9 FINANCIAL EVALUATIONS

Transcription

1 9 FINANCIAL EVALUATIONS This chapter deals with the financial aspects of the various scenarios developed in chapter 8. The mass balances allow the determination of equipment sizes, number of pieces required, and power requirements. An estimation of the operating costs is included. The mass balances also indicate the effect coal beneficiation has on the ROM coal requirements and the amount of discard to be handled. ROM coal costs are calculated, and an estimate is made for the costs associated with the disposal of discard material. The amount of sulphur recovered from the Rectisol off-gas changes with the implementation of coal beneficiation processes. As less sulphur enters the gas stream, less sulphur can be recovered. This has an impact on the income received from the sale of elemental sulphur. Also, less elemental sulphur is produced in the Cure option based on the implementation of a Wet Sulphuric Acid process. Sulphur is still be recovered, but converted into sulphuric acid. Fortunately, sulphuric acid earns a far higher income per ton sulphur sold than what can be achieved with the sale of elemental sulphur. There are minor utility consumption benefits in the gasifiers if the coal consumed contains less inert material. Less oxygen and steam is used to heat up and liberate the inert material. Although the amounts that can be saved are nominal, they are mentioned for completeness. For the same reason the estimated benefits resulting from the reduced abrasiveness of the coal and ash are included in the financial evaluations. The decisive indicator for the financial attractiveness of a scenario is the Net Present Value, NPV. The higher the value, the better the proposition. For each scenario a NPV is calculated. From the NPV values, a conclusion is drawn as to which process scenario is more attractive. Note: all costs are referenced to the last quarter of

2 9.1 Cost Estimates The mass balances for the coal beneficiation scenarios supply information for the sizing of the equipment as well as the determination of the number of pieces required of each. Using information available from equipment and technology suppliers, equipment lists were compiled. These lists are shown in appendix E, tables E4 to E9. To ensure that the same basis was used for all the plant sizing and cost estimations, each plant design was based on 1000 ton feed material to the separator. Scale-up factors were used to convert the 1000-ton base case to the actual case suitable of handling the full flow as calculated in the mass balances. Some of the equipment has components which are sourced from outside South Africa. The foreign currency content for each equipment list was determined and compensation was made for the changes in currency exchange rates between the time of acquiring the cost information and the final financial evaluations. The South Africa-based costs were also adjusted with the appropriate PPI (Producer Price Index) to compensate for inflation. A commonly-used estimation method was employed to derive at the End Of Job costs for each scenario based on the capital cost of the major mechanical equipment. A cyclonebased dense medium coal beneficiation plant built for a colliery served as the reference case for costing. Percentages of the scaled-up and escalated equipment costs were used to calculate the man-hour expenditure and project expense. These percentages are again based on industry experience. Table 9.1 Cost estimation proportioning basis Item Portion of End of Job capital costs Mechanical equipment 34.7% Erection and painting 27.4% Structural steel 15.8% Transport 6.5% Piping and Valves 13.0% Electrical and Instrumentation 2.6% Total 100% Table E3, appendix E, is a summary of the cost estimates. 125

3 Operating expenses need to be estimated too. Labour costs are estimated based on the number of people required to operate and maintain the plant. Power costs are calculated based on the power estimations from the equipment list. Magnetite losses are included. Experience shows that for the beneficiation of coarse coal, approximately 0.7 kilo magnetite per ton of processed coarse coal needs to be replaced. The cost of magnetite is known, and the replacement costs is calculated. Plant maintenance is taken as a percentage of total equipment cost. Since this is a materials handling plant, wear and tear will be higher than in a chemical plant. The cost of maintenance and consumables was taken as a percentage of total equipment cost. Table 9.2 shows a summary of the cost estimates for the coal beneficiation step. Six coal beneficiation scenarios were evaluated: large diameter cyclones, Wemco bath, Drewboy bath, LARCODEMS, a Baum-type jig and a Batac-type jig. Table 9.2 Summary of capital and operating costs, R million Cyclones Wemco Drewboy LARCODEMS Jig Baum Jig Batac Total equipment cost End Of Job Capital Annual power Labour Maintenance Magnetite Rand/ ton processed The costs of the Cure options have been estimated from information supplied by the technology suppliers. Base case information had to be scaled-up to derive at cost figures relevant to the size of the plant required for the target sulphur emissions. Operating costs could be determined from the utility requirements specified by the technology suppliers. Specific information is included in tables E10 and E11 in appendix E. The estimated capital costs for the Wet Sulphuric Acid option is R 1026 million, and for the Flexsorb/ OxyClaus process R 1308 million. Operating costs per annual ton sulphur recovered are R 998 and R 1495 respectively. 126

