department, improvement of coal processing plant with the aim of strengthening the primary

NPV IRR PI PBP

Scenario 1 $ 36.157.727 49% 4,00 2,06

Rank 2 2 2 1

Scenario 2 $ 23.628.366 42% 2,97 2,11

Rank 3 3 3 2

Scenario 3 $ 38.666.637 51% 4,12 2,82

Rank 1 1 1 3

Parameter Worst NPV Best NPV

Coal Price -20% 142.125.337 20% - 64.591.472

Mining Cost -20% - 59.901.007 20% 105.899.262

CAPEX -20% 47.960.299 20% 23.875.093

Royalty -20% 43.421.701 20% 28.893.753

Tax -20% 38.551.121 20% 34.208.075

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and secondary crusher, making WMP for mine water management and submitting permit applications to the government

2) Recommendation For Research

In this final project, the authors limit the research for case analysis at PT. Berau Coal due to the limited data available and time available. For further research the authors suggest that research can be collaboration integrate with team finance and contract management for data complete and assumption.

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http://www.beraucoalenergy.co.id/our-profile

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https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html

Gitman, L. J., & Zutter, C.J. (2014): Principles of Managerial Finance: Fourteenth Edition, Pearson Education Limited. United States of America.

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Indonesiaan Coal Index (2022), https://www.argusmedia.com/en/coal/argus- coalindo- indonesian-coal-index-report

Kementerian Energi Dan Sumber Daya Mineral (2022), HBA, Tax dan Royalty https://www.esdm.go.id/id/

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