Ashok Mitra, PT. Kaltim Prima Coal - Investment Consideration and Methods for Kalimantan Infrastructure Projects
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Investment Consideration and
Methods for Kalimantan
Infrastructure Projects
By:
Ashok Mitra Chief Financial Officer
PT. Kaltim Prima Coal
September 2013
Introduction – Global Economic and
Financial Crisis
! Global economic and financial crisis slowing down flow of Foreign Direct Investment (FDI) and start
bottom out in the latter half of 2009.
Global FDI Quarterly Index, 2000 Q1 – 2010 Q1
Source: World Investment Report; United Nations Conference on Trade and Development (Unctad) 2010-2012
Note: Graph using base 100; quarterly average 2005
Introduction – Global Economic and
Financial Crisis!(continued)
! Global economic crisis negatively impact Trans National Companies’ (TNCs’) Performance and
Investment plan.
Profitability and Profit levels of TNCs, 1997–2009
Source: World Investment Report; (Unctad) 2010-2012
Global Investment Prospect
! Despite strong impact of the global financial and economic crisis on
Trans National Companies’ (TNCs’) investment program, significant
divestment of TNC’s foreign assets has not been made, and
companies remain committed to expanding their presence abroad.
Source: World Investment Report 2011; Unctad
Top Host Economies for FDI in 2011–2013
Note: Number of times the country is mentioned as a top FDI priority by respondent TNCs.
Global Investment Prospect!(continued)
! Modest Recovery starting mid 2010 grow optimism on Global economic performance as indicated by predicted
increase of FDI.
Global FDI Flows, 2002–2009, and Projections for 2010–2012 (Billions of dollars)
Source: World Investment Prospect Survey; (Unctad) 2010-2012
! Concern for Indonesia’s uncertain and unattractive regulatory policies
are top of the list for the Miners today
! Country ranked last in 2012 by Fraser Institute Survey of attractiveness for Mining
! Export Ban
! Lack of clarity in authorities between central and regional government.
! Requirement under 2009 Mining Law to renegotiate CoW and CCoW
! Divestment criteria for foreign companies to divest 51% within 10th
year of commercial operation
! Presidential election 2014 – uncertainty surrounding it.
! Heightened labor activism
! Environmental issues
! Land compensation
! Shortage of talent
Investment Risk Profile
KPC Location
KPC Among Other Major Coal Producers
in Kalimantan
Capital Investment Decision Making
Process Corporate Goal
Strategic Plannning
Investment Ideas / Needs
Preliminary Screening
Financial Appraisal,
Quantitaive Analysis,
Project Evaluation /
Analysis
Qualitative Factors and
Judgement
Accept / Reject
Execution
Monitoring, Control, and
Review
Continue, expand or
abandon Project
Post Implementation
Audit
ACCEPT
REJECT OUT
! Following
weakening of global
Coal price in the
recent times, the
need for new
investment in Coal
mine Industry must
carefully be
analyzed to ensure
Capital Investment
gives expected
return.
Qualitative Factors Need to be Considered
for a Capital Investment
International Risk
AssessmentInput Market
General Economic
Condition Industry Condition
Historycal
Experience
Objectives, Priorities
Regulatory GovernanceRegulatory Rules/
Policies
Structure
Behaviour
Performance
Corporate
Governance
Legitimacy,
credibility
Institutional
Conditions
Assessing Economic Feasibility of a Capital
Investment – Current/Common Methods
! NPV analysis
! Payback Period
! Internal Rate of Return
! Sensitivity Analysis
1. Discounted Cash flow
3. Monte Carlo Simulation
5. Decision Tree
Analysis
! Provide distribution of projected NPV of the Cash flow
to identify variability/standard deviation of result.
! Calculate Expected value of NPV Scenarios by using
(defined) probabilities of NPV outcomes.
Limitations of Current/Common Economic
Feasibility Analysis of Capital Investment
Discounted Cash Flow & Monte Carlo Simulation Methods:
1. Both current approaches are deterministic approach which
do not address uncertainty.
2. Both methods uses fixed path outcomes; which does not
take into account management’s flexibility to change the
course of the project
3. Difficulty in accessing the risk of the project. Higher discount rate usually use to capture the riskier project.
Limitations of Current Economic Feasibility
Analysis of Capital Investment !(cont’d)
Decision Tree Analysis Method:
1. Probabilities of success used to calculate the NPV
outcomes are subjective which are possible to be skewed
as per analyst & management favor.
