European Lignite Mines Benchmarking

Sanitized Report

European lignite industry, at a glance

The global lignite production is approx. 1 billion metric tons for 2012 with major production coming from Europe, China, Australia and Russia. Europe accounts for roughly 40% of global lignite reserves. The top European producers include Germany, Greece, Poland and the Czech Republic. Outside the EU, countries with significant lignite production are Turkey (75,6 Mt) and Serbia (37,5 Mt). Power generation companies are the largest consumers of lignite in the EU (90% to 95% of the production) and nearly all the lignite production is consumed domestically, with supply and demand being closely matched.

Lignite is the lowest rank of coal with a gross calorific value less than 4.165 kcal/kg. Lignite comprises around 23% of overall global proved recoverable reserves of coal, however, accounts for about 13% of global coal production by volume in tons only.

Lignite production in the EU-27, 2012

EU-27 Lignite Producers

Production 2012 (Mt) %

Bulgaria 31,0 7%Czech Rep. 43,5 10%Germany 185,4 43%Greece 62,8 14%Hungary 9,2 2%Poland 64,2 15%Romania 30,2 7%Slovak Rep. 2,4 1%Slovenia 4,5 1%Total 433,2 100%

Greece62,8 Mt

Slovenia4,5 Mt

Czech Rep.43,5 Mt Slovak Rep.

2,4 MtRomania30,2 Mt

Romania30,2 Mt

Bulgaria31 Mt

Hungary9,2 Mt

Poland64,2 MtGermany

185,4 Mt

The characteristics of lignite make it unsuitable for trade unless the distances involved are very short. Lignite deteriorates rapidly and may ignite spontaneously when stockpiled, therefore producers and consumers avoid accumulating large stockpiles of lignite. In addition, the high water content of lignite makes it prohibitively expensive to ship and handle on a cost per energy unit basis. Due to its difficult handling, the cost of transport is very high and seaborne trade is considered unsuitable for safety and economic reasons. As a result, lignite is usually burned in power stations constructed very close to mines and the exported volume of lignite is insignificant in comparison with coal exports. Over 95% of lignite is consumed for power generation in electricity and combined heat power plants.

Although emphasis on renewable energy sources is increasing, lignite can still play an important role even in an energy system largely based on renewables. The German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety anticipates that in 2030, one in eight kWh will still come from lignite power and assumes that the role of lignite in the German energy mix will be rather stable or slightly decreasing. Lignite is considered not only as an important factor for energy security, but also a convenient and cost-efficient way of generating electricity. Even at a CO2 emission allowances price of €20/tCO2, lignite remains — besides nuclear power — the cheapest source of electricity generation (source: Cornerstone, October 2013).

433 Mtis the lignite production of the EU-27for 2012

43%of the EU-27 production

comes from Germany

95%of lignite is used for

electricity or heat generation

EY’s Benchmarking approach

Research was conducted across European countries, operating open-cast lignite mines. With the valuable help of participating companies and regulators, EY conducted primary research in 6 European countries of key interest, namely Bulgaria, Czech Republic, Greece, Hungary, Poland and Romania. The countries in scope produce approx. 241 Mt of lignite, covering more than half of the European lignite production (approx. 55%). Eventually, our study manages to cover 201 Mt of lignite production, the equivalent of 46% of the European lignite production.

Benchmarking methodology

• The peer group consists of 7 top lignite producers in Europe and includes 20 open cast mines in total, from Bulgaria, Czech Republic, Greece, Hungary, Poland and Romania. The average production of the peer group is 10 Mt of lignite, with average lower calorific value of approx. 1.800 kcal/kg and an average stripping ratio of 4,5 m3/Ton.

The goal is to evaluate key performance indicators (KPIs) around cost performance, productivity and employees’ safety. Our metrics include production cost per ton, production cost per m3, production cost per Gcal, production per FTE, injuries and fatalities rates.

• The data refers to a 3-year average aiming to smooth out any temporary or unusual effects. A validation process was performed to ensure data confidence. Data was normalized and brought to an equal basis to facilitate fair comparisons. Widely recognized adjusters were used for:• Foreign exchange adjustments (source: World Bank)• Inflation for prior years’ data (source: World Bank)• FTEs for differences in working hours (source: European Foundation for the improvement of Living and Working

Conditions)

• In order to ensure anonymity, the results presented in graphs render impossible the identification of specific countries and mines. There is no correlation between the identity characters (A, B, C etc.) presented in different graphs, as the KPIs are presented in order of magnitude.

EU-27 countries that do not produce Lignite

EU-27 countries that produce Lignite and are available

EU-27 countries that produce Lignite and are not available

Non EU-27 countries

We would like to sincerely thank the participating companies and regulatory authorities that supported the success of this extensive benchmarking study.

our study covers

201 Mtof lignite production

the equivalent of

46%of EU total lignite

production

OR

Measuring the effectiveness of mines

Production cost per unit

Cost metrics

A common performance indicator for cost effectiveness of mines is production cost per cubic meter (m3), since the core business of mines refers to excavations. However, this performance needs to be linked to the cost per ton of lignite excavated as well as to the cost per Gcal, since the ultimate goal of the lignite mine is to provide the neighboring power plant with the required quality of fuel. In the chart on the right the cost per ton, per Gcal and per m3 for each company are presented.Benchmarking findings demonstrated a production cost per ton ranging from 5,1 to 20,3 €/Ton. This metric is mainly affected by the geological characteristics of the mine and the volume of the quantities produced. Mines with lower stripping ratios demonstrate a better performance, as lignite production is achieved with less excavations. Another factor that affects “cost per ton” is changes in demand, due to the fact that mines’ setup is relatively fixed based on reserves, useful life and geological conditions.

As revealed from the benchmarks, the above range of production cost per ton is narrowed when examining production cost per m3, with a range from 1,4 to 3,3 €/m3. Differences in stripping ratios are eliminated in this metric and cost effectiveness is judged in a more equal basis, since our sample includes mines with a wide range of stripping ratios of 2,2 up to 9,5 m3/Ton. It was found that mining companies with the lowest performance operate with a higher number of employees. Moreover, companies with a proper mix of excavations conducted between internal means and contractors, exhibit a better performance in the cost metrics.

Lignite quality is of paramount importance and affects heavily the cost effectiveness of the mines. The neighboring power plants have specific requirements concerning heat input and average calorific values and, as a result, the mine is normally obliged to deliver lignite of predefined quality.

In our sample mines with average lower calorific value from approx. 1.100 to 4.200 Kcal/Kg are included, leading to a range of production cost per Gcal of 3,2 to 10,4 €/Gcal. It was found that even if a field can produce lignite of a standard quality, this quality can be deteriorated during the excavation if the mine fails to choose the appropriate equipment (e.g. bucket-wheel excavators vs. shovels) and techniques.

Keeping lignite competitive

Although a less expensive source of fuel, domestically consumed, lignite has to compete with natural gas, renewable energy sources and strict EU environmental legislation framework on power plants’ emissions. Mines should undertake measures towards enhancing lignite quality and continuously assess their effectiveness in terms of cost, productivity and safety of employees in order to remain competitive.

1,4

3,3

2,3

1,9

1,5

2,7

0,0

3,2

6,5

10,4

6,7

8,7

8,2

6,4

5,1

13,1

13,2

13,6

14,2

15,0

20,3

0 5 10 15 20 25

A

B

C

D

E

F

G

/unit

/Ton /Gcal /m3

Definitions

Production Cost: All production costs except supportingTons: Lignite produced in tonsm3: Amount of excavations in a given year measured in m3

Gcal: Computed from Tons, using average lower calorific value

Production cost per Ton, Gcal and m3. Note: Production cost per m3 is not available for company G.

Measuring the effectiveness of mines

Productivity metrics

In order to assess productivity in the mines, the metric of production per employee was examined across the mining companies.

The level of outsourcing affects the performance in this metric, since tons can be excavated from both internal resources and contractors. Research shows that streamlining outsourcing could increase the productivity of the mines and lead to cost savings.

The mining equipment has a crucial role in the productivity. Depending on the geological characteristics of the mines, either bucket-wheel excavators or conventional equipment (e.g. shovels) are used. Shortfall of skilled labor has led certain mines to produce lignite of inferior quality than could have been achieved using the proper techniques.

In the graph below the productivity of mines’ employees is presented, as measured by the production of lignite Tons per FTE.

Production per FTE (Tons/FTE)

1.626 2.398

3.879 4.416 5.608

6.935

11.192

0

2.000

4.000

6.000

8.000

10.000

12.000

A B C D E F G

Safety metrics

Apart from cost and productivity, safety is of paramount importance for mines. It can be observed that there are mines with higher injury and fatality rates, partially explained by geological difficulties and lack of strict adherence to safety rules.

Injuries and fatalities can be minimized through an intensive program of employees’ awareness and investments on technical safety measures. Except for the undisputable concern for human protection, “hard costs” can be minimized from possible litigations or indemnities. Below the injury rate and fatality rate per 100 FTEs are presented.

0,33 0,37 0,49 0,92 1,06

2,15

0,0

0,5

1,0

1,5

2,0

2,5

0 0

0,004

0,012 0,014

0,023

0,000

0,005

0,010

0,015

0,020

0,025

A B C D E F

Injury Rate (per 100 FTEs)

Fatality Rate (per 100 FTEs)

Definitions

Tons: Lignite produced in tonsFull Time Equivalents: Average number of permanent/temporary employeesInjury rate: Number of accidents and illnesses per 100 FTEsFatality rate: Number of fatalities per 100 FTEs

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For more information, please contact:

Michalis RodakisPartner | EY Advisory Services

Tel.: +30 210 28 86 074Mobile: +30 6937 054 295E-mail: michalis.rodakis@gr.ey.com

Marianna SfontouriExecutive Director | EY Advisory Services

Tel.: +30 210 28 86 074Mobile: +30 6942 847 957 E-mail: marianna.sfontouri@gr.ey.com