COMMERCIAL AND NATIONAL PROFITABILITY OF COAL MINING AT GACKO COAL DEPOSIT

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Elisabeth Hodges
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1 Origial scietific pater UDC: :5.51(497.6 Gacko) DOI: /afts V COBISS.RS-ID COMMERCIAL AND NATIONAL PROFITABILITY OF COAL MINING AT GACKO COAL DEPOSIT Vuković Boško 1 1 Mie ad Power Plat Gacko, Bosia ad Herzegovia, e.mail. bosko.vukovic@ritegacki.ba ABSTRACT Coal resources, beside oil, gas ad uraium as oreewable source of eergy, represet the most sigificat part of eergy potetial of Republic of Srpska ad eergy source of strategic importace.moder pace of techological ad idustrial developmet coditios costat icrease of coal exploitatio ad cosumptio. Usage of this resource must be plaed ad utterly ratioal.productio of coal from Gacko deposit has great importace from socio - ecoomical ad atioal aspect. If take ito accout that thermoeergey capacity of istalled power of 3MW was built very close to Gacko coal deposit, to the greatest extet the problems of uemploymet ad purchasig power of locals ad residets of eighborig muicipalities are solved. I the former productio of coal ad electric eergy from eergy complex i Gacko the commercial profitability is realized, which represets direct fiacial beefit for Republic of Srpska eergy sector. However, commercial profitability, which is practically determied by market ecoomy ad its priciples ca ot give clear picture about cotributio of coal ad electric eergy productio to atioal ecoomy of Republic of Srpska. Key words: coal, deposit, thermo- eergy facility, atioal profitabilityad INTRODUCTION There are umerous eergy ad mieral resources i the territory of Republika Srpska. Coal, petroleum, atural gas ad uraium are all o-reewable resources whereas water is cosidered a reewable resource. Ecoomy-wise, coal (o-reewable) ad surface water (hydropower), which is a form of reewable eergy, are amog eergy ad mieral resources of particular iterest for Republika Srpska [1]. Other above-metioed eergy ad mieral resources are ot utilized at all or are used miimally i Republika Srpska. However, the growig eergy eeds ad the eed to adjust to the eergy, evirometal ad other stadards i Europe ad the world represet a motive to reexamie both o-reewable eergy resources available ad used i Republika Srpska ad alterative oreewable resources that ca be utilized i the ear or distat future. I order to make the o-reewable eergy resource of Gacko edure ad develop i the actual eviromet, its purpose of existece has to be defied clearly. That purpose is primarily related to a multistage process of providig ad usig the o-reewable eergy resource i coformity with the actual atural, ecoomic ad evirometal potetial i regard to the eeds i the immediate or wide eighbourhood. The Gacko coal deposit cotais a commercial type of coal - ligite/brow-ligite coal. It is almost exclusively used by the coal-fired thermal power plat i Gacko ad is oe of the Techical Istitute Bijeljia, Archives for Techical Scieces. Year VIII N 14. 1

