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Microcap & Penny Stocks : MTEI - Mountain Energy - No BASHING Allowed -- Ignore unavailable to you. Want to Upgrade?

To: eric deaver who wrote (4392)	7/2/1998 7:18:00 AM
From: Solon	Respond to of 11684

Yesterday was holiday here in Canada--fireworks and fun. Thanks this morning to Eric and Thomas for a very interesting and informative dialogue! SOLON

To: eric deaver who wrote (4392)	7/2/1998 1:16:00 PM
From: Thomas C. White	Respond to of 11684

1. <<Basically, you probably need more or less around $.75 to $1 of net (depreciated) equipment for every $1 of coal sold per year (so, for example, if you are shipping $100 million of coal a year, you probably will end up having to have around net $75 - 100 million of plant and equipment). >> "Are you saying I have to take a one dollar per year depreciation charge on my equipment for each dollar of coal I sold per year? Maybe I am reading this wrong." Sorry not to be clearer. This doesn't mean you take a dollar a year depreciation charge for each dollar sold. It means you need a "net" asset base of equipment of roughly this magnitude to do the job (whether you own it or contract it from someone else). There will be some variance depending upon extraction method. Depreciation is basically accounting for wearing out of equipment. For example, if you have a $100,000 piece of equipment, and it has a 10-year useful life before it's junkyard material, if you use it one year, it's worth maybe $10,000 less than when you bought it. You account for using up your equipment by taking a depreciation expense. It's not a cash expense, because you spent the money when you bought the equipment a year ago (this is usually discussed in financials as the "capital budget"). So, the amount of depreciation depends upon the average useful life of your equipment. Using the most simplified method, if your equipment averages a ten year useful life, your year's charge for depreciation will be along the lines of 10 percent of the value of the equipment. So, if you're shipping $100 million, and you are using $75 million of equipment at the start of the year, you might have a depreciation charge of $7.5 million taken over the year. At the end of the year your equipment will be worth $67.5 million, as you've "used" part of it up. The $67.5 million is equipment "net of depreciation." If you're contracting, then obviously you're not expensing the depreciation directly. But your contractor is, since it's his equipment, and he's got to include those costs implicitly in his bid or else he won't be able to replace his equipment when it's ready for the scrapyard. Obviously, contractors have to price based upon the market -- just look at day rates for offshore platforms. When day rates are low due to overcapacity, the contractor may not be able to price in depreciation, he's pricing at variable cost "plus" whatever the market will bear just to get the damn things out of his shipyard. Then, later, when there's undercapacity, he'll hopefully get it back by charging the customer out the proverbial wazoo to make up for it. But overall, contractors have to get their depreciation costs from customers or else they go out of business because they're not able to replace their equipment. 2. As to mine prices vs. consumer prices, this is hard for me to comment too much on because to tell the truth I don't know a lot of the details. I would assume that "mine price" is average price the mines get "F.O.B." the mine ($26.58), while for example the electric utility price of $30.93 is average delivered price the utilities are paying for the WV coal. The difference between these two prices is about 14 percent (4.35/30.93). I would assume that out of this, there is transportation cost, which is probably pretty variable depending on method, distance etc. There may be other costs in there that I don't know about. I'd be careful about using "industrial" price -- industrial users often order very specialized coal which will be higher in price, also I would assume transportation prices could be higher, since they are taking smaller deliveries (maybe delivered by truck instead of rail etc.).