Standing up for coal – Abbott and Newman give investment advice
Tony Abbott has told a G20 leaders’ discussion on energy he was “standing up for coal” as the Queensland government prepares to unveil new infrastructure spending to help the development of Australia’s largest coal mine.
Abbott, who recently said coal was “good for humanity”, also endorsed
the mine, proposed by the Indian company Adani, to the meeting.
The Australian government has given all environmental and regulatory clearances
for the $7.5 billion coal mining, rail and port project, said Gautam
Adani, chairman, Adani Group, in an interview to The Indian Express.
And Campbell Newman is happy to put your money where his mouth is.
“We are prepared to invest in core, common-user infrastructure,” Mr
Newman said. “The role of government is to make targeted investments to
get something going and exit in a few years’ time.”
Despite poor market conditions, high costs and the massive outpouring
of concern over the environmental impacts of their projects, Indian
companies GVK and Adani remain hell-bent on opening up the Galilee Basin
in Queensland. The smallest mine is as large as Australia’s biggest
operating coal mine and the largest, twice the size. All of the
proposals in the Galilee Basin would produce enough coal to chew up 7%
of the world’s remaining carbon budget, drastically reducing our chances
of keeping a lid on global warming.
Adani and fellow Indian company GVK are pushing their projects and
Adani wants to start construction early next year, but the key problem
is access to funds.
Few banks are willing to lend when coal prices are so low and the industry is facing issues with climate change.
There are also issues with both companies.
Adani Mining Pty Ltd borrowed $516 million from another subsidiary of
the Adani Group, Adani Minerals, at an interest rate of 4.25%. Adani
Enterprises, the parent group, borrowed from the banks 2 per cent more
cheaply that it charges Adani Mining the subsidiary in Australia for
internal loans.
Why would these loans be priced so far above commercial rates?
Potentially they could rack up losses in Australia and rip out
equivalent profits to India. Some $10 million a year thereby transferred – 2 per cent on $516 million – tax free to the subcontinent. Rupert would be proud.
Adani Mining P/L had no revenue and booked a pre-tax loss of $112
million in 2013-14. It spent $75 million on exploration and evaluation
of the mining area, which was capitalised, along with $41 million of
interest, into the balance sheet rather than expensed against the profit
and loss.
Adani Mining’s red ink of $112 million mostly relates to currency
losses. All loans are in US dollars with no hedging, giving rise to a
loss every time the Australian dollar declines
The total investment so far by the Adani group in Adani Mining is now
$984 million and shareholder equity is negative to the tune of $45
million which reflects net borrowings of $1.015 billion in this
Australian subsidiary alone.
So we have a company with $1 billion in debt, negative shareholders
funds, zero revenue and high cash burn with $15 billion still to spend,
and the parent company, Adani Enterprises, has debts of $US12 billion.
Tim Buckley, director at the Institute of Energy Economics and
Financial Analysis, puts it bluntly: “This project is not commercially
viable”. Apart from the financial deficiencies of the main participants,
he says thermal coal is in structural rather than cyclical decline.
In another red flag, Linc Energy accepted $155 million from Adani a
couple of months ago for its option in the project. It is worth asking
why Linc boss Peter Bond would sell a royalty of $2 billion over 20
years – perhaps worth $600 million today – for just $155 million.
And then there’s GVK.
Despite claiming to be a “leading global infrastructure owner,
manager and operator” GVKPIL has no experience operating any business
outside of India. It has never successfully built and operated a coal
mine – in India or otherwise. GVKPIL has not operated any business in
Australia, let alone a US$10bn greenfield project in the face of massive
environmental, operational, logistical and financial challenges.
GVKPIL is currently committed to 16 greenfield infrastructure
projects across six different asset classes. Many are behind schedule
and / or over budget.
With a market equity capitalisation of only US$243m, GVKPIL is
carrying on-balance sheet net debt of US$2.8bn. It’s share price is at
an all time low and has underperformed the Indian index by 80% since
2010.
Building Australia’s largest black thermal coal mine in the untapped
Galilee Basin would challenge experienced operators, but the combination
of an inexperienced developer, slack demand globally for thermal coal
and a deteriorating cost of production scenario in Australia moves the
project beyond speculative.
Gina Rinehart’s Hancock Prospecting sold a majority stake in two
Galilee coal prospects – Kevin’s Corner and Alpha – to GVK in 2011 under
a deal believed to include a $1.3 billion upfront payment and a
requirement for a $1 billion payment later on. However, the latter
payment is still unresolved more than three years on, with Hancock
Prospecting listing the unpaid amount at $656 million in its 2013
financial accounts. Apparently they can’t afford to pay.
That asset was written down to nothing in Hancock Prospecting’s 2014
financial accounts, which were published by the Australian Securities
and Investments Commission on Friday.
“The carrying amounts of the financial assets relating to a coal
transaction with GVK … is based on the ability of the purchaser, GVK, to
complete the outstanding transaction conditions, which includes the
payment of substantial amounts,” the company wrote. “Management believes
it is increasingly unlikely that these accounts will be received from GVK.”
According to The Institute for Energy Economics and Financial Analysis, GVK‘s Alpha project appears likely to remain “stranded in the valley of death”.
Six of the top ten and nine of the top twenty coal funding banks have now stated that they don’t plan to fund the expansion of Abbot Point.
Given the global scale and Australian focus of Galilee Basin projects,
the Big Four banks in Australia (Commonwealth Bank, Westpac, ANZ Bank
and National Australia Bank) will be critically important to the
financing of this multi-billion work.
So far, the banks have been coy about saying anything about the
proposals to expand coal exports through the Great Barrier Reef, falling
back on sustainability policies that have, in recent years, seen them
lend nearly $20 billion to fossil fuels. It has created an absurd
situation where banks headquartered in Paris, London, and New York are
doing more to stand up and defend the Reef than Australian banks.
It is already costing the banks. Several thousand customers have so
far joined the rapidly growing divestment movement, moving to other
banks in protest of the big four’s massive lending to the fossil fuel
industry. And thousands more, worth hundreds of millions of dollars, sit
in waiting, ready to shift their business based on whether the
Australian banks will stand up and defend the Reef or fund its demise.
Rather than taking investment advice from Abbott and Newman, it’s
time for us all to let our banks know what we Australians want.
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