China - Changcun (Luan) Coal Mining Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5127-CIA STAFF APPRAISAL REPORT CHINA CHANGCUN (LUAN) COAL MINING PROJECT February 12, 1985 Industry Deparcment 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.  aJR! EUIAENT Cirreziy Name Rerydzi (M) Oirrency Unit - Yuan (Y) = 100 Fen US$1.00 - Y 2.80 Y 1.00 - US$0.357 (As of Jiary 1985) FISC.AL YFaR Jarxiry 1 to Decente 31 WEIGES AND MEASURE I British Thermal Uliit (1J - 0.252 lducaLories 1 cubLc neter (n3) - 35.315 cuic feet 1 Gigawatt kur (GWh) - 1,000,000 kdowtt bxurs 1 kilocalorie (kcal) - 3.97 British Thermal Urits 1 kilocalorie per Kilogram (kcal/kg) - 1.805 British Theunnl Urits per pound 1 kilogram of coal seuivaleri (kgce) - 0.64 kilogram of oil equivalert 1 kilometer (kn) - 0.621 mile I kilovolt (kv) - 1,000 volts I kilowatt (k) - 1,000 watts 1 MVA - 1,000 Kilo Volt Anpere I Megaatt (4) - 1,000 Kikowatts 1 Peter (m) - 3.281 feet I square kilometer Cef2) - 247.1 acre or 0.3861 square mile I square mreter (i2) - 10.764 square feet 1 tomre (t) - 1,000 ldlogran or 2,2D5 pounds PRINCIPAL ARN1S AND ABBEEVIATIa1 CC) - Capital CGntruction rmparent R Mi- Mistry of Foreiga Econanic CDCC - China Coal -Mi.e Desig. and CGbsulting Conppary Relat onx and Trade CIC - Coal L-xlstrial Comay MORNB- mstry of First Machine MA, - Coal Mine Administration Btil dix @QKDC - China National Coal Development Corporation .PI - Midstry of Petrolewn Industry CNC!IC - China National COal Export and Import Corporatinn MZ - Ministry of Railways (NTIC - Chna National Teck,ical Imort Corporation i'IMEP - Ministry of W6ater Resouroes and CV - Calorific Value Electric Power ERR - Ecciaoic Rate of Retur.. PCB - Provii.al CGol Industry Board ICB - Internatioral Conpetitive Biddirg PPCC - Priority Project Cbordination LIF - Liirted ITternational Biddi:g CoGnmittee LRMC - Log Rua Mrgfinal Cst SAA - State Audit Agency MC - tlxtnta Consulting SEC - State Ecoromic Camrdssion MOaC - IM-nistry of Coal Industry SPC - State PlMrr=ng Ccrudssion MDF - MLnistry of Firlnare toe - tannes of oil equivalent t A/ - tomr.es per nmshift  FOR OFICIAL USE ONLY CHINA CHANGCUN (LUAN) COAL MINING PROJECT STAFF APPRAISAL REPORT Table of Contents Page I. INTRODUCTION ................................................... 1 II. THE ENERGY SECTOR ........................... .... ....... .... 1 A. Resource Endowment ... ...................................... 1 B. Production and Consumption ..... ................. ... ........ a 2 C. Sector Policies . .............................. 3 III. THE COAL SUBSECTOR ............................ ....... ...*...... . 4 A. Organization of the Industry ..& ...... .......... 4 B. Manpower and Training ........ ...... ... .... .. ............. 5 C. Reserves and Production ...... .............................. 5 D. Costs of Production ........................................ 6 E. Consumption . . ................................... .6 F. Mining Methods ... .......................................... 7 G. Mining Equipment Manufacture 8............ .... ........ 8 H. Regional Coal Development and Transport ..... ............8 I. Coal Prices ................................................ 9 J. Mine Development Policy ........ .............. ....... .....6 10 K. Subsector Constraints ...................................... 12 L. Project Rationale ... ....................................... 13 IV. THE ENTERPRISE: LUAN COAL INDUSTRIAL COMPANY ................ .. 14 A. Organization ........ . ................... .....*.....*. * . 14 B. Staffing and Training .. .................................... 14 C. Operations ...... 15 D. Accounting Arrangements . .. .......... .................. .e. 15 E. Audit ........................................... .. 16 F. Financial Performance of Luan CIC ....... ................... 17 V. THE PROJECT: CHANGCUN COAL MINE .......... ..................... 18 A. Project Objectives ......................................... 18 B. Summary Description ....................................... 19 C. Detailed Features ....................................... 19 1. Mine Development ...... ............................... .. 19 2. Surface Plant and Coal Washery ......................... 21 3. Infrastructure Development ............................. 21 This report has been prepared by Messrs. P. Kotschwar, R. Bentjerodt, S. Chattopadhya, M. Fukuda, 0. Iskarpatyoti, and Ms. N. Hadjitarkhani of the Industry Department. I This docuent has a resticted disribution and may be used by rcpients only in the performanet of their offic duies. Its contents may not otherwise be disclosed without World Bank authorization.  -ii-- Page D. Manpower and Productivity ..................... ............. 22 E. Marketing .................................................. 23 F. Safety and Environment ............ ............... .. ........ 23 G. Technical Assistance and Training .......................... 24 H. Project Costs ................... ........................... 25 I. Financing Plan ........................................... 27 J. Procurement and Disbursement .. ...................... ........ 28 K. Project Management and Implementation ...................... 30 VI. FINANCIAL ANALYSIS . .......... . o .. ........ ....... . . 31 A. Luan CIC ................................................ 31 1. Changcun ...e............................... eso.o...... 31 2. Existing Operations .................... o ............... 