Whitepaper

Long Distance Transport

Cost Saving of Overland Conveyor

Compared to Coal Trucking
Coal hauling is one of the most important processes in mining industry.
The continuity of coal hauling from ROM stockpile to port stockpile will
determine the achievement of coal shipment target. In order to ensure
coal hauling was running well, equipment’s productivity must be
maintained in highest performance in various conditions to ensure coal
supply commitment to buyers can be met at agreed timeframe. Cost of
hauling equipment has big impact to the company's overall operation.
West Melawan is one of the KPC mining area that will be developed as a
part of expansion’s plan to 70 million tonnes coal production. Currently,
the type of coal hauling from West Melawan is coal trucking. Related to
expansion’s plan, KPC plans to replace coal trucking with Overland
Conveyor (OLC). The goal of this project is reducing hauling cost from
several aspects, such as fuel consumption, fuel price, and tyre supply
from market. OLC is expected to provide cost saving to the company.
Calculation of cost saving will use incremental analysis with two methods
of cashflow i.e, Discounted Cashflow and Real Option. Three financing
scenarios (Equity, Debt, and SPV) are used in order to calculate cost
saving ($/ton), NPV incremental, and IRR incremental of project. Based
on the analysis, it is expected that management has clear and objective
view to make the solid decision for this project.

Author:

C.E. Manurung, PT Kaltim Prima Coal, Indonesia

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Cost Saving of Overland Conveyor Compared to Coal Trucking

Case Study: Overland Conveyor (OLC) West Melawan

Cory Elisabeth Manurung

Business Analysis, PT Kaltim Prima Coal, Sangatta, East Kalimantan, Indonesia

Cory.Manurung@kpc.co.id

Abstract
Coal hauling is one of the most important processes in mining industry. The continuity
of coal hauling from ROM stockpile to Port stockpile will determine the achievement of coal
shipment target. In order to ensure coal hauling was running well, equipment’s productivity
must be maintained in highest performance in various conditions to ensure coal supply
commitment to buyers can be met at agreed timeframe.

Cost of hauling equipment has big impact to the company's overall operation. West
Melawan is one of the KPC mining area that will be developed as a part of expansion’s plan
to 70 million tonnes coal production. Currently, the type of coal hauling from West Melawan
is coal trucking. Related to expansion’s plan, KPC plans to replace coal trucking with
Overland Conveyor (OLC). The goal of this project is reducing hauling cost from several
aspects, such as fuel consumption, fuel price, and tyre supply from market. OLC is expected
to provide cost saving to the company.

Calculation of cost saving will use incremental analysis with 2 methods of cashflow
i.e, Discounted Cashflow and Real Option. Three financing scenario (Equity, Debt, and SPV)
are used in order to calculate cost saving ($/ton), NPV incremental, and IRR incremental of
project. Based on the analysis, it is expected that management has clear and objective view to
make the solid decision for this project.

This paper is organized into the following sections: 1 – Introduction, 2 – Background,

3 – Overland Conveyor (OLC) West Melawan, 4 – Economic Evaluation Method, and 5 -
Conclusion.
I. Introduction
Nowadays, coal is one of strategic energy alternative source and in the future it will
become one of the biggest incomes for country from export trading sector. Refers to Coal
Book 2008 – 2009 (published by Ministry of Energy and Mineral resources of Indonesia),
Indonesia has 69.98 billion tons of coal resources and 11.84 billion tons of coal reserves. With
this big potential resource, Indonesia becomes one of the biggest coal exporters in the world.
Distributions of coal potency in Indonesia are shown on Figure 1 below.

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 Figure 1. Distributions of Coal Potency in Indonesia
Related to big potency of coal, Indonesia has some strategic prospects of coal, such as:
1. Coal has key position as a fuel of motor generator in Indonesia and other countries in
the world.
2. World coal market will compete strictly until 2020 as an effect of China and India
demands for motor generator.
3. Coal is cheaper than oil and LNG as a fuel.
4. After global crisis, coal price will increase gradually in few years ahead and coal
demands will be higher than supply.
Kaltim Prima Coal, Ltd (KPC) is one of coal mining companies that categorized as
PKP2B first generation Company in Indonesia. Exploration activity in KPC has been started
since 1982 and mining activity with surface mine had been done since 1990. The first
commercial production was made in 1992 with 7.3 million ton of coal annually. The
increasing of production started from 1992 until 2010 (detailed on Table 1 below).
Tabel 1. Historical Coal Production of KPC Year 1992 - 2010
600,000 50,000

45,000

500,000
40,000

35,000
400,000
OB Removed (kbcm)

30,000
Coal Mined (kt)