2 strategic raw materials i Republika Srpska. This coal that origiates from the Gacko coal deposit is the o-reewable eergy ad mieral resource of vital importace for Republika Srpska ecoomy. COAL AS THERMAL ENERGY FUEL FOR PRESENT AND FUTURE POWER STATIONS Gacko s geological coal reserves are 34 Mt [2]. Accordig to the valid geological documetatio the mieable reserve is 19 millio toes, the average heatig value is 9.9 MJ/kg ad the eergy potetial is 545 TWh. Accordig to the efficiecy idices that have bee processed so far, the mieable coal reserve is able to provide a log-term fuel supply for preset ad future thermal power plats, which is bolstered by favourable ecoomic terms. Due to the overall amout of the ore reserve ad its quality, the Gacko coal deposit is the most sigificat source of that raw material required by thermal power plats i Republika Srpska. The average cocetratio of coal i the Gacko deposit is 9.36 t/m 2 i the mai coal seam whereas at all three levels of the first lower coal seam it is t/m 2. The secod lower coal seam is distiguished by a steady developmet i the whole deposit ad the average cocetratio is t/m 2. The average cocetratio of coal i the cotours of the mieable reserve i the upper coal zoe is 7.12 t/m 2. The Gacko coal deposit has Mt of coal classified as C 2 category maily i the deepest parts of the East field. It practically meas there is a real chace to fid ew mieable reserves i this area. If ew reserves are foud (there are favourable mieragetic precoditios), the lifetime of this coal-pit would be prologed, so Gacko s coal mie would be a idustrial facility that will have a importat impact o the developmet of ecoomy ad public services i the muicipality of Gacko over a loger period of time. So it is beig appraised that the costructio of the secod uit of the thermal power plat as well as the third oe i the foreseeable future is fully legitimate. To assess the possibility of eergy developmet based o the use of coal from the Gacko deposit, it is ecessary to kow the actual coal reserve, miig ad geological circumstaces, hydrogeological coditios, geomechaical parameters of overburde sedimet, quality ad usability of coal, possibilities of cheaper surface miig, chaces to use the latest state-of-the-art machiery i the surface miig, i.e. high-productio mechaized complexes [3]. I priciple, over a loger period of miig, it ca be expected to see a more otable ifluece of various risks withi which geological, miig ad ecoomic risks are domiat [4]. COMMERCIAL PROFITABILITY OF COAL MINING AT GACKO DEPOSIT Commercial profitability aalysis cotais: ivestmet profitability aalysis ad fiacial aalysis. These two types of aalyses are complemetary ad they are ot substitutable. Both of them have to be carried out because they focus o differet aspects of ivestmet evaluatio. Ivestmet profitability aalysis measures profitability of the resources put ito a project, the direct retur o the ivestmet regardless of the form of fiacig sources. So ivestmet profitability aalysis assesses potetial reveue of the resources ivolved i a project disregardig the fiacial trasactios that have occurred durig the project s lifespa. O the other had, fiacial aalysis takes ito cosideratio fiacial aspects of a project to esure that available fiaces will facilitate a smooth implemetatio ad operatio of the project i the future. The fial assessmet of commercial profitability of the coal productio at the Gacko coal deposit has bee doe by aalyzig ecoomic beefits of the project (estimated coal deposit). The followig dyamic methods have bee applied to evaluate the commercial profitability of the Gacko coal deposit: et preset value, iteral rate of retur ad discouted cash flow to determie the time horizo for recoverig the ivestmet. The aalysis of the ecoomic impact of the ivestmet project (examied deposit) has bee doe by applyig cost-beefit aalysis usig the followig methods: NPV, IRR, DCFROI. Ecoomic aalysis ecompasses ucertaity aalysis, that is, sesitivity aalysis of the Gacko coal deposit: static sesitivity aalysis (determiig the break-eve Techical Istitute Bijeljia, Archives for Techical Scieces. Year VIII N 14. 2

3 poit ad the break-eve price of mieral raw materials per uit) ad dyamic sesitivity aalysis which looks at the results of the chage i parameters (reveues, costs), ivestmet ad legal obligatios agaist the chage i the iteral rate of retur previously calculated. Net Preset Value (NPV) Net preset value is the differece betwee the preset values of future cash iflows ad outflows of the Gacko coal mie. It meas that all the cash flows are discouted at a predetermied discout rate accordig to the formula [5]: NPV = NPV et preset value ( P O), F t - sum total for the whole lifespa of the project from year to year ; P cash iflow i the year t (KM) O cash outflow i the year t (KM) F t discout factor i the year t correspodig to the selected rate of discout (%) The discout factor is calculated usig the followig formula: 1 F =, R (1 + ) 1 R iterest rate, umber of years. The NPV calculatio for a period of 21 years has bee doe o the basis of the followig parameters: productio, costs, reveues ad ivestmets at the Gacko coal mie. The reveue was projected o the basis of productio capacity plaig, a plaed sellig price per 1t of coal, ad the outflow side, the operatig costs were projected o the basis of past compoets of fiacial outflows ad a forecast for the 21-year period (projected lifespa). The compoets for determiig fiacial outflows are: stadard costs, labour, maiteace ad depreciatio charges. Based o the ecoomic cash flow calculatio it follows that the total et preset value (NPV) of the Gacko coal deposit over 21 years is positive ad it amouts to KM at a discout rate of 12% [6]. Iteral Retur Rate The iteral retur rate is a discout rate that reduces the et preset value of the estimated coal deposit to zero ad it is relied o the formula [5]: = ( P O), - sum total for the project s whole lifespa from year to year P cash iflow i the year t (KM) O cash outflow i the year t (KM) F t the discout factor i year t correspodig to the selected rate of rate (%) Techical Istitute Bijeljia, Archives for Techical Scieces. Year VIII N F t

