Pre-Feasibility Study for Coal Mine Methane Capture and Utilization at the Mahui and Pingshang Mines, Shanxi Province, People's Republic of China


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Pre-Feasib lity Study for Coal M ne Methane
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Pingshang Mines

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Pre-Feasibility Study for Coal Mine Methane Capture and
Utilization at the Mahui and Pingshang Mines

Shanxi Province
People's Republic of China

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Sponsored by:

U.S. Environmental Protection Agency, Washington, DC USA

Prepared by:

Advanced Resources International, Inc.

April 2015

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ACKNOWLEDGEMENTS

This report was prepared by Advanced Resources International, Inc. (ARI) at the request of the United
States Environmental Protection Agency (USEPA), in support of the Global Methane Initiative (GMI). In
collaboration with the Coalbed Methane Outreach Program (CMOP), the principal authors of the report
are Clark Talkington, Jason Hummel, Elizabeth Olson and Fawn Glen of Advanced Resources
International, Inc.

DISCLAIMER

This report was prepared for the U.S. Environmental Protection Agency (USEPA). This analysis uses
publicly available information in combination with information obtained through direct contact with
mine personnel, equipment vendors, and project developers. USEPA does not:

(a)	make any warranty or representation, expressed or implied, with respect to the accuracy,
completeness, or usefulness of the information contained in this report, or that the use of any
apparatus, method, or process disclosed in this report may not infringe upon privately owned
rights;

(b)	assume any liability with respect to the use of, or damages resulting from the use of, any
information, apparatus, method, or process disclosed in this report; or

(c)	imply endorsement of any technology supplier, product, or process mentioned in this report.

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Table of Contents

Executive Summary	I

1	Introduction	1

2	Background	1

2.1	Coal Mine Methane Potential in China	1

2.2	Selection of the Mahui and Pingshang Mines forthe Pre-Feasibility Study	3

2.3	Corporate Affiliation	3

2.4	Location	4

2.5	Topography and Climate	5

2.6	Regional Geology	6

3	CMM Project Evaluation at Mahui Mine	6

3.1	Summary of Mahui Mine Characteristics	6

3.2	Mahui Mine Gas Resources	8

3.3	Mahui Mine Gas Production Forecast	9

3.3.1	Mahui Mine Forecast Approach	9

3.3.2	Mahui Mine Forecast Assumptions	11

3.3.3	Mahui Mine Forecast Results	12

3.4	Mahui Mine Preliminary Cost-Benefit Analysis	14

3.4.1	Technical Assessment of Utilization Options at Mahui Mine	14

3.4.2	Mahui Mine Project Development Cases	14

3.4.3	Economic Assumptions and Input Parameters for Mahui Mine	15

3.4.4	Mahui Mine Baseline Case Results	16

3.4.5	Mahui Mine Maximum Power Production Case Results	17

3.4.6	Mahui Mine Incremental Economic Results	18

4	CMM Project Evaluation at Pingshang Mine	20

4.1	Summary of Pingshang Mine Characteristics	20

4.2	Pingshang Mine Gas Resources	21

4.3	Pingshang Mine Gas Production Forecast	22

4.3.1	Pingshang Mine Forecast Approach	22

4.3.2	Pingshang Mine Forecast Assumptions	23

4.3.3	Pingshang Mine Forecast Results	24

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4.4 Pingshang Mine Preliminary Cost-Benefit Analysis	26

4.4.1	Technical Assessment of Utilization Options at Pingshang Mine	26

4.4.2	Pingshang Mine Project Development Cases	27

4.4.3	Economic Assumptions and Input Parameters for Pingshang Mine	27

4.4.4	Pingshang Mine Baseline Case Results	29

4.4.5	Pingshang Mine Maximum Power Production Case Results	30

4.4.6	Pingshang Mine Fertilizer Production Case Results	31

4.4.7	Pingshang Mine Incremental Economic Results	32

5	Market Information	35

5.1	Energy Markets for CMM	35

5.2	Environmental Markets	37

5.3	Government Policy	37

6	Conclusions and Recommendations	38

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Acronyms/Abbreviations

ARI	Advanced Resources International, Inc.

Bcf	Billion Cubic Feet

cc	Cubic centimeter

CDM	Clean Development Mechanism

CER	Certified Emission Reduction

CMOP	US EPA Coalbed Methane Outreach Program

CMM	Coal Mine Methane

CH4	Methane

C02	Carbon Dioxide

EU ETS	European Union Emissions Trading Scheme

ft	Feet

GMI	Global Methane Initiative

Ha	Hectare

Hg	Mercury

km	Kilometer

kW	Kilowatt

kWh	Kilowatt hour

m	Meters

m3	Cubic meters

m3/h	Cubic meters per hour

m3/min	Cubic meters per minute

m3/t	Cubic meters per metric tonne

Mcf	Thousand cubic feet

MMBtu	Million British Thermal Units

MMcf	Million cubic feet

MMSCF	Million Standard Cubic Feet

MSCFD	Thousand Standard Cubic Feet per Day

Mta	Million (metric) tonnes per annum

MtC02e	Metric tonnes of C02 equivalent

MW	Megawatt

PL	Langmuir pressure (psia);

psi	Pounds per square inch

psia	Pounds per square inch absolute

SCF	Standard Cubic Feet

Sub-bit	Sub-bituminous coal

Tons	Short tons

Tonnes	Metric tonnes

USEPA	US Environmental Protection Agency

VAM	Ventilation air methane

VL	Langmuir volume (scf/ton

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Metric/Imperial Unit Conversions

Metric

Imperial

1 hectare

2.47 acres

1 centimeter (cm)

0.4 inches

1 meter

3.281 feet

1 cubic meter (m3)

35.3 cubic feet (ft3)

1 metric tonne

2,205 pounds

1 metric tonne

1,000 kilograms

1 short ton

2,000 pounds

1 short ton

907.185 kilograms

1 kilo calorie (kcal)

3.968 Btu (British Thermal Units)

252,016 kcal

1 MMBtu (million British Thermal Units)

159 litres

1 Barrel (bbl)

1 MegaPascal (MPa)

145 psi

760 mgHg

1 atmosphere or 14.696 psi

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Table of Figures and Tables

Figure ES-1: Mahui Mine Forecasted Coal Mine Methane Drainage Available for Use (m3/min). II

Figure ES-2: Pingshang Mine Forecasted Coal Mine Methane Drainage Available for Use

(m3/min)	Ill

Figure 2-1: Global CMM Emissions	2

Figure 2-2: Corporate Structure	4

Figure 2-3: Shanxi Province and Location of the Mahui and Pingshang Coal Mines	5

Figure 3-1: Location of the Mahui Mine	7

Figure 3-2: Passive vent and vacuum pump at the Mahui mine	9

Figure 3-3: Schematic Diagram of Existing Drainage System	10

Figure 3-4: Mine Plan for Mahui Mine	10

Figure 3-5: Histogram Summarizing Results of Mahui Mine Gas Drainage Simulation	12

Figure 3-6: Coal Production Forecast for Mahui Mine	13

Figure 3-7: Mahui Mine Forecast Coal Mine Methane Drainage (m3/min)	13

Figure 3-8: Mahui Mine Forecasted Coal Mine Methane Drainage Available For Use	14

Figure 4-1: Location of the Pingshang Mine	20

Figure 4-2: Vacuum pump at the Pingshang Mine	22

Figure 4-3: Mine Plan for Pingshang Mine	23

Figure 4-4: Histogram Summarizing Results of Pingshang Mine Gas Drainage Simulation	24

Figure 4-5: Coal Production Forecast for Pingshang Mine	25

Figure 4-6: Pingshang Mine Forecasted Coal Mine Methane Drainage (m3/min)	25

Figure 4-7: Pingshang Mine Forecasted Coal Mine Methane Drainage Available for Use

(m3/min)	26

Figure 4-8: Fertilizer Plant Near the Pingshang Mine	27

Table 3-1: Coal Historical Production and Gas Production at the Mahui Mine	8

Table 3-2: Characteristics of Seams No. 8 and 15 at the Mahui Mine	8

Table 3-3: Historical Production and Emissions Data for Mahui Mine	11

Table 3-4: Gas Drainage Simulation Model Input Distributions for Mahui Mine	12

Table 3-5: Summary of Mahui Mine Project Development Cases	14

Table 3-6: General Physical & Financial Factors Used in Economic Modeling of Mahui Mine .... 15

Table 3-7: Input Parameters Used to Model Economics of Mahui Mine Power Generation	16

Table 3-8: Cash Flow and Economic Results of Base Case for Mahui Mine	17

Table 3-9: Cash Flow and Economic Results of Maximum Power Production Case for Mahui

Mine	18

Table 3-10: Cash Flow and Incremental Economic Results for Mahui Mine (Max Power minus

Baseline)	19

Table 3-11: Summary of Incremental Economic Results for Mahui Mine Maximum Power

Production Case with Carbon Price Sensitivities	19

Table 4-1: Historical Coal Production and Gas Production at the Pingshang Mine	21

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Table 4-2: Characteristics of Seams No. 8, No. 9 and No. 15 at the Pingshang mine	21

Table 4-3: Historical Production and Emissions Data for Pingshang Mine	23

Table 4-4: Gas Drainage Simulation Model Input Distributions for Pingshang Mine	24

Table 4-5: Summary of Pingshang Mine Project Development Cases	27

Table 4-6: General Physical & Financial Factors Used in Economic Modeling of Pingshang Mine

	28

Table 4-7: Input Parameters Used to Model Economics of Pingshang Mine Power Generation 29

Table 4-8: Input Parameters Used to Model Economics of Fertilizer Production	29

Table 4-9: Cash Flow and Economic Results of Base Case for Pingshang Mine	30

Table 4-10: Cash Flow and Economic Results of Maximum Power Production Case for Pingshang

Mine	31

Table 4-11: Cash Flow and Economic Results of Fertilizer Production Case for Pingshang Mine 32
Table 4-12: Cash Flow and Incremental Economic Results for Pingshang Mine (Max Power minus

Baseline)	33

Table 4-13: Summary of Incremental Economic Results for Pingshang Mine Maximum Power

Production Case with Carbon Price Sensitivities	33

Table 4-14: Cash Flow and Incremental Economic Results for Pingshang Mine (Fertilizer minus

Baseline)	34

Table 4-15: Summary of Incremental Economic Results for Pingshang Mine Fertilizer Production
Case with Carbon Price Sensitivities	35

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Executive Summary

With funding from the United States Environmental Protection Agency (USEPA), under the auspices of
the Global Methane Initiative (GMI), this pre-feasibility study forecasts coal mine methane (CMM)
production and evaluates the economic feasibility of CMM utilization options for the Pingshang and
Mahui coal mines of the Yangquan Coal Group Jindong Coal Management Company in Shanxi Province,
China.