300,000 25,000

20,000

200,000
15,000

10,000
100,000

5,000

- -
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010P
Total OB Removal 47,260 65,596 71,733 70,659 87,010 112,49 123,61 124,33 103,29 115,07 145,81 129,66 169,63 274,58 352,32 335,47 366,77 444,22 484,38
Total Coal Mined 7,279 9,154 10,229 10,706 11,787 13,575 14,959 14,332 13,493 15,909 18,265 16,383 22,131 28,298 38,211 36,335 37,466 40,268 45,879

Total OB Removal Total Coal Mined

  ‐ 2 ‐ 
 To fulfill the increasing of coal demand in domestic and global market, KPC planned to
increase its production to maximum 70 million tons of coal per year and it is predicted to be
achieved in 2014. The production is coming from pits in Sangatta and Bengalon, by
expanding the current pits and opening new pits in both areas.
In order to increase the production sufficiently, pit expansion activity should be supported
by additional infrastructure. One of its project is the construction of new overland conveyor in
Melawan area. Currently, West Melawan mining area is done by two contractors’ i.e Thiess
Contractor Indonesia, Ltd (TCI) and Pama Persada Nusantara, Ltd (Pama). All coal from
West Melawan is estimated to achieve its peak production about 24 million tons in year 2014.
The production plan of West Melawan’s coal from 2011 until 2021 is shown below.

Figure 2. Production Plan of West Melawan’s Coal

OLC West Melawan is planned to be constructed in 2012 and ready to use in 2013. This
project is an important of management decision considering a big capital value. Therefore, an
evaluation of the economic feasibility of the project is critical.

II. Background
The selection of hauling equipment that is used will affect to the mining cost of coal.
All of coal from West Melawan area will be transported to Belut stockpile and continued to
Coal Processing Plant (CPP) for further process in accordance with customer requests.
Currently, existing coal hauling type used in KPC from Belut stockpile to CPP is coal
trucking method with 12 kilometer hauling distance. With the expanding of pit based on
mining sequences, the hauling distance from Belut stockpile to CPP would be farther than
before. So KPC need to be selective to choose the type of coal hauling from West Melawan.
Moreover, the increasing of coal production will directly add the needs of coal truck, which is
additional cost, will be higher. Additional needs of coal truck will create some issues in fuel
cost and tire cost. Since 2005, the fuel price subsidy enjoyed by KPC was withdrawn by the
Government of Indonesia. It made operating costs became much higher. In other side, the
removal of subsidy is correlated with high world oil prices. Tyre costs will be affected by

  ‐ 3 ‐ 
farther of the hauling distance. Beside that, the lack of tire is also become one of risk that
needs to be considered.
By constructing the OLC West Melawan as the replacement of coal trucking, it is
expected will reduce both fuel and tire cost. Thereby, OLC usage will reduce mining cost of
KPC overall.

III. Overland Conveyor (OLC) West Melawan

Overland conveyor is a kind of hauling equipment that is used to transport or to move material
from one place to another place. KPC will use belt conveyor type. These are some comparison
of hauling equipment in mining industry on Table 2 below.
Tabel 2. Comparison of Hauling Equipment
No Description Belt Conveyor Truck Train Pipe
1 Capacity Suitable with constan supply Flexibel Flexibel Suitable with constan supply
2 Type of material Bulk material  Bulk material  Bulk material  Bulk material 
3 Material size Limited Free Free Size: ‐3 mm
4 Site condition Slope: 200 Slope: 100 Relatively flat Will cause precipitation 
5 Hauling distance 0 ‐ 50 km 0 ‐ 10 km > 50 km > 50 km
6 Investment More expensive than truck Relatively cheap Expensive Expensive
7 Operating & Maintenance cost Lowest Highest Lower than truck Low

(Source: Konveyor Sabuk dan Peralatan Pendukung - Juanda Toha, 2002)

The scheme of existing coal hauling and expansion plan in KPC are shown on Figure 3 and
Figure 4 below.

Figure 3. Existing Coal Preparation Plant (CPP) KPC (Source: Expansion Project
Division KPC)

  ‐ 4 ‐ 
 Coal Chain Expansion – Pit Conveyors

Figure 4. Expansion Plan of Coal Preparation Plant (CPP) KPC (Source: Expansion
Project Division KPC)
OLC West Melawan will be constructed by 11 km length, starting from Melawan
mining area to CPP. Beside that, OLC will be completed with crushing station, transfer
infrastructure, and power infrastructure for electricity supply. Capacity of OLC Melawan is
approximately 4000 ton per hour (tph). The output connected to Surge Bin and then connected
to existing OLC and Tanjung Bara Coal Terminal. Location of this OLC is in a former mining
area.

