Track: Case Studies
Abstract
The coal mining industry is a high-cost and high-risk business and is significantly exposed to high turbulence of uncertainties. Valuation and assessment of a business project that is described as having high complexity and uncertainty requiring a comprehensive analysis. Parapatan Block of Binungan Site, part of CCoW of PT. Berau Coal, is an active mining area in the last year, which previously stopped operating for six years. The valuation method used by PT Berau Coal to value a Mining Project is Discounted Cash Flow (DCF). Both the DCF and RO methods are used to evaluate the economical fesibility of planned project of Parapatan Block of Berau Coal. The studied mining project is financially feasible by providing the positive value of NPV for all three technical scenario options, reviewed with the DCF valuation methods, the base 4-year production period (base option), 18 years production period with LCT moda (option-1), and 18 years production period with bridge moda (option-2). Provide the NPV as US$ 10.62 million for base option, US$ 10.10 million for option-1, and US$ 8.30 million for option-2. Further studies to optimize coal reserves mining using the Real Option method resulted in an option-1 scenario as an option that could be proposed to management. Option-1 provides the best average NPV value supported by the Expand Option scenario, a technical scenario in the form of accelerating investment and increasing production of the Parapatan Pit mine. Option-1 generates US $ 21.48 million NPV with 38% IRR. Furthermore, this option offers the opportunity for a statistically highest maximum NPV of US $ 248 million.
Keywords: valuation, uncertainty, DCF, real option, managerial flexibility.
The coal mining industry is a high-cost and high-risk business and is significantly exposed to high turbulence of uncertainties. Valuation and assessment of a business project that is described as having high complexity and uncertainty requiring a comprehensive analysis. Parapatan Block of Binungan Site, part of CCoW of PT. Berau Coal, is an active mining area in the last year, which previously stopped operating for six years. The valuation method used by PT Berau Coal to value a Mining Project is Discounted Cash Flow (DCF). Both the DCF and RO methods are used to evaluate the economical fesibility of planned project of Parapatan Block of Berau Coal. The studied mining project is financially feasible by providing the positive value of NPV for all three technical scenario options, reviewed with the DCF valuation methods, the base 4-year production period (base option), 18 years production period with LCT moda (option-1), and 18 years production period with bridge moda (option-2). Provide the NPV as US$ 10.62 million for base option, US$ 10.10 million for option-1, and US$ 8.30 million for option-2. Further studies to optimize coal reserves mining using the Real Option method resulted in an option-1 scenario as an option that could be proposed to management. Option-1 provides the best average NPV value supported by the Expand Option scenario, a technical scenario in the form of accelerating investment and increasing production of the Parapatan Pit mine. Option-1 generates US $ 21.48 million NPV with 38% IRR. Furthermore, this option offers the opportunity for a statistically highest maximum NPV of US $ 248 million.
Keywords: valuation, uncertainty, DCF, real option, managerial flexibility.