2. Difficulties in determine the appropriate discount rate to discount the cash flow within the decision tree.
Management judgment still play an important role to
capture issues which could not be calculated in the
analysis (e.g. risks, flexibilities) to overcome the limitations arise from the above three current/common
methods.
Case Study: Economic Analysis for Construction of an
Overland Conveyor at PT KPC
Background:
Construction of 2nd OLC from Coal Processing Plant to
Coal Terminal is intended to replace coal transportation
by using 30/40 tonne dump truck.
Data & Assumptions:
• OLC length : 13 kms
• Power Demand : 4 MW
• Road length: +/- 15 kms
• Power price : 11.56 c/kwh
Cost Model: 2nd OLC PT. KPC
Coal Trucking Cost $/t 1.67
Road Maintenance $/t 0.725
Total Trucking Cost $/t 2.39
OLC Mtce + Operating Cost $/t 0.025 Capital Cost $M 130.00 Tax Rate 45%
Discount Factor 10%
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 Total
Coal Conveyed Sangatta kt 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 - 360,000
Capital Cost $M 52.00 65.00 13.00
Potential Loss of Saving
Coal trucking Cost $M - - 25.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 475.02
Road Maintenance $M - - 10.87 21.74 21.74 21.74 21.74 21.74 21.74 21.74 21.74 21.74 206.58
Total Trucking + Road Mtce Cost $M - - 35.87 71.75 71.75 71.75 71.75 71.75 71.75 71.75 71.75 71.75 681.60
OLC Mtce + Operating Cost $M - - 0.37 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 6.99
OLC Operating Hours khr - - 3.57 7.14 7.14 7.14 7.14 7.14 7.14 7.14 7.14 7.14
OLC Power requirement kwh/t - - 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95
OLC Power Unit Cost $/t - - 0.110 0.110 0.110 0.110 0.110 0.110 0.110 0.110 0.110 0.110
OLC Power Cost $M - - 1.65 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 31.38
Total OLC Cost $ - - 2.02 4.04 4.04 4.04 4.04 4.04 4.04 4.04 4.04 4.04 38.36
Potential Cost Saving $ - - 34 68 68 68 68 68 68 68 68 68 643.24
Depreciation $ - - 6.84 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68
Profit Before Tax $ - - 27.01 54.02 54.02 54.02 54.02 54.02 54.02 54.02 54.02 54.02 513.24
Tax Calculation
Tax Rate 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45%
Tax Expense - - 12.16 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31
Tax Payment - - 12.16 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31
Cash Flow
Capital $ (52.00) (65.00) (13.00) - - -
Cash Cost Saving $ - - 33.85 67.71 67.71 67.71 67.71 67.71 67.71 67.71 67.71 67.71 -
Tax payment $ - - - (12.16) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31)
Net Cash Flow $ (52.00) (65.00) 20.85 55.55 43.40 43.40 43.40 43.40 43.40 43.40 43.40 43.40 (24.31) 282.28
Cummulative Cash Flow (52.00) (117.00) (96.15) (40.59) 2.81 46.20 89.60 133.00 176.40 219.80 263.19 306.59 282.28
Discount Factor 1 1.100 1.210 1.331 1.464 1.611 1.772 1.949 2.144 2.358 2.594 2.853 3.138
Discounted Cash Flow $ (52.00) (59.09) 17.24 41.74 29.64 26.95 24.50 22.27 20.25 18.40 16.73 15.21 (7.75)
Net Present Value $ 114.08
Internal Rate of Return 16.1%
Payback Period (after commissioning) years 2.56
Cost Model: 2nd OLC PT. KPC – Result and Sensitivity Analysis
Parameters Unit Result
Net Present Value $M 114.08
Internal Rate of Return (after Tax) % 16.06
Pay back Period (After commissioning) Years 2.56
Using Discounted Cash flow method,
the project shows very attractive
return, as it is reflected in its NPV,
IRR & short payback period.
Tornado diagram to identify
parameter’s sensitivity reveals that
the project is sensitive to tax rate,
discount factor, capital cost and
project duration, & less sensitive to
fuel price & electricity price
Thank you..
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