IV. Economic Evaluation Method

Calculation of coal hauling cash flow using OLC will be done with 3 financing
methods, i.e. Equity, Debt, and Leasing. Coal hauling cash flow using coal trucking will use
two scenario capital. i.e. Equity and Leasing. Each of financing scenario will be calculated by
two valuation approach methods, i.e. Discounted Cash Flow (DCF) and Real Option (RO).
Usage of 2 types of cash flow will show the differences of project value (NPV) considering
risk factor of coal price.

Figure 5. Differences between DCF and RO ( A New Era of Project Economics and
Investment Decision Techniques, Nuzulul Haq, 2008)

  ‐ 5 ‐ 
 Fundamental difference of DCF and RO is on the risk adjustment. Assumed the main
source of the uncertainty of the project is coal price. First step in RO valuation will apply risk
discount factor to that coal price. After that, time value of money’s risk (discount rate) will be
adjusted to the Net cash flow yearly. So others component in cash flow will not be discounted
by the uncertainty risk of coal price. In DCF method, discount rate is only adjusted once in
Net Cash Flow yearly.
From these valuations, we will get NPV and IRR of the project. Based on the theory, if
NPV>0 and IRR>discount rate means that the project is economical. These results will help
us to decide which scenario is the best and economical. The economic scenario then applied to
the incremental analysis to get NPV and IRR analysis. If the analysis gives positive value of
NPV and IRR bigger than discount rate, it means that project is the most economical. Beside
that, cost saving calculation will be got from the comparison of operating cost per ton between
OLC and coal trucking methods.

4.1. Net Present Value (NPV)

Total capital to construct OLC West Melawan is about $ 54.5 million. There is some
assumption that is used in calculation such as:
1. Life of Mine is 11 years (from 2011 until 2021)
2. Discount Rate 15%
3. Corporate tax 45% and SPV tax 30%
4. Debt proportion is 25% equity and 75% debt
5. Interest rate of debt is 10% and number of payment is 5 years
6. Long term oil price is approximately $ 0.68/liter
7. Inflation rate is 2.5%
The calculation of OLC West Melawan cash flow using discounted cash flow method gives
the result as shown on Table 3.
Table 3. Result of OLC West Melawan DCF Calculation
Method NPV ($'000) Unit cost ($/ton) Total Operating cost
Equity 2,631,767 0.09 17,182
OLC Debt 2,674,322 0.19 36,761
SPV KPC 2,674,856 0.53 101,273

Above table shows the financing using SPV gives the biggest NPV about $ 2,764,856,000. It
is slightly different with NPV of Debt financing about $ 2,674,322,000 or with total margin
about $ 534,000. Whereas compared to project financing with 100% equity, NPV calculated
by equity method resulting the smallest about $ 2,631,767,000.
But if we see from unit cost ($/ton), the result is opposite with NPV value. Financing with
equity gives the smallest unit cost about $ 0.09/ton and followed by Debt with $ 0.19/ton, and
the highest unit cost is SPV with $ 0.53/ton.

  ‐ 6 ‐ 
Based on above analysis, SPV is a preferable option even though it has the highest unit cost.
There are 2 fundamental considerations to conclude that SPV is the best option, i.e:
1. Company did not have to allocate big enough money so the decreasing of money can
be avoided (time value of money). Beside that, the money can be allocated for funding
other expansion projects.
2. KPC is one of National Vital Objects (OBVITNAS) in Indonesia. It means all KPC’s
assets will directly be owned by the government and KPC is not allowed to sell the
asset after used. In this case, OLC is just used for less than 10 years instead of the
economic life of OLC is 20-25 years. So OLC still has salvage value in year 10th. By
using SPV, KPC will not get losses by spending big capital and losing the salvage
value of OLC.
In other hand, the calculation of coal trucking DCF produce project value as shown on Table 3
below.
Table 4. Result of Coal Trucking DCF Calculation
Method NPV ($'000) Unit cost ($/ton) Total Operating cost
Equity 2,580,640 1.15 221,690
Trucking
Leasing 2,602,234 1.48 284,785

Table 3 above shows that NPV of coal trucking using Leasing gives the highest value about $
2,602,234,000 and financing using equity gives NPV value about $ 2,580,640,000 or we can
say the margin of both is significant about $ 21,594,000. For the unit cost, equity has unit cost
about $ 1.15/ton and leasing has about $ 1.48/ton. With those results, the best method to
execute coal trucking is leasing method. It is same with SPV method. Leasing will help
company in order to buy some equipment without spending big capital in the beginning of
purchasing.
After the evaluation using Discounted Cash Flow, the next analysis is using Real
Option Static method. It is done to get higher confidence level. Before cash flow is calculated
using RO static, we should determine that commodity price has the biggest risk of uncertainty
(coal price). Historical data of Melawan coal price period January 2005 until May 2010 can be
seen in Figure 6 below.