4 If the et preset value is positive, this rate is higher tha the discout rate. The ecoomic cash flow calculatio shows that i the case of the Gacko coal mie, the NPV amoutig to KM at a discout rate of 12% geerates the IRR of 33.43% [6]. Time Horizo of DCFROI The time horizo of the retur o ivestmet for the Gacko coal mie is stated i years i which the aual discouted et iflows received from the ivestmet will pay back the discouted value of the total ivestmet. I the case of the Gacko coal mie this period is 7 years [6], which meas that the implemetatio of the project will be justified because the pay-back period of the ivestmet is shorter tha the techological lifetime of the coal mie Gacko. Cost Beefit Aalysis (CBA) Cost-beefit aalysis (CBA) is a aalysis of the socio-ecoomic justificatio for costs of a ivestmet project. It is usually used to evaluate et social ad ecoomic impacts of the public sector ivestmet projects. The aalysis of the ecoomic effects arisig from the coal productio at the Gacko deposit has bee doe by applyig cost-beefit aalysis. It cotais: static sesitivity aalysis (establishig the break-eve poit ad the break-eve price of mieral raw materials per uit) ad dyamic sesitivity aalysis that looks at the results of chage i the parameters (reveues, costs, ivestmets ad legal obligatios) agaist the chage i the iteral rate of retur previously calculated. The static sesitivity aalysis ecompasses the calculatio of the break-eve poit ad the break-eve price for mieral raw materials per uit. The calculatio of the break-eve poit is doe as: BREAK-EVEN POINT (BEP) = [Total fixed costs/ (total reveues mius total variable costs)] x 1 [6]. At the break-eve poit reveues equate to expeses so there is o profit. Above this poit a project produces profits ad below it, losses. The break-eve poit for the Gacko coal mie with a average aual productio volume of 4.4. t is t. The break-eve price for mieral raw materials per uit below which the sale of the plaed quatity would geerate a egative result is calculated usig the formula [6]: (break-eve productio x sales price/average aual productio). I the case of Gacko s coal mie it is KM/t [6]: Dyamic sesitivity aalysis looks at the results of the chage i parameters agaist the chage i the iteral rate of retur. The poit of this aalysis is to chage parameters iteractively from -5, -1, - 2, -3, -4 to +5, +1, +15, +2, +3, +4 (or differet rages) ad they are calculated for the relevat values of the iteral rate of retur. I the case of the Gacko coal deposit, the IRR is the most sesitive to the chage i total reveue: if the reveue (prices) is icreased by 1%, the iteral rate of iterest will be 43% ad if we lower the prices (reveue) by 1%, the iteral rate of retur is 26% [6]. NATIONAL PROFITABILITY OF COAL MINING AT GACKO COAL DEPOSIT Natioal profitability aalysis is similar to commercial profitability aalysis sice both of them try to idetify the costs ad beefits ad whe commeasured, they ca assess the profitability of a proposed ivestmet. Commercial profitability aalysis is the first step towards atioal profitability aalysis. A overall developmet strategy of a coutry usually requires fulfillmet of several objectives. Namely, it is ecessary to evaluate the social soudess of a project its impact o the ecoomy as a whole ad the special aspects of the ecoomic life i the cotext of which the project will be cosidered. Accordigly, besides the basic criterio et value added as a tool for evaluatig the mai impact of a project o the ecoomy there are other additioal idices that measure certai implicatios of a ivestmet project such as: the effects o employmet, foreig exchage iflow ad iteratioal competitiveess. It is recommeded to do qualitative aalysis of o-quatifiable implicatios ad cosider their impact o the ifrastructure, techical kow-how ad the eviromet. The fial assessmet of the atioal profitability of coal productio at the Gacko coal deposit has bee Techical Istitute Bijeljia, Archives for Techical Scieces. Year VIII N 14. 4