4 9.3 Additional Costs and Benefits The principal additional cost is that for the replacement of the carbon lost. Additional ROM coal needs to be produced by the mining operation. The additional coal will be at marginal costs as long as the volume of additional coal required is within the production spare capacity. As soon as additional capital is required for equipment or a mining section, costs will increase substantially. The volumes required are between approximately and ton per year, depending on the organic efficiency of the separation process employed. This is within the production spare capacity, but nevertheless the associated costs are between R27 and R37 million per year. Discards need to be stacked on the ash stacking area. Each ton of discards stacked in this area reduces the space available to stack coarse ash, and therefore reduces the life of the ash stacking area. It should be noted however, that the ash content of the coal to the gasifiers has reduced significantly too, and theoretically each ton of discards would have been a ton of coarse ash from the gasifiers. There is however more discard material produced than ash content reduced, hence there will be a net loss of stacking space. The cost of replacing the lost stacking space is estimated at approximately R30 per ton of discards stacked. The reduction in mineral matter in the coal to the gasifiers reduces the amount of steam and oxygen consumed by the gasifier for the heating of this mineral matter to gasifier temperatures and to convert the mineral matter to its oxides. The ash is released from the gasifier at approximately 300 C and all this energy is lost. The amount of energy required to heat the mass of mineral matter can be calculated, and this relates to a certain amount of oxygen and steam, as well as carbon that needs to be combusted to provide the heat. These savings are small, and estimated to be approximately R 2.02 million per year for one Gas Production unit. Mineral matter reduction will also reduce the abrasiveness of the material handled in the gasifier, and would increase the life of the jackets and more importantly, the grate. It is estimated that due to the beneficiation of the coal, the amount of ash processed by the grates reduces by approximately 2 million ton per year, or 28%. This equates to a potential reduction in gasifier grate maintenance costs of approximately R 14 million. Alternatively, one could opt to extend the period between grate overhauls from 18 months to 25 months for the same amount of ash handled in these periods. Additional income will be derived from the sale of recovered elemental sulphur, or sulphuric acid in the case of the Wet Sulphuric Acid option. 127

5 Sulphuric acid is actually a very income effective product: each ton of sulphur is sold in three ton of sulphuric acid, resulting in a higher netback per ton sulphur sold compared to just selling the sulphur as elemental sulphur. All the sulphur processed to sulphuric acid would not be available for sale as elemental sulphur. Hence the income from sulphuric acid is debited with the sales value of the equivalent volume of elemental sulphur. The balance of sulphuric acid sale and reduced elemental sulphur sale is a net R 84.1 million in extra revenue. The Flexsorb/OxyClaus combination recovers sulphur for sale as elemental sulphur and this option is credited for the income derived from these sales, approximately R 7.6 million per year. The coal beneficiation processes suffer a double penalty. Not only do they cost money (capital and operating costs) but also the beneficiation of coal removes sulphur, which could have been sold as a product. The beneficiation processes are therefore be debited with the loss of income from the reduced sulphur sale volume. This is estimated at approximately R 5.6 million per year. 9.4 Net Present Value Of The Options The proper evaluation of the various options is on the basis of net present value or NPV. The calculation of NPV takes the time-value of money into account. Capital needs to be spent in the first three years of the project to establish the plants. Thereafter, income can be generated once the processes are commissioned. Operating costs are included for the whole period the plant is operational. For cash flow calculations, the plant is depreciated over 15 years. Income and expenses are discounted at a discount rate of 15%. The discount rate represents the Weighted Average Cost of Capital plus an investment return margin set by the management of a company, and is the expected Internal Rate Of Return for a NPV of zero. Tax regulations allow the capital to be writtenoff over a five-year period. This is included in the cash flow calculations. Income derived from sale of products is added to the calculations as a positive cash flow (income). Table 9.3 Net present value (NPV) of the scenarios, R million Flexsorb / Sulphuric Case Jigs Cyclones LARCODEMS Baths OxyClaus acid NPV

6 Appendix E, tables E12 to E17 show the NPV calculations for the different scenarios. A summary is given in table 9.3. Table E18 shows a calculation for the sulphuric acid scenario to determine the IRR. This scenario was the least cash negative (the NPV was just R42.2 million in the red). The IRR works out to be 1.05%, way short of the required IRR of 15%. 9.5 Financial Conclusions From the NPV calculations it is obvious that there is no cost beneficial option. All the scenarios have a negative NPV, albeit that the sulphuric acid option is a lot less negative than the others due to the income generated by the sale of the sulphuric acid. It is clear that the coal beneficiation scenarios are penalized for the required replacement of carbon lost, the handling of the discard material and the reduced income from lower sulphur sales. One never starts making money in these scenarios; the after-tax cash flow stays negative over the whole calculation period. The Flexsorb/OxyClaus combination does make money. In year three the after-tax cash flow does become positive, but the discounted contributions are not sufficient to compensate for the high capital outflow in the first two years and the NPV over the calculation period stays negative. The same is valid for the sulphuric acid option, although the income is better and the initial capital outflow is lower than the Flexsorb/OxyClaus option. From a pure financial perspective, none of the scenarios should be implemented. There is however an additional benefit that needs to be incorporated into the evaluations: the potential value of increased reserve utilization. 129

