2. Introduction
2Sunday, July 14, 2013
30%
33%
24%
5%
6%
2%
Coal Oil
Natural Gas Nuclear Energy
Hydro electric Renewable Source
31%
29%
1%
35%
4%
Asia Pacifc
USA
South and Central America
Europe and Eurasia
Africa and Middle East
World Energy Consumption Coal reserves distribution
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3. Coal
There are four stages in coal formation
a) Peat (1000 – 1500 Kcal/Kg),
b) Lignite (1700 – 2600 Kcal/Kg),
c) Bituminous (3500 – 6000 Kcal/Kg) and
d) Anthracite (above 6000 Kcal/Kg).
Commercially Coal is classified into two types
a) Coking Coal – It has a good coking property, low ash and moisture
content, and is used in metallurgy, mainly as a reducing agent.
b) Non Coking Coal - The two key varieties of non-coking coal are steam
coal and slack coal. Steam coal is generally used by the railways, textile
mills, slack coal and is used largely in power plants, the paper
industry, cement plants, brick burning industry, sugar mills
Sunday, July 14, 2013 3SBI Capital Markets Limited, Hyderabad
5. Indian Scenario
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53%
29%
10%
1%
5%
2%
Coal Oil
Natural Gas Nuclear Energy
Hydro electric Renewable Source
Primary energy consumption in India has
grown at CAGR of 8.8 per cent over the
last decade, while coal production has
grown at CAGR of 6.6 per cent.
The current estimated per capita primary
energy consumption in India is about
559.1 million tonnes oil equivalent (mtoe)
per year.
Driven by a rising population, expanding
economy and a quest for improved
quality of life, the energy usage in India is
expected to increase from the current
level.
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6. Indian Coal reserves
Types of Coal in million tonnes Proved Indicated Inferred Total
(A) Coking 17,933 13,653 2,102 33,688
-Prime 4,614 699 0 5,313
-Medium 12,837 11,951 1,880 26,668
-Semi 402 1,003 222 1,707
(B) Non Coking 100,211 128,515 31,082 259,808
Total 118,144 142,168 33,184 293,496
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There are total 559 coal mines in India, in which 337 are underground
mines, 186 are active surface mines, while the remaining 36 are mixed
mines.
Other than the reserves in India, Indian companies has coal reserves all
over the world, mainly in Australia, Indonesia, USA and New Zealand. The
total overseas coal reserve base which belongs to India is 53.549BT.
8. Coal supplyand demand
Company (million tonnes) FY10 FY11 FY12 FY13(E)
CIL 431.40 431.40 435.80 452.20
SCCL 50.30 51.30 52.20 53.20
Others 50.30 50.30 51.90 52.10
Total Indigenous supply 532.00 533.00 559.00 557.50
Demand 604.00 630.00 670 772.84
Gap to met through imports 72.00 97.00 130.10 192.50
Total Imports 67.74 68.90 98.90 142.93
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The overall long-term demand of coal is closely linked to the performance
of the Power, Iron & Steel and Cement industry.
Demand from the unorganized small scale sector comprising primarily of
the brick and ceramic industry.
9. Indian Coal Industry Structure
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Governing Bodies
Ministry of Coal
Ministry of Environment and Forest
Ministry of Mines, Mines Safety
Industry Participants
Central Sector & State Mining
Companies, Private Mine Developers,
Coal Traders
End Use Sectors
Power, Steel &
Cement
10. IndustryParticipants
Sector (million tonnes) 2006-07 2011-12 2016-17
Electricity (A) 341 539 836
Iron and Steel 43 69 104
Cement 25 32 50
Others 51 91 135
Non Electric (B) 119 192 289
Total (A) +(B) 460 731 1125
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End use Sectors
1. CentralMiningCorporations
CoalIndiaLimited
-BCCL,CCL, ECL,WCL,SECL,NCL,MCL.