Historical Melawan Coal Price
100.00
Historical
Coal Price ($/ton)

80.00 Coal Price
60.00
40.00
20.00
0.00
Sep‐05

Sep‐06

Sep‐07

Sep‐08

Sep‐09
Jan‐05
May‐05

Jan‐06
May‐06

Jan‐07
May‐07

Jan‐08
May‐08

Jan‐09
May‐09

Jan‐10
May‐10

Figure 6. Historical Data of Melawan Coal Price

  ‐ 7 ‐ 
Based on above data, the forward coal price will be calculated using formula below:
Risk Factor coal price = -LN (Long term coal price/Coal price year 2009)
We assumed that coal price in 2009 is $ 62.95/ton and long term equilibrium coal price is $
57/ton. By knowing the historical data of coal price, we get the uncertainty risk of coal price is
9.93%. Result of cash flow calculation using RO valuation method shows on Table 5 below:
Table 5. Comparison between SPV and Leasing Scenario
Method Financing NPV ($'000) Unit cost ($/ton) Total Operating cost
OLC SPV KPC 3,697,704 0.53 101,273
Trucking Leasing 3,593,191 1.48 284,785

Above table shows that OLC cash flow gives NPV about $ 3,697,704,000 and trucking is
about $ 3,593,191,000 or the margin of both NPV is $ 104,514,000. For component unit cost,
OLC still has the lowest cost ($ 0.53/ton) compared to unit cost of trucking ($1.48/ton).
Before we conclude that SPV financing is the most economical scenario, firstly we need to do
incremental analysis to OLC cash flow using SPV method and coal trucking cash flow using
leasing method. This method gives the NPV value as $ 41,608,000. So OLC is the most
economical scenario than coal trucking.

4.2 Cost Saving

In this case, cost saving means reducing the production cost by changing the method of West
Melawan coal hauling from Belut stockpile to CPP. It will be identified by comparing each
operating cost of OLC and coal trucking. These are the comparison of both operating cost of
OLC and coal trucking hauling methods in Figure 8 and Figure 9.

Figure 8. Operating cost of OLC

  ‐ 8 ‐ 
 Rental Cost,  Operator cost, 
,  ‐  Service cost, 
12,846,498  9,608,515 
8,567,044 
Tyre cost,  
21,133,425 

Fuel cost,  
104,540,648 
Component change, 
64,993,371 

Figure 9. Operating cost of Coal Trucking

Based on Figure 8 and Figure 9 above, shown that by using OLC as coal hauling method will
reduce many factors of cost as detailed below:

• Operating cost of OLC

Type of Cost Total Cost
Power cost 6,917,530
Maintenance cost 10,264,722
Grand Total 17,182,252

• Operating cost of Coal Trucking

Type of cost Total Cost
Operator cost 9,608,515
Service cost 8,567,044
Tyre cost 21,133,425
Component change 64,993,371
Fuel cost 104,540,648
Rental Cost 12,846,498
Grand Total 221,689,501

Based on those calculations, total cost saving using OLC as West Melawan coal hauling method
from Belut stockpile to CPP is about $ 204,507,000.

V. Conclusion
Based on cash flow calculation and simulation has been done, we can take some conclusion as
follow:
1. Constructing OLC project using SPV financing gives NPV value as $ 2,674,856,000
with unit cost as $ 0.53/ton.

  ‐ 9 ‐ 
 2. Coal trucking project using Lease financing gives NPV value as $ 2,602,234,000 with
unit cost as $ 1.48/ton.
3. The total of cost saving by using OLC West Melawan as coal hauling method is $
204,507,000
VI. Bibliography
Peterson, P, Pamela; and Fabozzi, J, Frank. Capital Budgeting: Theory and Practice. John
Wisley & Sons, 2002.
Toha, Juanda. Konveyor Sabuk dan Peralatan Pendukung. Indonesia, 2002.
Crundwell, F.K. Finance for Engineers: Evaluation and Funding of Capital Projects.
Springer-Verlag London Limited, 2008.
Haq.Nuzulul. A New Era of Project economics and Investment Decision Techniques, Fira
Publishing, 2009.
Martinez, A, Luis. “Why Uncertainty & Risk Can Improve Final Decision Making in
Strategic Open Pit Mine Evaluation”:1-9.
Haq. Nuzulul. “A New Era of Risk and Uncertainty Analysis In Project Valuation”. The 25th Pan
Pacific Congress, 2010: 1-19.

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