Investment Project Analysis of Mud Handling Using Slurry Pump Method: A Case Study of Pit C2 PT. Berau Coal
Mohamad Ihsan Priambodo1*, Raden Aswin Rahadi1, Mandra Lazuardi Kitri1
1 School of Business and Management, Institut Teknologi Bandung, Bandung, Indonesia
*Corresponding Author: [email protected]
Accepted: 15 January 2023 | Published: 31 January 2023
DOI:https://doi.org/10.55057/ijbtm.2022.4.4.12
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Abstract: Disposal is important in mining activity for allocation of waste material that need to be dispose to obtain the coal ores. The disposal allocation in Pit C2 currently has a long distance and there is an additional cost incurred due to the distance rate adjustment from distance contract reference. To overcome this problem, there is an option of short distance disposal scenario, namely in pit dump scenario. With this scenario, there is cost efficiency from the distance rate adjustment due to the reduction in disposal distance. Sump H as a planned area for in pit dump is currently fulfilled with sedimentation material, with a volume around 1,2 million cubic meters (BCM). Therefore, it is necessary for mud handling in Sump H area for it to become in pit dump location area. One of the proposed scenarios is the use of slurry pump, this scenario is more suitable for current condition due to it can finished earlier.
However, it is necessary to study and evaluate further the financial analysis of the proposed scenario in comprehensive manner. To obtain the financial feasibility of this project, this research use capital budgeting analysis in which the parameters used are studied further using sensitivity analysis and probability analysis. From the results of the financial feasibility analysis of this slurry pump scenario, it shows that this project is financially feasible with an NPV value of IDR 16.227.951.215,26, with an IRR of 43,08%, a Payback Period of 1,6 years, a Discounted Payback Period of 1,77 years and a Profitability value Index 1,7. In addition, based on the Monte Carlo Simulation for probability analysis, it is found that the probability of this project failing is 0%. Therefore, it can be concluded from the results of the financial feasibility analysis, this project is recommended to be implemented.
Keywords: slurry pump, mud handling, cost efficiency, capital budgeting, probability analysis ___________________________________________________________________________
1. Introduction
1.1 Background
Coal is an abundant natural resource that still plays a vital role in providing energy and building today modern societies. Forecast in 2040, coal still contribute 22% of world electricity sources remaining its biggest contributor (Papaspiropoulos & Demetriou, 2020). Even though coal production plunged in 2020 due to Covid-19 that make world’s economic fallout. In 2021, with world’s economy recovery from pandemic, demand of coal will increase driven by demand of higher electricity and resurgent industry powered by coal. This trend is still continued until now and many efforts and strategics are attempted to maximize the profit during this increase of coal price. To maximize profit in coal mining industry during the uptrend of coal price is mostly by increasing production to maximize coal gain in mining operational activity.
With increase of production means increase in demand of additional coal mining equipment.
Therefore, many factors are affected cost of operational regarding use of heavy equipment or mining cost but it mainly affected by two factors that expended most, mining contractor’s rate in overburden activity and its fuel consumption (Shafiee, Nehring, & Topal, 2009). Mining contractor’s rate in overburden activity is most affected and adjusted by its hauling distance.
The haulage of overburden using heavy equipment is adjusted according to distance, the longer the distance, the more costly the mining cost due to more use of heavy haulage equipment needed. The use of more heavy haulage equipment due to the increase of distance is to get effective cycle between loader and hauler or match factor (Anaperta, 2016).
One of mine operation activity strategies is using in-pit dump to reduce overburden removal distance (Endriantho, Prabudi, & Ardiansyah, 2019) rather than dumping at out pit that usually had longer distance than in-pit dump. In-pit dump is use of pit area that already finished or not mined anymore as a disposal for overburden. In-pit dump itself is usually located at lowest elevation area and mainly fulfilled by sedimentation material if abandoned for a long time (Nursecha, Saputra, Adhi Y., & Lestyo, 2020). The option to remove the sedimentation material in finished area is chosen to further used it as an area for in-pit dump and reduce the overburden removal distance to reduce mining cost.
Figure 1: Slurry Pump Method Illustration
1.2 Business Issue
The current Pit C2 finished area, namely sump H is now filled with sedimentation material from previous mining activity, with volume around 1.2 million bank cubic metre (BCM) of sedimentation. Sump H is needed to support the mining activity at Pit C2 as an in-pit dump disposal to dump overburden or waste material. With in-pit dump at Sump H, Pit C2 can get feasible development by shorter distance of disposal for waste haulage and get efficient mining cost for mining activity. Thus, the proposed scenario is by using slurry pump to handling the sedimentation material. The scenarios can be preferable if it can remove the sedimentation area on time based on Pit C2’s mining sequence and Pit C2 can further develop its mine activity.
1.3 Research Question
The problem identification process of this research is approached by answering following questions:
- Is the proposed scenario to remove sedimentation material are financially feasible?
- What are the variables affected the proposed scenario and how it affected the proposed scenario?
