© MEA 2006 V 1.

0 08/2006

COAL MINE PURCHASE

ASSESSMENT
Aim:
Develop an FTM to determine if Coalex Ltd
should purchase a coal mine
Data:
Refer to Question Sheet
 Elements of evaluation
◼ Inflation rates ◼ Operating margin

◼ Exchange rate ◼ Depreciation

(US$:AU$) ◼ Taxable income and
tax payable
◼ Coal prices
◼ After tax cash flows
◼ Salable coal
◼ Debt payments
◼ Mine revenue ◼ Net Cashflows
◼ Costs – Mining & ◼ NPV calculation
Sales
◼ Gross margin
◼ Interest
◼ Exchange Rates:
Exchange Rate (yr t) = (Rate yr t-1)x[(1+US rate)/(1+AUrate)]
E.g, Year 2 rate = 0.94 x (1.02/1.04) = 0.922
◼ Coal Prices:
Price = (Price yr t-1) x (1 + US Inflation rate)
Eg. Coal price Yr 2 = 110(1+0.02) = $112.2/tonne salable coal
◼ Australian Coal Price = US Price/Exchange rate
◼ Salable Coal = Recovery x Production = 0.8 x Production
Eg. Yr 1,2, 3; Salable coal = 0.8 x 500kt = 400kt/year
◼ REVENUE:
Revenue = (Price/tonne) x Salable tonnes
E.g, Year 1 Price = $117.02 x 400 = AU$46,808,510
◼ COSTS:
- Mining contractor = $25/t coal mined (Yr 1)
Yr 2 unit mining cost = 25(1+0.04) = $26/tonne coal mined
- Mining costs = Coal production x Cost per tonne
Eg Yr 2 Cost = 500kt x 26 = A$13,000,000
- Salable coal costs = Wash + Freight, etc + management = 7+13+0.5 = A$21/t
This cost is escalated by inflation rate (4% & 3%) for year 2 and 3, repect.
Eg. Yr 1 sales costs = 400kt x 21 = A$8,400,000
◼ TOTAL COSTS
= Mining costs+Salable coal costs
E.g, Year 1 total cost (‘000) = $12,500 + $8400 = A$20,900

◼ GROSS MARGIN
= Sales Revenue – Total costs
Eg., Year 1 gross margin = $46808.51 - $20,900 = A$25,908
◼ INTEREST
Purchase Price = A$40M
Debt:Equity = 30:70
Therefore, Debt = 0.3 x 40 = A$12,000,000
Interest on debt = 10%
Outstanding debts: Yr 1 = A$12M; Yr 2 = 12/2 = A$6M
hence interest payment Yr 1 = 10% x $12m = A$1,200,000
Yr 2 = 10% of $6M = A$600,000
◼ OPERATING MARGIN
= Gross Margin – Interest payment
E.g., Yr 1 op margin (‘000) = $25908.5 - $1200 = A$24,708.51
◼ DEPRECIATION
(purchase price depreciated for taxable income)
Depreciation per year = $40M/3 yers = $13,333,333
◼ TAXABLE INCOME
= Operating Margin – Depreciation
E.g., Yr 1 (‘000) = $24,708.51 - $13,333.333 = A$11,375.18
◼ TAX PAYABLE
= 30% OF Taxable Income
E.g., Yr 1 tax payable (‘000) = 0.3 x $11,375.18 = A$3,412.55
◼ AFTER TAXI CASH FLOW
= Operating Margin* – Tax payable
E.g., Yr 1 (‘000) = $24,708.51 - $3,412.55 = A$21,295.96
◼ DEBT PAYMENT
E.g., Yr 1 (‘000) = $12,000/2 yrs = A$6000 = Yr 2 payment
◼ NET CASH FLOW
= After tax cash flow - Debt payment
E.g., Yr 1 tax payable (‘000) = $21,295.96 - 6000 = A$15,295.96
◼ NPV @ 13%
= NPV (0.13, Net cash flow yrs 1 to 3)
= A$42,648,502
◼ NPV OF PURCHASE
= NPV @ 13% + Debt - Purchase Price
= $42,648.52 + $12,000 - $40,000 = $14,648,520