SingareniCollieriesCompanyLimited
NeyveliLigniteCorporation
2. StateMiningCorporations
11. Coal Allocation Modals
FUEL SUPPLY
AGREEMENT
It is a agreement between the developer
and the coal companies for long-term
supply of coal. The quantity of coal to be
supplied along with other commercial
terms and conditions are covered in the
FSA itself.
E–AUCTION OF COAL
E-auction is of two types - Spot E-
auction and Forward E-auction.
Spot E-auction where a intending
buyer can participate in auction.
Forward E-auction, only end-
users/ actual consumers are
eligible to participate and have
assured supply over a long period
of one year.
Around 10% of estimated annual
production of CIL would be
offered under e-auction.
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Coal Supply Levels Penalty
80 – 65% 1.5%
65 - 60% 5.0%
60 – 55% 10%
55 – 50% 20%
Below 50% 40%
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4.2
5.7
4.1
14.8
1.6
0.2
1.8
10.9
5
2.7
4.8
3.3
12.4
1.6
0.2
1.7
10.3
4.6
80%
60% 58%
37%
91%
37%
96%
46%
56%
0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
14
16
BCCL CCL ECL MCL NCL NEC SCCL SECL WCL
milliontonnes
Sales volumes of E-auction coal July 2011- July 2012
Total Quantity offered Total quantity sold Increase over notified price
13. Pricing of Coal
Colliery Control Order, 2000 - Coal prices are fixed by the respective
coal companies and revised periodically
In February 2011, Coal India Limited (CIL) adopted a differential
pricing structure for coal based on end-use sector
- Power Utilities (including IPPs), Fertilizers and Defence sector
- Sectors other than Power Utilities (including IPPs), Fertilizers and
Defence sector
Royalty on coal
- unit of production basis
- ad valorem basis
- both tonnage basis and ad valorem basis
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14. Legislation, Policy Frameworkand
Guidelines
1. Mines and Minerals (Development & Regulation) Act 1957
• The Act aims at regulation of mines and development of minerals under
the control of the Central Government. It deals with reconnaissance
operations, grant of prospecting licenses and mining lease.
2. Coal Mines (Nationalization) Act 1973
• The purpose of the legislation was to acquire the existing mines at the time
and the provisions relate to taking over the management, accounts, and
compensating the owners of the mines.
3. Environment related legislation
• This area is one where a delicate balance is sought to be maintained
between the often conflicting goals of protecting the environment and that
of ensuring energy security in the country.
• „Go-No Go‟ and CEPI policies adopted by the Ministry of Environment.
• CEPI norms prohibited mining in areas with a high pollution index.
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15. Coal Block Allocation
Coal blocks are allocated to both private and public
companies to meet the growing demand by 3 routes
Captive dispensation route through screening committee
– Govt allocates the blocks after considering many factors
Under government company dispensation
- Under this route, only Government companies are allocated coal blocks
Tariff based bidding route
- Coal blocks have been earmarked for the power projects to be set up on the basis
of tariff based competitive bidding system
So far 195 coal blocks are allocated with geological reserves
of about 44.23 billion tonne.