1.4 Research Question
To identify the best scenarios to generate maximum profit to PT Berau Coal at Sump H’s sedimentation material removal there are several objectives that need to be carrying out in this research as following:
- Analyze the financial feasibility of proposed scenario.
- Determine and analyze which variables affected the proposed scenario 1.5 Research Scope and Limitation
The scope and limitation of this research are as following:
- The financial feasibility analysis based only on mining cost of mining contractor’s rate, specifically distance adjustment if or if not using in-pit dump disposal as cash inflow.
- The capital expenditure information is based from owner estimate from PT. Berau Coal refers from booster pump manufacturer’s quotation.
- The assumption parameters used for slurry pump method of mud handling scenario is using rate and assumption by PT HBSM as supplier of slurry pump that has historic activity at PT Berau Coal.
- Production plan of Pit C2 for 2022-2025 refers to PT Berau Coal’s planning data.
- This research only limited to analyze the investment of slurry pump method project for in pit dump scenario in Pit C2.
2. Research Methodology
2.1 Business Situation Analysis
The preliminary decision is solved using business situation analysis that divided into 2 parts, external analysis and internal analysis. External analysis is factors outside of company or organization that can affect the project. For this research the tools used is PESTLE analysis, which the external factor affected is divided into six categories, namely political, economic, sociocultural, technological, legal, and environmental. Internal analysis is vice versa from external analysis, is all factors from inside of company or that can affect the project. This research used resource and capabilities analysis as a tool to analyze internal factors of the project
Analysis from external analysis and internal analysis than are further analyze using SWOT analysis to identify and evaluate the organization or company competitive position to decide which planning strategic is best fit company current situations (Aryoseno & Ahyudanari, 2019). SWOT analysis is identifying the results from external and internal analysis to four categories, which is, strengths, weaknesses, opportunities, and threats. This analysis will become reference for decision making of proposed scenarios.
2.2 Capital Budgeting Analysis
Capital budgeting is process of evaluating and selecting long-term investments that are align with the firm’s goal to maximize profit earned (Gitman & Zutter, 2010). In this research, capital budgeting can be used to evaluate mud handling project financially. The proposal generation of this research obtained from business issue of re-mined Pit C2 that in need of shorten distance disposal by using in-pit dump method. To implemented in-pit dump in proposed area, sedimentation material that fulfilled it must be remove first according to Pit C2 mine’s sequence to provide opportunity of shorten distance disposal. The evaluation of the proposed mud handling project will used discounted cash flow method to evaluate the project financially (Lee, 2018).
Discounted cash flow is a valuation method to estimate value of an investment based on its expected future cash flow (Fernando, 2022). The use of discounted term is because the calculation of expected future cash flow that takes consideration of inflation rate or commonly use of weighted average cost of capital (WACC) depending from investor financing option. To decide if the investment been made are financially viable to implement there are several parameters that can be used to help assess the investment financially, namely net present value, payback period, profitability index, and internal rate of return (Ardian & Kumral, 2018).
2.3 Sensitivity and Probability Analysis
To valuate which variables most affected the project, this research used sensitivity analysis and Monte Carlo Simulation to model probability analysis. In sensitivity analysis, by using high and low swing with designated percentage it can foresee which variables are highly affected and which variables are less affected the project. In Monte Carlo Simulation, the affected variables are than simulates by using random values to get the all-possible outcomes of the investment been made. This method allowing for better decision making for the investment been made under uncertainty.
3. Result and Analysis
3.1 Business Situation Analysis
Based on analysis from internal and external analysis done in this research, for further analysis, SWOT analysis is using to identify and evaluate PT. Berau Coal competitive position during this project. The analysis elaborate as follows:
Table 1: Research Swot Analysis
Based on SWOT analysis above we can see that slurry pump method had more competitive advantages in term of internal and external factors that can be affected the projects. Even though there are still threats with local community, it is still manageable by PT. Berau Coal.
Thus, the slurry pump method based on business situation analysis is more preferable than
3.2 Capital Budgeting Analysis
The project’s cash outflow in this project is differ into two components, capital expenditure (CAPEX) and operating expenditure (OPEX). Where CAPEX is the initial investment for slurry pump project in the form of assets, which in this project are the purchase and installation of booster pumps that valued around Rp. 23,3 billion based on owner estimate PT. Berau Coal from booster pump’s manufacturer’s quotation. As for the operating expenditure is the operating lease for slurry pump by PT. HBSM that has relation and historic activities in PT.
Berau Coal. The option of PT. HBSM is chosen to minimize error because administration issues for operation in PT. Berau Coal. The cost for operating lease is based on quotation from PT. HBSM for project in Pit C2. The cost is based on volume pumped or Indonesian rupiah per cubic meters. The cost is including all operation and administration costs provided by PT.
HBSM, including the booster pumps operation and maintenance during the project held.
