Savings of USD 27,113 million by means of solar electricity on Mining at northern Chile
In this article we will discuss the potential gains due to energy savings which will mean migrating a portion of the power consumption of mining from fossil to solar PV. We will also see how these savings are transformed in increased profits and subsequently higher valuation for the mining companies. Northern Chile mining seems to turn the leading region worldwide on solar energy for the next 15-25 years.
The team partners of renewables4mining conducted in late 2013 a research for technical and financial modeling in a pipeline of 67 plants and photovoltaic projects in the mining regions of northern Chile (ongoing, approved and / or pending final approval PV projects).
NOTE: The heading figure of this article illustrates an executive summary about the savings (USD) resulting from substracting the cost of power generation by the current energy mix (diesel & coal) of northern Chile to the cost of investment and O&M of Solar PV plants on current active PV project pipeline (end 2013). Also schematically it illustrates the geographical location of the 4 Chilean regions studied.
«Big Picture» approach
The Chilean miners are lucky, the geographical and climatic conditions at far north country would save 27 billion dollars in 25 years thanks to the production of 187.47 TWh of electricity from 5,007 MW Solar PV installations foreseeably could be installed between 2014 and 2017.
If this 187.5 TWh / 25 years were generated in a Business As Usual Model (mainly coal and diesel), the economic cost would exceed 40 billion USD with an average price of 216 USD / MWh.
First cost approach in the study was based on «turnkey» model which means avoiding financial costs. In the case that these solar plants would be leveraged with «project finance» and secured by PPA, the total savings would decline from 27 billion to 17.5 billion. It’s because the costs of «financial restructuring» would amount to 35.19%, in other words 9.5 billion dollars.
¿What interest have known these prior data??
The upfront Capex investment could go free!
What these data lead background? Energy savings can be «accounted for» an increase in EBITDA from mining companies. Thus the valuation of mining companies would increase. So what would be the increase in value of the mining cluster in northern Chile by these photovoltaic savings? Let’s look below:
8.89 billion dollars of upfront capital investment linked to the engineering, procurement and construction of these 67 photovoltaic plants are needed. If the increase of business value, based on the previously explained savings, exceeded the upfront investment, thus, Capex financed goes «free».
And how and why we can make such a claim?
The increase of EBITDA leads to the rise on Mining Valuation
Roughly, the official system of mining valuation indicates that the value of a mining business (by means of discounted free cash flow systems) is the ratio between EBITDA and WACC, then we measured in each of the 67 projects in the pipeline:
- (a) FIRST:
The energy savings
=
(Fossil fuel electricity costs)
–
(cost of solar PV electricity).
This savings imply corresponds to a growing EBITDA impliying the increase of mine valuation.
- (b) SECOND
… the weighted cost of capital (WACC).
Our research has been taken into account 8 variables related with the WACC for each project. We developed a for sensitivity analysis new methodology for PV Plant investing in Copper Mines with the corresponding KPI.
Through this analysis, the data clearly illustrate that Chilean mining companies would increase their business / company value by using Solar PV in the following terms:
- Increase value of 19.233 million dollars if the mine follow the way of the «turnkey» model.
- Increase value of 12.413 million dollars if they used the leveraged model (ie Project Finance, PPP)
And if we compare this value increase with the upfront investment cost (8.89 US$ billion), we conclude the gain in value business exceeds the capex requirements. In fact, the «net present value of this new business value» presents as a «free finance collateral». Then, funding could be resolved with specific corporate bonds emission or other financial weapons. WOW!!
Chilean regions of «Norte Grande»
We will now address how it would affect the installation of photovoltaic projects in each of the four regions of the mining cluster of northern Chile: Arica, Antofagasta, Atacama and Tarapaca.
1. Active project pipeline of Solar PV on Mining at Arica Region
We have analyzed 8 projects with a total capacity of 442 MW and the most important findings include:
- These 8 solar facilities generate 689,832 MWh in the first year and 558,934 MWh in the year 25
- The total production in 25 years reach 15,470 GWh
- Photovoltaic production allow savings of 2,091 million dollars in 25 years compared to the energy mix of current fossil fuels production
- These savings represent annual mine revalorization between USD 690 and 1,160 million
2. Active project pipeline of Solar PV on Mining at Antofagasta Region
31 projects and solar PV plants of this mining region with a total capacity of 3226.8 MW were analyzed. The most significant results include:
- These 31 solar PV facilites generate 5.31 terawatts hour (TWh) in the first year of production and 4.76 TWh in the year 25
- The total producción in 25 years period will reach the 119 TWh (119,000 GWh)
- Antofagasta, with an average annual production of 4.75 TWh photovoltaic year, is the Chilean region of greatest potential
- This production will allow savings of 17,62 billion USD in 25 years compared to equivalent fossil fuel production.
- These savings can become EBITDA growth divided by the WACC, produces an increase in mining valuation of
- 10 billion USD (for leveraged model, Project Finance PPP)
- and 14.7 billion USD (for Model Turnkey)
- Upfront Capex investment required would be around USD 5,500 million.
- The Antofagasta mining and earn over 10 billion U.S. in 25 years (the difference between the increase in valuation and Capex)
3. Active project pipeline of Solar PV on Mining at Atacama Region
11 projects and solar PV plants related to this mining region with a total capacity of 609.1 MW were analyzed. The most significant results include:
- These 11 facilities will produce 926,441 MWh in the first year and 750.417 MWh in the year 25
- The 25 years power generation points to 20.75 TWh and the average year production achieve the 830 GWh
- Total savings reach to 3.28 USD billion in 25 years.
- The average valuation gains would range from 1.3 to 2 USD billion.
- The upfront Capex needed is USD 1.123 million
4. Active project pipeline of Solar PV on Mining at Tarapacá Region
We have analyzed 17 PV projects / plants with a total capacity of 794.6 MW and the most relevant results include:
- The PV plants will produce 1.27 TWh for the first year and 1.03 TWh for the year 25
- The 25 years power generation leads to 28.53 TWh with an average production of 1,411 GWh/year
- Total savings will achieve 4.121 million USD at the Tarapacá region during 25 years
- The average valuation gains would range from 1.75 to 2.7 billion USD
- The upfront Capex needed would be about 1.446 million USD
How are the total costs divided?
Photovoltaic PV costs of the Chilean mining plant, taking a regional average financial leverage for the next 25 years will be 14,590 million dollars divided into:
- Capital Expenditure (Capex): 8.86 billion dollars
- Operation and Maintenance Expenses (Opex): 4.49 billion dollars
- Finance costs: 830,26 million dollars
- Income Taxes: 409,74 million dollars.
TO BE CONTINUED ... In a future article we will discuss about how unit costs (per kWh) capital as well as the operation and maintenance expenses, financial expenses and taxes to the electricity tariff for 25 years in each of the mining areas. We'll talk about the LCOE (Levelised Cost of Electricity).