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16. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 16
Approvals / Clearances Authority / Agency Involved
Mining Lease
Approval or Purchase of
Geological Report
CMPDIL (purchase could also be from SCCL, MECL) Directorate General of Civil Aviation and
Ministry of Defence (for unexplored blocks if aerial reconnaissance is conceived)
Mine Plan CMPDIL Coal Controller
Mine Safety Directorate General of Mine Safety
Mining Technology &
Conservation Measures, and
Coal Categorization
Coal Controller (under the provisions of Colliery Control Rules and the Coal Mines (Conservation &
Development) Act)
Mining Lease
State Government (Mining Department), Ministry of Coal (GoI) – Reviewed at various levels within
the Departments at the State & Central Government level
Environment
EIA / EMP Studies
State Pollution Control Board State Environmental Impact Assessment Authority State Water
Resource and Water Supply Department District Administration (for various aspects of site
clearance) Coal Controller Department of Environment (MoEF)
Forest
Forest Clearance & Valuing
Compensatory Afforestation
Committee to Advise GoI (MoEF) Office of Chief Conservation of Forests, (Regional Office of MoEF)
State Forest Department & District Authority Department of Forest (MoEF) State Revenue
Department Hon‟ble Supreme Court
Land Acquisition Ministry of Coal (under provisions of CBA) State Department of Revenue
Infrastructure
(Electricity, Water, Railways, Road, etc) Appropriate Departments of the State Government &
17. Global Coal scenario
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6.29 5.97 6.01
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
3,900
0
100
200
300
400
500
600
700
2009 2010 2011
MillionShorttons
Millionshorttons
Australia Production Indonesia Production
Canada Production Brazil Production
India Production China Production
18. Coal Production & Consumption
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6.29 5.97 6.01
19.47 25.82 27.57
3,000
3,100
3,200
3,300
3,400
3,500
3,600
3,700
3,800
3,900
0
100
200
300
400
500
600
700
800
2009 2010 2011
All values are in Million Short Tons
Australia Production Australia Consumption Indonesia Production
Indonesia Consumption Canada Production Canada Consumption
Brazil Production Brazil Consumption India Production
India Consumption China Production China Consumption
19. Coal Exports
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0 0 0.092752.90 5.03
5.04
0
50
100
150
200
250
300
350
400
2009 2010 2011
All values are in Million Short Tons
China Exports Australia Exports Indonesia Exports
Canada Exports Brazil Exports India Exports
20. Coal Imports
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0.00661 0.01543 0.06063
0.07606 0.06063 0.06063
83.35
64.02
86.83
124.41
163.82
192.50
0.00
50.00
100.00
150.00
200.00
250.00
0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011
All values are in Million Short tons
Australia Imports Indonesia Imports Canada Imports
Brazil Imports India Imports China Imports
21. Risk Structureand Allocation
Operating : Technical
Cost
Management
Participant
Completion
Supply
Market
Infrastructure
Environmental
Political
Force Majeure
Foreign Exchange
Engineering
Syndication
Funding/Interest
Legal
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Risk can be structured in five ways
Controlled or Shared, as in a Contract
Switched from one party to another by means of Trigger
Financed, such as through standby loans,
Deemed reduced, per Study results
Avoided altogether
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Risk Mitigation
Environmental
Risk
Rehabilitation Guarantee, Environmental Warranty
Political Risk
Local National Participation, War and Insurrection Residual,
Political Risk Insurance, Co-financing.
Force Majeure Business interruption insurance, Deferral
Foreign
Exchange Risk
Hedging, Swaps.
Engineering
Risk
Independent Certification
Syndication risk
26. Regulatory Risks
1. GUIDELINES
Identification of blocks for allocation to private sector by CIL/SCCL.
The State Government and its agencies should facilitate infrastructure.
The captive block developers should coordinate with other coal block developers in
proximity
2. ALLOCATION OF COAL BLOCK
Should give adequate weightage to the technical & financial capability of the applicants for
timely development of the blocks
3. APPROVALS AND CLEARANCES
The nodal agency can pre-determine the conditions for each category of land based on
environmental sensitivity and nature of the proposed activity (prospecting, mining
etc.)
The nodal agency may complete the requirements of identification of land for
compensatory afforestation, enumeration of trees, cost benefit analysis, etc. before
inviting application for mining lease.
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27. MoEF should segregate coal bearing areas into „Go„ and „No-Go„ areas for
each type of lease (Reconnaissance, Prospecting, and Mining) on the basis of
the forest cover and environmental & ecological sensitivity
State Government should adopt procedures to issue the prospecting license
within a minimum time.
4. LAND ACQUISITION
The procedure for land acquisition needs to be made less time consuming
5. REHABILITATION OF PROJECT AFFECTED PEOPLE (PAP)
It is recommended that the Ministry of Coal coordinate with the State
Governments to align the State R&R Policies with the National R&R Policy.
Area Development Fund by applying a levy on each tonne of coal produced.
This fund could be utilized for social welfare of PAP including their health &
education, improvement of infrastructure, roads, water supply etc.
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28. 6. GEOLOGICAL INVESTIGATIONS & MINING PLAN
New agencies with the competence to perform geological investigations need
to be set up and accredited by the Government of India. These agencies or an
independent expert group should also be empowered to review and approve
the mining plan, which would be an input to Ministry of Coal.
7. JOINT ALLOTMENT OF COAL BLOCKS
In case of joint allotment of coal blocks - the companies that do not furnish
the Bank Guarantee, should be replaced with other companies from among
the applicants whose applications are pending with the Ministry.
8. INFRASTRUCTURE STATUS FOR COAL INDUSTRY
Coal industry needs to be given infrastructure status so as to attract more
players into this industry and to incentivize domestic production of mining
equipment.
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29. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 29
S.No EVENT TIME LIMIT in months from '0' date
1 Allocation 0
2 Purchase of GR 1.5
3 Bank Guarantee 3
4 Mining Lease Application 3
5 Mining Plan submission 6
6 Mining Plan approval 8
7 Previous approval application 11
8 Previous approval 11
9 Forest Clearance application 12
10 Forest Clearance 18
11 Environment Clearance Application 12
12 Environment Clearance 18
13 Mining Lease grant 24
14 Land acquisition begin 9,19
15 Land Acquisition 30,36
16 Opening permission application 34, 40 for OC
17 Opening permission grant 35,41 for OC
18 Production
36, 42 for OC
48, 54 for UG
30. Capital Raising options
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Economic uncertainty created
volatility and risk aversion among
investors. The fall in overall
capital raised in 2012, to $249b
from $340b in 2011, reflects
changing investment appetite. A
volatility-led structural shift in
investor preferences from equity
to fixed income instruments
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6.62
444.26
34.16
174.4
79.51 98.28
2007 2008 2009 2010 2011 2012
(April -
May)
USDmillion
FDI inflow in Indian Mining Industry
Mining and metals companies
raised bond proceeds of $113b in
2012, using bond markets to
diversify away from their past
reliance on bank debt.
Low benchmark rates
encouraging demand from
investors for yield, which in turn
is reducing borrowing costs for
investment grade issuers.
Mining and exploration of metal
and non-metal but excluding
titanium - MMDR
Coal & lignite mining and its
processing – Coal mines
(Nationalization) Act
33. Innovativeoptions
Flow Through Shares (FTS)
A flow through share (FTS) is a share, or the right to buy a share, of the stock
of a mineral resource company where tax deductions, “flow through” from
the company to the investor.
The individual agrees to pay for the shares, and the corporation agrees to
transfer certain mining expenditures to the individual
Eligible exploration expenditure has been 100% deductible from income from
any source for more than two decades
Canadian mining firms have raised $2.5-billion over the past five years using
flow-through shares
Mineral Bonds
Mineral bonds can be used to attract more investments in mineral exploration
and mining fields like infrastructure bonds.
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35. Mining/Mineral development fund
This fund needs to have three crucial components.
a) Provision of low interest loans to local mining ventures
b) Financing geological exploration and mapping
c) Contribution towards developing to enhance the national capacity
in this field
Sourcing funds from professional lending institutions
The private sector body is encouraged to form a joint venture
company along with the participating public sector agency with the
later holding only minority shares in a PPP arrangement.
Coal India Ltd (CIL) and IL&FS Infrastructure Development
Corporation Ltd (IL&FS IDC) have signed a memorandum of
agreement (MoA) to float a 50-50 joint venture, to undertake project
development for mine, power and other coal-based projects.
