Morocco - Jerada Coal Mine Modernization and Expansion Project

~~~~; ~~~~~~Doument of The World Bank FOR OMFCIAL USE ONLY Ret No. 5288--kOR. STAFF APPRAISAL REPORT MOROCCO JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT February 12, 1985 Industry Department Ihis document hs a resricted distribution ad may be use by recipents emy in the peif#oiae of their oicial duties. Its contents may nt otherwise be discloed witbut World Bnk sauthorbtion.  CURRENCY EUALNS Dirham (DR) 1 =US$0.105 DR 9.5 US$1.00 (as of January 1, 1985) FISCAL YEAR January 1 - December 31 WEIGHTS, MEASURES, AND ENERGY CONVERSION FACTORS 1 square kilometer (sq. km.) = 100 hectares (ha) = 0.3861 square miles 1 metric ton (tomne, t) = 1,000 kilograms (kg) = 2,205 pounds (lb) 1 Mt = 1,000,000 tons 1 kilometer (km) = 1,000 meters (m) = 0.6214 miles tmi) 1 inch (in) = 2.54 centimeters (cm) 1 barrel (bbl) = 42 U.S. gallons = 159.0 liters 1 kilocalorie (kcal) = 3.968 British thermal units (Btu) 1 Megawatt (MW) = 1,000 kilowatts (kW) 1 ton of crude oil equivalent (toe) = 2.00 tons of raw fines from Jerada anthracite mine (0.50 toe/T) = 1.40 tons of washed Jerada anthracite (0.74 toe/T) = 1.70 tons of imported steam coal (0.59 toe/T) = 4200 kWh of electricity (245 toe/GWh) (2,500 kcal/kWh) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BME - Belgian Mining Engineers BRPM - Bureau de Recherches et de Participations Minieres CdM - Charbonnages du Maroc (the Borrower) CIOR - Cimenterie de l'Oriental KfW - Kreditanstalt fuir Wiederaufbau MEM - Ministry of Energy and Mines ONAREP - Office National de Recherches et Exploitations Petrolieres ONE - Office National de l'Electricite  FOR OMCIAL USE ONLY MOROCCO JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMMARY ........................................... i I. INTRODUCTION. 1 II. THE ENERGY SECTOR........... .. ... 1 A. Background. .. I B. Resource Base.... 2 C. Energy Consumption.... 4 D. Energy Supply.... 5 E. Sector Organization.... 6 F. Energy Pricing and Conservation.... 7 G. Government Strategy ..... . .. 8 III. THE COAL MARKET IN MOROCCO. 8 A. Local Production and Markets.... 8 B. Coal Imports.... 9 C. Pricing . . ................................................ 11 D. Jerada's Future Coal Markets ............................ 12 IV. THE BORROWER .... 13 A. Background and. Production Performance .................... 13 B. The Jerada Coal Deposit .................................. 14 C. Underground Mines ........................................ 16 D. Surface Installations .................................... 17 E. Organization and Management .............................. 19 F. Accounting, Auditing Practices and Financial Reporting... 20 G. Production Costs ......................................... 20 H. Past and Present Financial Performance ................... 21 I. Debt and Financial Restructuring ......................... 22 V. TEE PROJECT .............. 23 A. Project Origin and Preparation . . . 23 B. Project Objectives . . ..................................... 24 C. Project Description . . .................................... 25 (i) Drilling Program .................................. 25 (ii) Underground Development Work ...................... 25 (tii) Sinking of the New Vertical Shaft ................. 26 (iv) Installation of Underground Equipment ............. 27 (v) Surface Investments ............................... 27 (vi) Auxiliary Investments ............................. 27 (vii) Technical Assistance .............................. 28 (viii) Safety, Health, Environment .28 D. Project Implementation and Schedule . . .29 E. Reporting Requirements . . .29 This report was prepared by Messrs. K. Voltaire, S. von Klaudy and H. Hendriks, of the Industry Department on the basis of an appraisal mission in July, 1984. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Page No. VI. PROJECT COSTS, FINANCING AND PROCUREMENT .................... 30 A. Capital C os.-s ....... ...................... 30 B. Financing ...................... a..0.. ...... ': : 31 C. Procurement ............................ 33 D. Disbursement .......... .......... . ,. ... a .. * . * 34 VII . FINANCIAL ANALYSIS ...... . .... .......................... .... 35 A. Financial Projections ............. ................... 35 B. Financial Covenants ........................a... 38 C. Financial Rate of Return and Sensitivity Analysis ....... 38 VIII. ECONOMIC ANALYSIS ........................................39 A. Economic Rate of Return .............................. 