The Pingshang mine (Xiyang County Pingshang Coal Co. Ltd.) and the Mahui mine (Shanxi Xiyang Fenghui
Coal Co. Ltd.) are located in eastern Shanxi province in Xiyang County 75 km south of the city of
Yangquan and about 400 kilometers southwest of Beijing. Xiyang County is located in the northeastern
corner of the methane-rich Qinshui coalfield, one of China's best known and most productive coalbed
methane basins.

Although operated by two different companies, the Pingshang and Mahui mines are affiliated as their
respective owners are subsidiaries of the same parent company, the Yangquan Coal Group Jindong Coal
Management Co. The mines are located in close proximity to each other, although they do not share a
boundary and are geographically distinct. The two mines are also affiliated with another subsidiary of
Yangquan Jindong, the Shanxi Xiyang Fenghui project development company, which is responsible for
CMM utilization at Yangquan Jindong mines.

Gas management at both mines consists of mine ventilation and methane drainage. Each mine's
methane drainage system relies on a system of sealed drainage galleries developed in seams above the
mined seam with negative pressure applied to the galleries to draw mine gas into the drainage
networks. A share of the drained CMM produced at the mines is captured for utilization while the
remainder is vented. The Mahui mine currently hosts a 9.8 MW combined heat and power plant and a
14.4 MW power plant is operating at the Pingshang mine.

Yangquan Jindong is planning to expand the existing power plants and is also interested in other
markets for the drained gas with a target date of 2015 to commence project expansion at each mine. At
the same time, mining is moving further below surface at each mine. The company, therefore, will
benefit from an analysis that projects gas production to properly plan for future expansion and to justify
the investment required. To assist Yangquan Jindong, a gas production forecast for each mine was
prepared based on available geologic data, current and future mine plans and historic gas production
data. Potential market options for CMM utilization were also evaluated for both mines. This pre-
feasibility study aims to assist Yangquan Jindong with moving closer to project implementation in 2015.

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Mahui Mine

The Mahui Coal Mine is located in Mahui Village, Dazhai Town, Xiyang County. It is 12 km south of
Xiyang. The mine has total coal reserves of 84.96 million tonnes (42 million tonnes being mineable),
with no known or planned reserve additions. The planned production rate is 1.2 Mta; however, actual
annual coal production ranges between 1.2 to 1.6 million metric tonnes per annum (Mta). The
expected remaining mine life is 30 years.

Figure ES-1 below shows the residual gas forecast for high, best (i.e., base) and low cases for the Mahui
mine. Residual gas is the gas production available for incremental use assuming demand from existing
power plants will continue.

Figure ES-1: Mahui Mine Forecasted Coal Mine Methane Drainage Available for Use (m3/min)

Month

Pingshang Mine

The Pingshang coal mine is located approximately 8.5 km north-northwest of the Mahui Coal Mine in
Xinangou Village, Leping Town in Xiyang County. The Pingshang mine was consolidated from two coal
mines, the Pingshang and Xinangou mines, both of which started coal production in 1983. In 2006,
approval was received to consolidate the two mines into one larger mine with total coal production
capacity of 300,000 tonnes per annum (tpa). In the same year, Yangquan Jindong entered into a joint
operating agreement with Pingshang Coal Mining Co. Ltd., making Pingshang a subsidiary company of
Yangquan Jindong. It was then decided to upgrade the mine to reach production capacity of 900,000
tpa.

The Pingshang mine has total coal reserves of 60 million tonnes (26 million tonnes being mineable),
which is undergoing expansion through a reserve addition of 20 million tons. Although the planned coal
production rate is 900,000 tpa, the mine's actual coal production is 1.2 Mta and Yangquan Jindong plans
to expand future coal production to 1.2-1.5 Mta. The estimated remaining life of the mine is 20+ years.

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Similar to the Mahui mine, residual gas production available for incremental use was calculated,
assuming that demand from existing power plants will continue. Figure ES-2 shows the gas forecast for
the low, base (i.e., "best") and high cases. For the Pingshang mine, a residual gas deficit in forecasted in
the base case for the first year, and for the first three years in the low case.

Figure ES-2: Pingshang Mine Forecasted Coal Mine Methane Drainage Available for Use

(m3/min)

CMM Utilization

Xiyang County is located 75 km due south of Yangquan, a major and well-known metropolitan area
within Shanxi Province. However, Xiyang is relatively isolated from Yangquan by surrounding rugged
mountain terrain. Therefore, any market for the CMM will most likely be limited to Xiyang County.

The use of residual CMM produced by both mines in on-site power plants or boilers for hot water and
steam would be a likely market given Yangquan Jindong's existing experience with power generation.
Another option is use in industrial applications at nearby manufacturing facilities

While not economically feasible at this time, the following market options were also considered:

• Natural gas distribution as town gas - CMM quality at both mines ranges from 40-50 percent at
the surface which is sufficient for town gas distribution. However, a town gas project would
require installing 12 km and 8 km low pressure transmission lines to Xiyang from Mahui and
Pingshang, respectively, and then the construction of gas distribution mains in Xiyang.

• Natural gas pipeline sales - There are no major natural gas trunklines in close proximity to the
mines. Furthermore, the capital cost (Capex) for a gas processing unit would be approximately
US$4 million and annual operating expenses (Opex) could be expected to total around US$1
million.

• Compressed Natural Gas (CNG)/Liquefied Natural Gas (LNG) - Although this may be an attractive
option in the future for mines in Xiyang County, conversion of drained gas from the Mahui and
Pingshang mines is not economically feasible at this time. Capex to manage the residual gas
flow at each mine could total US$3 million for CNG and US$6-7 million for an LNG plant. Opex at

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each mine could total US$l-2 million per year. Moreover, a market must exist to accept CNG
and LNG. This infrastructure does not exist yet in Xiyang.

• Flaring - The mine is not interested in flaring methane, as it is difficult to receive authorization to
flare CMM in China because the energy value of CMM is highly valued. There is no economic
incentive to flare at this time.

In assessing market opportunities, the credibility and position of Yangquan Jindong as the CMM project
host was also considered. Yanguan Jindong's success with the existing projects provides confidence
that it has the technical and financial capacity to deliver a CMM project.

Mahui Mine Project Economics

Using a discount rate of 10 percent, the baseline (i.e., best or base) case for use of residual gas
production at the Mahui mine generates an estimated cash flow stream with a net present value (NPV-
10) of US$16.9 million and an internal rate of return over 90 percent. Combining both the existing 9.8
MW power project and 8.8 MW for the new power project, the NPV-10 is $42.7 million.

With the addition of another 8.8 MW of electricity generation capacity at Mahui mine above and
beyond the existing plant of 9.8 MW, 100 percent of the drained methane is destroyed resulting in net
emission reductions of 183,000 tC02e/yr over the 11-year project life. Additionally, the incremental
electricity generated will offset electricity consumption from the North China Power Grid, which would
decrease project-related emissions by an estimated 55,000 tC02e/yr, for a total emission reduction of
238,000 tC02e/yr over the 11-year project life.

Pingshang Mine Project Economics

The maximum power production case at Pingshang mine generates an estimated cash flow stream with
an NPV-10 of US$17.3 million. The results of the economic analysis indicate an incremental increase in
NPV-10 of US$4.6 million for the maximum power production case, as compared to the baseline case, at
Pingshang mine. The fertilizer production project at Pingshang reduces NPV-10 by US$9.6 million when
compared to the baseline case, which indicates that the loss of revenue from decreased electricity sales
outweighs any fuel cost savings associated with switching from coal to gas.

With the utilization of drained gas in the fertilizer plant and on-site power generation plant at Pingshang
mine, 100 percent of the drained methane is destroyed resulting in net emission reductions of 78,000
tC02e/yr over the 8-year project life. Additionally, the use of drained gas by the fertilizer plant will
offset emissions from coal by 62,000 tC02e/yr. However, since drained gas previously utilized to
generate on-site electricity is diverted to the fertilizer plant, electricity purchased from the North China
Power Grid will increase, which will offset any emission reductions gained by switching to gas from coal
at the fertilizer plant. As a result, total emission reductions over the 8-year project life are estimated at
78,000 tC02e/yr.

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Next Steps

Although Mahui and Pingshang mines already host CMM utilization projects, the support of USEPA and
the GMI fill an important market need by providing the crucial early-stage analysis necessary for any
further project development. Yangquan Jindong faces a challenge common with many mines today in
China. Low prices for carbon credits, uncertainty over a successor agreement to the Kyoto Protocol
and lower coal prices have diverted resources away from planning CMM projects. This pre-feasibility
study presents a rigorous analysis based on high level data that shows expansion of existing projects to
be feasible and economically attractive. This provides a foundation for a more thorough full feasibility
study potentially leading to project investment and implementation.

The following next steps are suggested to prepare for an expansion of existing operations, including
production of a more detailed project feasibility study:

1. Take cores in the future mining districts and conduct gas desorption analyses to obtain accurate
measure of gas content, permeability and porosity of the coals. This will inform a more
thorough gas production forecast.

2. Review the mine maps to specify the exact height of overburden over the coal seams
throughout the mine to support more accurate modeling.

3. Evaluate the potential for participation in Chinese carbon markets, including obtaining reputable
carbon price projections for these markets.

4. Consider other mine degasification options including use of boreholes to enhance drainage of
gob gas into the drainage galleries, use of cross-measure boreholes, longhole in-mine boreholes.
Surface gob vent boreholes may also be considered.

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1 Introduction

Under the auspices of the Global Methane Initiative (GMI), the U.S. Environmental Protection Agency
(USEPA) works with coal mines in the U.S. and internationally to encourage the economic use of coal
mine methane (CMM) gas that is otherwise vented to the atmosphere. Methane is both the primary
constituent of natural gas and a potent greenhouse gas when released to the atmosphere. Reducing
emissions can yield substantial economic and environmental benefits, and the implementation of
available, cost-effective methane emission reduction opportunities in the coal industry can lead to
improved mine safety, greater mine productivity, and increased revenues.

An integral element of USEPA's international outreach in support of the GMI is the development of
CMM pre-feasibility studies. These studies provide the cost-effective first step to project development
and implementation by identifying and evaluating potential opportunities through a high-level review of
gas availability, end-use options, and emission reduction potential. In recent years, USEPA has
sponsored feasibility and pre-feasibility work in China, India, Kazakhstan, Mongolia, Poland, Russia,
Turkey, and Ukraine. These studies can be found at
http://www.epa.gov/coalbed/resources/international.html.

Advanced Resources International, Inc. (ARI) prepared this study for the Yangquan Coal Group Jindong
Coal Management Company Mahui and Pingshang coal mines in Shanxi Province, China. The Pingshang
mine (Xiyang County Pingshang Coal Co. Ltd) and the Mahui mine (Shanxi Xiyang Fenghui Coal Co. Ltd)
are located in eastern Shanxi province in Xiyang County 75 km south of the city of Yangquan and about
400 km southwest of Beijing. Xiyang County is located in the northeastern corner of the methane-rich
Qinshui coalfield, one of China's best known and most productive coalbed methane basins.

