Mine Economic training v3edit

Mine Economic Analysis session#1 Pisit M April-2021 PIMA

Objectives 20x 1. Understand the leading financial parameters that have high impact to the economic of the mine and selection the alternative of mine plan 2. Able to identify the key value drivers and justify the feasibility of each scenario of mine plan OUR WAY IN ENERGY 2 PIMA

Pisit Masiri (Note) 2019 - Now • Manager – Business Unit Strategy #1 2017 – 2018 • Manager – Corporate Strategy 2015 - 2017 • Manager - Business Planning and Analysis 2013 - 2015 • Senior Analyst – Australia Investment 2009 - 2013 • Analyst – Coal Business Planning and Analysis (S&BD) 2006 - 2009 • Analyst Coal Business Office - BANPU 2004 - 2006 • Business Performance Analysis – Siam Gypsum Industry 2001 - 2004 • Electrical Engineer – Siam Gypsum Industry Saraburi OUR WAY IN ENERGY 3 PIMA

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 4 PIMA

Value Based Management (VBM) One of the framework listed companies widely adopted Planning to achieve highest value Interpreting and Strategic Allocating capital on sending market signals Planning basis of highest value Investor Value Focus strategy Communications Resource Allocation Reward and incentive Incentive Performance Setting and monitoring around delivering value and Compensation Measurement and performance to deliver creating plans Evaluation plan OUR WAY IN ENERGY 5 PIMA

Enterprise’s business plan We are focusing to continue increase VALUE Management’s Strategic Potential Investor Plan DCF Valuation Expectations 4.0 Net $3.5 3.5 3.0 Gap $0.3 $2.7 $0.4 2.5 Billions 2.0 $1.0 Gap $2.0 of Dollars Debt 1.5 $1.0 1.0 Equity 0.5 0 BC D Intrinsic Market Market Enterprise A Value Value Value (1) (2) Business Unit Alternative OUR WAY IN ENERGY 6 PIMA

VALUE ??? Can comes from More revenue, Low cost, Faster cash receives, Lower Investment, Financial Leverage … OUR WAY IN ENERGY 7 PIMA

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 8 PIMA

Discounted Cash Flow valuation 20x OUR WAY IN ENERGY 9 PIMA

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 10 PIMA

Key value drivers: Open-pit mine 20x OUR WAY IN ENERGY 11 PIMA

Key value drivers (impacts) 20x Tornado Chart Sensitivity OUR WAY IN ENERGY 12 PIMA

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 13 PIMA

External / Macro economic parameters Macroeconomic Assumptions for Strategic BASE CASE Plans 2020 2020 2021 2022 2023 2024 2025 OUTLOOK OIL PRICE ASSUMPTIONS 20xCountry-specific Indonesia's Diesel price IDR/Liter 6,218 7,799 8,859 8,512 8,505 8,880 Coal-specific Economic / Finance Indonesia's Diesel price USD/Liter 0.39 0.50 0.61 0.61 0.62 0.64 1. Coal Price WTI Crude oil USD/Barrel 29 42 54 54 55 58 2. … 34 47 60 60 61 64 Brent Crude oil USD/Barrel 47 60 73 73 74 77 Gasoil Singapore FOB USD/Barrel 1. Diesel / Biodiesel price 1. Exchange rate (IDR/USD) Source: EIU, EIA, Oxford Economics, PIRA, and SP&A Analysis WACC (cost of capital) % 8.21% 2. Interest rate (cost of 2. Inflation: US, Indonesia Coal - Thailand 10.65% Debt) Coal - Indoneisa (Rp) Coal - Indonesia (USD) 9.54% 3. WACC 3. Corporate income tax Coal - China 10.84% Coal - Vietnam 14.85% 4. … 4. Royalty Coal - Vietnam(US$) 10.67% Coal - Australia 5. VAT Coal - India 7.99% Coal - India(U$) 9.84% 6. Local taxes Coal - Laos 12.25% Coal - Laos (U$) 14.44% 7. Environmental costs Coal- South Africa 9.19% Coal- Mongolia 14.38% 8. Mine reclamation reserve Coal- Mongolia (US$) 18.62% (regulated) Coal-Philippines 12.67% Coal-Philippines(US$) 11.32% 9. … Coal- Pakistan 11.33% Coal- Pakistan (US$) 17.59% Power -Thailand 12.98% Power - Indonesia (Rp) 6.24% Power - Indonesia (USD) 10.51% Power - China 9.37% Power - Vietnam 9.81% Power - Vietnam(US$) 11.24% Power - Australia 9.95% Power - India 6.02% Power - India(U$) 8.76% Power - Laos 10.09% Power - Laos Hongsa 12.32% Power- South Africa 7.22% Power- Mongolia 13.67% Power- Mongolia (US$) 16.86% Power- Japan 12.80% Power- Japan Solar 6.39% Power-Philippines 6.88% Power-Philippines(US$) 11.61% Power- Pakistan 8.60% Power- Pakistan (US$) 16.85% Power- Myanmar (US$) 11.79% OIL AND GAS 10.84% 7.93% Source: Finance (based on SP&A assumptions) Coal benchmark prices 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025 (USD/ton) OUTLOOK OUTLOOK (nominal) OUTLOOK 65 68 68 69 73 69 71 76 67 70 61 63 63 65 67 62 65 65 66 70 68 66 68 73 64 67 63 58 60 60 62 64 JPU 68 65 60 GC Newcastle 65 Source: MS&L (based on SP&A benchmark price assumptions) Natural gas benchmark price 2020 2021 2022 2023 2024 2025 (USD/mBtu) 2.2 2.3 2.5 2.7 3.0 OUTLOOK Source: EIU, EIA, PIRA, and SP&A Analysis Henry Hub 2.0 Source: MEA Strategic Plan April 2020 OUR WAY IN ENERGY PIMA 14