Figure 2: Slurry Pumps and Booster Pumps Illustration
The project’s cash inflow is efficiency cost using incremental distance reduction between the use of IPD and without IPD. The incremental cost value obtained from over distance hauling distance adjustment (OHDA) or distance rate adjustment from the different between commitment distance and actual or plan distance align with overburden production forecast volume. By using the cost efficiency as revenue stream and operating lease as operating cost for earnings before interest tax depreciation and amortization (EBITDA), the cash flow analysis for this project shows as follow:
Table 2: Projected Cash Flow
To estimate value of an investment based on its expected future cash by using WACC as consideration. The WACC using is 10,04% which is used because it had greater value than company WACC of 10%. Thus, the calculate WACC is using, with assumption using for WACC is the risk-free rate of 3,42% based on IBPA 10 years government bond yield (average from Jan 2012 – Dec 2021), Beta of 1,174 due to BCE delisting since 16 November 2017 and trend assumed equal to ADRO with had similarity with PT. Berau Coal (ADRO Beta as of June 2022), Market Rate of Return of 9,06% based on historical monthly market return last 10 years (Jan 2011 – Dec 2021), and for cost of debt is 0% due to debt composition for this project is 0% and equity composition is 100%, its due to PT. Berau Coal uses own capital to financing this project.
To decide if the investment been made are financially viable to implement there are several parameters which will be used to evaluate the investment. Using discounted cash flow, the result of financial feasibility parameters shows in table below:
Table 3: Investment Decision Parameters
3.3 Sensitivity and Probability Analysis
In this research, the sensitivity analysis is carried out by define affected variables that may influence the project cash flow. There are four variables that this research assumed and divide into two types uncontrollable and controllable variables. Where the uncontrollable variables are distance rate variation. Distance rate variation in PT. Berau Coal even though the value is stated in contract (base value IDR 3.510,00), the swing in cost can be happen due to spot price of USD/IDR exchange rate, where the base value of distance rate is adjusted with spot price divide with base value reference in contract of IDR 13.500,00. For the controllable variables are slurry volume, slurry pump productivity, and specific gravity.
Figure 3: Sensitivity Analysis
The Monte Carlo Simulation in this research carried out by using the most sensitive variables according to sensitivity analysis, which is distance rate variation, the variable is chosen due to its sensitivity value is greater than input value in sensitivity analysis. Hence, the selected variable will be further analysis its historical data to get its descriptive statistics.
Table 4: Descriptive Statistic of Distance Rate Variation
The variable selected for Monte Carlo Simulation will be randomized to get random NPV value, then the NPV value will be iterate 1000 times to get descriptive statistics and the result of iteration presented into histogram chart to known the distribution.
Figure 4: Descriptive Statistic and Histogram Graph of Monte Carlo Simulation
As can be seen in the table above the mean value of Monte Carlo simulation is IDR 16.232.958.483,13. The NPV value at DCF analysis is less than the mean value of Monte Carlo Simulation, it means the parameters use in this research can be considered conservative but still the value not to diverse only 0,03% difference in value. For the probability of this project failing is show in probNPV<0, where the probability is 0%.
3.4 Scenario Analysis
The scenario for the worst and best scenario are obtained from historical percentage swing of parameters use in sensitivity analysis. The historical percentage swing show as follow:
Table 5: Historical Parameters Swing Percentage
Based on analysis and research held, it can be seen that the best case for distance rate variation is positive value of swing percentage, this is due to the incremental cost efficiency of distance adjustment for cash inflow in this research. Although at actual situation, the positive value of swing percentage means there are extra cost incurred due to distance rate adjustment. As for the scenario analysis, the project can be implemented with consideration show in table below:
Table 6: Scenario Analysis
3.5 Implementation Plan
For the proposed implementation of slurry pump scenario is show with figure below. With consideration of current situation in Pit C2 PT. Berau Coal.
Figure 5: Slurry Pump Scenario Gantt Chart
4. Conclusion
In accordance with the research question, the proposed scenario of slurry pump method for mud handling scenario is analyze its financial feasibility. Based on this research the investment of proposed scenario is financially feasible to implement, with investment that need to be issued is IDR 23.314.937.625,00 from CAPEX. The NPV get is IDR 16.227.951.215,26 with IRR 43,08%, payback period of 1,60, discounted payback period of 1,77 and profitability index of 1,7.
The sensitivity analysis of the proposed scenario shown that the variable that most sensitive toward it is distance variation rate variable. However, the distance rate variation is considered uncontrollable variable, which means PT. Berau Coal cannot influence this variable. Although, during the probability analysis, the probability of the project failing is 0% despite this uncontrollable variable. Can be conclude from the probability of project failing, that the project will still generate profit even though during the worst possibility outcome happen.
Despite the parameters used for this research based on historical value, the actual project will probably more dynamic. To prevent that, the need to implement project management for project monitoring is necessary to reduce all controllable variables affected. Such thing as exceeded cost and delay in project schedule must had to be reduced to avoid project failure. But, even though the dynamic condition of project, considering current economic situation, with the current coal prices in global market. This project is recommended to be implemented immediately for future cost efficiency of Pit C2.
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