MINING ECONOMICS

TRAINING
21-22 April 2022
 MINING ECONOMICS FUNDAMENTAL

Mining is the extraction of valuable minerals or other geological materials from the

Earth, usually from an ore body, lode, vein, seam, reef, or placer deposit. Exploitation
of these deposits for raw material is based on the economic viability of investing in
the equipment, labor, and energy required to extract, refine and transport the
materials found at the mine to manufacturers who can use the material

Economics is a social science concerned with the production, distribution, and

consumption of goods and services. It studies how individuals, businesses,
governments, and nations make choices about how to allocate resources. Economics
focuses on the actions of human beings, based on assumptions that humans act with
rational behavior, seeking the most optimal level of benefit or utility.

The building blocks of economics are the studies of labor and trade. Since there are
many possible applications of human labor and many different ways to acquire
resources, it is the task of economics to determine which methods yield the best
results.
 MINING ECONOMICS FUNDAMENTAL
MINING
MINING
We are playing with GOD’s handmade
• Un renewable deposit, once depleted needs to discover new
source.
• Only God knows every detail of its shape, tonnage and
grade/quality
• What we do is to discover, estimate not calculate by using
existing knowledge & technology
• Every mine has different characteristic
• Location, geology, quality, resources&reserves, mining
method, processing, logistic, etc
• High grade/quality low tonnage, low grade/quality high
tonnage
• Mine is driven by Optimum Mineplanning to deliver its
best output
• Strip Ratio and Grade/Quality determine the economic
mine operation
• It has RISK & UNCERTAINTY to manage
• Starting from exploration up to corporate performance
• Less Risk& uncertainties means more knowledge to
acquire
discuss about materiality (tonnage, grade/quality)
ECONOMICS
• Requires Capital Expenditure to explore it’s shape, tonnage
grade/quality
• It will be described as sunk cost if the coal/mineral deposit is not
economic
• there are different activity cost of each mines from upstream to
downstream (pit to vessel)
• Different mine equipment to be used for optimum mine
operation (CAPEX) due to geology constraint
• Need capital to develop the mine, construct the road access,
processing plant, mine facilities before mine operation started
(CAPEX)
• Grade/Quality determines the Coal/Concentrate/Metal Price
• Tonnage determines the Mine Revenue Scale (from mine plan)
• More knowledge needs technology and capital cost
• Mining is HIGH RISK, HIGH CAPITAL and HIGH RETURN
Discuss about money, investment (commodity sale price, OPEX,
CAPEX, revenue, NPV, IRR, ROI, etc)
COAL/MINERAL EXPLORATION BUDGET

CURRENT PROJECT
SITUATION

BLUE SKY HIGH

SUNK COST
DESCRIBED AS CAPEX
EXPLORATION BUDGET GREENFIELD

BROWNFIELD
PART OF OPEX
$/TONNES OF MARKETABLE
COAL
GENERAL MINING CYCLES
 MINING INDUSTRY UNCERTAINTIES
Mining is a risky business and each stage is impacted by uncertainties

Political
Political
Uncertainty
Uncertainty
Financial &
Economic
Investor Science & Uncertainty
Investor
Uncertainty Technology
Uncertainty
Uncertainty Mining
Complexity

Geological
Uncertainty Market &
Construction Mining Metallurgical Commodity
Uncertainty Uncertainty Uncertainty Pricing
Location Uncertainty
Uncertainty

Exploration Development Mining Processing Marketing Corporate

Performance Performance Performance Performance Performance Performance

Social & Social & Social & Social & Social & Social &
Environmental Environmental Environmental Environmental Environmental Environmental
Uncertainty Uncertainty Uncertainty Uncertainty Uncertainty Uncertainty

Pervasive, Poorly Defined

Direct “Risk Categories”
Largely and somewhat Global Financial &
Controllable
Uncontrollable Controllable Economic Risks
CSC Risks Risks
Risks
Excellence In Risk Management Ref.Evan, 2007
 GEOLOGY
INDONESIAN COAL BEARING FORMATIONS

• Coal bearing formations are located within sedimentary basins

• Every Coal bearing formation has different coal quality and specification
• Sumatra, Kalimantan and Papua have potential coal deposit
 GEOLOGY
NO OF SEAMS, DIPPING & THICKNESS ARE THE KEY

S/R A < S/R B < S/R C S/R A < S/R B < S/R C
 GENERAL COAL MINE PRODUCTION
PROCESS
Every mining activity has its operating cost (OPEX)

Haul Distance 30 km

Barge Distance 150 km

 WHAT IS OPEX

An operating expense is an expense a business incurs through its normal business

operations. Often abbreviated as OPEX, operating expenses include rent, equipment,
inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research
and development.

Understanding Operating Expenses

One of the typical responsibilities that management must contend with is determining how
to reduce operating expenses without significantly affecting a firm's ability to compete with
its competitors.

Operating expenses are necessary and unavoidable for most businesses. Some firms
successfully reduce operating expenses to gain a competitive advantage and increase 
earnings. However, reducing operating expenses can also compromise the integrity and
quality of operations. Finding the right balance can be difficult but can yield significant
rewards.

How to reduce operating expense in mining industry?

Increasing productivity is the key

 GENERAL COAL MINE PRODUCTION
PROCESS
A typical operating cost for mining companies who use contractors to run its operating mine
Activity Unit Rate Qty
Landclearing, wood cutting, etc $/Ha
Topsoil removals, stocking and rehandling $/bcm
Waste (OB) removals at S/R X $/bcm
Coal getting and hauling to ROM Stockpile distance XX km $/t
Coal Processing (coal crushing, coal washing,etc) $/t
Coal loading & hauling to Port/Jetty distance XX km $/t
Coal handling at port and loading to barge by conveyor $/t
Coal barging to Mother vessel distance XX km $/t
Coal loading to mother vessel (steevedooring) $/t

A typical operating cost for mining companies who run its operating mine
Activity Unit Rate Qty
Waste (OB) removals at S/R X Fleet rent $/month
Operator & mechanics wages $/month
Fuel, Lubricants, grease, tyres, etc $
 COAL/METAL PRICES AS A RESULT OF
SUPPLY & DEMAND
supply and demand, in economics, relationship between the quantity of a commodity that
producers wish to sell at various prices and the quantity that consumers wish to buy. It is the main model
of price determination used in economic theory.

The price of a commodity is determined by the interaction of supply and demand in a market. The
resulting price is referred to as the equilibrium price and represents an agreement between producers
and consumers of the good. In equilibrium the quantity of a good supplied by producers equals the
quantity demanded by consumers.

Factors Affecting Supply

• Supply is largely a function of production costs, including:
• Labor and materials (which reflect their opportunity costs of alternative uses to supply consumers with other goods)
• The physical technology available to combine inputs
• The number of sellers and their total productive capacity over the given time frame
• Taxes, regulations, or additional institutional costs of production

Factors Affecting Demand

• Consumer preferences among different goods are the most important determinant of demand.
• The existence and prices of other consumer goods that are substitutes or complementary products can modify
demand.
• Changes in conditions that influence consumer preferences can also be significant, such as seasonal changes or the
effects of advertising.
• Changes in incomes can also be important in either increasing or decreasing the quantity demanded at any given
price.
THERMAL COAL PRICE INDEX
5Y PERIOD
Challenges:
• Which price line to be used for
estimating the mine economics?
• How is the future coal price?
• Is it bullish or bearish condition ?
• What is the policy of world
countries for electricity from coal
power plant?
• Carbon Tax?
• Energy substitution to replace coal

https://tradingeconomics.com/commodity/coal
 HOW TO DEFINE THERMAL COAL PRICE

Grade/Quality determines the Coal/Concentrate/Metal Price

Steam Coal parameter to define its price
1. Calorific Value, CV (kcal/kg unit, GAR or NAR basis)
2. Sulfur , TS (%, GAR basis)
3. Ash content, (%, GAR basis)
4. Total Moisture, TM (%, GAR basis)

Penalty/Reward and Rejection for Ash, Sulfur and Total

Moisture

Examples: 6500 GAR

Ash <12% reward, 12-15% penalty per 1% added, >15% reject
TS <1% reward, >1% penalty per 0.1% added

GAR: Gross As received

NAR: Net As received
TS or Sulfur: Sulfur content within coal properties
Ash: Ash content within coal properties
TM : Water content within coal properties
M or IM : Moisture in samples
HOW TO DEFINE THERMAL COAL PRICE
 GOVERNMENT & REGULATION ASPECT
UUD 1945 CLAUSE 33
Government release the policy for national mining industry (Regulation)
• Exploration & Mining Permits, Land resources Status, Forestry Permit (IPPKH)
• Coal/mineral reference price for coal mineral royalty estimate,
• Coal/Mineral Royalty PP No.81 Tahun 2019
• Deadrent
• Labour/Workforce
• Tax : Corporate Tax, PPn, PPh, etc
HOW TO ESTIMATE THE “HPB FROM HBA”

Open link: http://imining.id/solutions/coal-price-calculator or www.coalspot.com

All parameters are as received basis.