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36. Risk, Value and Sourceof Finance
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Equity
ProjectDebt
drawdown
Project Debt
repayment
Returns to
Equity
37. Appropriate Funding Sources
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License Acquisition &
Grassroots Exploration
Advanced Exploration &
Delineation
Feasibility Studies
Construction &
Commissioning
Production & Brownfield
Expansion
Private Equity & Pre-IPO
Finance
IPO & Public Equity
IPO, Public Equity & Quasi-
equity
Debt (Full or Limited
Recourse), Equity & Other
Refinancing, Senior Debt &
Equity
38. Business models
Engineering, Procurement and Construction (EPC) Model
In this model, the owner goes in for separate EPC contracts (mine construction), coal &
OB removal & haulage contracts. These are short duration contracts and adopted in
operational mines.
Since multiple contractors work on the site management becomes a complex task. The
owner takes all the responsibility and obligations in terms of planning and
construction. Subsidiary obligations of mine management also remain with the owner.
Mine Developer cum Operator (MDO) Model
Under the MDO model, the mine owner outsources all the tasks and obligations of
developing the mine. The contractor furnishes the entire requisite capital for the
progression of the coal mine. The mine owner gives a fixed fee generally fixed on per
tonne of coal produced, to the MDO.
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39. Joint Venture Model
Under this type of business model the mining company owns the authority over the
coal block. The joint venture partner is chosen via bidding process.
Mine owner bears the responsibility of ensuring that all
clearances, permits, leases, along with the liability towards mining license, land
acquisition and also solely takes accountability for coal evacuation.
Mine contractor takes on the activities of production planning, construction & mine
operations like drilling, blasting, excavation and hauling. Apart from this to maintain
the safety standards is also the responsibility of mine contractor.
Alliance Model
The ownership of the project is limited to the mine owner only and the alliance formed
only focuses on developing the mine in a timely manner. However the cost of
development is borne by the mine owner.
Every profit and loss, would be divided between the mine owner and mining partner
The primary advantage is that the board of the alliance entails the emissaries of both
the parties.
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40. RelationshipContracting – by MCA and ACA
Core Values Guiding Principles
Commitment
Total commitment to achievement of the project goals – actively
promoted by the Chief Executives of all parties
Trust
To work together in a spirit of good faith, openness, cooperation and
no blame
Respect
The interests of the project take priority over the interests of any of
the parties
Innovation
To couple breakthrough thinking with intelligent risk taking to
achieve exceptionally good project outcomes
Fairness To ensure that neither party is being unfairly disadvantaged
Enthusiasm
To engender enthusiasm for professional duties and the project‟s
social activities
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41. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 41
Project Circumstances Weight Low 1 2 3 4 5 6 7 8 9 10 High
1 Is project completion
critical?
10% Doesn‟t matter ● Critical
2 Is early completion
valuable?
10% Little value ● High value
3 Brownfield or
greenfield work?
15%
Mature
environment
● Unworked
4 Geological
environment
15% Well known ● Not well known
5 Geotechnical
environment
15% Defined ● Undefined
6 Quality parameters 5% Well known ● Not well known
7 IR Environment 10% Low risk ● High risk
8 Owners capacity to be
part of project
5% Little experience ● Very experienced
9 Owners Risk Culture 10% Risk adverse ● Sophisticated view
10 Availability of
Contractors
5% Few ● Many
100% Totals - - 0.3 - 0.5 0.3 1.4 2.4 0.9 1.5 Net total 7.3
<3 3 - 7 >7
Use hard Strategy
Requires closer
examination
Co-operative risk
embrace
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Relationship Contracting
Decreasing use Increasing use
1 2 3 4 5 6 7 8 9 10
<3 3 - 7 >7
Lump Sum
Schedule of Rates
Cost reimbursable
Cost plus incentive
Alliancing
Partnering
The benefits offered by Relationship Contracting
Time
Cost
Risk
Relationship
Flexibility
Technology and innovation
Optimum Standards
Clearly defined project goals
and scope
Gain share/pain share
Integrated project team
43. Fortescue Project – Case Study
Constructing and Operating iron ore mines (Cloud Break and
Christmas Creek) in western Australia to produce an initial targeted
amount of 45 million tons per annum (―mtpa) through Chichester
Hub.
Constructing and Operating rail and Port Infrastructure through TPI
(The Pilbara Infrastructure Pty Ltd) to transport and load the iron ore
for shipment to customers in Asia.