33 B. Financial Projections . .... .w ............... ... .. .. *.... 34 C. Financial and Efficiency Covenants ............ .. ........... 37 D. Financial Rate of Return and Sensitivity Tests ........... .. 38 E. Project Risks ... ............. 39 VII. ECONOMIC ANALYSIS .................... ........... 39 A. Economic Rate of Return and Sensitivity Tests .............. 39 B. Project Benefits ........................................... 40 C. Least Cost Development Programs ......................... 41 VIII. AGREEMENTS AND UNDERSTANDINGS REACHED AND RECOMMENDATIONS ...... 47  -iii- ANNEXES Annex 1 The International Coal Market Annex 2 Yearly Allocation of Input (Materials and equipment) during construction - Producer/Consumer Delivery Arrangements on Yearly Allocation Annex 3 Yearly Allocation of Funds for Coal Mine Projects Annex 4 Execution of New Coal Mine Construction (Yearly Allocation After SPC Approval of Year's Budget) Annex 5 Coal Production in China by Region, Provinces and Cities, 1970-82 Annex 6 Coal Production in China by Type and Size of Mine and Rank, 1970-82 Annex 7 Long-Run Marginal Production Costs (LRMC) Annex 8 Major Coal Mining Equipment Factories Annex 9 Interprovincial Trade of MOCI-Coal, 1981 Annex 10 Mine-Mouth Coal Prices for Selected Coal Mine Administrations, 1982 Annex 11 Current Formula for Calculation of Coal Prices Annex 12 Coal Quality and Washing Characteristics Annex 13 Brief Description of Longwall Coal Mining Method Annex 14 Historical Financial Statements of Luan CIC, 1979-83 Annex 15 Implementation Schedule Annex 16 Coal Supply & Demand Projection, 1980-82 and 1985-2000 Annex 17 Statistics of Mine Accidents, 1978, 1980 and 1982 Annex 18 Summary of Technical Assistance and Training Program Annex 19 Procurement Schedule Annex 20 Disbursement Schedule Annex 21 Development Organization Structure Annex 22 Coal Prices of Luan CIC in 1982 Annex 23 Assumptions Underlying the Financial Analysis Annex 24 Projected Financial Statements of Luan CIC Consolidated Annex 25 Projected Financial Statements of the Changcun Project Annex 26 Financial Costs and Benefits Stream Annex 27 Economic Costs and Benefits Stream Annex 28 Assumptions Underlying the Economic Analysis Annex 29 Selected Documents and Data Available in the Project File MAPS IBRD 17642Rl IBRD 17500R  -iv- CHINA CHANGCUN (LUAN) COAL MINING PROJECT Loan and Project Summary Borrower: The People's Republic of China. Beneficiary: The Luan Coal Industrial Company (Luan CIC). Amount: US$126.0 million equivalent. Terms: 20 years, including 5 years of grace, at standard variable interest rate. Onlending Terms: The proceeds of the loan will be onlent from the Government to Luan CIC, with a term of 20 years including five years of grace and an interest rate of 8% p.a. The Luan CIC will bear the foreign exchange risk (between the dollar and the borrower's currency)., Project Description: The project is an important element in the Government's policy to double coal output to 1,200 million tonnes per year Cmtpy) by the year 2000. The project is the first of a series of large-scale, fully mechanized coal mining operations in the country. It will contribute to: (a) increasing coal production by about 4.5 mtpy by the early 1990s; (b) transferring technology in mine design, engineering and construction (especially the highly productive, mechanized longwall exploitation technology); (c) introducing modern coal washing technology; and (d) fostering improved management techniques for project scheduling, monitoring and cost control. The project will finance construction of the Changcun mine, including vertical shafts, underground roadways, and longwall faces; construction of a coal preparation plant; equipment for coal extraction, washery and loadout operations; and surface infrastructure including a railway spur line, an electrical substation, water supply lines, workshops, and warehouses. Risks are normal for a major coal mining project of this type. The project's technical assistance and training program will assure adequate support for project implementation and facilitate development of technical and managerial skills of local staff. The Government is planning to raise coal prices to approach the long run marginal cost of production within the Seventh Five-year Plan (1986- 90) and maintain that level in real terms thereafter.  _v Cofinancing (grant aid) has been secured from the Federal Republic of Germany (US$1.9 million) and UNDP (US$384,000) for project preparation and technical assistance. Estimated Costs: Local Foreign Total ---- (US$ million) Mine development 22.9 11.1 34.0 Civil works 19.2 5.5 24.7 Equipment 39.7 93.0 132.7 Pre-production works 11.9 - 11.9 Technical assistance, training and engineering - 7.5 7.5 Base Cost (Jan.-1985 prices) 93.7 117.1 210.8 Physical contingencies 14.1 12.4 26.5 Price contingencies 49.7 25.3 75.0 Installed Cost 157.5 154.8 312.3 Working capital 8.0 0.2 8.2 Total ProJect Cost a/ 165.5 155.0 320.5 Interest during construction - 36.5 36.5 Total Financing Required 165.5 191.5 357.0 a/ The project is exempted from import taxes and duties. Financing Plan Local Foreign Total (US$ million) IBRD loan - 126.0 126.0 FR Germany grant 1.9 1.9 UNDP grant 0.4 0.4 Government contributions 157.5 63.0 220.5 Local bank loans 8.0 0.2 8.2 Total 165.5 191.5 357.0  -vi- Estimated Disbursements: Bank FY 1985 1886 1987 1988 1989 1990 1991