Investment Consideration and

Methods for Kalimantan

Infrastructure Projects

By:

Ashok Mitra Chief Financial Officer

PT. Kaltim Prima Coal

September 2013

Introduction – Global Economic and

Financial Crisis

!  Global economic and financial crisis slowing down flow of Foreign Direct Investment (FDI) and start

bottom out in the latter half of 2009.

Global FDI Quarterly Index, 2000 Q1 – 2010 Q1

Source: World Investment Report; United Nations Conference on Trade and Development (Unctad) 2010-2012

Note: Graph using base 100; quarterly average 2005

Introduction – Global Economic and

Financial Crisis!(continued)

!  Global economic crisis negatively impact Trans National Companies’ (TNCs’) Performance and

Investment plan.

Profitability and Profit levels of TNCs, 1997–2009

Source: World Investment Report; (Unctad) 2010-2012

Global Investment Prospect

!  Despite strong impact of the global financial and economic crisis on

Trans National Companies’ (TNCs’) investment program, significant

divestment of TNC’s foreign assets has not been made, and

companies remain committed to expanding their presence abroad.

Source: World Investment Report 2011; Unctad

Top Host Economies for FDI in 2011–2013

Note: Number of times the country is mentioned as a top FDI priority by respondent TNCs.

Global Investment Prospect!(continued)

!  Modest Recovery starting mid 2010 grow optimism on Global economic performance as indicated by predicted

increase of FDI.

Global FDI Flows, 2002–2009, and Projections for 2010–2012 (Billions of dollars)

Source: World Investment Prospect Survey; (Unctad) 2010-2012

!  Concern for Indonesia’s uncertain and unattractive regulatory policies

are top of the list for the Miners today

!  Country ranked last in 2012 by Fraser Institute Survey of attractiveness for Mining

!  Export Ban

!  Lack of clarity in authorities between central and regional government.

!  Requirement under 2009 Mining Law to renegotiate CoW and CCoW

!  Divestment criteria for foreign companies to divest 51% within 10th

year of commercial operation

!  Presidential election 2014 – uncertainty surrounding it.

!  Heightened labor activism

!  Environmental issues

!  Land compensation

!  Shortage of talent

Investment Risk Profile

KPC Location

KPC Among Other Major Coal Producers

in Kalimantan

Capital Investment Decision Making

Process Corporate Goal

Strategic Plannning

Investment Ideas / Needs

Preliminary Screening

Financial Appraisal,

Quantitaive Analysis,

Project Evaluation /

Analysis

Qualitative Factors and

Judgement

Accept / Reject

Execution

Monitoring, Control, and

Review

Continue, expand or

abandon Project

Post Implementation

Audit

ACCEPT

REJECT OUT

!  Following

weakening of global

Coal price in the

recent times, the

need for new

investment in Coal

mine Industry must

carefully be

analyzed to ensure

Capital Investment

gives expected

return.

Qualitative Factors Need to be Considered

for a Capital Investment

International Risk

AssessmentInput Market

General Economic

Condition Industry Condition

Historycal

Experience

Objectives, Priorities

Regulatory GovernanceRegulatory Rules/

Policies

Structure

Behaviour

Performance

Corporate

Governance

Legitimacy,

credibility

Institutional

Conditions

Assessing Economic Feasibility of a Capital

Investment – Current/Common Methods

!  NPV analysis

!  Payback Period

!  Internal Rate of Return

!  Sensitivity Analysis

1.  Discounted Cash flow

3.  Monte Carlo Simulation

5.  Decision Tree

Analysis

!  Provide distribution of projected NPV of the Cash flow

to identify variability/standard deviation of result.

!  Calculate Expected value of NPV Scenarios by using

(defined) probabilities of NPV outcomes.

Limitations of Current/Common Economic

Feasibility Analysis of Capital Investment

Discounted Cash Flow & Monte Carlo Simulation Methods:

1.  Both current approaches are deterministic approach which

do not address uncertainty.

2.  Both methods uses fixed path outcomes; which does not

take into account management’s flexibility to change the

course of the project

3.  Difficulty in accessing the risk of the project. Higher discount rate usually use to capture the riskier project.

Limitations of Current Economic Feasibility

Analysis of Capital Investment !(cont’d)

Decision Tree Analysis Method:

1.  Probabilities of success used to calculate the NPV

outcomes are subjective which are possible to be skewed

as per analyst & management favor.