Although CMM utilization projects currently exist at both mines, Yangquan Jindong wishes to better
understand future gas availability to plan for expansions of existing projects and to diversify end use
options to spread risk. The objective of this pre-feasibility study is to develop CMM production forecasts
and assess potential utilization options at the two mines. The study also includes a high-level financial
analysis of the prospective CMM utilization options and estimates greenhouse gas emission reductions.

This pre-feasibility study is intended to provide an initial assessment of project viability. A final
investment decision (FID) should be made only after completion of a more rigorous study of project
feasibility utilizing more refined data and detailed cost estimates, completion of a detailed site
investigation, and more accurate gas production forecasts.

2 Background

2.1 Coal Mine Methane Potential in China

Any sustained effort to reduce global CMM emissions must include China. Chinese coal mines produce
3.68 billion metric tonnes of coal per year, almost four times the production of the United States, the

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next largest producer.1 Today, China accounts for almost 50 percent of global production2, and China's
energy use is predicted to steadily increase over the next twenty years, impacting all energy sectors.
Recently, China's National Development & Reform Commission (NDRC) approved construction of 15
new, very large coal mines with combined capacity of 100 million tonnes, and by 2015, China aims to
increase total coal production capacity by 860 million tonnes over 2010 production.

China also leads the world in CMM emissions. Figure 2-1 below shows China's projected CMM
emissions through 2030 in relation to other major emitting countries. Total emissions for China are
around 23 billion cubic meters (Bm3). According to the China Coal Information Institute (CCII), CMM
drainage volume increased from 2.2 Bm3 in 2005 to 12.6 Bm3 in 2013. In the first six months of 2014,
gas drainage was 6.56 Bm3, a 7.7 percent increase over 2013. Shanxi province leads all other provinces
in total gas drainage with 2.71 Bm3 in 2013 or 22 percent of China's total. China's CMM emissions are
anticipated to continue increasing with growth in coal production far outpacing every other country.
China will account for 56 percent of global CMM emissions by 2030, presenting significant opportunities
for methane capture and use.4

800
700
600
500

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utilization with 0.96 Bm3 used in 2013.5 This is due to its extensive and well-capitalized mining industry,
large CMM resource base, and support from the provincial government. Other important drivers are
high industrial power prices and prospective internal Chinese carbon markets. Despite the success in
China generally and in Shanxi province specifically, there is still great demand for technical assistance
with respect to mine gas assessment, management, and utilization. Coal mines in China are still venting
8.3 Bm3 of drained gas.6

2.2 Selection of the Mahui and Pingshang Mines for the Pre-Feasibility Study

The Mahui and Pingshang coal mines in east central Shanxi Province are excellent subjects for a pre-
feasibility study for several reasons:

• They are sizeable coal mines with each mine producing over one million tonnes of coal per year.

• The coals being mined have relatively high gas contents.

• Surrounding rock strata and coal seams also hold methane influencing the volume of gas flow
into the mine.

• Both mines already employ methane drainage, thus there is a ready source of gas for utilization.

• There are CMM utilization projects at both mines, providing confidence that the mine operator
and the associated project developer have the technical and operational capacity to deliver
future expansions of the existing projects, and to also expand into other utilization options.

• Existing projects have not relied on carbon markets for revenues, instead using conventional
energy markets to support the projects; therefore, the absence of regional, national and
international markets may not have an adverse impact on the ability of Yangquan Jindong to
implement the projects.

• The mine operator has expressed a clear need for technical assistance to forecast future gas
availability to meet its anticipated development date of 2015, including anticipated increases in
gas production due to deepening mining conditions.

An initial data request was provided to the mines in October 2013 with subsequent data requests in
December 2013 and April 2014. The project team visited the coal mines and the mines' affiliated project
development company, Shanxi Xiyang Fenghui Industry Co., Ltd., in November 2013. This provided the
opportunity to gather data, tour surface facilities at the mines, meet with staff of both mines, and
observe operations including gas and electricity production and transport. During the visit and in
subsequent communications, management at Yangquan Jindong, both mines and Shanxi Xiyang Fenghui
Industry Co. Ltd. demonstrated a strong commitment to maximizing gas capture and use at the two
mines now and in the future. The company's senior management, including the Yangquan Jindong
Group Chief Executive Officer, participated in meetings.

2.3 Corporate Affiliation

The Mahui and Pingshang mines are affiliated but owned by two different subsidiaries of the same
parent company. The Mahui mine is operated by Shanxi Xiyang Fenghui Coal Co. Ltd. and Pingshang
mine is operated by Xiyang County Pingshang Coal Co. Ltd. The parent company of Shanxi Xiyang and
Xiyang Pingshang is the Yangquan Jindong Coal Management Company. The Mahui mine was
constructed in 1983 by the local county and privatized in 2000. In 2009, Fenghui bought the mine. The
project development affiliate of both mines and subsidiary of Yangquan Jindong is the Shanxi Xiyang

5 Huang (2014)

6 Huang (2014)

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Fenghui Industry Company. The diagram in Figure 2-2 highlights the corporate structure of Yangquan
Jindong and shows the relationships between the companies.

Figure 2-2: Corporate Structure

2.4 Location

The two mines are located in Shanxi Province, roughly 415 km to the southwest of Beijing in what is
known as the Northern China region. The mines are situated along the eastern border of the province in
Jinzhong prefecture, one of 11 prefecture-level divisions within Shanxi Province. Specifically, Mahui and
Pingshang mines are located within Xiyang County, which is 75 km south of Yangquan city, the major
metropolitan area of east central Shanxi (see Figure 2-3).

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2.5 Topography and Climate

The primary consideration for the Mahui and Pingshang mines is the mountainous terrain in eastern
Shanxi province. The mines are located in the northeastern edge of Qinshui coalfield, along the western
ridge of the Taihang Mountains. The Taihang have an average elevation of 1,500 to 2,000 meters (4,900
to 6,600 ft). The terrain consists primarily of mountains interspersed with valleys. Although small
villages are located in the valleys, the mine galleries are located under mountains at varying elevations.

The valleys are typically cut by surface streams and rivers. Commercial, industrial, and residential areas
and farming are located in the valleys, including the Mahui and Pingshang mine offices and buildings.
However, some aspects of the mining operations necessarily are located in the higher elevations
including ventilation fans, gas drainage pump stations, and electricity substations.

The Mahui mine is at a slightly higher elevation than Pingshang. The highest point of the Mahui mining
area is in the western area of the mine plan, at elevation of 1,129 m (3,704 ft). The altitude drops to the
east, with the lowest point in the eastern part of the permitted mine plan situated at 993 m (3257 ft).

For the Pingshang mining area, the terrain is higher in the west and central regions of the mine
concession, with the highest point in the southwest section of the mine property at 996 m (3,267 ft)
above sea level. The surface elevation drops to 862 m (2,827 ft) at the lowest point in the northeast.

The elevation at the main portals for both mines is approximately 960 m above sea level (3,150 ft).

Shanxi Province has a dry, monsoon-influenced humid continental climate, with cold and very dry
winters, and warm, humid summers. Spring is extremely dry and prone to dust storms. Monthly
average temperatures range from -3.4°C (26°F) in January to 24°C (75°F) in July. The average annual
temperature is 9.4°C (49°F). Construction and operation of CMM projects in mountainous areas of
Shanxi province can be influenced by weather. Delays or the complete cessation of construction activity
can occur in winter months (effectively November through March) due to extreme cold temperatures
that may occasionally bring ice and snow.

Page 5

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2.6 Regional Geology

Both the Mahui and Pingshang mines are located in the northeastern corner of the Qinshui Basin, which
is one of China's major coal basins. The Qinshui basin, one of the Mesozoic basins that evolved from the
late Paleozoic Northern China's Craton Basin, is surrounded by theTaihang Mountains, Huo Mountain,
Wutai Mountain, and Zhongtiao Mountain. The Mahui and Pingshang coal mines exploit coal seams that
occur within the Carboniferous Taiyuan Formation and the overlying Permian Shanxi Formation.

Ordovician carbonates form the basement for the coal deposits in the area. The Ordovician unit
contains limestone and dolomite rock and averages 578 m in thickness. Unconformably overlying the
Ordovician is the Carboniferous Benxi Formation, which is made up of siltstones, organic-rich shale, and
thin discontinuous coals. No mineable coals occur in the Benxi formation.

Overlying the Benxi Formation is the Carboniferous Taiyuan Formation, one of two principal coal-bearing
units, which is comprised of a siltstone, mudstone, and coal sequence that averages 120 m in thickness.
Importantly for this analysis, the Taiyuan Formation contains coal seams No. 15, No. 8, and No. 9. Seam
No. 15, the seam currently being mined in the Mahui and Pingshang mines, lies on top of a thick (over 7
m) clay and siltstone formation, which is immediately overlain by limestone followed by sandstone and
clay. The mines are also authorized to produce coal from the No. 8 and No. 9 seams, but thus far have
only produced run-of-mine coal from the No. 8 seam where gas drainage galleries are driven above the
No. 15 seam. The planned expansions at both mines will occur in the No. 15 seam, with drainage
galleries in the No. 8 seam.

Overlying the Taiyuan Formation is the Shanxi Formation. The Shanxi has an average thickness of 56 m
and contains less desirable coals than the Carboniferous Taiyuan Formation. Overlying the Shanxi
Formation is the Permian Lower Shihexi Formation, which is a regressive sequence that contains much
more coarse-grained sandstone than the underlying coal bearing formations. Over the lower Shihexi
formation is the Permian Upper Shihexi Formation, which is an assemblage of poorly sorted sandstone,
siltstone, and mudstone. Lastly, overlying the Permian upper Shizexi Formation is the Permian
Shiqianfeng Formation.

The Mahui and Pingshang mines are located on the southern edge of the Pingxi mining field, which is on
the eastern edge of the northern section of Qinshui Depression and the west wing uplift of Taihang
Mountain. The basic form is a monocline structure whose axis strikes NNE to NW. This monocline
developed lower level folds. The dip is generally around 10°, but locally can be up to 20 °. The axial
direction of faults and folds are mostly north east with some being north west. Collapse columns are
generally developed.

Overall, the structural configuration of the mining area is broadly consistent with regional structure (i.e.,
a monoclinic structure with a gentle dip of 5-8 °). Faults are well developed. Wide and gentle folds can
be seen in the southeast.

3 CMM Project Evaluation at Mahui Mine
3.1 Summary of Mahui Mine Characteristics

The Mahui Coal Mine is located in the central eastern part of Shanxi Province, in Mahui Village, Dazhai
Town, Xiyang County. It is 12 km south of Xiyang with coordinates 37 31'47.0"N, 113 40'16.0"E, and has
an aerial extent of 13.95 km2. The topography is mountainous. The mine is located 75 km or about 1
hour drive south of the city of Yangquan (see Figure 3-1).