Need to convert Ash & Sulfur parameter (ad basis) in to (ar
basis)
( 100 − 𝑇𝑀 )
𝐴𝑠h ( 𝑎𝑟 )= 𝑥 𝐴𝑠h (𝑎𝑑 )
( 100 − 𝑀 )
(100 − 𝑇𝑀 )
𝑇𝑜𝑡𝑎𝑙 𝑆𝑢𝑙𝑓𝑢𝑟 ( 𝑎𝑟 ) = 𝑥 𝑇𝑜𝑡𝑎𝑙 𝑆𝑢𝑙𝑓𝑢𝑟 (𝑎𝑑)
( 100 − 𝑀 )
 TYPICAL COAL PRODUCT
GEMS

The unit basis are given from the independent laboratory result (ar basis & ad basis),
meanwhile for market purpose requires (ar basis only)  CONVERTION FORMULA
 STRIP RATIO & BREAK EVEN STRIP RATIO
(BESR) CONCEPT
Stripping ratio simply refers to the amount of waste volume (bcm : bank cubic meter before extracted)
handled in order to recover certain amount of ore/coal tonnage (tonnes)
𝑊𝑎𝑠𝑡𝑒 𝑉𝑜𝑙𝑢𝑚𝑒( 𝑏𝑐𝑚)
𝑆𝑡𝑟𝑖𝑝𝑝𝑖𝑛𝑔 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑜𝑎𝑙 𝑡𝑜𝑛𝑛𝑎𝑔𝑒(𝑡𝑜𝑛𝑛𝑒𝑠)

Incremental S/R & Accumulative S/R

No Coal (tonnes) SR (bcm/t)
Increment 1 1,000,000 3.0
Increment 2 1,500,000 5.0
Increment 3 2,200,000 8.0
Coal Seam Total 4,700,000 6.0
Waste
The maximum allowable Stripping Ratio (SRmax) defines break even stripping ratio (BESR).
This represents the highest possible units of waste that can be handled.

If the SR exceeds the BESR then the operation will be uneconomical as the income generated by the
ore/coal is insufficient to offset the costs incurred in mining.
𝐶𝑜𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 $ /𝑡 −𝑐𝑜𝑎𝑙𝑟𝑜𝑦𝑎𝑙𝑡𝑦 $ /𝑡 − 𝐴𝑙𝑙 𝑐𝑜𝑠𝑡 𝑓𝑟𝑜𝑚 𝑐𝑜𝑎𝑙 𝑙𝑜𝑎𝑑∧h𝑎𝑢𝑙𝑡𝑜 𝑅𝑂𝑀 𝑡𝑜 𝑀𝑜𝑡h𝑒𝑟𝑣𝑒𝑠𝑠𝑒𝑙 $ /𝑡
𝐵𝐸𝑆𝑅=
𝑊𝑎𝑠𝑡𝑒 𝑟𝑒𝑚𝑜𝑣𝑎𝑙𝐶𝑜𝑠𝑡 $ /𝑏𝑐𝑚

BESR means : Total income – Total Cost = 0, define the S/R where results = 0
 STRIP RATIO & BREAK EVEN STRIP RATIO
(BESR) CONCEPT
Activity Unit Rate Qty
Waste (OB) removals at S/R X (incl Land clearing) $/bcm 2.75
Coal getting and hauling to ROM Stockpile $/t 10.0
Coal Processing (coal crushing, coal washing,etc) $/t 12.0
Coal handling & hauling to Port/Jetty $/t 25.0
Coal handling at port and loading to barge by conveyor $/t 2.5
Coal barging to Mother vessel $/t 5.0
Coal loading to mother vessel (steevedooring) $/t 3.0
Total Cost $/t without OB removals $/t 57.5
Coal Price ($/t) 70 75 80 85 90 95 100
Royalty 7% ($/t) (4.9) (5.3) (5.6) (6.0) (6.3) (6.7) (7.0)
Coal price less Royalty ($/t) 65.1 69.8 74.4 79.1 83.7 88.4 93.0
Coal Cost ($/t) (57.5) (57.5) (57.5) (57.5) (57.5) (57.5) (57.5)
  7.6 12.3 16.9 21.6 26.2 30.9 35.5
BESR @ OB Cost 2.75 $/bcm 2.76 4.45 6.15 7.84 9.53 11.22 12.91