2.  Difficulties in determine the appropriate discount rate to discount the cash flow within the decision tree.

Management judgment still play an important role to

capture issues which could not be calculated in the

analysis (e.g. risks, flexibilities) to overcome the limitations arise from the above three current/common

methods.

Case Study: Economic Analysis for Construction of an

Overland Conveyor at PT KPC

Background:

Construction of 2nd OLC from Coal Processing Plant to

Coal Terminal is intended to replace coal transportation

by using 30/40 tonne dump truck.

Data & Assumptions:

•  OLC length : 13 kms

•  Power Demand : 4 MW

•  Road length: +/- 15 kms

•  Power price : 11.56 c/kwh

Cost Model: 2nd OLC PT. KPC

Coal Trucking Cost $/t 1.67

Road Maintenance $/t 0.725

Total Trucking Cost $/t 2.39

OLC Mtce + Operating Cost $/t 0.025 Capital Cost $M 130.00 Tax Rate 45%

Discount Factor 10%

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 Total

Coal Conveyed Sangatta kt 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 - 360,000

Capital Cost $M 52.00 65.00 13.00

Potential Loss of Saving

Coal trucking Cost $M - - 25.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 475.02

Road Maintenance $M - - 10.87 21.74 21.74 21.74 21.74 21.74 21.74 21.74 21.74 21.74 206.58

Total Trucking + Road Mtce Cost $M - - 35.87 71.75 71.75 71.75 71.75 71.75 71.75 71.75 71.75 71.75 681.60

OLC Mtce + Operating Cost $M - - 0.37 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.74 6.99

OLC Operating Hours khr - - 3.57 7.14 7.14 7.14 7.14 7.14 7.14 7.14 7.14 7.14

OLC Power requirement kwh/t - - 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95

OLC Power Unit Cost $/t - - 0.110 0.110 0.110 0.110 0.110 0.110 0.110 0.110 0.110 0.110

OLC Power Cost $M - - 1.65 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 31.38

Total OLC Cost $ - - 2.02 4.04 4.04 4.04 4.04 4.04 4.04 4.04 4.04 4.04 38.36

Potential Cost Saving $ - - 34 68 68 68 68 68 68 68 68 68 643.24

Depreciation $ - - 6.84 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68 13.68

Profit Before Tax $ - - 27.01 54.02 54.02 54.02 54.02 54.02 54.02 54.02 54.02 54.02 513.24

Tax Calculation

Tax Rate 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45% 45%

Tax Expense - - 12.16 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31

Tax Payment - - 12.16 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31 24.31

Cash Flow

Capital $ (52.00) (65.00) (13.00) - - -

Cash Cost Saving $ - - 33.85 67.71 67.71 67.71 67.71 67.71 67.71 67.71 67.71 67.71 -

Tax payment $ - - - (12.16) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31) (24.31)

Net Cash Flow $ (52.00) (65.00) 20.85 55.55 43.40 43.40 43.40 43.40 43.40 43.40 43.40 43.40 (24.31) 282.28

Cummulative Cash Flow (52.00) (117.00) (96.15) (40.59) 2.81 46.20 89.60 133.00 176.40 219.80 263.19 306.59 282.28

Discount Factor 1 1.100 1.210 1.331 1.464 1.611 1.772 1.949 2.144 2.358 2.594 2.853 3.138

Discounted Cash Flow $ (52.00) (59.09) 17.24 41.74 29.64 26.95 24.50 22.27 20.25 18.40 16.73 15.21 (7.75)

Net Present Value $ 114.08

Internal Rate of Return 16.1%

Payback Period (after commissioning) years 2.56

Cost Model: 2nd OLC PT. KPC – Result and Sensitivity Analysis

Parameters Unit Result

Net Present Value $M 114.08

Internal Rate of Return (after Tax) % 16.06

Pay back Period (After commissioning) Years 2.56

Using Discounted Cash flow method,

the project shows very attractive

return, as it is reflected in its NPV,

IRR & short payback period.

Tornado diagram to identify

parameter’s sensitivity reveals that

the project is sensitive to tax rate,

discount factor, capital cost and

project duration, & less sensitive to

fuel price & electricity price

Thank you..