- Problem Definition
I’ve been described the topic above during my previous class because there is not yet available intensive study concerning MARR (Minimum Attractive Rate of Return or “hurdle rate”) in Indonesia for mining. For Simatupang2014 class, I will use Analytic Hierarchy Process (AHP) based on risk of project location and type criteria for developing mining MARR.
Figure 1 Mining Activity
- Identify the Feasible Alternatives
There is not yet standard for mining MARR in Indonesia which divided the MARR for project. For first approach I take MARR from reference as follows:
- For high risk project type, the MARR value is 25%
- For moderate risk project type, the MARR value is 18%
- For low risk project type, the MARR value is 10%
These values will be compared later with result using AHP model.
- Development of the Outcome for Alternatives
In sequences described the modelling for mining MARR as follows:
1. WACC Value-Cost from Capital
I take the WACC 12.40 % of P90 based on the previous simulation.
2. MARR Formula
The MARR formula reference for AHP model is:
MARR for mining = WACC + Country Risk + Project Risk
Country risk premium for Indonesia is 4.13%
Project risk divided into project stage (exploration and operational), project location (Java, Sumatera, Kalimantan and Papua) and mining method (surface mining and underground mining)
3. AHP Diagram
AHP diagram developed for this simulation present in Figure 2:
Figure 2 AHP diagram for Mining Activity
4. AHP Model Result
AHP model gives the risk result for project present in Figure 3:
Figure 3 Project Risks Result
- Selection Criteria
I want to find the range of mining MARR based on country and project risk in Indonesia using AHP tool and compare it with previous reference.
- Analysis and Comparison of the Alternatives
It shows on above Figure 3, Papua is the worst place concerning project risk compare to Java. It is logic considering infrastructure transport, field condition, labor force …etc. In other hand Java has low risk in project due to accessibility compare to Papua.
- Selection of the Preferred Alternatives
Finally I can develop the mining MARR range for Indonesia as follow:
Minimum mining MARR in Indonesia = 12.40% + 4.13% + 0.70% = 17.23% or rounded to 17%
Maximum mining MARR in Indonesia = 12.40% + 4.13% + 27.31% = 43.84% or rounded to 44%
In short the range for mining MARR in Indonesia is between 17% – 44%. The previous 18% – 25% MARR for moderate and high risk project is within this range but not the low risk project, 10% MARR it seem too low.
- Performance Monitoring and the Post Evaluation of Result
This range of MARR could be used as 1st assessment and required further study for final confirmation. The simulation of Mining MARR using AHP could also extend for specific mining method such as drift wall, shaft, high wall and others.
Sullivan, William G., Wicks, Elin M., & C.Patrick, Koelling. (2012), Engineering Economy (15th Edition) (pp.531-533). New Jersey, United States: Prentice Hall.
alaskafisheries.noaa.gov. (2006). An Illustrated Guide to the Analytic Hierarchy Process. Retrieved from http://alaskafisheries.noaa.gov/sustainablefisheries/sslmc/july-06/ahptutorial.pdf.
W10_AP_ MARR For Coal Mining Business in Indonesia-Mercure2013). Retrieved from http://mercureaace2013.wordpress.com/2013/03/02/w10_ap_marr-for-coal-mining-business-in-indonesia/
Damodaran, Aswath. (2013). Country Default Spreads and Risk Premiums. Retrieved from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html.