BESR is dynamic following the coal price movement

 STRIP RATIO & BREAK EVEN STRIP RATIO
(BESR) CONCEPT
Coal Price 35 $/t
No Coal (tonnes) SR (bcm/t)
Gross Margin ($/t)
Increment 1 1,000,000 3.0 12.0
Increment 2 1,500,000 5.0 6.0
Increment 3 2,200,000 8.0 2.0
Total Accum. 4,700,000 6.0 5.4

Coal Price 33 $/t Coal Price 33 $/t

No Coal (tonnes) SR (bcm/t) Coal SR
Gross Margin ($/t) No (tonnes) (bcm/t)
Increment 1 1,000,000 3.0 10.0 Gross Margin ($/t)
Increment 2 1,500,000 5.0 4.0 Increment 1 1,000,000 3.0 10.0
Increment 3 2,200,000 8.0 0.0
Total Accum. 4,700,000 6.0 3.4 BESR 8.0 Increment 2 1,500,000 5.0 4.0
       
Total Accum 2,500,000 4.2 6.4

Coal Price 27 $/t Coal Price 27 $/t

No Coal (tonnes) SR (bcm/t) No
Coal SR
Gross Margin ($/t) (tonnes) (bcm/t)
Increment 1 1,000,000 3.0 4.0 Gross Margin ($/t)
Increment 2 1,500,000 5.0 -2.0 BESR 4.0 Increment 1 1,000,000 3.0 4.0
Increment 3 2,200,000 8.0 -6.0        
       
Total Accum. 4,700,000 6.0 -2.6
Total Accum 1,000,000 3.0 4.0
PHASE 1 COMPLETED
ANY QUESTIONS
 EXERCISES

1. Sinarmas Mining has new product with Coal Specification as follows: CV 6300 kcal/kg
adb , Ash 12% adb, TS 1.2% adb, TM 35%, IM 17%.
1. Estimate the HPB Price for the month March 2022 at FOB Vessel
2. Estimate the Royalty Rate and its dollar amount
2. Please estimate the BESR with operating activity as follows
Activity Unit Rate Qty
Waste (OB) removals at S/R X (incl Land clearing) $/bcm 2.25
Coal getting and hauling to ROM Stockpile $/t 15
Coal Processing (coal crushing, coal washing,etc) $/t 5
Coal handling & hauling to Port/Jetty $/t 20
Coal handling at port and loading to barge by conveyor $/t 2.5
Coal barging to Mother vessel $/t 10
Coal loading to mother vessel (steevedooring) $/t 3.0

Please generate the sensitivity if price increase/drop by 5%,10%,15%,20%,25%

 Answer :

1. Estimate The HPB Price for the mounth march 2022 is

US$ 113.62 per MT
2. Estimate the Royalty Rate is US $ 7.9534 per MT

Coal Price ($/t) 113.62 119.62 124.982 130.663 136.344 162.025 107.939 102.258 96.577 90.896 85.215
Royalty 7% ($/t) (7.953) (8.373) (8.748) (9.146) (9.544) (11.341) (7.555) (7.158) (6.760) (6.363) (5.965)
Coal price less
Royalty ($/t) 105.667 111.247 116.234 121.517 126.800 150.684 99.838 95.100 89.817 84.533 79.250
Coal Cost ($/t) (55.5) (55.5) (55.5) (55.5) (55.5) (55.5) (55.5) (55.5) (55.5) (55.5) (55.5)
  50.167 55.747 60.734 66.017 71.300 95.184 44.338 39.600 34.317 29.033 23.75
BESR @ OB Cost
2.25 $/bcm 22.296 24.776 26.992 29.341 31.688 42.184 19.705 17.600 15.252 12.903 10.556