Coal Price Assumptions 20x Remark: In Long-Term where is no price assumption provided, we normally assumed US inflation (2.5% per year) applied OUR WAY IN ENERGY 15 PIMA

Pro-rata: Mine gate prices 20x OUR WAY IN ENERGY 16 PIMA

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 17 PIMA

Operating cost & CAPEX Source: 2020_ITM Financial Model Example: TCM mine 18 Regulation related costs Regulation related costs Regulation related costs OUR WAY IN ENERGY PIMA

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 19 PIMA

Profit & Loss : Income Statement Source: Coal India 20 OUR WAY IN ENERGY PIMA

Definitions Valuation Profit & Loss 20xDCF = Discounted cash flow valuation method Top line = Sales revenue Multiples = Multiples valuation method e.g. P/E, P/BV, EV/EBITDA Bottom line = Net income NPV = Net present value (amount in USD) EBITDA = Earnings before interest tax depreciation amortization = Present value of future cash flow netting with initial EBIT = Earnings before interest tax investment NOPAT = Net operating profit after tax IRR = Internal rate of return (%) = EBIT x (1-%Tax) = Comparable to yearly bank deposit rate Other comprehensive income = Revenues, expenses are excluded from EIRR = Equity IRR (%), calculate from cash flow to equity the net income and listed below the net income line DIRR = Dividend IRR (%), calculate from dividend cash flow = Separate from discounted cash flow analysis, to be added back if significant WACC = Weighted Average Cost of Capital = Actual cost of financing business activity through either debt or equity capital Discount rate = Interest rate used to determine the present value of future cash flows, many company used WACC OUR WAY IN ENERGY 21 PIMA

Depreciation – Amortization & Deferred charges Cash Flow Profile Tangible asset >> depreciation 2021 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 Investment CAPEX Intangible asset (software, license) >> amortization [Deferred charges] -1000 Profit & Loss Statement 2021 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 Depreciation -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 Deferred charges (pre-production drill, deferred OB, LW [Amortization] relocation) >> amortization 10 years useful life 5.0 Strip Ratio 4.0 Average S/R OUR WAY IN ENERGY 3.0 22 2.0 PIMA 1.0 0.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Content 1. Value-based management concept 20x 2. Net Present Value of the mine - Discounted Cash Flow valuation motive 3. Key value drivers – How a mine contribute the value? 4. Macroeconomic assumptions: the external forces 5. Operation & asset-specific performance: the internal strength 6. Brief definition of Financial statement and terms 7. Mine feasibility evaluation OUR WAY IN ENERGY 23 PIMA

Project Valuation Project Cash Flow Projection (US$ million) 20xProject feasible when: 1000.0 • NPV > 0 • IRR > WACC 800.0 • (coal project required IRR > 15%) 600.0 • (power project required IRR > 9%) 400.0 ROIC – Return on invested capital (%) • Calculate based on 1 year profit (NOPAT / 200.0 Invested Capital) 0.0 • Mining project evaluation can’t be decided 2021 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35 '36 based only on 1 year profit -200.0 EBIT Marginal Tax Net change in working capital Add back Depreciation CAPEX FCF before financing Cumulative FCF • WACC - Coal Indonesia USD = 9.54% • Evaluation period 2021-2036 (16 years) • NPV = +483 Million USD; IRR = 75% • Payback period: 2 years OUR WAY IN ENERGY 24 PIMA

Conclusion 20x 1. With the VBM - Value-based Management, we are continuously seeking areas to improve BANPU’s values 2. Value - are mainly the project cash flow generation (subtracted the cash outflow requirement for investments) 3. Some operating parameters post higher impact than others, what are them? Good management to these parameters will yield better valuation 4. Project / Mine will be feasible (ready to be invested and implemented) when … a) All operating parameters are well planned b) All risks are evaluated, and mitigation plan are in place c) NPV > 0, IRR > WACC d) [Preferable] short payback period (say <7 years) OUR WAY IN ENERGY 25 PIMA

PIMA

Balance sheet: Company assets funding from Liabilities + Equity OUR WAY IN ENERGY 27 PIMA

Cash flow statement: Cash is everything OUR WAY IN ENERGY 28 PIMA

Dividend policy → Dividend IRR Consolidated “” US dollar ‘000 “” 2015 2014 OUR WAY IN ENERGY 29 PIMA