Gina Rinehart with GVK Chairman and MD G. V. Krishna Reddy and GVK Vice-Chairman G. V. Sanjay Reddy

After partnering with Gina Rinehart’s Hancock Prospecting in 2011, India’s GVK was seen as the company most likely to open up the Galilee Basin. But with onerous make-good requirements and falling coal prices, will it be worth it?

Rinehart’s top-of-the-market sale of Hancock’s Galilee coal interests for US$1.3 billion in 2011 proved her deal-making savvy, and her attendance at the wedding of GVK founder Dr Gunupati Venkata Krishna Reddy — with then Nationals leader Barnaby Joyce and foreign affairs spokesperson Julie Bishop in tow — showed her ability to schmooze. Controlled by one-time millionaire Reddy, GVK is a much smaller than rival Adani but was nevertheless the first to get approval for a rail corridor to Abbot Point, and it has produced the first coal from the Galilee at a trial pit. Hancock retains a 21% stake in the Alpha Coal projects, and Hancock’s coal chief, Paul Mulder, is a rising star within the empire, regarded as one of the most talented miners in the country, making up for GVK’s lack of experience in coal.

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As Crikey wrote yesterday, analysts have argued Galilee coal is uneconomic in today’s market, but GVK argues the thermal coal seams it is targeting in the Galilee are shallower and thicker than in the established Bowen Basin, and that analysts applying the same cost structures would clearly get their figures wrong. GVK is a believer in long term demand for thermal coal, and its mines in the Galilee are “comparatively immune to the volatility of cyclical coal prices”.

In April, Land Court member Paul Smith ruled on objections to GVK’s Alpha mine by environmentalists and neighbouring farmers. Smith recognised the case was a “watershed”, as the project would result in the opening up of the Galilee Basin. Smith stressed his impartiality: he had proud Ipswich coal miners on one side of his family, sugar cane growers on the other. He held dear the independence of the Land Court — it was no rubber stamp — and stressed he had not been subject to political interference. Then, in a careful 149-page ruling,  he recommended that given uncertainty over the mine’s impact on groundwater, the project should either be refused altogether or approved on condition that make-good agreements were reached with the neighbouring landowners.

“Locals at the nearby town of Alpha no longer expect the mine to go ahead … ‘The boom hardly started, and the bust is already here’.”

Both sides claimed victory — Queensland Treasurer Jeff Seeney said the make-good agreements would have been negotiated anyway — but the Land Court ruling was no mere speed bump. The onus to reach an agreement with neighbouring landholders falls on GVK. One of those landholders, Paola Cassoni, co-owns an 8000-hectare property within the Bimblebox Nature Reserve — which featured in a 2012 documentary — where she runs 200 head of cattle. She hasn’t signed and three weeks ago rejected an approach by GVK to meet without lawyers present. She and other landowners depend completely on groundwater, and she told Crikey she only had one chance to get the deal right: “I’m not going to, out of the blue, sign on the back of an envelope. If I want to sell, this is my security for water. If I make a mistake there is no safety net. No one’s going to compensate me.”

In an apparent attempt to reduce the number of objectors, GVK recently narrowed the mining lease area by almost 40%. GVK does not appear to be in a hurry. Cassoni and others are also objecting in court to GVK’s adjacent Kevin’s Corner mine, and in that case the company was keen to push out the timeframe for hearings, so a decision is unlikely before next year. Unusual for the proponent of such a large project to seek to delay it.

Cassoni says locals at the nearby town of Alpha no longer expect the mine to go ahead. “Alpha is dead. It was buzzing in the exploration phase. Houses are empty, the usual stuff that happens … The boom hardly started, and the bust is already here.”

Financially, GVK is in poor shape. Listed on the Bombay Stock Exchange, it currently has a market capitalisation of under US$400 million dollars and US$3.3 billion in debts. It owes Hancock a final tranche payment of US$560 million, due by September, and there are serious questions it can raise that money. Last year GVK reportedly tried to sell down to Coal India, but was rebuffed. Only in June GVK announced it was considering asset sales to reduce debt, including the Australian rail and port assets.

Shareholders in rail freight giant Aurizon, the former QR National, may be getting nervous. As chief executive Lance Hockridge reconfirmed at a Brisbane speech to the Australia-Israel chamber of commerce a fortnight ago, Aurizon is readying to invest billions to take majority 51% ownership of GVK’s $6 billion port and rail infrastructure development — a deal foreshadowed over a year ago. Analysts aren’t factoring the capital expenditure into their spreadsheets yet — they see Aurizon’s joint venture with Baosteel in the Pilbara as more likely to proceed short term — but the day cannot be too far away.

Aurizon, which depends on the big miners for most of its haulage, is playing a risky game venturing billions on a partnership with GVK, given opening up the Galilee will add as much as 30% to Australia’s coal export volumes in an already-oversupplied market, and lower thermal coal prices.

“A lot of coal companies will be ruing this announcement,” Tim Buckley, of the progressive Institute for Energy Economics and Financial Analysis, told Crikey after Hockridge’s speech. Still, GVK’s looming deal with Aurizon, and Adani’s deal with POSCO, are big steps forward. Both are credible, bankable parties. Buckley concedes the Galilee projects are advancing — lining up some of the ducks. “But there is a huge milestone ahead of them called financial close,” Buckley said. “It doesn’t matter how many government approvals they get, until they can raise the ten and sixteen billion dollars respectively, neither of these projects can proceed. In this market that is a huge obstacle”.