My views on CAG Report: Part 3 - Analysis of the CAG Report on Coal Mine

CAG Report - Reading between the Lines

Part 3: Technical Analysis

I recently got hold of the CAG report pertaining to Coal Mining. The report indeed had some technical errors, a couple of which I would like to discuss.

• Geological Reserve – 
• In my first blog I stated the ratio of Mineable reserve to Geological Reserve. But In CAG report, there seems to be some error in documenting the geological reserve, a reserve that forms the basis to calculate Mineable reserve. The Coal Reserve (Geological Reserve) is considered on the basis of ISP(Indian Slandered Procedure Code 1956), when it should be calculated on the basis of UNFC (United Nation Frame Work Classification). The Geological Reserve should be calculated in accordance with the Technical, Economical and Geological dimensions along with Geographical consideration. These factors needs to taken in consideration while preparing the Mine Plan.

• Valuation of the Coal Reserve
• The Coal Reserve will be extracted in a fixed duration of the time. Thus a simple multiplication of Coal Reserve and per ton price cannot be used to do the valuation of the coal reserve. To calculate the value of the Coal Reserve we need to apply Discounted Cash Flow Method. (Ref. Chapter 4 of CAG Report)

• Per ton Sale Price of Coal
• The Quality of the Coal extracted from the Mines fall into one of the categories, namely A,B,C,D,E,F,G; A being the highest quality grade Coal. The Coal blocks allotted by the government consisted of the open cast mines, mixed mines. In the open cast mines the extracted coal falls in quality grade E, F, G. The notified price of E-G grade coal falls in between 440rs/ton to 840rs/ton. The CAG report has calculated the value of coal by taking a per ton price of 1028.42rs/ton, which is very high.

• Stripping Ratio
• In mining, stripping ratio or strip ratio refers to the ratio of the volume of overburden (or waste material) required to be handled in order to extract 1 ton volume of coal. In case of CIL, for open cast mine the stripping ratio is 1 to 2 (Refer GEVRA , DIPIKA. KUSMUNDA mines of S.E.C.L. & Mines of N.C.L., M.C.L., etc.). Such a stripping ratio results in a low production cost. But in case of the allocated coal mines the stripping ratio can go upto 3 to 4. Thus the production cost will be higher. Thus the Cost of extraction taken by CAG doesn’t seems to be justified.

• Underground Mine vs Opencast Mine
• The production Cost of Underground mine is higher than production cost of open cast mine. Thus calculating the production cost by taking the two values (cost pertaining to OC mine and cost pertaining to UG mine) same is not justified