7 9.6 The Bigger Picture The Secunda coal reserves are depicted in figure 1.5, which is repeated below (as figure 9.1). Figure 9.1 Ash yield distribution of the Secunda coal deposit (courtesy Sasol Geology Department) The mining operations progress further away from the good quality coal reserves which are close to the Sasol Synfuels complex. The next developments will be in the northwestern part of the reserves, and include coal in the Kriel and Trichardt/Bethal areas. With time, the operations will move into seams with higher ash and higher sulphur content. Selective mining and mine planning could be employed to mine around the areas of lower quality. In-seam selective mining is possible to remove the better part of a seam and leave coal of lower quality behind. In-seam mining may also be a way to extract coal from areas which are geologically less favourable for mining (devolatilised coal, reduced strata strength, etc.). These options reduce the amount of coal that is extracted from the reserve in comparison to full extraction. Once mining has been done in an area, the 130

8 remaining coal cannot be removed at all or only with substantial cost and operational risk. Basically, coal left behind in an area where extraction has taken place, or in areas deemed unviable to mine, is sterilised forever. The selection criteria for the determination of the boundaries of the coal extraction processes are not only based on mining and geology principles. The coal mined is used in the Gas Production and Steam Plant units of Sasol Synfuels, and the coal quality requirements of the processes employed in these units need to be considered. The test gasifier project had as main objective the determination of coal quality requirements for optimal operation of the gasifier. Although some information to determine the ranges of some of the coal characteristics was obtained during the tests, not all is known as yet. The coal characteristic most needed but lacking from the evaluations is the ash content, and more specifically the maximum ash content allowed in the gasifier feed coal for a certain gasifier performance. The lack of scientifically verified information regarding the allowable maximum ash content has led to conservative approaches for the coal reserve exploitation. Whilst coal has been gasified in the gasifiers with ash yields as high as 42% (mass, air dried) in the Sasolburg complex and well over 35% in the Secunda complex, there is a hesitation to mine in areas of coal with an ash yield higher than 34%. In the mine reserve estimations, a coal quality cut-off point based on an ash yield of 34% (air dried) is used. This results in an estimated ash yield of approximately 24.6% after mining for the future reserves (those which have not yet been actively exploited). It is not advocated here to mine the complete reserve irrespective of the ash content or mining conditions, far from that. But what needs to be considered is the possibility of mining coal with higher ash contents, beneficiating only the coarse fraction of the coal to remove the highest mineral matter containing material, and thus producing a coal that is still acceptable to the gasifiers. What is acceptable to the gasifiers still needs to be determined, but it will certainly be higher than the aggregate average of 24.6% ash yield. The benefits are enormous. Figure 9.3 depicts a cumulative graph of the reserves (future reserves, not part of current mining operations) available against the ash content of the coal. As can be seen from the graph, the application of a 34% ash cut-off to the reserve evaluation for extraction purposes leads to an in-situ reserve of approximately 2700 million ton coal. The cumulative ash yield of this reserve is estimated at 24.6% (air dry). The coal screening process separates the coarse from the fine coal, and the coarse coal will have a few percentage points more ash than the finer coal. This would make the ash 131

9 yield of the coarse coal to the gasifiers approximately 28-29%, still well below the expected maximum tolerable ash content. If the cut-off is increased to 42%, approximately 766 million ton coal is added to the usable portion of the in-situ reserve and the cumulative ash yield increases to 28.4%. To get to an average of 42% ash yield means that there are areas within this part of the reserve which have an even higher ash content. Some of this coal must be beneficiated to remove the very high ash content material Cum ash : 28.4% In-situ ton, AD, million Cum ash : 24.0% Cum ash : 22.7% Cum ash : 23.4% Cum ash : 21.6% 1,296 Cum ash : 24.6% OPPORTUNITY 766 Cum ash : 18.6% Average ash, % AD Reserve Cumulative Figure 9.2 In-situ coal reserves versus ash yield of the coal After beneficiation, which would be a destoning operation at relative density 1.95 to 2.0, a large part of the additional reserve that would otherwise be sterilised, could be used in the Synfuel processes. Value is added to coal that would not have been mined. Granted, the mining process might be a bit more expensive as the coal to be mined has a higher mineral content. Machine wear and energy consumption will go up. In some of the areas the overlying strata may require additional support to prevent a collapse. But this should all be weighed against the increased life and utilisation of the reserve, and the added value that can be obtained from converting this previously made redundant coal into chemicals and fuels. 132