Start up scheduled at 2008
Ore Type
Marra Mamba
High Grade lump – 61.1%Fe
Fines Grade – 60.2% Fe and 58.7% Fe
Lead Arranger / Debt Underwriter – Citibank
Co-Lead Manager – Jeffries & Co
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45. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 45
Leucadia National
Corporation
Fortescue Metals Group Ltd
FMG Pilbara Pty Ltd
International Bulk
Ports Pty Ltd
Pilbara Mining
Alliance Pty Ltd
(“PMA”)
The Pilbara
Infrastructure Pty
Ltd (“TPI”)
FMG Chichester Pty
Ltd
FMG Finance Pty Ltd
(SPV)
Equipment
Leasing
Senior
Secured
Notes
US $300 million
Leucadia Placements
US $ 100
million
Leucadia
Sub -
ordinated
Notes
28 Sales
Contracts
Project Group
WorleyParsons
Team 45
Roche Mining Pty Ltd
Alliance Contract for mining
construction and operations
Connell Wagner Pty Ltd
Independent
Engineer
EPC
Contract
46. Project Financing Plan
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Source of Funds US $
(millions) Application of Funds US $
(millions)
Debt
Senior Secured Notes
Operating Leasing
2,051
115
Project Capital
Feasibility capital expenditure
Repayment of Bridge Loan
Infrastructure
Mining
Working Capital
136
150
1,130
408
139
Equity and Subordinated Debt
Sponsor Equity
Leucadia Placements
Leucadia Subordinated Notes
136
300
100
Contingencies
Cost overrun Reserve Account
Back – Up Reserve Account
Risk provision contingency
223
100
147
Other Sources
Interest on proceeds on deposits
Initial production
142
81
Financing Related Costs
Debt Service Reserve
Account
Fees
419
73
2,925 2,925
47. Risk
POLITICAL RISK
The Mining State Agreement has not yet been ratified by the Upper
House of the Western Australia Parliament until August 22, 2006
FORIGN EXCHANGE RISK
The assets, earnings and cash flow of the project group are influenced
by movements in exchange rates of the U.S dollar against the
Australian dollar
TECHNICAL RISK
The Project Group„s projections for mining iron ore include a
new application of Strip mining methodology, which has not
yet been applied in other iron ore mining settings
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48. MANAGEMENT RISK
The project group does not have an operating history and is still in
the early stages of development.
FORCE MAJEURE RISK
The Pilbara Region is exposed to adverse weather events, including
cyclones
COMPLETION RISK
Construction costs for the development of the project may be higher
than anticipated and the project may be subject to delays.
PARTICIPANT RISK
Project group has to bear all the risks, if the individual contractors
who are engaged but fail to perform as there is no single overarching
contractor that would bear these risks
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49. THE RISKS ELIMINATED BYTHE PROJECT GROUP
MARKET RISK
The Fortescue and the Project Group have negotiated and
executed contracts for 39.5 mtpa under 28 contracts
SUPPLY RISK
Current reserve estimates provide for a minimum project mine
life of approximately 20 years at an ongoing production rate of
45mtpa
INFRASTRUCTURE RISK
260 Kilometers railroad with loading and unloading facilities
and a new port facility at Port Hedland with all facilities
required for export from the port
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50. Sunday, July 14, 2013 SBI Capital Markets Limited, Hyderabad 50
Risk
Supply/Traffic/Reserve
Market
ForeignExchange
Operating:Technical
Operating:Cost
Operating:Management
Environmental
Infrastructure
ForceMajeure
Completion
Engineering
Political
Participant
Funding/Interest
Syndication
Legal
Output Number/Qty
times: Price
equals: Revenue
less: Cash Costs
Royalties
Overheads
equals: Net Operating Cashflow
plus: Project Loan
Equity
equals: Total Sources
less: Capex
Working Capital
Interest (“I”)
Income Tax
Principal (“P”)
equals: Total Uses