Gautam Adani's billion dollar Australian coal dreams are turning black

Just two weeks after Australia approved Adani's controversial A$16.5 billion Carmichael coal project in Queensland that could yield up to 60 million tonnes of coal a year, thepromoters ofAdani Groupare planning to sell off their coal terminal in the countryat close to the acquisition price of $2 billion.

According to a report in Business Standard, the Adani Group is keen on disposing of the Abbot Point (AP) port due to a slump in coal traffic, and a significant dip in coal prices to$70 a tonne from $120 a tonne three years ago, when Adani bought the terminalin an attempt to increase its access to more energy resources and meet rising demand for power in India.

Adani's plans to develop the existing export terminal at Abbot Point have been hampered by delays in finding a suitable site to dump up to three million cubic metres of sand and mud that needs to be dredged from the sea bed to add new terminals and loading berths. Environmentalists such as Greenpeace and others have argued that about 3 million cubic metres of dredged mud will be dumped in the Great Barrier Reef Marine Park during the expansion of the terminal, which would cause irreversible damage to the Reef's fragile ecosystem.

According to this report, Adani's losses, if the port expansion does not proceed by 2017, are expected to run to about $1 billion annually because it will not be able to export thermal coal from its $16 billion Carmichael mine.

In January 2014, the Financial Times reported that Deutsche Bank had refused tofund Adani Enterprises' plans to expand Abbot Point after heritage agency Unesco warned of risks to the fragile ecosystem of the reef, dealing yet another blow to the project.

As Forbes.com reported earlier this year, "There's a very good chance that (the) billionaire Gautam Adani-owned company can easily line up financing from other banks, especially for a project as big as this one. However, if there is a massive build-up in public sentiment against the project, it is possible that the tide could still turn against it, forcing more such withdrawals."

Which is why perhaps in March 2014,Anglo American Plc abandoned plans for a coal port expansion in Australia, leaving GVK Reddy and Gautam Adani as the last major investors in the Abbot terminal.

In February 2014, one of the world's largest infrastructure developers, Lend Lease, pulled out of the AP-X coal terminal at Abbot Port in Queensland. This follows BHP Billiton's decision in November 2013 to withdraw their proposal to build the Terminal 2 project at Abbot Point and surrender their development rights. In 2012, Rio Tinto cited 'economic uncertainty' for shelving plans for its port development at Fitzroy Delta in Central Queensland.

Australian coal projects need investments in infrastructure, which make it tough to raise resources. At the beginning of this month, Greg Hunt, Austrialia's minister for the environment, allowed the Adani Group to develop the Carmichael coal deposit in Galilee Basin, central Queensland, even though a sustained downturn in coal prices threatens to undermine the project's viability.

Located 400 km inland from the Great Barrier Reef, Adani will have to build a major rail line, which is yet to receive final approval, to transport the coal, which must then be loaded on to ships at Abbot Point and then shipped to India.

So in essence, Adani requiresbillions of dollars to establish rail access, water and power supplies in the remote region before the Carmichael mine can be built. Considering the current coal price, which has plummeted to a record low of $70 (Carmichael may require a coal price of at least $100 to make the mine viable), Adani will struggle to raise the money to build the Carmichael Mine.

In November 2013, the US-based Institute for Energy Economics and Financial Analysis had released a report warning investors the controversial coal mine and infrastructure project is not commercially viable.

"It's a high-cost coal product in a low-cost market in structural decline. The project is uneconomic by any measure and is on the wrong side of the coal boom. It might have been viable five years ago but the market has moved on. Adani bought in at the peak of the coal cycle but failed to predict the structural decline of coal," said Tom Sanzillo, the report's co-author in a statement. (You can read the full report here).

Key findings of the report include:
1. The estimated cost of production of A$87/tonne (energy adjusted) is likely to be above the global thermal coal price for the foreseeable future, rendering the project uneconomic.

2. Adani is in a weak financial position to execute such an ambitious project: with external equity market capitalisation at only $5.17 billion against an estimated net debt of $12 billion, development costs for the Carmichael and Abbot Point t0 coal terminal projects are estimated at $10 billion.

3. Adani has over-estimated coal quality while under-estimating costs and project complexities.At peak production of 60 million tonnes per annum, Adani's Carmichael mine would be by far the largest coal mine in Australia in a remote inland region with no power, rail, water or workforce infrastructure. Prior to 2013, Adani's only other experience in coal mining is a 2-4 mtpa coal mine in Indonesia that has consistently performed below expectations.

4. The project is plagued by delays that continue to squeeze the Adani Group's cash flow, with the company conceding the 2014 timetable for commencement of production has been pushed out to 2016, but more likely 2017 with full production beyond 2022.

The crux of the report is this: Adani may have thought they were buying a coal mine, but they merely bought themselves financial trouble, which is why they are now seeking an exit from Abbot Port. But if Adani wants to sell the port through which it would transport coal to India, it is likely that he will shelve all plans of developing theCarmichael project too.

Adani was earlier considering exporting coal from new export terminals at Dudgeon Point but in June 2014 Adani and North Queensland Bulk Ports Corporation abandoned plans to develop the Dudgeon terminals due to weakening demand for coal.

Moreover, with the Narendra Modi government showing strong resolve to reform the Indian coal sector, Adani might as well be able to meet the group's coal requirement from the domestic market itself in the near future.


Published Date: Aug 11, 2014 01:01 pm | Updated Date: Aug 11, 2014 01:01 pm

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