40 B. Foreign Exchange Benefits .............................. 41 C. Project Risks .............................. 41 IX. AGREEMENTS REACHED AND RECOMMENDATIONS ...................... 42 ANNEXES 4-1 Jerada Organization Chart 4-2 Charbonnages du Maroc - Historical Financial Statements 5-1 Project Implementation Schedule A. Summary B. Drilling and Mine Development C. Installation of Major Equipment D. Technical Assistance 6-1 Procurement Schedule 6-2 Disbursement Schedule for Bank Loan 7-1 Assumptions for Financial Projections 7-2 CdM - Sales Forecasts 7-3 CdM - Projected Income Statements 7-4 CdM - Projected Working Capital Schedule 7-5 CdM - Projected Funds Flows 7-6 CdM - Projected Balance Sheet 7-7 Cash Flows for Financial Rate of Return 8-1 Power Generation Cost Comparison 8-2 Opportunity Cost of Jerada Coal 8-3 Cash Flows for Economic Rate of Return 10-1 Documents Available in the Project File MAPS IBRD 18452RI IBRD 18453  -iii- KINGDOM OF MOROCCO JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT LOAN AND PROJECT SUMMARY Borrower: Charbonnages du Maroc (CdM) Guarantor: Kingdom of Morocco Amount: US$27.0 million equivalent Terms: Payable in 15 years, including four years of grace at tha Bank standard variable interest rate. CdM would pay a guarantee fee of 1.0X of the loan outstanding to the Government. Project Description: The project is directed towards the modernization and expansion of the Jerada mine from 0.8 mtpy to 1.0 mtpy by 1988 and the strengthening of CdM's operational and planning capabilities. It would (i) concentrate production in a single mine (ii) simplify the infrastructure of this mine for increased productivity and production, and (iii) improve safety, bealth and working conditions in the mine. It includes: (a) a drilling program to prepare underground development work and shaft sinking; Cb) underground development work to prepare future mining areas and to simplify existing mining areas; (c) sinking of an additional vertical shaft to maintain the production capacity after completion of the project and depletion of CdM's smaller mines; (d) installation of underground and surface equipment to increase efficiency, production capacity and to improve safety and health; and (e) technical assistance to support CdM in the implementation of above tasks. Project benefits: The project would help secure and expand a competitive indigenous coal supply in Morocco. Given Morocco's chronic balance of payments deficits due to  -iv- a large extent to fuel imports, the Project is expected to have a beneficial impact in that area. An important benefit is also the strengthening of CdM to make it a financially viable and well managed company. Project risks: The project carries geological, technical and economic risks that are prevalent in underground thin seam coal mining. The geological risks are of two kinds: (i) lower minable reserves than estimated and (ii) difficult geological conditions linked with the shaft sinking. The exploration program is designed to remove the uncertainty related to the geological conditions. The technical risks relate to the possibility of CdM not attaining the planned production build-up. These risks are reduced because of CdM's 3 year experience with mechanized coal winning, the reinforcement of CdM's organization and a technical assistance program. The economic and financial risks relate to the long-term competitiveness of Jerada coal vis-a-vis imported coal and the financial viability of CdM. Closeness to markets and the expected increase in productivity should help CdM retain a comparative advantage in Eastern Morocco. Also an adequate coal pricing policy should help maintain CdM's financial viability in the future. Project Cost Estimate: a/ Z Total (US$ million) Foreign Base Local Foreign Total Exchange Costs Investment Costs A. Civil Works 13.5 9.8 23.3 42 45 B. Equipment 3.2 23.1 26.3 88 41 C. Services 0.4 1.6 2.0 79 5 Total Investment Costs 17.1 34.5 51.6 67 100 Total Base Costs 17.1 34.5 51.6 67 100 Physical Contingencies 2.1 3.5 5.6 62 11 Price Contingencies 5.0 9.5 14.5 66 28 Total Project Costs 24.2 47.5 71.7 66 139 a _N _ __ Increase in Working Capital 0.5 1.8 2.3 80 4 Total Financing required 24.7 49.3 74.0 67 143 : =m =M = a/ Including US$2.2 million in taxes and duties.  _v- Financing Plan: --(US$ million)-- External Local Foreign Total IBRD - 27.0 27.0 KfW - 12.9 12.9 France - 7.6 7.6 Internal - - - CdM 24.7 1.8 26.5 Total 24.7 49.3 74.0 Estimated Disbursement: