2011 02 22 Final Report Reserve Evaluation PV for HSEIMC-Montan Consulting GmbH RESERVE EVALUATION...

IMC-Montan Consulting GmbH

FINAL REPORT

PROJECT: Reserve Evaluation of the Velenje Mine, Slovenia

CLIENT:

Holding Slovenske Elektrarne d.o.o.

Ljubljana, Slovenia

CONSULTANT: IMC-Montan Consulting GmbH

Am Technologiepark 1

D-45307 Essen, Germany

Tel.: +49 (0)201 / 172-1507

Fax: +49 (0)201 / 172-1727

E-Mail: [email protected]

ESSEN (GERMANY), 22.02.2011

Author(s): Ulrich Ruppel, Ralph Schlüter, Maurizio Boaretto, Winsor Lewis, Florian Beier Important Notice: This report has been prepared by IMC-Montan Consulting GmbH (“IMC-MC”) for the exclusive use of the Holding Slovenske Elektrarne d.o.o. (“HSE or Client”) on the basis of instructions, information and data supplied by the Client. No warranty or guarantee, whether express or implied, is made by IMC-MC with respect to the completeness or accuracy of any aspect of this document and no party, other than the Client, is authorized to or should place any reliance whatsoever on the whole or any part or parts of the document. IMC-MC does not undertake or accept any responsibility or liability in any way whatsoever to any person or entity in respect of the whole or any part or parts of this document, or any errors in or omissions from it, arising from negligence or any other basis in law whatsoever. Likewise IMC-MC disclaims liability for any personal injury, property or other damage of any nature whatsoever, whether special, indirect, consequential or compensatory, directly or indirectly resulting from de publication, use of application, or reliance on this document.

HOLDING SLOVENSKE ELEKTRARNE


RESERVE EVALUATION OF THE VELENJE MINE

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JANUARY/FEBRUARY 2011 PAGE 2 OF 50

TABLE OF CONTENTS

1 INTRODUCTION .................................................................................................... 7

1.1 BACKGROUND ................................................................................................................ 7

1.2 SCOPE OF WORK ........................................................................................................... 7

1.3 SITE VISIT ...................................................................................................................... 8

1.4 REFERENCES ................................................................................................................. 8

2 SITE CONDITION ................................................................................................ 10

3 GEOLOGY ......................................................................................................... 11

3.1 GENERAL GEOLOGY ..................................................................................................... 11

3.2 EXPLORATION AND MINING HISTORY ............................................................................. 16

3.3 POTENTIAL MINING RISK ............................................................................................... 16

3.3.1 Hydrogeology ........................................................................................................... 16

3.3.2 Gas ........................................................................................................................... 17

3.3.3 Faulting ..................................................................................................................... 17

4 RESOURCE AND RESERVE ESTIMATE ............................................................................ 18

4.1 COAL QUALITY ............................................................................................................. 18

4.1.1 Background .............................................................................................................. 18

4.1.2 Velenje Mine ............................................................................................................. 18

4.1.3 Calorific Value .......................................................................................................... 19

4.2 ADEQUACY AND CATEGORIZATION OF THE MINEABLE RESERVE CALCULATION ................ 20

4.2.1 Background .............................................................................................................. 20

4.2.2 Slovenian System of Reserve Calculation ............................................................... 21

4.2.3 Coal Reserves at Velenje Mine ................................................................................ 22

4.3 DMT/IMC RESOURCE ESTIMATE .................................................................................. 25

4.4 COMPARISON BETWEEN THE RESOURCE/RESERVE STATEMENT 2008 OF PV AND

DMT/IMC’S RECALCULATION ....................................................................................... 26




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5 MINING ............................................................................................................. 27

5.1 INTRODUCTION ............................................................................................................. 27

5.2 GEOTECHNICAL CHARACTERISTICS ............................................................................... 27

5.3 MINE LAYOUT ............................................................................................................... 28

5.4 UNDERGROUND FACILITIES ........................................................................................... 28

5.5 MINING METHOD .......................................................................................................... 29

5.6 NEW INVESTMENTS ...................................................................................................... 32

5.7 MINING LOSSES ........................................................................................................... 33

5.8 DEVELOPMENT OF MINING LOSSES ............................................................................... 34

5.9 MINING EQUIPMENT AND GENERAL UNDERGROUND EQUIPMENT .................................... 35

5.10 PRODUCTION PLANNING ............................................................................................... 37

5.11 LIGNITE DEMAND VERSUS REMAINING MINEABLE RESERVES ......................................... 39

5.12 SUBSIDENCE ................................................................................................................ 39

5.13 WORK ORGANISATION AND PERFORMANCE ................................................................... 40

6 FINANCE ........................................................................................................... 43

6.1 CAPITAL EXPENDITURES ............................................................................................... 43

6.2 OPERATIONAL EXPENDITURE ........................................................................................ 46

ANNEX I ...................................................................................................................... 50




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LIST OF TABLES

TABLE 1: BASIC COAL QUALITY PARAMETERS ........................................................................................... 18

TABLE 2: LONG TERM HISTORY MATCHING OF PROJECTED AND ACTUAL HEATING VALUES AND PRODUCTION

FOR THE PERIOD FROM 2003 TO 2010 ........................................................................................ 20

TABLE 3: REQUIRED DEGREE OF EXPLORATION FOR SLOVENIAN RESERVE CATEGORIES ACCORDING TO

“RULES ON CLASSIFICATION AND CATEGORIZATION OF SOLID MINERAL RESERVES AND

RESOURCES”. ............................................................................................................................ 22

TABLE 4: GEOMECHANICAL PARAMETERS OF THE MAIN LAYERS .................................................................. 27

TABLE 5: CAPITAL EXPENDITURES UNTIL 2027 IN EURO ............................................................................ 45

TABLE 6: HISTORICAL OPERATIONAL EXPENDITURES ................................................................................. 46




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LIST OF FIGURES

FIGURE 1: GEOGRAPHY OF THE VELENJE – ŠOŠTANJ AREA ......................................................................... 10

FIGURE 2: OUTLINE OF THE LIGNITE BOUNDARY (YELLOW) AND MINE CONCESSION AREA (RED) ...................... 10

FIGURE 3: SECTION THROUGH VELENJE BASIN ........................................................................................... 11

FIGURE 4: STRATIGRAPHIC SEQUENCE ....................................................................................................... 12

FIGURE 5: DEPTH OF TOP OF COAL SEAM (TOP BALANCE SHEET RESERVES). NOTE THAT SOME AREAS ARE

INFLUENCED BY FORMER MINING ACTIVITIES ................................................................................ 13

FIGURE 6: DEPTH OF BOTTOM OF CLEAN COAL (BOTTOM BALANCE SHEET RESERVES) ................................. 14

FIGURE 7: STRUCTURAL MAP OF THE VELENJE ............................................................................................ 14

FIGURE 8: GEOLOGICAL CROSS SECTION A – B (FOR POSITION OF SECTION SEE FIGURE 7)........................... 15

FIGURE 9: DISTRIBUTION OF COAL SEAM THICKNESS BY DMT (TOP AND BOTTOM BALANCE SHEET

RESERVES) BASED ON PV MODEL .............................................................................................. 15

FIGURE 10: CALCULATED COAL QUALITY (CALORIFIC VALUE) FOR THE PERIOD FROM 2011 TO 2054 IN MJ/KG

(WITH RED LINE INDICATING LONG TERM AVERAGE OF CV = 10,330 KJ/KG) .................................. 19

FIGURE 11: SLOVENIAN CLASSIFICATION SCHEME (LEFT) AND CORRESPONDING JORC CLASSIFICATION

(RIGHT) ..................................................................................................................................... 24

FIGURE 12: RESOURCE/RESERVE FIGURES FROM PV’S 2008 REPORT ........................................................... 24

FIGURE 13: RESOURCE/RESERVE FIGURES FOR 2010 BASED ON DATA PROVIDED BY PV ................................ 25

FIGURE 14: RESOURCE/RESERVE FIGURES FROM PV’S 2008 REPORT COMPARED TO FIGURES FROM

DMT/IMC CHECK ...................................................................................................................... 26

FIGURE 15: VELENJE MINING METHOD IN TWO SLICES OR LEVELS OF THE DEPOSIT ......................................... 30

FIGURE 16: UNDERGROUND MINING WORKS AND INFRASTRUCTURE WITHIN THE CONCESSION AREA ................. 32

FIGURE 17: LOCATION OF THE NEW SKIP SHAFT ............................................................................................ 32

FIGURE 18: ARRANGEMENT OF THE LOADING STATION UNDERGROUND ........................................................... 33

FIGURE 19: NEW HAULAGE LAYOUT COMPARED WITH OLD ONE (RED) ............................................................. 33

FIGURE 20: DEVELOPMENT OF THE EXCAVATION LOSSES OVER THE LAST YEARS ........................................... 34

FIGURE 21: BUCYRUS DBT 2200/4200 TWO LEGS SHIELD SUPPORT DEVELOPED FOR PV .............................. 35

FIGURE 22: GPK ROAD HEADER AND STEEL SUPPORTS ................................................................................. 36

FIGURE 23: EXAMPLE OF SUPPORT MP2 PROFILE (SECTION UP TO 20 M2) ...................................................... 37




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FIGURE 24: LONG TERM PRODUCTION PLANNING UNTIL 2054 IN TONNAGES AND CALORIFIC VALUE .................. 38

FIGURE 25: SUBSIDENCE FORECASTS DUE TO THE MINING WORKS ................................................................. 40

FIGURE 26: SUBSIDIARIES OF VELENJE MINE ................................................................................................ 40

FIGURE 27: TREND OF EFFICIENCY RATE SINCE 1990 TILL 2010 .................................................................... 41

FIGURE 28: TREND OF EFFICIENCY FROM 1990 TILL 2010 FOR EXPLOITATION AND OVERALL MANPOWER ......... 41




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1 INTRODUCTION

1.1 BACKGROUND

Holding Slovenske Elektrane (HSE) is the parent company of the HSE Group, with its head office in Ljubljana. It is a state owned company. Premogovnik Velenje d.d, which is supplying lignite from an underground mine to the nearby lignite fired thermal power plant in Šoštanj (TEŠ), is a member of the Group as is Šoštanj. TEŠ has undertaken a construction project of a new 600 MW power generation unit which is already underway. As the project represents a huge financial investment, the HSE supervisory board has requested the verification of lignite reserves in the Velenje mine.

Mine activity has taken place for more than 130 years and so far more than 200 million t of lignite have been mined. Total production feeds the nearby Thermal Power Station of Šošstanj, supplying approximately 4.0 million tonne of run of mine coal per year.

1.2 SCOPE OF WORK

In order to secure the fuel supply the supervisory board of HSE requested an independent review of the reserves of the mining company Premogovnik Velenje (PV).

The services were performed on the basis of the studies/research which has been performed by Premogovnik Velenje. IMC was aware of the fact that the studies/research are based on the Slovenian national standards and regulations i.e. “Pravilnik o klasifikaciji in kategorizaciji zalog in virov trdnih mineralnih surovin” (The Rules), and has considered “The Rules” at performing the services for HSE. In particular, IMC has taken into account “The Rules” to ensure comparability of the results of its services performed for HSE with the studies/research which have been performed by PV, all regarding quantities of the coal reserves of PV.

IMC has audited the PV’s figures in the country own system with a description of the relationship between the “The Rules” and JORC, outlining both categories. The mandate was not for a full audit of the reserves, which would require a full investigation of the ‘Modifying Factors’ as defined by JORC.

IMC has restated the reserves and resources in accordance with the JORC resp. JORC-equivalent and clearly stated weather the reserves/resources are suitable for the lifetime of Unit 6 of the power plant.

The final scope of services provided by IMC to HSE includes:

Assessment of quantity and heating value of coal reserves, and

Cost prices forecast in relation to the change of extraction conditions over time period until 2054.

The review by IMC was limited to the areas described above. IMC has assumed that there are no conflicts or problems pertaining to the environment, operations, sales profile and other operational companies or departments within the mining operation. IMC will quote the




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PV as the source of any such information as no IMC resources have been allocated to investigate or confirm the statements.

1.3 SITE VISIT

A site visit was conducted by four IMC/DMT experts from 11th to 14th of January 2011 at the Velenje mine site in Slovenia.

The participants from IMC/DMT were:

Ulrich Ruppel is IMC´s Mining Director and principal mining engineer who can reflect upon 29 years of experience in all aspects of mining, roadway heading and rock support, especially in deep mines with very complex rock mechanical conditions.

Ralph Schlüter as nominated Chief Geologist of DMT with a bright experience record most of the coal mining areas in the world and some 32 years in the mining industry.

Maurizio Boaretto is IMC’s expert o all questions of mining and infrastructure. He has gained extensive experience in projects all over the world in more than 40 years.

Winsor Lewis is IMC-MC`s senior economic expert with in dept knowledge of human resources and management aspects of coal mining projects and an in-depth understanding of underground coal mining from both a financial and practical mining viewpoint..

The site visit included:

Underground visit in panel operating with the Velenje Method and development face

Surface visit to see the effect of mine subsidence, creating the Velenje Lake

Visit to the surface facilities

1.4 REFERENCES

This Report is based on the information, discussions, and a site visit (both surface and underground carried out in Premogovnik Velenje from 11th to 14th of January 2011.

Information was provided during detailed discussions with the following:

Milan MEDVED Director

Bojan LAJLAR Head of technical department

Marijan LENART Manager of Hydrogeology Department

Tatjana KRENKER Head of Controlling Department

Ivan POHOREC Techincal Manager – Plant Operation

Bozo SPEGEL Manager of Coal Mining Project




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Igor VEBER Senior Geologist

The works organization included:

Detailed discussions about the geology of Velenje deposit

Detailed analysis of coal quality, with particular attention to the variability of Calorific Value

Discussions about the peculiar Velenje Mining Method

Detailed discussion with the specialists of the Project and Planning Department about the mining sequence

Detailed information included in the report was given by the Mine Direction and Staff, including pictures, drawings, tables and diagrams. A list of received material is outlined below:

The Velenje Mine Management was cooperative in providing the requested data and they were responsive in answering questions of the Consultants. The Consultants have recognized the high professional competence of the involved counterparts from the Velenje Mine.

Additional information has been gathered from papers of public domain, such as Congress Paper, specialized technical magazines, papers and documents available in the internet.




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2 SITE CONDITION

Velenje Coal Mine is one of the largest underground mines in Europe. It is located in the Saleska Valley in the northern part of Slovenia, in the area between the township of Sostanj and the township of Velenje, about 55 kilometres northeast of the capital of Slovenia. The overall coal basin covers an area of about 21 km2.

Velenje Coal Mine covers an area of 1,104 hectares. On the surface there is a recreation centre, sports grounds, infrastructure and some buildings.

Figure 1: Geography of the Velenje – Šoštanj area

The Velenje deposit and the Velenje underground mine have direct access to the public road and rail network. Highway no. 4 goes from highway no. 1 (E 57) in a northerly direction to the city of Velenje. Coming from Velenje, highway no. 425 crosses Sostanj into north-western direction. In addition to the road connection there is also a railway line. It also runs from the south across Velenje, directly passing the mine and Sostanje power plant to the north-western. Concession licence and outlines of the lignite boundary are shown in the below figure.

Figure 2: Outline of the lignite boundary (yellow) and mine concession area (red)




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3 GEOLOGY

3.1 GENERAL GEOLOGY

The Velenje coal deposit is located in the Šaleška Valley. Elevation of the area varies between 350 and 400 m a.s.l. The geologically young depressional structure that is containing the deposit is bound by two major subparallel NW – SE trending tectonic features: the Šoštanj Fault in the south and the Smrekovec Fault in the north. Major faults have recently been interpreted as dextral strike/slip faults with lateral movements (of up to 25 km) exceeding vertical movement by far.

The northern part of the Plio-/Pleistocene coal bearing sediments has a basement made up of mostly Triassic dolomites and some early Tertiary marls and clastics. In the depocentre of the Velenje depression south of the Velenje fault, a more than 2.000 m deep well still exists in Tertiary rocks. The lowest sediments are mainly tuffitic and andesitic rocks of Oligocene and Miocene age, followed by sands, silts and clays from the Middle Pliocene. In total, rocks of Pliocene and Pleistocene age deposited in the depression are up to 1.200 m thick. Obviously, subsidence of the area was quite rapid to accommodate such a thick sequence from a terrestrial phase over the swampy to the lacustrine phase and reverse.

Figure 3: Section through Velenje Basin

Only one coal seam is of economic significance. This seam was formed in an elongated basin which started within a marshy area with a riparian type flora with trees. With deepening, and subsequent flooding of this depression, a swampy lake was formed with a continuous change to a non-woody flora. Investigation of the coal petrological constituents shows a unidirectional development of the facies in the part of the deposit within the Velenje depression. At least in the actual and future mining areas, the relative uniform quality shows that sedimentation occurred without major interruptions. Only to the north, where older basement is underlying the northern rim of the deposit, is there a splitting of the seam into a number of seamlets, separated by fluviatile clay and sandstone interlayers.

During the accumulation of coal, and continuing after the end of coal formation, the depression turned into some kind of a half-graben with the depot-centre moving towards the south.




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The top of the coal shows a sharp boundary against a 2 to 3 m thick isolating marl layer with mollusc shells in the roof. Higher up, laminated mudstones including occasional occurrences of coal follow with fluviatile sandy facies layers and lenses of fine to coarse clastic sediments, which are of major importance for water management, accompanied a general coarsening upward trend.

Figure 4: Stratigraphic sequence

In the centre, the elevation of the seam top lies just below sea level (approximately 400 m below surface. Towards the rims, the seam top lies at approximately +100 m a.s.l (300 m below surface). Accordingly, the base of the coal section (> 8.4 MJ/t) lies at -180 m b.s.l. in the centre part (Figure 5 and Figure 6).




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Figure 5: Depth of top of coal seam (top Balance Sheet Reserves). Note that some areas are influenced by former mining activities

Actual and future mining areas are focusing on the part of the deposit with a compact seam with increasing quality (= decreasing ash content) from bottom to top. Waste coal is defined by a minimum heating value of 4.2 MJ/t and, thus, separated from the carbonaceous clays in the bottom (boundary between incombustible and combustible substance). Coal is defined by a minimum of 8.4 MJ/kg. Due to the unidirectional development of the seam, respective resources or reserves are limited by these two quality surfaces at the bottom and by the sharp boundary between coal and roof rock at the top.

The southern part of the deposit is interspersed with northerly and southerly dipping normal faults of considerable displacement as part of the still active Šoštanj fault zone. These faults have been identified when this part of the deposit was mined. Basically, the faulted areas are mined out and/or belong to safety pillars that are not included in the reserve assessment. In the current mine workings a network of fractures representing potential faults are also described. It is, however, questionable whether these fractures indicate any displacements influencing the mining process. Due to the thickness of the seam, faults of several meters displacement will not hamper the mining activities and reduce the reserves by a negligible amount.




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Figure 6: Depth of bottom of clean coal (bottom Balance Sheet Reserves)

Figure 7: Structural map of the Velenje




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Figure 8: Geological cross section A – B (for position of section see Figure 7)

Figure 9: Distribution of coal seam thickness by DMT (top and bottom Balance Sheet Reserves) based on PV model

The position of the coal seam is the shallowest along its rim and deepest in the central part tracing the greater subsidence in the centre of the depression. The development is also underlined by the occurrence of the greatest thickness of 168 m in the centre (Figure 9).




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The resource and reserve calculation in this report is limited to the central area of the Velenje part of the deposit while the other areas are not considered for mining in the near future and/or by conventional mining methods.

Dips are generally orientated towards the centre of the depression- the position of highest subsidence and maximum thickness of coal and total rock sequence. However, the dip is relatively shallow and mainly below 15°- in the northern part, below 8° (Figure 3 and Figure 8).

3.2 EXPLORATION AND MINING HISTORY

First documentation of coal occurrence in the area originates from the 18th century. This coal, however, belonged to the thin seamlets in the roof of the mined seam. The mined seam does not outcrop anywhere in the Velenje Basin.

After sinking the first boreholes in 1873, excavation work commenced in 1885. Currently, 4 Mt of lignite are produced annually. In total, approximately 222 Mt of lignite have been produced until 2009, mainly in the easternmost part where most of the previous underground operations took place. Extraction of large amounts of coal and subsequent subsidence has formed three lakes at the surface. Actual production is taking place under the westernmost and (with 73 m) deepest lake (Lake Družimirje). The other mining induced lakes – Lake Velenje and Lake Škale – are 55 m and 20 m deep, respectively.

So far, more than 600 boreholes with more than 200.000 m total length have been drilled from the surface comprising structural boreholes, water monitoring and dewatering wells as well as for geomechanical measurements. Generally, the holes are cored in order to gain samples for accurate thickness readings and quality data. Core data from surface holes is also confirmed by geophysical measurements. In addition, approximately 2.000 boreholes have been drilled from underground. Drill cores are subject to comprehensive analyses of coal quality and geomechanical parameters.

3.3 POTENTIAL MINING RISK

There are mining risks involved in lignite production at Velenje. These are:

Water inflow,

Methane, and

Faulting.

3.3.1 Hydrogeology

Significant inflow of water comes from various stratigraphic and tectonic units: from Triassic dolomite and earlier Tertiary sands and limestone in the floor and – in particular – from Plio-/Pleistocene sand layers and lenses in the roof. The seam and the marl and mudstone in the roof form major hydrogeological barriers. Here, it is of major importance to maintain the integrity of the isolating layers. Due to their limited degree of consolidation, these layers show some plastic deformation. Argillaceous roof strata can increase in thickness from a few m only up to 50 m. The mining method is adapted, applying less destructive methods in the top of the seam, wherever clay thickness is reduced.




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In order to keep the underground working relatively dry and provide a safe working environment, a comprehensive network of wells, piezometres, pumping stations and pipelines is maintained by the mine. Prior to mining, the water table is lowered down to the working level.

Currently, dewatering and water management is carried out on a routine basis and does not create major problems for ongoing operations. Approximately 2.4 Mm³ annually are pumped from the mine, roughly equivalent to 0.6 m³ of water for 1 t of coal produced.

3.3.2 Gas

The second hazard presents sudden outbursts of crushed coal, dust and gas (methane and CO2). Due to its complexity, this risk is rather more difficult to handle than water inflow. For lignite of this low degree of coalification, there is a considerable amount of methane in the mine released from the coal. Methane consists of a mixture of thermogenic and biogenic (bacterial) CH4. Bubbles in lakes confirm that there is a continuous gas release to the surface.

Part of the gas in the coal shows a certain degree of regular distribution – increasing from bottom to the top of the seam. But there is also additional gas in pockets, probably tectonically influenced parts of the seam. Horizontal movements along the fault pattern are notorious for higher gas yields. Generally, emission of CO2 is greater than of methane. Measured in CO2e, both gases emit approximately 700,000 t per year. For methane, gas yield is between 1.5 and 2.4 m³/t of production. The methane is diluted and transported to the surface in the ventilation stream. Due to the mining method applied, a considerable portion of the remaining methane is collected in the roof goaf of the panel- according to the mine’s estimation, approximately 30 – 50 %.

In order to keep the methane concentration below the safety limit, certain ventilation volumes and, thus, ventilation speed are required. High ventilation speed, on the other hand, increases the dust load in the workings. Therefore, methods of reducing the methane content prior to mining could save money by reducing ventilation and improving working conditions.

It is worth investigating, which measures might be applied. Due to the limited depth and the reasonable permeability in the coal of 1 to 5 mD, the deposit may be suitable for degasification from the surface. In addition, AMM may be an option to reduce gas emissions from old mine workings (possible JI/CDM projects) and to create additional revenues by producing energy from the gas mixture. At least, it has been stated that the volume of CH4exceeds that of CO2 in the old mine workings.

3.3.3 Faulting

Minor faults do not pose a significant threat for the mining operations. Major faults seem to be confined to the area close to, and along, the Šoštanj fault in the south. In comparison to thin seam mining in hard coal, faults with minor displacements of a few m are not important with regard to resource and reserve calculation. However, as mentioned above, they may influence mining operations in view of gas and dust outbursts and destroying integrity of isolating roof layers.




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4 RESOURCE AND RESERVE ESTIMATE

4.1 COAL QUALITY

4.1.1 Background

As with most Eastern European exploration projects, the various parameters of coal and host rock have been extensively tested. Also, geophysical well logging has been performed in order to confirm seam thicknesses (and to some degree coal quality). Most of the coal quality parameter measuring procedures (for instance proximate and ultimate analyses, coal petrography) are directly comparable, since the standard procedures are carried out according to, or have direct equivalents for instance, in the ISO collection of testing procedures. Generally, the degree, the standards and comprehensiveness can be considered as very high. There is no reason to doubt the data that has been acquired during previous exploration.

4.1.2 Velenje Mine

Due to the conformity and thickness of the seam, sampling does not have to be highly selective. Sequence of sampling is approximately 5 m. Wherever changes in the coal structure/quality are visible, a shorter sampling sequence is applied. Annually, an underground drilling program is set up, in order to raise balanced reserves from the B to the A level. All coal cores are sampled and tested. Currently, the quality data base comprises some 6,000 samples from surface and underground boreholes. Production samples are analysed in PV’s laboratory as well as in an independent laboratory. These values are compared with the feedstock samples from the power plant showing, generally, an excellent congruence (see tables below).

According to the ASTM standard, Velenje coal is of Lignite B type with the following parameters for the mined part of the seam (excluding waste coal, in brackets average figures of Balanced Reserves):

Table 1: Basic Coal Quality Parameters

BASIC COAL QUALITY PARAMETERS International Standard (Analyses)

Moisture: 20 – 45 % (35.23 %) DIN 51718

Ash: 3 – 30 % (15.87 %) DIN 51719 (1997)

Heating value: 7.5 – 13.5 MJ/kg (10.47 MJ/kg) DIN 51900 del 1 (2004)

Sulphur: partly exceeding 3 % (1.3 %) ASTM D 4239 (1997)

Density: 1.33 t/m³Uniaxial Compressive Strength: 7.43 MPa

Thickness of the seam varies between 0 and 168 m (for coal > 8.4 MJ/kg), in the mining area- mostly exceeding 50 m.




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4.1.3 Calorific Value

Actual and future mining areas are located in the centre part of the deposit. At least for this part of the seam, a mathematical model »Classification of coal seam by calorific value and geomechanical parameters« was developed that only requires

sea level of surface,

sea level of top of seam,

sea level of base (quality boundary 7,5 MJ/kg) and

sea level of point of excavation.

This implies, as mentioned before, a steady development of the depositional environment and, hence, the coal seam and its properties, from bottom to the top. The model is based on a statistical analysis from data of bore holes correlating chemical, physical and mechanical parameters such as specific weight, content of dry ash, upper calorific value, content of moisture and ash in as-received state, uniaxial compressive strength and others. It is designed as a simple MS Excel spreadsheet.

Figure 10: Calculated coal quality (calorific value) for the period from 2011 to 2054 in MJ/kg (with red line indicating long term average of CV = 10,330 kJ/kg)

The model is particularly used for the prediction of quality for individual panels. Here, the quality of virtual sampling points with a distance of 30 m along the panel is calculated. From this, a parameter distribution is calculated for the whole panel. Based on the forecasted quality for individual panels, in particular the calorific value, the development of the mine and the sequence of panels to be mined can be controlled in a way that the quality parameters

Calorific Value




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maintain a consistent standard. This allows long term planning and flexible adjusting of production of certain qualities.

According to PV figures, the deviation of actual from projected qualities is generally below 10 %- mostly below 5 %- as demonstrated by historic matching for recent production data. In fact, sampled values were always slightly better than projected data.

Table 2: Long term history matching of projected and actual heating values and production for the period from 2003 to 2010

Year

Mine samples Power plant

samples

Projected CV

Deviation Actual

production Projected. Production

Deviation CV lab1

CV lab2

Deviation

(KJ/kg) (KJ/kg) (KJ/kg) (KJ/kg) (t) (t)

2003 10,093 10,068 0.25% 9,961 9,475 4.9% 4,193,714 4,338,684 -3.5%

2004 10,300 10,299 0.01% 10,304 10,076 2.2% 4,196,315 4,090,720 2.5%

2005 10,877 10,831 0.42% 10,847 10,701 1.3% 3,947,914 3,828,091 3.0%

2006 11,132 11,227 -0.84% 11,190 10,799 3.5% 4,088,118 3,878,539 5.1%

2007 11,269 11,357 -0.78% 11,334 10,828 4.5% 4,037,793 3,863,861 4.3%

2008 11,114 11,003 0.77% 11,048 10,734 2.8% 3,473,310 3,560,344 -2.5%

2009 10,883 10,953 -0.64% 10,962 9,944 9.3% 3,919,879 3,868,443 1.3%

2010 11,050 11,168 -0.73% 11,122 10,968 1.4% 3,925,992 3,769,105 4.0%

This accuracy of predicted parameters of coal, also proved by the September 2010 sample figures, allows accurate planning- not only of future quality, but even of geo-mechanical parameters and is incomparable to the vast majority of coal deposits world-wide.

4.2 ADEQUACY AND CATEGORIZATION OF THE MINEABLE RESERVE CALCULATION

4.2.1 Background

In recent years, a geological database has been set up by the geological department of the Velenje mine. It comprises data from surface as well as from underground drillholes. Based on this, a simplified three-dimensional model of the geology has been set up. Using the AutoCAD Civil 3D software, a number of different geological, as well as technical, surfaces have been gridded by triangulation of geodetic points forming an irregular network (TIN – triangular irregular network) and closed networks (GRD) and combinations of both. The created surfaces have been smoothed by kriging of geodetic input points.

Mining is increasingly selective. Planned Block 6 of the power plant requires at least 8.5 MJ/kg. Therefore, the lower cut-off for coal as compared to waste coal was increased from 7.5 to 8.4 MJ/kg for the actual resource/reserve calculation.

Additional constraints are limits of sub-economic reserves of coal, off-balance reserves and coal safety pillars, in the mining lease and defined panels, the latter for the determination of class A reserves.




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Due to the large thickness of the seam and the mining method applied, these virtual limits are not implemented in the model as vertical planes but with an angle of 45° from top to bottom.

For final calculation of excavation reserves, relevant and envisaged technical parameters of excavation- particularly the location of the planned excavation floors and types of coal mining method in different parts of the coal mine- have been allocated. In addition, additional “slope” angles of as low as 32° are applied for the overburden rock from top of the seam to the surface. Here, the degree is depending on existing structures at the surface. Structures that are to be protected by safety pillars are the Škale pit (Slovenian Coal Mining Museum), road and railway infrastructure, the river Paka in the southern part of the valley, the Šoštanj thermal power plant in the south-western part and the city of Šoštanj in the western part. All these structures in the SW require a shallower slope than the predominantly natural landscape area in the NE to take care from potential damages caused by subsidence. 80 – 90 % (some ten to more than 100 m) of the subsidence arrives at the surface. Within 6 months, the process of subsidence is almost completed and goaf areas are basically consolidated.

The resulting volume of coal reserves is multiplied with the average density value. Contrary to previous calculations, when a value of 1.28 t/m³ was used, for actual calculations this value was adjusted to 1.33 t/m³. This was justified in the document “Amendments to the Experts Report on Classification and Categorization of calculated Reserves and Resources of Coal in Velenje Coal Mine on 31. 12. 2008 according to the comments in minutes of the Commission’s 19th regular meeting”, particularly by applying the above mentioned quality forecast method. It is also mentioned that this difference accounts for only 3.5 % of the reserve increase which is still below the 5 % variance normally used for accounting for uncertainties in resource assessment. Both values seem reasonable. However given the percentage of moisture and considerable amount of ash (Ø 15 %), 1.33 t/m³ can be considered as a likely density.

4.2.2 Slovenian System of Reserve Calculation

The Slovenian system of resource and reserve determination is a mixture of the former USSR system, which is basically still applied in all former CIS states, and “western” systems such as JORC, UN Framework Classification (UNFC) scheme, and others. It still uses the terms “Balanced Reserves” and the letters A, B, C, D and P for the degree of exploration. Conditions for the allocation to these groups are based on structural simplicity or complexity of the deposit. At PV, the deposit is classified into Group I, Subgroup I. Group I “… includes the deposits which are characterized by simple geological structure with horizontal or slightly inclined layers up to 25º” and “… the first subgroup includes deposits which are characterized by a large area of constant thickness and low variability in coal layers”. Both conditions can certainly be confirmed. The following table gives the distances of observation points, normally drillholes, required for the different categories. Going beyond, PV lists all resources, which are explored by drilling only, as category B reserves even though a major part meets category A requirements, given the dense grid of wells. Category A reserves are only stated when exposed by underground workings.




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Table 3: Required degree of exploration for Slovenian reserve categories according to “RULES on classification and categorization of solid mineral reserves and resources”.

(Due to the progressing development of underground workings, Category A Reserves are updated

annually.)

Group and sub group of the deposit

Maximal distance between observation points in m Category A Category B Category C1

vertical Perpendicular

to stratification

verticalPerpendicular

to stratification

vertical Perpendicular

to stratification

First group 1. Subgroup 250 250 500 500 1000 1000

All stated resources and reserves are limited to the eastern and central (Velenje) part of the deposit. No resources in the western (Šoštanj) part are included. PV gives a figure of 200 Mt of additional coal resources in the Šoštanj field. This coal was researched under criteria for category B, but has been classified as a resource given that it lies outside the current exploitation area.

Below, definitions of the respective classification terms are given as they are formulated and applied in PV, based on what is called “combustible substance” with a calorific value exceeding 4.2 MJ/kg. Generally, reserves are subdivided into Balance Sheet reserves and Sub-economic Reserves.

4.2.3 Coal Reserves at Velenje Mine

The method of evaluation developed by PV Geological Staff is based on the most updated algorithm for reserves evaluation; the geological data base source of the model, includes all the necessary parameters in order to develop a reliable evaluation of the coal tonnage.

On the basis of geological parameters, particularly the Calorific Value and geotechnical information, three basic surfaces have been created, represented in 3D form. Further data included in the model is:

the limit of the border of exploitation area,

the limit of the border of coal occurrences in security pillar,

the border of the sub economic layers of coal

the border of mineable layers of coal

the projection of the slope of security pillar that protect strategic surface structures

According to the PV evaluation modeling therefore, the reserves can be classified in A and B categories. These criteria ignore the other categories and resources.

BALANCE SHEET RESERVES

Balance sheet reserves can be exploited.




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SUBECONOMIC RESERVES

Subeconomic Reserves will not be exploited because they represent resources:

with calorific value below 8.4 MJ/kg,

in safety pillars and or

“… lying in “unreachable” remote areas, where excavation is not economically justified given the large length of gateways and transport ways needed for excavation”.

CATEGORY A – DEMONSTRATED RESERVES

Category A reserves are calculated annually and comprise only those quantities of coal, that are “ready or prepared” for excavation, which means they are surrounded with gateways.

CATEGORY B – MEASURED RESERVES

Category B accounts for all identified geological reserves which are explored to a high degree (see above) but are not classified as Category A.

EXPLOITATION LOSSES

From the excavation reserves, a certain percentage is deducted as Exploitation Losses, which cannot be mined due to technical reasons. This percentage is currently set as 15.53 for A and 23.35 % of B reserves due to long term experience.

Since there will be no further preparation, no additional losses have to be taken into account.

EXCAVATION RESERVES

Excavation reserves represent the part of the reserves, which is obtained by subtracting Exploitation Losses from Category A plus Category B Reserves (Balance Sheet Reserves), representing potential production quantities.

The following chart shows the Slovenian classification scheme confined to categories and classes that are occurring in PV’s licence area and the respective equivalents of the JORC system.

Total mineable reserves (Proven and Probable Reserves according to JORC) amount to 131,670,000 t based on the figures of the 2008 report (“Experts Report on Classification and Categorization of calculated Reserves and Resources of Coal in Velenje Coal Mine on 31. 12. 2008”).




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Figure 11: Slovenian classification scheme (left) and corresponding JORC classification (right)

The figure below shows the respective figures from PV’s 2008 report.

Figure 12: Resource/Reserve figures from PV’s 2008 report




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4.3 DMT/IMC RESOURCE ESTIMATE

In order to verify the amounts given by PV, AutoCad files (surfaces) of PV’s geological model have been used for a spot check of two particularly important resource values. The data for calculation of the resource volume were provided in an AutoCAD-Format as *.dwg-files (ACAD-C3D surfaces on 31.12.2008 contours.dwg). These drawings were loaded into Global Mapper 11 Software. From here, it is possible to export the data in a xyz - format, which is compatible with Petrel 2010.

Thus, the following surfaces were loaded into Petrel:

the top, middle (8.4 MJ/t) and bottom (4.2 MJ/t) surfaces of Identified Reserves

the top and middle (8.4 MJ/t) surfaces of the Balance Sheet Reserves.

Calculation of the volume between two surfaces is an operation in Petrel. By calculating the volume using two surfaces and a boundary one can also choose to toggle the ‘create attributes’ button. Here the attributes ‘Area’ and ‘Volume’ are calculated.

For estimating the volume of the Identified Reserves, volume calculations between the top and the bottom surfaces were performed. For estimating the volume of Balance Sheet Reserves, the same calculation was carried out for the top and middle surfaces. These volumes were multiplied with a factor of 1.33 t/m³ (average density).

Figure 13: Resource/Reserve figures for 2010 based on data provided by PV




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Results for beginning of 2011 (= 31.12.2010), showing reduced figures due to production in 2009 and 2010 of approximately 8 Mt, are given in Figure 14. Exploitation losses for 2009 and 2010 amount to 9.7 % and 11.4 %, respectively of A + B reserves, reducing the long time average looses from 23.2/23.0 % in 2008 to 21.1/20.9 % in 2010 (see section 5.8 and Figure 21).

4.4 COMPARISON BETWEEN THE RESOURCE/RESERVE STATEMENT 2008 OF PV AND

DMT/IMC’S RECALCULATION

The Lignite B type coal deposit is well explored. Additional drilling programmes are set-up annually. Current and future mining areas are located in a part of the deposit that is only slightly influenced by tectonic structures and will probably not hamper mining activities.

Coal quality shows a constant increase from bottom to top in the seam. Quality of future production can be assessed quite accurately based on a formula taking into account the position of the panel.

In general, production volumes and quality can be forecasted even for longer periods with great accuracy due to the simple structure and predictable quality parameters. Identified Reserves (equivalent to Geological Resources) in PV’s report as of 31.12.2008 are stated as 380 Mt. Here DMT/IMC’s recalculation – based on actual, updated surfaces – amounts to 373 Mt, a difference of less than 2 %.

Balance Reserves (equivalent to Measured and Indicated Resources) are stated as 171 Mt. Here, DMT/IMC’s calculation of 172.5 Mt is even slightly higher. The difference amounts to a surplus of 0.9 % only.

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Figure 14: Resource/Reserve figures from PV’s 2008 report compared to figures from DMT/IMC check

Excavation Reserves at the end of 2010 amount to almost 124 Mt with Balanced Reserves of approximately 162 Mt. Small deficits can be balanced provided that the mining technology




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allows further reducing of Exploitation Losses. Another option is to include additional small areas, particularly in the north which are currently considered as Subeconomic Resources.

5 MINING

5.1 INTRODUCTION

Underground lignite mining in Velenje has a rich history and tradition. Industrial lignite mining from the Velenje deposit has taken place for 130 years and is ongoing at a level of around 4 million tonnes per annum. Since the start of mining, approximately 200 million tonnes of lignite have already being mined. The Velenje lignite deposit is unique in Europe regarding its geological conditions. Special mining methods are being used and a large amount of practical experience gathered in underground lignite mining.

5.2 GEOTECHNICAL CHARACTERISTICS

Geotechnical and geomechanical behavior of the Velenje Rock Mass, both coal and hanging wall, allow the long term, planned production levels to be considered as achievable.

Geo-mechanical characteristics are very important to verify reliability of the mine to supply fuel to the Power Plant; geomechanical characteristics influence the exploitation method and environmental impacts at the surface.

In the table below, the main geomechanical parameters are quoted. Values have been surveyed during geotechnical investigations.

Table 4: Geomechanical parameters of the main layers

Where1: Density w Moisture - tl Uniaxial compressive strength - n Tensile strength E Youngs modulus Poisson ratio c Cohesion angle of friction

According to the indications given by the Technical Department of PV regarding the reaction of the overhanging strata, the clay barrier and the water bearing sands following coal extraction indicate that the clay barrier is plastic in behaviour, which keeps the underlying mining operations basically dry.

During the visit it was possible to confirm this phenomenon. The coal, other than the inherent moisture or the humidity due to dust suppression, is dry.

1 Premovnik Velenjie Coal Mine: Power Point Presentation




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The water sealing capability of the clay seam is based on the very low permeability, K, that is of the order of 10-8 – 10-10 m/sec2. Quoted values have been detected during geotechnical investigations for the construction of TES Unit 6.

Behaviour of the hanging wall strata are predicted by means of numerical models developed by the geotechnical department of Premogvnik Velenje ; the reliability of the models is tested by geotechnical measurements carried out on the surface and underground.

Risk of water inrush in the mine openings, according to the models, is very low and these prediction models were confirmed via the geotechnical records.

As reviewed during the site visit and according to information provided, no particular problems therefore can be foreseen for the risk of flooding the mine.

5.3 MINE LAYOUT

The mine layout can be summarised as follows:

access entries from the surface through vertical shafts (two for personnel access and fresh air intake, two for exhaust air return), and two dipping drifts used for coal transport from underground to the surface by conveyor belts;

two underground main roadways (for fresh air intake and for air return). These roadways are also used for coal transport by conveyor belts, personnel and supplies transportation, and for the transport of technological installations (power cables, industrial and exhaust water pipes, etc.);

two gateways to access working sections.Average daily advance of the new-built gateway depends on several parameters and ranges from 5 m to 6 m per day. Gateway cumulative coal average daily production is between 350 and 800 tonnes;

Longwall panels.

Galleries, shafts stations, pumping stations and other ancillary facilities are also part of the mine layout. Gallery cross sections vary, according to planned life and utilization, from 16 m2 up to 20 m2. Underground drifts are used to link the different production levels.

5.4 UNDERGROUND FACILITIES

The Coal mine Velenje underground facilities are at the highest level from a technological point of view.

Materialis transported to the mine through the main shaft. Mine transport is organised by classic mine rail transport and with monorail used for long transportations and movements in inclined parts of the mine.

Main facilities present in the coal mine are:

2 Source: Geoinženiring d.o.o. and the Institute of Construction of Slovenia: "REPORT ON FURTHER EXAMINATIONS SLOPES FOR COOLING TOWER " in July 2008 and University of Ljubljana, Faculty of Civil Engineering and Geodesy, Institute of structures, Earthquake Engineering and Computer Science "EARTHQUAKE DESIGN PARAMETERS FOR STRUCTURES OF UNIT 6 OF TPP ŠOŠTANJ" in July 2007.(Internet source)




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Conveyor belts, transporting the coal from the face up to the surface.These are installed in dedicated roadways and have an overall capacity of 25,000 tonnes/day;

Suspended monorail for equipment and supplies transportation;

Car rail system for material transportation;

Chair lift for personnel movement between different levels;

Ventilation fans with total flow capacity 27,000 m3/min;

Pumping stations for water drainage, with an overall capacity of 0.6 m3/tonne of coal.

5.5 MINING METHOD

Currently, mining operations are located in south western areas, near the town of Šoštanj, adjacent to and below Lakes Velenje and Druţmirje. They cover a surface of 1,104.00 hectares.

The Velenje mining method is very peculiar because of the high coal seam thickness and the specific coal mechanical characteristics (good, brittle characteristic of the coal). The method consists of a subdivision of the coal seam in several layers, having a height manageable by standard longwall equipment.

Thickness of the coal seam dictate mining at different levels in order to get the highest possible recovery from the deposit. Production faces are prepared in advance delimiting the panel area, through drivage of parallel gateways at a separation of 200m,- this being the future planned face length. In recent years the longwall face connecting the two roadways has increasedfrom 130 m to 160 m, and finally up to 180/200 m, with a target of 220 m faces.

Coal mining is carried out in by retreat mining towards the structure galleries. Therefore, during production, the gate roads are detroyed.Adoption of the above parameters indicates clearly that the underground pressure is quite severe.

The impressive thickness of the coal seam forced the PV engineers to develop a mining method that allows recovery of as much coal as possible.

The “Velenje Mining Method” is covered by a world wide patent and consists of a combination of classical coal winning operations together with a caving mining, inducing the roof coal to fall into the longwall face by special actions of the hydraulic shields supports.

Exploitation is carried out along a number of levels at different elevation, as shown in the below scheme (for two levels). When the first level is close to the hanging wall, excavation is carried out using the classical method of longwall shearing, to prevent any damage or collapse of the upper clay formations.




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Figure 15: Velenje Mining method in two slices or levels of the deposit

A typical longwall layout is used for the extraction of coal. As mentioned previously,, the longwall face length has been increased from the past from 130 m up to 200 m, with a typical longitudinal length of some 700-900 m. The new layout, together with newly designed coal winning equipment, has several advantages. It:

reduces the numbers of equipment relocations,

increases the face productivity,

allows the reduction of simultaneously operating panels to two,

reduces the needs of ventilation flows, and

reduces the needs of meters of infrastructural roadways.

In second and third levels, the Velenje Mining Method is applied, which is based on the following basic concepts:

The coal mass above longwall supports shields is stressed by the geological forces induced by the hanging wall strata and coal winning at the face causes the breakage of the upper coal roof. After shearing of the front (at least two passes), the shields are moved, folding the front flaps and lowering the upper canopies. This manoeuvre induces the roof coal to drop




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down onto the AFC and then is hauled to a feeder breaker and, thence to the main conveyors line.

Recently new-designed equipment has been introduced in the mine (see further in equipment description):

Shields of new modern design, specially made for Velenje Coal Mine

New shearers from Eickhoff.

Updates have involved the organization of work as well- reducing the production panels from three to two and allowing the same output from two longwall panels operating at the same time only.Together with the development drivages, this generates a coal production of more than 4,000,000 t/annum.

The height above the canopy that can flow into the front with the new design equipment, according to information given by the mine staff, is up to 15 m.

Considering the face height of 5m. excavated with the shearer, the total height mineable becomes about 20 m.

In the panel design, the second level of coal winning is therefore developed having a distance of 20.0m from the floor of the panel to the floor of the upper mined out part. Performances can reach daily production capacities, on average, of 10,000 tonnes per day.

Evidently, the choice of the distance between the immediate roof above the canopy of shield in the second level must be carefully evaluated in order to have the consolidation area floor to represent the upper limit for the caving.

The consolidation area, according to information given by the mine staff, assumes its final characteristics a minimum after six months from the exploitation of the first level.

According the information acquired (and showed in the picture), it is not possible to avoid some coal remaining in the goaf.

This was confirmed by watching the caving operation underground, where the formation of big coal blocks in the caved zoneconfirmed the possibility for the formation of interlocked blockage.

The following picture shows the concession limit together the underground mine workings between the urban settlements and surface facilities The eastern area, toward the Velenje township is mined out and no more mining works will take place.




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Figure 16: Underground mining works and infrastructure within the concession area

5.6 NEW INVESTMENTS

The investment strategy for major mine infrastructure includes the creation of a new extraction shaft, equipped with skips. This shaft will be located in the area near the stockpile and will have a circular section with a net diameter of 6.00 m, completely lined with reinforced concrete.

It will be equipped with double skips, in order to have a winding capacity of 4,000,000 t/year over 250 days, at 18 operating hours per day, at a speed of 12 m/sec and a time cycle of 81.43 sec. Depth of extraction will be 490 m.

Figure 17: Location of the new skip shaft




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Figure 18: Arrangement of the loading station underground

The new shaft will allow reduction of coal conveying from 3841 m to 1040 m, with less personnel involved and a consequent reduction in costs.

As well as reducing the length of haulage roadways, other major benefits will be a reduction of electricity costs( mainly for ventilation and haulage) and a reduction of manpower.

Figure 19: New haulage layout compared with old one (red)

5.7 MINING LOSSES

As indicated, mining losses are due mainly to:

A need to protect important and strategic surface settlements (Sostanj township, industrial estate, river and road infrastructures),

A need to protect strategic mine infrastructure, and




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Losses due to the chosen exploitation method.

Currently, average mining losses recorded on a statistical basis have been assessed on 23%, as reported in the official Certifcate of Status of Mineral Reserves and Resources Nr. 3611-3/2010-2, of march 2010 and related to year 2008. Mine Management has the target to reduce mine losses to the level of 10 %; in the medium- to long term. With a tight regard to executive planning, this target, is reachable, based upon available evidence.

In the longer term, central main roadways servicing Preloge and Pesje areas will be mined out, with the subsequent relocation of exploitations toward the North-West.Therefore, the main underground haulage roadways will follow the southern and western border, ear the limit of the deposit and where the non-productive zone has been established. A combination of reduced coal thickness with the bedrock proximity, seems to confirm the reliability of the 10% mining losses assumed in planning.

5.8 DEVELOPMENT OF MINING LOSSES

Looking at excavation losses over the last 10 years, the percentages have been steadily decreased. Taking into consideration the figures from 1999 to 2010 the average losses have been calculated as 21.1 %. The chart below compares different figures for recent years. The different columns show two ways of calculating the average excavation losses in terms of simple and weighted average.

In essence, the weighted average figures are slightly higher than the simple averages.

Figure 20: Development of the Excavation Losses over the last Years

23,24%

22,86%

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20,89%

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Average

Development of the Excavation Losses over the last Years




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5.9 MINING EQUIPMENT AND GENERAL UNDERGROUND EQUIPMENT

Performances reported are made possible by a huge effort in purchasing high production equipment. Therefore PV decided to install specially designed shield supports, manufactured by Bucyrus DBT.

The geometrical dimensions of the new shield Velenje Bucyrus DBT 2200/4200 two legs, are shown in the drawing below.

Figure 21: Bucyrus DBT 2200/4200 two legs shield support developed for PV

The range of extension varies from 2200 up to 4200 mm, with high flexibility in cutting height. Of particular note is the limited dimension of the roof canopy- 1770 mm- that facilitates caving operations.

The combination with Eickoff shearer model SL 300 IPC seems to be the best match in order to have the best performance in order to guarantee the target output of 4.000.000 t/annum or more. The shearer allows a maximum cutting height of 4295 mm, that means an effective front height of approximately 5.0 m.

Alongside the Eickhoff sheare, the other coal winning machine is the JOY 4LS5, that has similar geometric dimensions but less power (753 kW compared to 830 kW).

The overall impression is that the equipment is over-designed (in term of power installed and construction characteristics) for the operating conditions of the mine with resulting high reliability and availability of the equipment.

It is important to notce that ancillary and transportation equipment is designed and chosen under the same criteria. The conveyors system, moreover, is designed for high capacity




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ranging from 1000 t/h in the tertiary hauling (from longwalls to structures) tothe 2000 t/h of the main conveyors system.

Longwall equipment is completed with:

JOY AFC conveyor in the front, capacity of 1100 t/h, power installed 2x400 kW U=1,0 kV

Hammer crusher of 160 kW, U=1,0 kV

JOY stage Loader, capacity 1100 t/h power 400 kW U=1.0

Major machines such as shearer, shields, AFC and so on are computer assisted in their function and continuously monitored both locally and remotely in the main control room. Also the main environmental parameters such as gas content (CO2, CO, CH4), oxygen, air flow, temperature are monitored separately and values are displayed locally and in the main control room.

Development works are carried out by means of roadheader with axialhead, model GPK –PV- a Russian design for the chassis and steel body, while the electro mechanic and hydraulic components are installed directly by PV.

In order to assure continuous production of 4.0 million tonnes/annum, it is necessary to drive indicatively from 6,000 to 9,000 m of new gateways per year. Due to the particular geomechanical conditions of the coal mass, this tends to induce heavy pressure around the openings. Thus, it is necessary to install heavy steel support, with narrow span between them.

Development gateways have cross section up to 20 m2, sometimes 24 m2, and are heavily supported with TH arches (28 kg/m class) in circular or near circular shapes, defined type MP1 and MP2. The span between arch supports varies from 0.33 to 0.75 m, according to ground pressure conditions.

Figure 22: GPK road header and steel supports




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Daily advance of each development roadway is around 5 – 6 m while the number of developments varies according to planning during the year. Indicatively, there are 6, with a performance of 900 – 1000 m per working equipment.

Wood lining and mortar injection behind prevent the possibility of spontaneous combustion of the coal. Supports are removed during retreating of the coal face.

Figure 23: Example of support MP2 profile (section up to 20 m2)

Coal production from development can be estimated between 160.000 to 200.000 t/annum, depending on the number of developments in simultaneous operation.

5.10 PRODUCTION PLANNING

The amount of excavation reserves allows 30 years of mining operations at the rate of 4.200.000 t/year. Technical staff of PV have carried out a detailed planning till 2018, panel by panel.

For the later years, planning is estimated every 5 years, due to difficulty in planning in detail every single panel.

Production levels are strictly linked to the demand of the Power Station TES Units, particularly the Unit 6.

The following diagram 3 shows the production behavior to maintain the development programme for TES.

3 Source: “from coal to Energy of the future”- Dr Milana Medved




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Figure 24: Long term Production planning until 2054 in tonnages and calorific value

According to information acquired, both tonnage output and average calorific values demanded are met. This is done by an appropriate mixing of the coal coming from panels located in levels of the coal deposit. Thus, the average C.V. of 10 MJ/kg, required during the period of exploitation is achieved.

PV planning staff expect to excavate 123 Mt in total, reducing progressively the tonnage, starting from the year 2021, till year 2041, when the level of 2,000,000 t will be reached. This will be maintained till the end of operations in 2054.

The main structure pillars will be mined as well, as soon as the mine is going deeper and the access to north areas will be realized along the western excavation limit. The choice of operating with only two panels 200 m width, at high performance levels, together with the adoption of a new layout of the transportations lines, leads to considerable cost reduction.

On the other hand, having only two panel operating, a major breakdown in one of them could reduce significantly the level of production.

On the basis of the 2010 production, it can be seen that as soon as a panel finishes operation, a new one starts immediately This is evident for 2010 where, for example, panel B k-120 finished on May 15th and the panel G2/C started on May 17th, in order to assure production continuity.

Panel design in detail is the result of much work carried out as a flow from the geological office, the quality provision office and finally the planning and technical reporting office.

Quality of each panel is evaluated in order to assure the weighted value during the whole life of the panel and in a way that, blending the ROM. coal with the production of the other panel

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and drivages, the desired average C.V., according the requirements of the Power Station, is assured during the years.

It can be said that PV is able to predict at any moment of the year and, at least till the year 2018, what will be the reference value (plus or minus the obvious tolerance) of coal quality produced. Of course a continuous quality control is carried out both in the mine and in the stockpile and compared. Production planning includes any action that must be carried out, knowing exactly the relocation time of equipment, the scheduled service maintenance, the support, spare parts and consumption of materials and human resource deployment.

Production planning is, of course, based on statistical data, in order to prepare exact year by year the production program; It has be seen that in any case the realised production is always slightly more (with one small exception) of the yearly planned.

5.11 LIGNITE DEMAND VERSUS REMAINING MINEABLE RESERVES

Mineable reserves according to the last update calculation by DMT/IMC were determined as 124 million tonnes. The actual production scenario of PV to serve the needs of a Unit 6 of the Sostanj Power Plant over the long term until 2054 was estimated according to the provided data as 123 million tonnes.

Based on this calculation and the computerized comparison of the end of 2008 volumes, the total resources within the license area of PV are sufficient to meet the production plan from 2011 until 2054. This is almost equivalent to the projected demand of the power plant for this period. Further reduction of the excavation losses should be targeted in order to increase the mineable reserves (see section 4.3 and Figure 14).

5.12 SUBSIDENCE

Planning of mine operations will last a long time (up to 2054). Therefore the investigations and the modeling in order to predict the geo-mechanical behavior of the overlaying strata are carried out continuously. This subsidence is inevitable ; due to the historical (and practical ) choice of not using backfilling.

The consequence is major subsidence at the surface, with vertical movement of more than 70 metres. Prediction of subsidence is done with high accuracy over the mine lifetime, as shown in the figure below.

The deposit is explored in detail with a very high accuracy and the prediction models present a high coefficient of reliability in order to predict the evolution of the coal mass behaviour in all its aspects to ensure a long term of mining operation.

Subsidence cannot be avoided using the present coal exploitation method because the method itself cannot permit any remaining coal pillar to sustain the overburden. On the other hand, the overburden characteristics are not suitable to be mechanically sustained and the reduced coal recovery could not make mining operations profitable.

In order to prevent any claim by possible land owners, Premogovnik Velenje purchased the land affected by subsidence, allowing the land to be used for agricultural purposes in the mean time.




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Figure 25: Subsidence forecasts due to the mining works

5.13 WORK ORGANISATION AND PERFORMANCE

PV is the head of a group of companies, but it manages directly the mining activities. Subsidiary companies cover several services that include maintenance and service companies, environment, financial including also museum and touristic activities.

The picture below shows the composition of PV group.

Figure 26: Subsidiaries of Velenje Mine




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Manpower directly involved in the mining activities is 1303 people in 2010, as the result of a process of optimization and implementation of the technologies.

Planned reorganization for the years 2011 uponrd forecast further reduction of personnel maintaining the same production levels, therefore increasing the efficiency rates.

Figure 27: Trend of efficiency rate since 1990 till 2010

The trend of efficiency shows a steep increasing of this parameter for the past; it can be see also more in detail in the diagram below, showing the trend for manpower in direct production and the overall PV manpower.

Figure 28: Trend of efficiency from 1990 till 2010 for exploitation and overall manpower




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In particular in a longwall such as B k-50 where the mean daily production rate has been of 10.197 t, with a face crew of 20 employees, the shift mean efficiency is 170 t/man-shift.

Total man power in PV, as stated, is 1300 employees (2010), of which roughly 900 are directly involved in the underground operations (including technical staff and safety people); the other 400 are involved in engineering, administration and general services.




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6 FINANCE

At PV, all costs appear to be well itemised and controlled. Regular (monthly) management accounts are drawn which form the basis for decision-making and forward planning. This monthly report includes the costs in the month compared to the budget as well as the year to date, both budget and actual.

Looking to the future, the stated aim of PV is to produce coal (or, more accurately, Gigajoules) sufficient to meet the needs of the power station whilst maintaining a cost less than €2.25 per Gigajoule. This is no mean task; especially since current (2010) output has been at an average cost of €2.74/GJ. There are already significant efforts to achieve this target and it is possible, but further cost-cutting efforts will help. And certainly, there does seem to be scope for cuts to be made.

Actual output for the future breaks down into three distinct phases: 2011 – 2020, where output is maintained as now, 2021 – 2040, where output reduces gradually to half the current output and 2041 – 2054, where output is maintained at the lower level. Costs of the mine are approximately split as 70% fixed and 30% variable. Thus, one would expect that it will be extremely difficult to maintain the cost below €2.25/GJ, when the output is halved. However, this structure is generally only true for the short term. In the medium to long term where output is slowly reduced in a planned fashion, it is possible to make reductions in fixed costs too. This is the main way in which PV will be able to achieve significant reduction in costs overall.

PV has a strong social responsibility element in its overall objectives and , as such, strives to create jobs for those it no longer needs due to productivity increases. This is entirely laudable but can get in the way of the overall objective of management , which is to produce coal/energy. New ventures have an incubation time and are not guaranteed to become profitable. As such, they absorb management time and may not contribute as expected. In recent accounts, PV show a level of income from these companies as well as a future income- net of costs. IMC have taken these figures at face value. However, a significant contribution to income in future years comes from subsidiary companies which have been set up to provide services to production and also sell their services externally.

6.1 CAPITAL EXPENDITURES

Over recent years, the company has continued its policy of general replacement and modernisation of mining equipment as well as investment in future cost savings.

Future spend on capex is dominated, in the short term, by the cost of the new shaft. This, of course, drives up depreciation charges in the future which figure in the operational costs. The rationale for this new shaft is that there will be significant savings in opex from the removal of many kilometres of roadway from the overall system and a new ventilation system which reduces the overall power costs. This is reflected in the following table of major capital expenditure.

At the same time, capital expenditure continues in the other key elements of the business. The expected return on the investment in the new shaft is only just over 7%. This would normally be considered rather low but, in current conditions is probably acceptable. This




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extraordinary expenditure continues until completion in 2015, when a more normal level of capital is maintained, albeit slightly reducing as output begins to be reduced.

Details of capex after 2027 are not given. While this is acceptable regarding a detailed plan, there is no indication of overall expenditure in general. However, it is inevitable that there will be such expenditure. Based upon predicted depreciation charges in later years, there is a slow reduction in expenditure on capital items. Indeed, management have stated that, after 2027, from a cashflow point of view, the expected capital expenditure will equate to the depreciation charge in the year. Based upon this premise, the latter years of capex will be reduced slowly from about €11 million in 2027 to the level of some €6 million per annum in 2040 and will remain at this level till the plan ends.

In general, this level of capital expenditure will be adequate to ensure that sufficient equipment is available to ensure maintenance of production. Wear and tear on mining equipment is relatively little and the need for replacement equipment will reduce in later years as production winds down. This, of course, assumes that there is no need for new equipment to mine after 2054.




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Table 5: Capital Expenditures until 2027 in Euro

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

A - CONSTRUCTION WORKS - MINE 0,85 0,85 0,85 0,85 0,85 0,85 0,85 0,85

0,85 0,85 0,85 0,83 0,81 0,79 0,76 0,74 0,72

0,70

B - CONSTRUCTION WORKS - OUTDOORS 6,59 9,54 11,13 9,83 7,22 2,83 1,10 1,10

1,10 1,10 1,10 1,07 1,04 1,02 0,99 0,96 0,93

0,90

C - EXCAVATION EQUIPMENT 8,59 6,50 4,45 5,35 4,75 8,60 9,60 8,60

7,10 5,70 3,80 4,20 4,10 5,10 4,60 3,40 3,50

3,90

D - EQUIPMENT FOR PREPARATORY SITES 2,25 2,89 3,40 2,25 2,80 2,30 1,90 2,50

2,50 1,90 2,50 2,60 2,20 1,90 1,90 2,60 1,90

1,90

E - INFRASTRUCTURE EQUIPMENT 2,28 1,40 1,25 1,38 1,32 1,28 1,31 1,12

1,11 1,27 1,58 1,49 1,49 1,44 1,49 1,67 1,51

1,39

F - VENTILATION EQUIPMENT 0,30 0,53 0,50 0,30 0,30 0,50 0,30 0,30

0,50 0,30 0,25 0,30 0,23 0,28 0,25 0,29 0,24

0,30

G - EQUIPMENT FOR TRANSPORT OF MATERIALS 0,91 0,96 0,61 0,90 0,96 0,51 0,51 0,75

0,51 1,16 1,51 0,92 1,36 1,31 0,92 1,36 1,31

0,92

H - EQUIPMENT FOR TRANSPORT AND CRUSHING OF COAL 0,04 0,20 0,20 0,20 0,20 0,20 0,20 0,20

0,20 0,20 0,20 0,20 0,20 0,20 0,20 0,20 0,20

0,20

I - IT EQUIPMENT0,70 0,70 0,70 0,70 0,70 0,70 0,70 0,70

0,70 0,70 0,70 0,66 0,62 0,58 0,54 0,50 0,46

0,42

K - OTHER EQUIPMENT 0,54 1,06 0,36 0,36 0,52 0,42 0,96 0,36

0,52 0,52 0,51 0,70 0,50 0,50 0,33 0,48 0,69

0,62

SUM: 23,04 24,63 23,45 22,11 19,61 18,18 17,43 16,48

15,09 13,70 13,00 12,97 12,56 13,11 11,99 12,20 11,46

11,25




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6.2 OPERATIONAL EXPENDITURE

Opex has been relatively steady in recent years as the company has striven to drive down costs to the level of 2.25/GJ. Basic information is shown in the following table for the year 2010:

Table 6: Historical Operational Expenditures

Item 2010 Percentage

Material costs 14,763,307 12% Service costs 37,581,955 30% Depreciation 14,917,000 12% Labour costs 52,629,677 42% Other expenditure 4,481,372 4% Total 124,373,311 100% Cost/GJ (€) 2.74

Cost structures as above are somewhat unusual for a modern mine. Usually, the use of high-cost investments would result in a higher depreciation charge in recognition of the high capital investment and lower labour charges because all the modern equipment and investment should result in labour savings. One possible reason for this structure might be that the main mine is older and the related depreciation charge has all been borne. Another interpretation , however, might suggest that the mine is over-manned. Certainly, as mentioned earlier, PV has a strong social responsibility to the local community and its labour force. Thus, labour is only shed if new subsidiary operations exist to take up those made redundant. While this is understandable and to be applauded, it is not necessarily the best approach to sound mine management and ensuring a low cost product for the power station.

In 2010, other income from subsidiary companies amounted to nearly €7 million but this is planned to increase to some €15 million in 2015. It is difficult to find any justification for this income and why it varies. Cynically, one might be tempted to infer that this is a ‘balancing item’ which overall reduces costs to the desired €2.25/GJ. If this income is not gained, the maximum increase in costs could be as much as €0.35/GJ. Thus, this income is important to achieving the target cost. However, there is no way to verify plans proposed for current subsidiaries nor how new ventures, set up in order to create more jobs to replace those lost in PV, will perform.

In terms of future costs, PV have provided a plan in some detail for the period 2011 till 2029, and thereafter, a more general plan till 2054. These figures are in terms of 2009 values, with adjustments made relating to fixed and variable costs, adjustments relating to changes in output and assumptions of increasing productivity. In general these predictions are feasible and based upon reasonable assumptions. These costs are detailed for each year in Annex I.




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In terms of target costs, it is obvious that labour is the key element, followed by Service costs. It is not insignificant that the service costs are mostly made up of charges from a subsidiary company (employing former workers) and which is also important in terms of profit contribution from external work. In many ways, both these costs are therefore more under the control of the company and provide opportunities for more savings, if necessary. At the same time, losing control of labour or failure in this subsidiary company could create more strain on costs which are already under pressure. However, observations during mine visits suggest that the mine is well manned and, if need be, there could be further savings.

There are some significant issues that should be highlighted since they are important to the understanding of the predictions and the acceptability of future costs. These are discussed in the following paragraphs:

New shaft- this development will significantly reduce the overheads related to roadway maintenance, ventilation and other overheads. Expected return on this investment is not very high but should be sufficient to justify the expenditure. We are told that alternative options were considered and that this is the best option.

Reduced personnel- manpower is reduced in line with reductions in planned output. Further manpower reductions are anticipated after 2027, which is based upon an assumed increase in productivity of 0.8% per annum. This is acceptable and achievable.

Reduction in output- there is a gradual reduction from 2020 to 2040 to a level of half the current output and then it is held steady till 2054. During this period of controlled and planned reduction, it is possible to also reduce fixed costs over this time in an orderly fashion. Usually, fixed costs will not change with any change in output. However, in this case, when a slow and planned reduction in output will take place, it is possible to make reductions in fixed costs. PV appear to have reasonable plans to achieve this and there are many opportunities to be considered.

Longer term depreciation reduction- after the major investment in the new shaft, the level of capital expenditure reduces to ‘normal’ levels and this is further reduced as planned output falls. In the final stages, the level of capital expenditure falls further to reflect a rundown in the need for new equipment. As a result, depreciation, which is a significant element in the cost statements will reduce and help the cost target to be met. It is, however, important to note that IMC have not been able to check in detail that this level of depreciation will reduce the values of assets to zero during the life of mine. If this is not the case and the mine closes, the costs indicated could be higher due to a need for higher depreciation charges.

Environmental compliance costs and any closure costs have not been investigated. It is assumed that these costs are all recognised within the costs outlined either by provision for future costs or direct expenditure from revenue.

PV is already a modern mine with the latest equipment in use. However, it is essential that management continue to investigate all opportunities which might yield savings in manpower.




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Recognising that labour is such a major cost element, it might also benefit the company to think of a zero-based budgeting approach to staffing to ensure that all employees are necessary to achieve the outputs.

Further research into other modern techniques may also yield results. It is recognised that the geology in PV mine is complex but it could well be worth carrying out trials with roof-bolting. Successful trials might indicate alternative roof support systems that could reduce materials costs for developments, speed up development rates and improve face rates. Similar research in other locations could also be beneficial. There is recent evidence from a brown coal mine in Serbia that roof-bolting significantly increased the stability of a roadway section at Rembas mine and allowed a much wider spacing of arches; similar research work is currently being carried out at Soko mine and it might be useful for PV to review this work or even undertake similar research at Velenje




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ANNEX I

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Material costs 14,763,307 14,788,307 14,464,307 14,241,187 14,018,929 12,492,401 12,367,477 12,243,802 12,121,364 12,000,151 11,816,149 11,485,004 11,142,944 10,897,085 10,657,034 10,422,649 10,193,792 9,970,328Service costs 37,581,955 36,211,376 35,828,254 35,211,682 34,397,696 31,523,282 30,778,563 30,038,234 29,537,852 29,042,473 28,552,048 27,866,122 27,180,253 26,511,387 25,859,102 25,222,985 24,602,634 23,997,658Depreciation 14,917,000 15,200,000 15,200,000 14,500,000 14,500,000 13,800,000 13,400,000 13,450,000 13,400,000 13,350,000 13,400,000 13,400,000 13,400,000 13,500,000 13,480,000 13,500,000 13,000,000 12,800,000Labour costs 52,629,677 49,162,418 48,198,449 47,253,382 46,739,250 45,227,727 44,779,928 44,336,562 43,897,586 43,462,957 43,032,631 41,777,737 40,534,265 39,199,085 37,978,721 36,565,482 35,368,398 34,182,320Other expenditure 4,481,372 5,081,230 5,480,730 5,058,066 4,928,682 4,589,014 4,758,080 4,893,971 4,618,454 4,275,230 4,292,542 4,333,838 4,306,200 4,266,659 4,276,956 4,063,310 3,832,957 3,641,174 TOTAL EXPENDITURE

124,373,311

120,443,332

119,171,740

116,264,317

114,584,557

107,632,425

106,084,048

104,962,570

103,575,257

102,130,811

101,093,370

98,862,702

96,563,662

94,374,216

92,251,813

89,774,425

86,997,780

84,591,480

Coal production in GJ 42,878,000 41,295,000 41,295,000 41,295,000 41,295,000 41,140,000 41,140,000 41,140,000 41,140,000 41,140,000 41,140,000 40,140,000 39,140,000 38,040,000 37,040,000 35,840,000 34,840,000 33,840,000 Cost price EUR/GJ 2.742 2.668 2.657 2.646 2.634 2.252 2.252 2.252 2.252 2.252 2.252 2.252 2.252 2.252 2.252 2.252 2.252 2.252

2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

2041 - 2054 letno

Material costs 9,877,785 9,783,173 9,686,376 9,587,269 9,485,712 9,381,554 9,274,625 9,164,740 9,051,692 8,935,251 8,815,159 8,691,123 8,562,815 8,562,815 Service costs 23,317,964 22,621,909 21,938,558 21,238,895 20,522,644 19,819,789 19,130,990 18,426,018 17,673,362 16,997,987 16,275,015 15,535,388 14,811,380 14,811,380 Depreciation 12,300,000 11,800,000 11,300,000 10,800,000 10,300,000 9,700,000 9,100,000 8,500,000 7,900,000 7,300,000 6,700,000 6,100,000 5,500,000 5,500,000 Labour costs 32,872,338 31,562,357 30,293,313 29,024,269 27,755,225 26,527,117 25,339,947 24,152,777 22,924,669 21,819,373 20,673,139 19,526,906 18,421,609 18,421,609 Other expenditure 3,441,174 3,241,174 3,041,174 2,941,174 2,841,174 2,741,174 2,641,174 2,541,174 2,441,174 2,341,174 2,241,174 2,141,174 2,041,174 2,041,174 TOTAL EXPENDITURE 81,809,261 79,008,613 76,259,421 73,591,608 70,904,756 68,169,634 65,486,736 62,784,709 59,990,898 57,393,785 54,704,487

51,994,591

49,336,979

49,336,979

Coal production in GJ 32,793,000 31,746,000 30,699,000 29,652,000 28,605,000 27,558,000 26,511,000 25,464,000 24,417,000 23,370,000 22,323,000 21,276,000 20,229,000 20,229,000 Cost price EUR/GJ 2.251 2.250 2.250 2.253 2.254 2.253 2.254 2.254 2.251 2.256 2.257 2.257 2.260 2.260

2011 02 22 Final Report Reserve Evaluation PV for HSEIMC-Montan Consulting GmbH RESERVE EVALUATION...

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