5 carried out by aalyzig the results of the basic criterio of atioal profitability et value added ad idirect iflueces of coal productio i Gacko o the atioal ecoomy of Republika Srpska. I order to measure the cotributio of the coal productio at the Gacko coal deposit to the atioal ecoomy of Republika Srpska, the et value added criterio is applied. The adjusted world market prices of coal are used to determie the et value added. The et value added criterio measures the cotributio of coal productio at the Gacko coal deposit to the icrease i the atioal icome. It is calculated as the differece betwee the reveues geerated by the coal productio ad the expected value of material iputs, services ad ivestmets [7]: NVA = O (MI + I) NVA et value added geerated by coal productio at the Gacko coal deposit (KM) O differece betwee the reveue received from the sale of coal at world market prices ad the reveue received from the sale of coal at the prices set by coal mie Gacko (KM) MI expected value of material iputs ad services (operatig costs of coal mie Gacko), (KM) I total ivestmets of coal mie Gacko (KM) Based o these calculatios, the et value added for the Gacko coal deposit is KM [6] Whe some additioal criteria of the atioal profitability appraisal (employmet effects, foreig exchage iflow ad iteratioal competiveess) are cosidered alog with the results of the et value added, we get a fuller picture of the atioal profitability of the coal productio at the Gacko coal deposit ad we comprehed the importace of this resource for Republika Srpska [8]. Impact o Employmet A additioal implicatio of the atioal profitability of the ivestmet project is expasio of coal ad electricity productio at the thermal power complex Gacko. It eables the creatio of ew jobs for skilled ad highly skilled labour force. Foreig Exchage Iflow Rudik i Termoelektraa Gacko a.d. compay ears foreig exchage by exportig electricity to the eighbourig coutries Moteegro ad Croatia. Iteratioal Competitiveess Iteratioal competitiveess reflects the capability of Rudik i Termoelektraa Gacko compay to egage i iteratioal trade successfully. At the same time it represets the capability of the eergy sector i Republika Srpska to esure that the products (coal ad electricity) are i compliace with the iteratioal market stadards ad to maitai ad icrease the real icome of the populatio i the log-ru. CONCLUSION Based o the iput parameters, that is, the iput assessmet (productio, costs, ivestmets) ad the expected results (reveue, profit etc. over 21 years), the NPV ad the IRR for the Gacko coal deposit were computed. The time of the retur o ivestmet was calculated by discoutig ecoomic cash flow. The break-eve poit, the break-eve price for mieral raw materials per uit as well as the break-eve capacity were calculated withi the static sesitivity aalysis resultig i the followig values [6]: Techical Istitute Bijeljia, Archives for Techical Scieces. Year VIII N 14. 5

6 The level of groud water at a discout rate of 1% is KM The level of groud water at a discout of rate 12% is KM IRR is 33.43% Time horizo of ROI is 7 years Break-eve poit is 37% Break-eve capacity for the aual coal productio of 4.4. t is t; Break-eve price for mieral raw materials (coal) per uit is KM/t; The et value added (NVA) was applied i order to assess the atioal profitability ad it was calculated o the basis of world market price of coal of 13 KM/t ad it amouts to KM Besides direct iflueces of coal productio i Republika Srpska o the atioal ecoomy (fiacial reveues ad costs), some additioal criteria were aalyzed: the impact o employmet, foreig exchage iflow ad iteratioal competitiveess, that is, the cost-beefit aalysis showed direct ad idirect impacts of the coal productio at the Gacko coal deposit o the atioal ecoomy of Republika Srpska. REFERENCES (Received April 216, accepted April 216) [1] Strategija razvoja eergetsike Republike Srpske. Baja Luka, [2] Nikolić D, i saradici (213). Elaborat o rezervama uglјa u ležištu Gacko sa stajem godie, GEOING-group, Beograd. [3] Vuković B. (2). Kompleksa ocea gatačkog uglјeog basea i jegov začaj za ukupi eergetski potecijal Republike Srpske, magistarska teza, RGF, Beograd. [4] Milovaović D. (1991). Neka aktuela pitaja ekoomske ocee ležišta mieralih sirovia u tržišim uslovima - Tehika, Rudarstvo, geologija i metalurgija, br. 3-4, Beograd. [5] Uido (1988):Priručik za vredovaje idustrijskih projekata, UNIDO, Orgaizacija ujedijeih acija za idustrijski razvoj i cetar za idustrijski razvoj arapskih država. [6] Vuković B. (211). Geološko-ekoomska ocea eobovlјivih eergetskih resursa Republike Srpske u fukciji acioale i komercijale isplativosti, Doktorska disertacija, Rudarsko-geološki fakultet, Beograd. [7] USAID (21). Muicipal ecoomic growth activity, srpsko izdaje- Priručik o razvoju i fiasiraju kapitalih ivesticioih projekata, Beograd. [8] Jaković N. (1985). O ekoomskoj dobrobiti, Istraživačko-izdavački cetar, SSO Srbije, Beograd. Techical Istitute Bijeljia, Archives for Techical Scieces. Year VIII N 14. 6

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