10 A calculation example might illustrate the order of magnitude of additional income possible. The annual report of Sasol for 2007 indicates that Sasol Synfuels made R million contribution to the Sasol operating profit from the utilisation of approximately 40 million ton of coal. Approximately two-thirds of that coal went to the Gas Production units. To be conservative and to account for the coal used to raise steam for the gasifiers, it is assumed that all the coal was required by the gasifiers. This means that for every 10 million ton of coal provided to the complex approximately R million operating profit was realized. If, through mining in higher ash yield areas and subsequent destoning of the produced coal to remove the really high ash yield material, an additional 100 million ton of coal could be extracted from the reserves, the contribution to operating profit would be R 40.6 BILLION and roughly two and a half year would be added to the life of the complex. There will be additional operating costs, and capital needs to be spent to establish the beneficiation plants and associated infrastructures. But even if that would amount to half of the potential additional operating profit (which is very conservative and probably way too high a portion), the remaining additional contribution would still be in the order of R 20.3 BILLION. Given the volumes in the graph of figure 9.2, it appears that the potential is more than R 310 BILLION worth of operating profit and 18 years of complex life extension. One has, however, to consider the time value of money. The additional reserves would in reality add only additional complex life to the end of the current period using current exploitation principles. To relate the potential value of coal in 2035 into 2007 figures, a discount factor of 50.1 needs to be applied (based on 15% per year discounting). The contribution to operating profits of 40 million ton coal additional reserve in 2035 would be approximately R (160/2) or R 80 million in 2007 terms, using the same logic as above. This is not enough to off-set the NPV of any of the coal beneficiation processes. But one has to consider an additional issue. If the extension of complex life cannot be ensured through increased reserve utilisation, it means that external coal supplies need to be utilised to feed the Sasol Synfuels complex when the own reserves in Secunda are exploited completely. This means that coal needs to be imported from other coal suppliers. If a good arrangement can be made, coal can be obtained at slightly above cash costs. It is however far more likely that the coal will be at transfer cost, which is 133

11 substantially higher. These costs, recalculated to 2007 terms, need to be considered if one desires to have the Sasol Synfuels plant still operational at that time. Table 9.4 Net present value (NPV) of coal replacement costs 2007 base cost 2035 cost 2050 cost R/ton R/t, 2007 basis R/t, 2007 basis 2035 cost, 40 million ton R million, 2007 basis 2050 cost, 40 million ton R million, 2007 basis Cash cost basis Transfer cost basis The detailed calculations are in Tables E19 and E20, Attachment E. As can be seen, the cost of the coal to replace coal that potentially could have come from own reserves is substantial. These costs can be avoided if the life of the reserves can be extended. The cost of replacement coal should be included in the economic evaluation of the coal beneficiation scenarios. Assuming that in 2035, the R 484 million replacement cost of coal can be avoided (optimistically obtained at cash costs) and the R 80 million (conservative) additional contribution to operating profit is realised, then the combined impact in 2007 financial terms would be R 564 million. This should be added to the NPV for the coal beneficiation cases. Table 9.5 NPV of scenarios, adjusted for complex life extension benefits, R million Case Jigs Cyclones LARCODEMS Baths NPV When this complex life extension impact is considered, coal beneficiation does make sense on the longer term. The potential of coal beneficiation therefore does not lie in just the removal of sulphur from coal to release the pressure on the sulphur emissions into the atmosphere. The true value lies in the ability to unlock previously deemed un-usable coal from the reserves, and make this coal suitable for conversion to value-added products through coal beneficiation (and simultaneously also reduce the sulphur content). This leads to the extension of the complex utilizing own coal, and avoiding the purchase of expensive external replacement coal. It is realised however that standard business financial evaluations seldom go beyond a 15 year period for NPV calculations. The above calculation spans a timeline far longer 134

12 than 15 years. A different method for decision-making in these cases needs to be adopted, one that is probably based on scenario evaluations rather than exact financial calculations. When it is assumed that the current global trend of increased energy consumption continues, and the supplies of oil and gas are significantly less than that of coal (when compared on equal basis, ton of oil equivalent), then the role of a Coal-to-Liquids business like Sasol s is self-explanatory. The need to keep the Secunda complex in operation for as long as is practically possible becomes obvious, and the need to stretch the reserves as long as is possible becomes equally clear. From a long term business point of view as well as a National Resource utilization perspective, coal beneficiation cannot be avoided. The bigger-picture business aspects will have to sway the decision for the longer term towards coal beneficiation. The removal of sulphur from the coal, and the subsequent lowering of sulphur emissions to the atmosphere, will be an added benefit. 135