Page 6

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Chor^jfc© Tefflffe

Xiyang

X»OMU«

**iij "

Mahui Mine

Figure 3-1: Location of the Mahui Mine

Construction on the Mahui mine began in 1978 with production starting in 1981. The mine has total
coal reserves of 84.96 million tonnes (42 million tonnes being mineable), with no known or planned
reserve additions. The planned production rate is 1.2 Mta; however, actual annual coal production
ranges between 1.2 to 1.6 Mta. The expected remaining mine life is 30 years. Table 3-1 shows the
historical coal and gas production at the mine since 2010, the earliest data provided by the mine.

Page 7

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Mine

Year

Gas
Production
(Mm3/yr)

Coal
Production
(kt/yr)

Relative

Gas
Emissions
(m3/t)

Absolute

Gas
Emissions
(m3/min)

2013

1200

Mahui

2012

1200

2011

900

2010

800

Table 3-1: Coal Historical Production and Gas Production at the Mahui Mine

Two coal seams in the Mahui mine have been approved for mining by the government, seam No. 8 and
seam No. 15, but only the No. 15 is currently being mined. Yangquan Jindong uses retreat longwall
mining in the No. 15 seam. Coal is produced from the No. 8 seam but only as part of mine development
to drive drainage galleries and associated roadways in the gas drainage system. The coal characteristics
of the No. 8 and No. 15 are shown in Table 3-2. Seam 15 is located in the lower part of the Taiyuan
formation and has a thickness of 4.2 to 5.3 m and an average thickness of 5.0 m. The seam has
permeability of 0.068 m2/Mpa2 d, and the roof is sandy mudstone and the floor is mudstone. The
mining level is 640 m above sea level, which makes the depth of mining in the range of 293 to 489 m
below surface. Currently the Mahui mine operates one longwall in the No. 15 seam with a face width of
200 m.

Ash (ad)

Volatile (Vdaf)

Sulfur (St. d)

Content

Calorific (Qb,

(percent)

d) (MJ/kg)

Raw

Float

Raw

Float

Raw

Float

Seam

avg

17.00

7.04

9.26

6.96

1.49

0.74

33.69

27.16

10.16

11.06

7.55

0.75

0.55

32.86

Table 3-2: Characteristics of Seams No. 8 and 15 at the Mahui Mine

The geology of the mine is not considered to be complex, according to mine management. This is
positive as structurally complex areas often have low permeability due to the annealing of coal cleats
under tectonic stress over geologic time. However, CMM is far less sensitive to geologic structure than
virgin coalbed methane or other unconventional natural gas reservoirs because even low inherent
permeability is greatly increased by the intense fracturing that takes place during mining and gob
collapse.0

3.2 Mahui Mine Gas Resources

Xiyang Fenghui reports that in situ gas content (also referred to as the inherent gas content) at the
Mahui coal mine is 7.48 m3/t. Seam No. 15 has a gas in place estimate of 318 million m3. Although No.
15 is the only seam being mined by longwall method, seams 8 and 9, which overlie seam 15, are both
attractive gas reservoirs with gas in place estimates of 97 million m3 and 175 million m3, respectively.
There is also sandstone overlying No. 15 which has a gas in place estimate of 955 million m3. Thus the

Page 8

-------
Mahui mine has a total gas reserve estimate of 2925 Mm ' arid recoverable gas is believed to be 877
Mm3.

Methane liberated during coal extraction at the Mahui mine is managed through mine ventilation and
methane drainage. The mine ventilation system contains three inlet returns and one outlet return. The
methane drainage system at the Mahui mine employs drainage galleries developed in the No. 8 and No.
9 seams, which are located approximately 40 meters above the No. 15 seam. Drainage galleries, which
are also sometimes referred to as the superjacent method, are driven and sealed in the No. 8 and 9
seams allowing gob gas to migrate into the galleries. The galleries are sealed and gas is drawn into the
gathering network using vacuum pumps. While superjacent galleries sometimes include drainage
boreholes drilled from the galleries into the gob area in order to augment gas drainage, such boreholes
are not necessary at the Mahui mine. The galleries have been effective at drawing gas with just a
vacuum pump. The mine gas is transported through two drainage systems, one high pressure and one
low pressure, to the surface. Drainage pump stations are located on the surface along with dewatering
equipment.

The methane concentration at the longwall face varies from 45 percent to 70 percent CH4, while the
average concentration in the drainage system at the surface is 45 percent CH4. The dilution is due to air
ingress into the collection system, not loss of methane during transport. However, mine gas with a
relatively consistent CH4 content of 45 percent can be used in many applications. The reported drainage
recovery efficiency is 53 percent.

Figure 3-2: Passive vent and vacuum pump at the Mahui mine

3.3 Mahui Mine Gas Production Forecast
3.3.1 Mahui Mine Forecast Approach

As noted previously, the methane drainage systems at both mines utilize drainage galleries developed in
coal seams above the #15 seam (Figure 3-3). The galleries are sealed and connected to the methane
extraction system via a pipeline that is under suction (i.e., vacuum or negative pressure). As the

Page 9

-------
longwall passes arid the roof collapses, gob gas is collected in the drainage galleries and transported to
the surface for utilization.

Tailgate

Drainage Gallery

Longwall Panel

Headgate

(a) Plan View

Figure 3-3: Schematic Diagram of Existing Drainage System

Gas production from Mahui mine was estimated based on the mining plan provided by the mine
operator (Figure 3-4). The mine plan for the Mahui mine project consists of 8 panels with one set of
panels being 2000 m by 200 m and the other set being 1000 m by 200 m. For purposes of modeling,
however, the project area for the gas drainage project has been divided into 12 longwall panels, each
having a length of 1000 m, a width of 200 m, and an average height of 5 m. The mine plan shows
longwall panels scheduled to be mined at Mahui through 2026. For forecasting purposes a face advance
rate of 3 meters per day (m/d) is assumed, which results in a total project duration of approximately 132
months for the Mahui mine.

Mahui Mine Plan

200 m 200 m 200 m 200 m

2015

2018

2021

2024

200 m

2016

2019

2022

2025

200 m

2017

2020

2023

2026

Year panel mined Longwall panel

Figure 3-4: Mine Plan for Mahui Mine

Page 10

-------
Since gas liberation is largely a function of the gas content of the coal seams and the rate of coal
production, historical production data can be a useful indicator of future gas drainage potential. Table
3-3 shows annual coal and gas production data as provided by mine management (also presented earlier
in the overview of the Mahui mine). Gas emissions per tonne of coal mined range from 17 to 38 m3/t
from Mahui mine. Over the four year period for which data are available, gas emissions have a direct
relationship to the quantity of coal produced at the Mahui mine.

Mine

Year

Gas
Production
(Mm3/yr)

Coal
Production
(kt/yr)

Relative

Gas
Emissions
(m3/t)

Absolute

Gas
Emissions
(m3/min)

2013

1200

Mahui

2012

1200

2011

900

2010

800

Table 3-3: Historical Production and Emissions Data for Mahui Mine

In order to forecast future gas production at the Mahui mine, a model was developed to simulate gas
drainage volumes based on mine-specific data and assumptions. Monte Carlo simulation (10,000 trials)
was conducted in order to develop a probability density function to predict gas drainage volume for a
given quantity of coal mined. Based on planned mine capacity increases, coal production forecasts were
generated for the project area. Monthly gas production was then forecast by sampling the probability
density function (1000 trials for each month) and multiplying the results by forecasted monthly coal
production. The monthly gas volumes were then aggregated into annual quantities to be used in the
economic analysis.

3.3.2 Mahui Mine Forecast Assumptions

Probability distributions were estimated for each of the key input parameters used in the gas drainage
simulation model. Table 3-4 presents the range of distributions used in the simulation model. The
model is based on work conducted by the Shenyang Institute of Coal Science Research in association
with the preliminary design of the gas drainage project at the Mahui mine.7 The probability
distributions for the input parameters were based on actual data provided by the mines, recommended
ranges provided by the Institute, and values derived through matching of historical data via trial
simulations.

7 Shenyang Research Institute of Coal Research (2000). Shanxi Coal Industry Co., Ltd. Xiyang Fenghuiyuan Mergers
and Acquisitions Integration of Mine Gas Drainage Project Preliminary Design. February 2000.

Page 11

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Parameter

Units

Distribution

Minimum

Mahui Mine
Most
Likely

Maximum

Rock gas emission coefficient

ratio

Triangular

1.15

1.30

Coal face gas emission

coefficient

ratio

Triangular

1.00

1.25

1.50

Seam gas content

m3/t

Triangular

7.48

13.92

Adjacent layer gas emission

coefficient

ratio

Triangular

1.50

150

2.10

Coal production

Mt/yr

Uniform

0.800

1.200

Gob gas emission coefficient

ratio

Triangular

1.20

1.45

Adjacent layers drainage rate

Triangular

70%

90%

Gob drainage rate

Triangular

20%

62%

Table 3-4: Gas Drainage Simulation Model Input Distributions for Mahui Mine

3.3.3 Mahui Mine Forecast Results

The probability density function for the Mahui mine is presented in Figure 3-5. A lognormal probability
distribution function was fit to the simulation results in order to facilitate random sampling during the
generation of the monthly gas forecast. This function is used to estimate the likelihood of a volume of
gas being drained for a specific quantity of coal produced.

Mahui Mine Gas Drainage (m3/t)

Figure 3-5: Histogram Summarizing Results of Mahui Mine Gas Drainage Simulation

The coal production forecast used in the calculation of gas drainage is presented is Figure 3-6. Coal
production was assumed to remain flat at 1.2 Mt/yr through the end of 2014. Future planned capacity
of 1.6 Mt/yr was provided by the mine and a five year ramp-up period was assumed beginning in 2015.

Page 12

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1.8
1.6
1.4
1.2
£.1.0
2 0.8
0.6
0.4
0.2
0.0

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Year

Figure 3-6: Coal Production Forecast for Mahui Mine

A gas forecast was developed for the Mahui mine based on the coal production forecast and the low,
best, and high values (i.e., 10th, 50", and 90lh percentile, respectively) from random sampling of the
probability distribution function for relative gas emissions at Mahui. Figure 3-7 shows the forecasted
gas drainage from Mahui, and Figure 3-8 shows drained gas available after current (baseline) gas
utilization is accounted for. The gas drainage volumes shown in Figure 3-8 are the residual volumes
available for use after the fuel needs of the existing power plant have been met. Current gas
consumption is based on an 80 percent utilization factor for existing engines and is estimated at 35
rrf/min at Mahui mine.

—> —»ro3c-L
-------
Figure 3-8: Mahui Mine Forecasted Coal Mine Methane Drainage Available For Use

3.4 Mahui Mine Preliminary Cost-Benefit Analysis

3.4.1 Technical Assessment of Utilization Options at Mahui Mine

Currently all methane produced from the Mahui mine is either utilized by the onsite power plant or
vented to the atmosphere. Yangquan Jindong would like to expand the existing power plant based on
the expectation that CMM production will increase in future years. Other markets for the additional
CMM were considered as noted in Section 5; however, power generation in internal combustion engines
remains the most favorable utilization scheme given the experience of Yangquan Jindong and Xiyang
Fenghui.

3.4.2 Mahui Mine Project Development Cases

Incremental project economics are evaluated where cash flows from alternative gas utilization cases are
compared to cash flows resulting from business as usual (i.e., the baseline case). The assessment is
based on the best gas production forecasts (i.e., 50 percentile) for each mine, and all economics are
compared on a pre-tax basis. The cases evaluated are shown in Table 3-5.

Case Description

Baseline Business as usual; drained gas used as fuel for existing 9.8 MW of on-

site electricity generation capacity; excess drained gas vented to the
atmosphere

Maximum Power Production New electricity generation capacity added to utilize 100 percent of

available drained gas
Table 3-5: Summary of Mahui Mine Project Development Cases

Page 14

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3.4.3 Economic Assumptions and Input Parameters for Mahui Mine

The assumptions and input parameters used in the economic evaluation are summarized in the tables
below. Table 3-6 presents the general physical and financial factors used in the modeling and Table 3-7
highlights input parameters related to power generation at Mahui mine.

The baseline case is designed to represent current operations at the Mahui mine. It is assumed that gas
will be utilized in the existing engines, which are assumed to have an electricity generation efficiency of
35 percent and a run time of 80 percent. The baseline case assumes 9.8 MW of electrical generation
capacity is available at the Mahui mine - this is the existing plant. The capital expenditure for the
existing generation capacity is assumed to represent a sunk cost and is therefore not factored into the
project economics. Existing agreements between the mines and the power development affiliate,
Xiyang Fenghui, are also represented in the baseline case where Mahui mine provides gas free of charge
to the power company. The calorific value of the drained gas from Mahui mine is assumed to have a
heating value of 459 Btu/cf (4,084 kcal/m3) corresponding to a methane concentration of 45 percent.

Parameter

Value

Price Escalation

Cost Escalation

Calorific Value of Gas

459 Btu/cf

Table 3-6: General Physical & Financial Factors Used in Economic Modeling of Mahui Mine

8 This cost represents the installed cost in China for Chinese-made gas engines and is significantly less than the cost
of purchasing and installing gensets from western manufacturers which can range from $700-$1200 per kW.

Page 15

-------
Parameters

Value

Physical & Financial Factors

Baseline Electricity Generation Capacity

9.8 MW

Power Sales Price

$0.0817/kWh

Generator Efficiency

35%

Run Time

80%

CAPEX

Generator Cost Factor

$401/kW

Generator Relocation Fee

$100/kW

OPEX

Power Plant O&M

$0.03/kWh

Fuel Cost

$0/yr

Table 3-7: Input Parameters Used to Model Economics of Mahui Mine Power Generation
3.4.4 Mahui Mine Baseline Case Results

Table 3-8 shows the cash flow profile and economic results of the baseline case for the Mahui mine.
Using a discount rate of 10 percent, the baseline case at Mahui generates an estimated cash flow stream
with a net present value (NPV-10) of US$25.8 million.

Page 16

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Mine: Mahui
Forecast: Best
Case: Baseline

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.082

2015

9.8

68,678

0.084

5,779

2,271

3,509

2016

9.8

68,678

0.087

5,953

2,339

3,614

7,122

2017

9.8

68,678

0.089

6,131

2,409

3,722

10,845

2018

9.8

68,678

0.092

6,315

2,481

3,834

14,678

2019

9.8

68,678

0.095

6,505

2,556

3,949

18,627

2020

9.8

68,678

0.098

6,700

2,633

4,067

22,695

2021

9.8

68,678

0.100

6,901

2,712

4,189

26,884

2022

9.8

68,678

0.103

7,108

2,793

4,315

31,199

2023

9.8

68,678

0.107

7,321

2,877

4,445

35,644

2024

9.8

68,678

0.110

7,541

2,963

4,578

40,222

2025

9.8

68,678

0.113

7,767

3,052

4,715

44,937

TOTAL

755,462

74,022

29,085

44,937

Discount Factor: 10%

NPV ($,000): 25,805
IRR:

Table 3-8: Cash Flow and Economic Results of Base Case for Mahui Mine
3.4.5 Mahui Mine Maximum Power Production Case Results

Table 3-9 shows the cash flow profile and economic results of the maximum power production case for
Mahui mine. The maximum power production case at Mahui generates an estimated cash flow stream
with an NPV-10 of US$42.7 million.

Page 17

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Mine: Mahui
Forecast: Best

Case: Max Power

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.082

2,023

(2,023)

2015

14.8

104,016

0.084

8,753

3,439

5,314

409

4,905

2,882

2016

15.8

110,945

0.087

9,616

3,779

5,838

396

5,442

8,323

2017

16.8

117,466

0.089

10,487

4,121

6,366

393

5,974

14,297

2018

17.7

123,742

0.092

11,379

4,471

6,908

389

6,519

20,816

2019

18.5

129,780

0.095

12,292

4,830

7,462

7,430

28,246

2020

18.6

130,263

0.098

12,708

4,993

7,715

35,960

2021

18.5

129,970

0.100

13,060

5,132

7,928

43,889

2022

18.5

129,848

0.103

13,439

5,281

8,158

52,047

2023

18.6

130,095

0.107

13,868

5,449

8,419

60,466

2024

18.5

129,528

0.110

14,222

5,588

8,634

69,100

2025

18.5

129,664

0.113

14,664

5,762

8,902

78,002

TOTAL

1,365,319

134,489

52,844

81,645

3,642

78,002

Discount Factor: 10%

NPV ($,000): 42,736
IRR: 253%

Table 3-9: Cash Flow and Economic Results of Maximum Power Production Case for Mahui

Mine

3.4.6 Mahui Mine Incremental Economic Results

Table 3-10 presents the incremental economics for the Mahui maximum power production case, in
other words the maximum power production case less the baseline case (existing project). The results
of the economic analysis indicate an incremental increase in NPV-10 of US$16.9 million for the
maximum power production case as compared to the baseline case at Mahui mine. Total incremental
generating capacity would be 8.8 MW for a total nameplate capacity of 18.6 MW at Mahui by 2020.

Page 18

-------
Mine: Mahui
Forecast: Best

Case: Incremental (Max Power- Baseline)

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.000

2,023

(2,023)

2015

5.0

35,338

0.000

2,974

1,168

1,805

409

1,397

(627)

2016

6.0

42,267

0.000

3,664

1,440

2,224

396

1,828

1,201

2017

7.0

48,788

0.000

4,356

1,711

2,644

393

2,251

3,453

2018

7.9

55,064

0.000

5,063

1,990

3,074

389

2,685

6,137

2019

8.7

61,101

0.000

5,787

2,274

3,513

3,481

9,618

2020

8.8

61,585

0.000

6,008

2,361

3,647

13,266

2021

8.7

61,292

0.000

6,159

2,420

3,739

17,005

2022

8.7

61,170

0.000

6,331

2,488

3,843

20,848

2023

8.8

61,417

0.000

6,547

2,573

3,975

24,822

2024

8.7

60,849

0.000

6,681

2,625

4,056

28,878

2025

8.7

60,986

0.000

6,897

2,710

4,187

33,066

TOTAL

609,856

60,467

23,759

36,708

3,642

33,066

Discount Factor: 10%

NPV ($,000): 16,931
IRR: 92%

Table 3-10: Cash Flow and Incremental Economic Results for Mahui Mine (Max Power minus

Baseline)

With the addition of another 8.8 MW of electricity generation capacity at Mahui mine, 100 percent of
the drained methane is destroyed resulting in net emission reductions of 183,000 tC02e/yr over the 11-
year project life or 2,013,000 tC02e over the life of the project. Additionally, the incremental electricity
generated will offset electricity consumption from the North China Power Grid, which would decrease
project-related emissions by an estimated 55,000 tC02e/yr, for a total emission reduction of 238,000
tC02e/yr over the 11-year project life. Thus the project would yield a total 3,113,000 tC02e in emission
reductions over the project life. Table 3-11 illustrates the impact on project economics resulting from
the potential monetization of carbon emission reductions under various carbon price regimes.

Carbon Price
($/tC02e)

NPV-10
($,000)

IRR
(percent)

16,931

92%

18,410

99%

24,324

129%

31,717

165%

39,110

202%

Table 3-11: Summary of Incremental Economic Results for Mahui Mine Maximum Power
Production Case with Carbon Price Sensitivities

Page 19

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4 CMM Project Evaluation at Pingshang Mine

4.1 Summary of Pingshang Mine Characteristics

The Pingshang coal mine is located approximately 8.5 km north-northwest of the Mahui Coal Mine in
Xinangou Village, Leping Town in Xiyang County. The geographic coordinates are 37 36;19.0"N,
113°38'10.0"E (see Figure 4-1) and the mine property has an aerial extent of 7.41 km2. As with the
Mahui mine, the topography is mountainous.

Figure 4-1: Location of the Pingshang Mine

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The Pingshang mine was consolidated from two coal mines, the Pingshang and Xinangou mines, both of
which started coal production in 1983. In 2006, approval was received to consolidate the two mines
into one larger mine with total coal production capacity of 300,000 tpa. In the same year, Yangquan
Mining (Group) Limited entered into a joint operating agreement with Pingshang Coal Mining Co. Ltd.,
making Pingshang a subsidiary company of Yangquan Jindong. It was then decided to upgrade the mine
to reach production capacity of 900 tpa.

The Pingshang mine has total coal reserves of 60 million tonnes (26 million tonnes being mineable).
Yangquan Jindong has plans for a reserve addition of 20 million tons to the existing 60 million tonnes of
reserves. The reserve addition will justify production beyond 2022.

The planned coal production rate is 900,000 tpa, but the mine's actual coal production is 1.2 Mta.
Additionally, the mine plans to expand future coal production to 1.2-1.5 Mta. The estimated remaining
mine life is currently 20+ years with the reserve addition. Table 4-1 presents historical coal and gas
production from the Pingshang mine since 2010, the earliest data provided by the mine.

Page 20

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Mine

Year

Gas
Production
(Mm3/yr)

Coal
Production
(kt/yr)

Relative

Gas
Emissions
(m3/t)

Absolute

Gas
Emissions
(m3/min)

2013

880

Pingshang

2012

820

2011

800

2010

780

Table 4-1: Historical Coal Production and Gas Production at the Pingshang Mine

There are 3 coal seams in the Pingshang mine that have been mined at some point, seam No. 15, seam
No. 8, and seam No. 9. Similar to the Mahui mine, longwall mining is only occurring in seam No. 15 at
present. The coal characteristics of all three seams are shown in Table 4-2. Seam 8 is located in the
upper Taiyuan formation and consists of the No. 81 and No. 84 coal seam groups. No. 81 has an average
thickness of 0.74 m with a roof and floor of dark grey siltstone, silty mudstone and shale. No. 84 has an
average thickness of 1.33 m with a roof of carbonaceous mudstone, sandy mudstone, and siltstone, and
a floor of fine sandstone, siltstone, silty mudstone or shale. Seam No. 9 is also situated in the upper
Taiyuan formation, has an average thickness of 1.18 m, and has a roof and floor consisting of sandy
mudstone or shale. Seam No. 15 is located in the lower part of the Taiyuan formation and has an
average thickness of 6.09 m with and a permeability of 0.068 m2/Mpa2 d and a roof and floor consisting
of mudstone to sandy mudstone. The longwall face of Seam No. 15 is 165 m with a thickness of 5.5 m
and an advance rate of 3 m/d. Mining is at 320m below the surface.

Ash (ad) Volatile (Vdaf) Sulfur (St. d)

Content Content Content Calorific (Qb,

(percent) (percent) (percent) d) (MJ/kg)

Raw

Float

Raw

Float

Raw

Float

Seam

avg

20.29

7.96

10.13

7.00

1.07

0.68

34.5

17.53

8.72

8.54

7.21

1.76

0.88

35.57

8 (No. 81)

22.81

9.81

9.89

7.56

3.94

0.72

34.81

8 (No. 84)

24.09

9.57

11.86

7.56

0.45

0.53

33.57

Table 4-2: Characteristics of Seams No. 8, No. 9 and No. 15 at the Pingshang mine
4.2 Pingshang Mine Gas Resources

The in situ gas content of the coal in the No. 15 seam at the Pingshang mine is 7.85 m3/t, slightly higher
than the Mahui mine's 7.48 m3/t. The mine has a total gas reserve estimate of 1,032 million m3.

Pingshang mine uses drainage and ventilation to manage methane produced in the mine. The mine
ventilation system contains three inlets and one outlet return. The drainage system is very similar to
that used at Mahui; sealed galleries are driven into the No. 9 seam 68 meters above the No. 15 seam
with a vacuum pump used to pull the gob gas to the surface. Gas is then transported by high and low
pressure systems, with high pressure systems venting to the atmosphere and a low pressure system
supplying gas to the power plant. A new high-volume low pressure pump station, which has a pump

Page 21

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capacity of 800 rrr/min, was installed in 2012, although the pump is not close to full utilization. The
estimated low pressure throughput is 150 m/min.

Methane concentration at Pingshang averages 41 percent at the surface, and the drainage recovery
efficiency at Pingshang is reported to be 59 percent.

Figure 4-2: Vacuum pump at the Pingshang Mine

4.3 Pingshang Mine Gas Production Forecast
4.3.1 Pingshang Mine Forecast Approach

As noted previously, the methane drainage systems at both mines utilize drainage galleries developed in
coal seams above the #15 seam (see Figure 3-3). The galleries are sealed and connected to the methane
extraction system via a pipeline that is under suction (i.e., vacuum or negative pressure). As the
longwall passes and the roof collapses, gob gas is collected in the drainage galleries and transported to
the surface for utilization.

Gas production from Pingshang mine was estimated based on the mining plan provided by the mine
operator (Figure 4-3). The gas drainage project at the Pingshang mine consists of a total of eight
longwall panels, each having a length of 1000 m, a width of 165 m, and an average height of 5.5 m. The
mine plan shows longwall panels scheduled to be mined at Pingshang through 2022. With a reserve
addition, the number of panels wiil increase at Pingshang to extend production beyond 2022. However,
for this analysis, it is assumed that 2022 is the final year of production for the study area. The results
can be extrapolated to future years beyond 2022 if the mining conditions and gas contents in the
reserve addition are similar to the study area. For forecasting purposes a face advance rate of 3 m/d is
assumed, which results in a total project duration of approximately 88 months for the Pingshang mine.

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Pingshan Mine Plan

165 m 165 m 165 m 165 m

Figure 4-3: Mine Plan for Pingshang Mine

Since gas liberation is largely a function of the gas content of the coal seams and the rate of coal
production, historical production data can be a useful indicator of future gas drainage potential. Table
4-3 shows annual coal and gas production data as provided by mine management (also presented earlier
in the overview of the Pingshang mine). Gas emissions per tonne of coal mined range between 24 and
31 m3/t from Pingshang mine. Over the four year period for which data are available, gas emissions
have a direct relationship to the quantity of coal produced at the Pingshang mine.

Relative Absolute
Gas Coal Gas Gas

Production Production Emissions Emissions
Mine Year (Mm3/yr) (kt/yr) (m3/t) (m3/min)

2013

880

Pingshang

2012

820

2011

800

2010

780

Table 4-3: Historical Production and Emissions Data for Pingshang Mine

As with the Mahui mine, in order to forecast future gas production at the Pingshang mine, a model was
developed to simulate gas drainage volumes based on mine-specific data and assumptions. Monte Carlo
simulation (10,000 trials) was conducted in order to develop a probability density function to predict gas
drainage volume for a given quantity of coal mined. Based on planned mine capacity increases, coal
production forecasts were generated for the project area. Monthly gas production was then forecast by
sampling the probability density function (1000 trials for each month) and multiplying the results by
forecasted monthly coal production. The monthly gas volumes were then aggregated into annual
quantities to be used in the economic analysis.

4.3.2 Pingshang Mine Forecast Assumptions

Probability distributions were estimated for each of the key input parameters used in the gas drainage
simulation model. Table 4-4 presents the range of distributions used in the simulation model. The
model is based on work conducted by the Shanxi Chen State Construction Engineering Survey and
Design Co., Ltd. in association with the preliminary design of the gas drainage project at the Pingshang

Page 23

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mine.9 The probability distributions for the input parameters were based on actual data provided by the
mines, recommended ranges provided by the Shanxi Chen, and values derived through matching of
historical data via trial simulations.

Parameter

Units

Distribution

Pingshang Mine
Most

Minimum Likely Maximum

Rock gas emission coefficient

ratio

Triangular

1.15

1.30

Coal face gas emission

coefficient

ratio

Triangular

0.85

1.15

1.44

Seam gas content

m3/t

Triangular

4.20

7.85

12.15

Adjacent layer gas emission

coefficient

ratio

Triangular

1.50

2.10

Coal production

Mt/yr

Uniform

0.780

0.880

Gob gas emission coefficient

ratio

Triangular

1.25

1.30

1.45

Adjacent layers drainage rate

Triangular

70%

90%

Gob drainage rate

Triangular

20%

34%

38%

Table 4-4: Gas Drainage Simulation Model Input Distributions for Pingshang Mine

4.3.3 Pingshang Mine Forecast Results

The probability density function for the Pingshang mine is presented in Figure 4-4. A lognormal
probability distribution function was fit to the simulation results in order to facilitate random sampling
during the generation of the monthly gas forecast. This function is used to estimate the likelihood of a
volume of gas being drained for a specific quantity of coal produced.

Pingshang Mine Gas Drainage (m3/t)

Average

26.531

5.0668

Max

51.197

Min

13.398

13 18 23 28 33 38 43 48

Figure 4-4: Histogram Summarizing Results of Pingshang Mine Gas Drainage Simulation

The coal production forecast used in the calculation of gas drainage is presented in Figure 4-5. Coal
production was assumed to remain flat at 0.88 Mt/yr through the end of 2014. Future planned capacity
of 1.5 Mt/yr was provided by the mine and a five year ramp-up period was assumed beginning in 2015.

9 Shanxi Chen State Construction Engineering Survey and Design Co., Ltd (2008). Xiyang County Coal LLC
aerodromes upgraded the 15th mechanized coal seam gas drainage preliminary design. July 2008.

Page 24

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1.6

2014 2015 2016 2017 2018 2019 2020 2021 2022
Year

Figure 4-5: Coal Production Forecast for Pingshang Mine

A gas forecast was developed for Pingshang mine based on the coal production forecasted and the low,
best, and high values (i.e., 10 ", 50th, and 90" percentile, respectively) from random sampling of the
probability distribution function for relative gas emissions at Pingshang. Figure 4-6 shows the
forecasted gas drainage from Pingshang mine, and Figure 4-7 shows drained gas available after current
(baseline) gas utilization is taken into account. Current gas consumption is based on an 80 percent
utilization factor for existing engines and is estimated at 52 rrr/min at Pingshang mine.

Figure 4-6: Pingshang Mine Forecasted Coal Mine Methane Drainage (m3/min)

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Figure 4-7: Pingshang Mine Forecasted Coal Mine Methane Drainage Available for Use

(m3/min)

4.4 Pingshang Mine Preliminary Cost-Benefit Analysis

4.4.1 Technical Assessment of Utilization Options at Pingshang Mine

Currently all methane produced from the Pingshang mine is either utilized by the onsite power plant or
vented to the atmosphere. There are plans to increase power generation capacity at Pingshang by
adding four to six 500 kW gensets (2-3 MW). The mine is also considering supplying a nearby fertilizer
plant with methane to replace coal that is currently used in a burner at the plant. The mine currently
supplies the fertilizer plant with 20,000 tonnes of coal per year, which will be substituted by an
estimated 12 million m/yr of CMM. Currently, in order to make fertilizer, the plant crushes and then
mixes shells and lime before heating, which results in the final product, fertilizer. Using coal as the heat
source, the plant must gasify the coal. If CMM replaces coal as the energy source at the fertilizer plant,
the availability of a methane stream would allow the plant to eliminate the gasification step. Figure 4-8
is a picture of the fertilizer plant near Pingshang mine.

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Figure 4-8: Fertilizer Plant Near the Pingshang Mine

4.4.2 Pingshang Mine Project Development Cases

Case Description

Baseline Business as usual; drained gas used as fuel for existing 14.4 MW of on-

site electricity generation capacity; excess drained gas vented to the
atmosphere; fertilizer plant fueled by coal
Maximum Power Production New electricity generation capacity added to utilize 100 percent of

available drained gas; fertilizer plant fueled by coal
Fertilizer Production Fertilizer plant converted to natural gas and receives priority over on-

site power station with regard to gas supply; surplus gas used to
generate electricity
Table 4-5: Summary of Pingshang Mine Project Development Cases

4.4.3 Economic Assumptions and Input Parameters for Pingshang Mine

The assumptions and input parameters used in the economic evaluation are summarized in the tables
below. Table 4-6 presents the general physical and financial factors used in the modeling, Table 4-7

Page 27

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highlights input parameters related to power generation at Pingshang mine, and Table 4-8 shows inputs
for the fertilizer production case.

The baseline case is designed to represent current operations at the Pingshang mine. It assumes that
gas will be utilized in the existing engines, which are assumed to have an electricity generation efficiency
of 35 percent and a run time of 80 percent. The baseline case assumes 14.4 MW of electrical generation
capacity is available at the Pingshang mine. The capital expenditure for the existing generation capacity
is assumed to represent a sunk cost and is therefore not factored into the project economics. Existing
agreements between the mines and the power development affiliate are also represented in the
baseline case where Pingshang mine receives US$963,000 (RMB6 million) per year for gas, regardless of
the quantity supplied. Additionally, the Pingshang baseline case assumes the fertilizer plant is fueled by
20,000 tpa of coal. The calorific value of the drained gas from Pingshang mine is assumed to have a
heating value of 418 Btu/cf (3,719 kcal/m3) corresponding to a methane concentration of 41 percent.

The maximum power production case assumes new electricity generation capacity is added until 100
percent of available drained gas is utilized. New generation capacity is assumed to cost $401 per kW,
which includes costs for installation and other ancillary equipment. Under this case, the fertilizer plant
associated with the Pingshang mine remains to be fueled by coal, as it is in the baseline case.

The fertilizer production case assumes the fertilizer plant is converted to natural gas and receives
priority over the power station with regard to gas supply. Under this case, the fertilizer plant receives
approximately 12 Mm3 of gas each year with any surplus gas utilized to generate electricity. Incremental
capital costs associated with this case include expenditures for conversion of the burner and the
construction of a pipeline to the fertilizer plant.

Parameter

Value

Price Escalation

Cost Escalation

Calorific Value of Gas

418 Btu/cf

Table 4-6: General Physical & Financial Factors Used in Economic Modeling of Pingshang Mine

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Parameters

Value

Physical & Financial Factors

Baseline Electricity Generation Capacity

14.4 MW

Power Sales Price

$0.0817/kWh

Generator Efficiency

35%

Run Time

80%

CAPEX

Generator Cost Factor

$401/kW

Generator Relocation Fee

$100/kW

OPEX

Power Plant O&M

$0.03/kWh

Fuel Cost

$963,000/yr

Table 4-7: Input Parameters Used to Model Economics of Pingshang Mine Power Generation

Parameters

Value

Physical & Financial Factors

Coal Consumption

20,000 t/yr

Coal-Gas Equivalence Factor

1.5 kg coal/m3 CH4

CAPEX

Burner Conversion Cost

$236,000

Pipeline Cost

$230,000

OPEX

Fuel Cost - Coal

$88/t

Table 4-8: Input Parameters Used to Model Economics of Fertilizer Production
4.4.4 Pingshang Mine Baseline Case Results

Table 4-9 shows the cash flow profile and economic results of the baseline case for Pingshang mine.
Using a discount rate of 10 percent, the baseline case at Pingshang generates an estimated cash flow
stream with a NPV-10 of US$12.7 million.

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Mine: Pingshang
Forecast: Best
Case: Baseline

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.082

2015

13.8

96,793

0.084

8,145

2,811

3,201

2,134

2016

14.4

100,915

0.087

8,747

2,895

3,437

2,415

4,549

2017

14.4

100,915

0.089

9,009

2,982

3,540

2,488

7,037

2018

14.4

100,915

0.092

9,280

3,071

3,646

2,562

9,599

2019

14.4

100,915

0.095

9,558

3,163

3,756

2,639

12,238

2020

14.4

100,915

0.098

9,845

3,258

3,868

2,718

14,957

2021

14.4

100,915

0.100

10,140

3,356

3,984

2,800

17,757

2022

6.9

48,430

0.103

5,012

1,966

1,969

1,077

18,834

2023

2024

2025

TOTAL

750,713

69,737

23,502

27,402

18,834

Discount Factor: 10%

NPV ($,000): 12,668
IRR:

Table 4-9: Cash Flow and Economic Results of Base Case for Pingshang Mine
4.4.5 Pingshang Mine Maximum Power Production Case Results

Table 4-10 shows the cash flow profile and economic results of the maximum power production case for
the Pingshang mine. The maximum power production case at Pingshang mine generates an estimated
cash flow stream with an NPV-10 of US$17.3 million. An incremental 6.2 MW of power is added to the
existing power plant at Pingshang mine.

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Mine: Pingshang
Forecast: Best

Case: Max Power (100% of surplus gas to additional power generation)

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.082

2015

13.8

96,793

0.084

8,145

2,811

3,201

2,134

431

1,704

2016

15.4

108,215

0.087

9,380

2,895

3,686

2,799

755

2,045

3,748

2017

17.2

120,638

0.089

10,770

2,982

4,232

3,557

741

2,815

6,563

2018

18.9

132,488

0.092

12,183

3,071

4,787

4,325

781

3,544

10,108

2019

20.6

144,602

0.095

13,696

3,163

5,381

5,151

15,259

2020

20.6

144,404

0.098

14,087

3,258

5,535

5,294

20,552

2021

20.6

144,396

0.100

14,509

3,356

5,701

5,452

26,005

2022

6.9

48,430

0.103

5,012

1,966

1,969

1,077

27,082

2023

2024

2025

TOTAL

939,965

87,783

23,502

34,492

29,789

2,707

27,082

Discount Factor: 10%

NPV ($,000): 17,261
IRR:

Table 4-10: Cash Flow and Economic Results of Maximum Power Production Case for

Pingshang Mine

4.4.6 Pingshang Mine Fertilizer Production Case Results

Table 4-11 shows the cash flow profile and economic results of the fertilizer production case for the
Pingshang mine. The fertilizer production case associated with Pingshang mine generates an estimated
cash flow stream with an NPV-10 of US$3.0 million. In this case, the use of CMM at the fertilizer plant
substantially decreases the gas available for power generation, reducing the electrical output of the
power plant.

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Mine: Pingshang
Forecast: Best

Case: Fertilizer (max gas to fertilizer plant; surplus gas to additional power generation)

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.082

465

(465)

2015

3.0

21,364

0.084

1,798

992

706

(366)

2016

3.7

26,047

0.087

2,258

1,022

887

349

(17)

2017

4.4

31,141

0.089

2,780

1,052

1,092

635

618

2018

5.1

35,999

0.092

3,310

1,084

1,301

926

1,544

2019

5.8

40,966

0.095

3,880

1,116

1,525

1,239

2,783

2020

5.8

40,884

0.098

3,989

1,150

1,567

1,271

4,054

2021

5.8

40,881

0.100

4,108

1,184

1,614

1,309

5,364

2022

2.0

13,749

0.103

1,423

1,220

559

(356)

5,007

2023

2024

2025

TOTAL

251,032

23,545

8,821

9,252

5,473

465

5,007

Discount Factor: 10%

NPV ($,000): 3,016
IRR: 82%

Table 4-11: Cash Flow and Economic Results of Fertilizer Production Case for Pingshang Mine
4.4.7 Pingshang Mine Incremental Economic Results

Table 4-12 and Table 4-14 present the incremental economics for the Pingshang maximum power
production case and the Pingshang fertilizer case, respectively. The results of the economic analysis
indicate an incremental increase in NPV-10 of US$4.6 million for the maximum power production case,
as compared to the baseline case, at Pingshang mine. The fertilizer production project at Pingshang
reduces NPV-10 by US$9.6 million when compared to the baseline case, which indicates that the loss of
revenue from decreased electricity sales outweighs any fuel cost savings associated with switching from
coal to gas.

Page 32

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Mine: Pingshang
Forecast: Best

Case: Incremental (Max Power- Baseline)

Electricity

Generation Electricity Cumulative

Capacity Electricity Sales Fuel O&M Operating Capital Cash Cash

Utilized Generation Price Revenue Cost Cost Income Cost Flow Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.000

2015

0.0

0.000

431

(431)

2016

1.0

7,300

0.000

633

249

384

755

(371)

(801)

2017

2.8

19,723

0.000

1,761

692

1,069

741

328

(474)

2018

4.5

31,573

0.000

2,903

1,141

1,763

781

982

508

2019

6.2

43,686

0.000

4,138

1,626

2,512

3,020

2020

6.2

43,488

0.000

4,243

1,667

2,576

5,596

2021

6.2

43,481

0.000

4,369

1,717

2,652

8,248

2022

0.0

0.000

8,248

2023

0.0

0.000

2024

0.0

0.000

2025

0.0

0.000

TOTAL

189,252

18,046

7,091

10,955

2,707

8,248

Discount Factor: 10%

NPV ($,000): 4,594
IRR: 87%

Table 4-12: Cash Flow and Incremental Economic Results for Pingshang Mine (Max Power

minus Baseline)

With the addition of another 6.2 MW of electricity generation capacity at Pingshang mine, 100 percent
of the drained methane is destroyed resulting in net emission reductions of 78,000 tC02e/yr over the 8-
year project life or 624,000 tC02e over the project life. Additionally, the incremental electricity
generated will offset electricity consumption from the North China Power Grid, which would decrease
project-related emissions by an estimated 23,000 tC02e/yr, for a total emission reduction of 101,000
tC02e/yr over the 8-year project life or a total of 808,000 tC02e over the project life. Table 4-13
illustrates the impact on project economics resulting from the potential monetization of carbon
emission reductions under various carbon price regimes.

Carbon Price
($/tC02e)

NPV-10
($,000)

IRR
(percent)

4,594

87%

5,093

94%

7,089

124%

9,584

160%

12,079

197%

Table 4-13: Summary of Incremental Economic Results for Pingshang Mine Maximum Power

Production Case with Carbon Price Sensitivities

Page 33

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Mine: Pingshang
Forecast: Best

Case: Incremental (Fertilizer- Baseline)

Electricity

Generation Electricity Cumulative

Capacity

Electricity

Sales

Fuel

O&M

Operating

Capital

Cash

Utilized

Generation

Price

Revenue

Cost

Income

Cost

Flow

Year

MWh

$/kWh

$,000

2014

0.0

0.000

465

(465)

2015

(10.8)

(75,429)

0.000

(6,347)

(1,819)

(2,494)

(2,035)

(2,500)

2016

(10.7)

(74,868)

0.000

(6,489)

(1,873)

(2,550)

(2,066)

(4,566)

2017

(10.0)

(69,774)

0.000

(6,229)

(1,929)

(2,448)

(1,852)

(6,419)

2018

(9.3)

(64,916)

0.000

(5,969)

(1,987)

(2,346)

(1,637)

(8,055)

2019

(8.6)

(59,949)

0.000

(5,678)

(2,047)

(2,231)

(1,400)

(9,455)

2020

(8.6)

(60,031)

0.000

(5,856)

(2,108)

(2,301)

(1,447)

(10,902)

2021

(8.6)

(60,034)

0.000

(6,032)

(2,172)

(2,370)

(1,491)

(12,393)

2022

(4.9)

(34,681)

0.000

(3,589)

(746)

(1,410)

(1,433)

(13,826)

2023

0.0

0.000

2024

0.0

0.000

2025

0.0

0.000

TOTAL

(499,682)

(46,192)

(14,681)

(18,150)

(13,361)

465

(13,826)

Discount Factor: 10%

NPV ($,000): -9,652
IRR:

Table 4-14: Cash Flow and Incremental Economic Results for Pingshang Mine (Fertilizer minus

Baseline)

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Carbon Price

NPV-10

IRR

($/tC02e)

($,000)

(percent)

-9,652

-9,271

-7,745

-5,837

-3,930

Table 4-15: Summary of Incremental Economic Results for Pingshang Mine Fertilizer
Production Case with Carbon Price Sensitivities

5 Market Information

Xiyang County is located 75 km south of Yangquan city, a major metropolitan area within Shanxi
Province, and the largest city in the east central area. Although reasonably close to Yangquan by
distance, Xiyang remains somewhat isolated by the surrounding mountain ranges. Therefore, any
market for the CMM will most likely be limited to Xiyang County.

5.1 Energy Markets for CMM

The status of China's energy markets at a national, regional, and local level were reviewed to determine
demand for the incremental CMM volumes produced at the Mahui and Pingshang mines. With average
methane contents ranging between 40 percent and 50 percent, the drained gas from the mines is
considered medium-concentration CMM. Potential utilization options for medium-quality gas are
power generation using internal combustion engines, industrial boilers, household use, vehicle fuel (e.g.,
CNG or LNG), or flaring. Following is an assessment of each potential market:

Power Generation

There is a strong case to use the incremental gas production for power generation at both mines for
several reasons:

Yangquan Jindong has experience with power generation at both mines. Its success with the existing
projects provides confidence that it has the technical and financial capacity to deliver a power project.
The experience of developing, building and operating power projects provided an important learning
experience, and future efforts should be able to capitalize on that experience to reduce overhead
associated with design and build of the projects.

Generating electricity on site is attractive, because the input CMM gas stream can be used as is, with
minimal processing and transportation. Additional generating sets can be installed relatively cheaply
and infrastructure for the power plant and distribution system is already in place.

A generally accepted breakeven cost for CMM-based power projects is 0.04-0.06 $/kWh. The price for
the North China Grid paid for power generated by the two mines is $0,082 per kWh, thus the power
price is very favorable.

Coal mines are major power consumers with substations and transmission lines near large mining
operations and accessible to CMM-based power projects. Capacity is available on the North China Grid
for the incremental power generation at Mahui and Pingshang.

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Town Gas

Historically, town gas was the predominant use of CMM in China prior to the Kyoto Protocol, when
power generation grew in popularity. Town gas is produced from in-mine or surface gob wells, and is
often stored in large holding tanks at a mine. The gas is medium-quality (usually 30 -60 percent CH4),
and distributed to local communities in the immediate vicinity of a coal mine through low pressure
distribution lines.

CMM quality at both mines ranges from 40-50 percent at the surface, which is sufficient for town gas
distribution. However, a town gas project would require installing 12 km and 8 km low-pressure
transmission lines to Xiyang from Mahui and Pingshang respectively, and then the construction of gas
distribution mains in Xiyang. This would be an expensive undertaking and would require the
construction of a wide local distribution network and the conversion of heaters, stoves and other
household and commercial equipment to gas from coal. Therefore, the economics for town gas are not
as favorable as they are for power generation.

Natural Gas Pipeline Sales

Natural gas pipelines sales were considered but ruled out because gas pipeline sales are not possible.
There are no major natural gas trunklines in close proximity to the mines. There are pipelines in other
parts of Shanxi Province, but the cost to build a pipeline lateral to a natural gas pipeline in mountainous
terrain, along with the cost of upgrading 45 percent CH4 mine gas to pipeline quality, is cost-prohibitive.
The capital cost (Capex) for a gas processing unit would cost approximately US$4 million and annual
operating expenses (Opex) could be expected to be around US$1 million.

Industrial Use

Industrial use can be an excellent market for CMM produced by the two mines. There are several
industrial/manufacturing operations in the area. Rather than distributing CMM to multiple users as
would be required with town gas, one or a limited number of industrial users will require limited
infrastructure investment. In addition they can present a strong, credit-worthy counterparty in a
transaction.

A fertilizer plant located adjacent to the Pingshang mine uses coal to fire an industrial burner. However,
the coal must be gasified prior to combustion. Therefore, the facility is interested in changing from a
coal-based burner to CMM-fired burner. The proximity of the plant and interest in switching to natural
gas could make the fertilizer plant an opportune off-taker of CMM.

Boiler Fuel

Use of the CMM from Mahui and Pingshang mines in boilers is technically feasible, and there is a
demand for hot water to heat mine buildings and to heat ventilation shafts. However, power
generation is considered a higher priority after consultations with management at both mines.

Compressed Natural Gas (CNG)/Liquefied Natural Gas (LNG)

There is growing interest in CNG and LNG in China as demonstrated by the USEPA feasibility study for
the Songzao mine in Chongqing. Although this may be an attractive option in the future for mines in
Xiyang County, conversion of drained gas from the Mahui and Pingshang mines is not economically
feasible at this time. Similar to natural gas pipeline injection, significant capital costs are required to
first upgrade gas quality to almost pure methane, but additional costs are incurred for compression,
and, for LNG, liquefaction. Capex to manage the residual gas flow at each mine could total US$3 million
for CNG and US$6-7 million for an LNG plant. Opex at each mine could total US$l-2 million per year.
Moreover, a market must exist to accept CNG and LNG - usually automobiles, heavy trucks, boats, trains

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or other transport vehicles must be converted and infrastructure must be created to transfer CNG and
LNG from the seller to the buyer. This infrastructure does not yet exist in Xiyang.

Flaring

The mine is not interested in flaring methane, and it is very difficult to receive authorization to flare
CMM in China because the energy value of CMM is highly valued.

5.2 Environmental Markets

Through 2012, many Chinese CMM projects relied on the value of Certified Emission Reductions (CERs)
in the European Union Emissions Trading Scheme (EU ETS) to help finance projects and create a revenue
stream for those projects. The lack of a post-2012 agreement to succeed the Kyoto Protocol and
oversupply of emission allowances in the EU ETS resulted in a dramatic fall in CER prices starting in 2011
and today CERs are less than Euro 1.00. Even though carbon markets have been available, to date the
Mahui and Pingshang mine projects have relied solely on power sales to generate revenues. They have
not participated in the CER markets. Power sales and even sale of CMM for industrial use are still
expected to generate revenue, and power sales in particular could be profitable for future expansions of
the power plants. Still carbon markets could improve profitability and provide another source of project
finance by serving as another revenue source.

While CERs are not an option in the near term, internal Chinese carbon markets could be attractive
markets. In August 2014, China announced that it plans to roll out a national market for carbon permit
trading in 2016.10 If it is implemented, it could be the world's biggest emissions trading scheme. As a
precursor to the national system, China has launched seven regional pilot markets in a bid to gain
experience ahead of a nationwide scheme. As yet, CMM project offsets cannot be traded in the regional
markets, but that may change under a national system. Allowance prices in the China regional markets
are reported to be equivalent to EU ETS prices, around €6. 11

For this pre-feasibility study, project returns were calculated with and without carbon revenues. Given
price uncertainty for carbon offsets in China, the impact of carbon pricing on total project revenue is
calculated over a range of carbon prices.

5.3 Government Policy

The Chinese Government is encouraging recovery and use of CMM through the Guideline on Further
Accelerating the CBM/CMM Exploitation and Utilization issued by the State Council of the People's
Republic of China in September 2013. The Guideline includes the following objectives:

• Increase government funds support

• Increase indirect financial incentives

• Encourage private investment in CBM/CMM

• Market pricing mechanism

• Encourage power plants to use CBM/CMM as fuel

According to a recent GMI publication, Legal and Regulatory Status of CMM Ownership in Key Countries:
Considerations for Decision Makers, CBM and CMM are a significant component of natural gas

10 Reuters (2014). China's national carbon market to start in 2016 -official.
http://uk.reuters.com/article/2014/08/31/china-carbontrading-idUKL3N0R10742014Q831

11 Carbon Brief (2014). Analysis: China's big carbon market experiment.
http://www.carbonbrief.org/blog/2014/09/analvsing-china-carbon-market/

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development in the government's Twelfth Five-year Plan. 12 The Plan calls for more CMM utilization,
with increased local fuel for residential users (town gas) being a very high priority. Use in power
generation is also a high priority. The Plan seeks to quadruple CMM-based generation to 2850 MW as
overall CMM utilization rises by about 5.5 billion cubic meters. The plan calls for total CMM output of 30
billion cubic meters by 2015.

6 Conclusions and Recommendations

The Yangquan Jindong company and its subsidiary, Xiyang Fenghui, requested technical assistance to
project gob gas production from drainage galleries in future mining areas. The objective is to assure
Xiyang Fenghui that future supplies are sufficient to continue operation of existing CMM use while
expanding the existing projects and expanding into other end uses, such as use in a neighboring fertilizer
plant. Yangquan Jindong plans to initiate development activity in 2015.

Analysis shows that there should be adequate CMM to expand existing projects at both mines. With
respect to incremental CMM development, the results of the gas production forecast and the economic
analysis of end-use options indicate attractive NPV's and IRR's for the maximum power production case
at both mines (current plant plus expanded operation to consume 100 percent of available CMM). The
increase is due to the incremental addition of up to 8.8 MW of power at Mahui and up to 6.2 MW of
power at Pingshang. The economics of power production are attractive due to the lower cost of
Chinese-made gas gensets with an installed cost of ~$400 per kW compared with the cost of $700 -
1,200 per kW installed for gensets manufactured by well-established international companies. Relatively
high power prices of $0,082 per kWh in China also underpin attractive project economics for power. In
contrast, the fertilizer production project at Pingshang indicates that a loss of revenue from decreased
electricity sales outweighs any fuel cost savings associated with switching from coal to gas.

The expanded projects would result in significant greenhouse gas emission reductions in addition to
producing much more electricity than is the case with the existing plants. The 8.8 MW expansion of the
Mahui mine power plant could generate up to 238,000 tC02e/yr emission reductions over the 11-year
project life, and the 6.2 MW expansion of the Pingshang mine power plant could result in 101,000
tC02e/yr emission reductions over the 8-year project life and 78,000 tC02e/yr if sales to the fertilizer
plant are chosen.

The financial analysis shows that the most profitable projects use the CMM for power generation only at
the Mahui and Pingshang mines. Sales to the fertilizer plant from Pingshang will draw CMM away from
the existing power plant. While generating revenue, the fertilizer plant sale will reduce the output of
the power plant by a considerable margin.

This pre-feasibility study provides a high- level assessment and analysis of the CMM production
potential of the two mines and end-use options available. Yangquan Jindong has indicated that it is
planning to initiate CMM project expansion plans in 2015. Given this tight time frame, the following
next steps are suggested to produce a more detailed project feasibility study:

• Take cores in the future mining districts and conduct gas desorption analyses to obtain accurate
measure of gas content, permeability and porosity of the coals. This will inform a more
thorough gas production forecast.

12 US Environmental Protection Agency (2014) Legal and Regulatory Status of CMM Ownership in Key Countries:
Considerations for Decision Makers. July 2014. http://epa.gov/coalbed/docs/CMM-Ownership-Policv-White-
Paper-Julv2014.pdf

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• Review the mine maps and cross-sections to specify the exact height of overburden over the
coal seams throughout the mine to support more accurate modeling.

• Further refine cost estimates and revenue sources for the financial analysis.

• Evaluate the potential for participation in Chinese carbon markets, including obtaining reputable
carbon price projections for these markets.

• Consider other mine degasification options including surface gob vent boreholes.

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