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Aug 7, 2014


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.

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”.


Aug 6, 2014


The development of Queensland’s vast new interior coal province, the Galilee Basin, is a riddle wrapped in a mystery inside an enigma. The Abbott and Newman governments are absolutely determined to see the world’s biggest coal mines opened up there this decade, despite a market glut and in the face of global warming. Defying science and economics, these projects just won’t die.

Queensland Premier Campbell Newman in particular is doing everything he can, offering royalty discounts to first movers in the Galilee and unlimited access to water from the Great Artesian Basin. In the last month, proponents of the two most advanced projects in the Galilee Basin — both from India — have confirmed indicative deals to build the hundreds of kilometres of new rail needed to get the coal to port, suggesting the projects may be getting real traction.

The climate consequences are enormous: at full production, annual emissions from just two of the most likely mega-mines planned for the Galilee will run to 250 million tonnes per annum — almost twice the 130-odd million tonnes a year Australia is trying to save by cutting emissions by 5% by 2020.

At the beginning of 2013, Greenpeace fingered the Galilee Basin as one of 14 “worst of the worst” fossil fuel expansion projects in the world — if all 14 go ahead as planned, they would lock in more than two degrees of warming.

For the past few years, Galilee coal has been considered uneconomic, as has been argued in a report by progressive-leaning think tank, the Institute of Energy Economics and Financial Analysis. Given the distance to the coast and the lack of rail or port infrastructure, the projects are often said to be uneconomic with thermal coal prices below US$100 a tonne. Right now, thermal coal is trading in the spot market below US$70 a tonne, and lots of commodity analysts do not expect a recovery in the short or medium term, with bearish notes coming from HSBC, Deutsche, Citigroup, Bernstein, Standard & Poor’s and Moody’s in recent months. Coal mines have been shut or put up for sale, and a string of new projects have been shelved.

Defenders of the Galilee Basin projects say the downturn in the thermal coal price will be temporary and point to the long-run demand for more coal-fired power generation in developing countries like India, the world’s third-largest coal consumer in 2010, which could double its demand for coal by 2040.

Last week’s federal environment approval of the giant Indian power company Adani’s $16 billion Carmichael mine, 100 kilometres north of Emerald, was a milestone, but it merely adds to the list of Galilee Basin approvals already racked up, including the construction of a new coal loader at Abbot Point, near Bowen, where Adani hopes to dump dredge spoil right next to the Great Barrier Reef. Adani’s rival GVK also has a big project planned for the area, which we will discuss tomorrow.

Adani is controlled by the country’s 16th-richest man, billionaire Gautam Adani, which is aiming to create a vertically integrated business in Australia supplying coal for its own power stations in India. It can afford to take a longer-term view of the project’s economics. And as Guy Pearse, David McKnight and Bob Burton’s Big Coal points out, Adani has gained carbon credits under the United Nations Clean Development Mechanism for installing particular technology in its power plant at Mundra, meaning the company will be rewarded for climate abatement for burning the coal from the Galilee Basin:

“It raises the farcical possibility that Australian electricity generators might soon ‘offset’ emissions from burning coal with carbon credits purchased at new Indian coal-fired power plants burning even more of the same Australian coal”.

Adani owns the existing coal terminal at Abbot Point, which it bought for almost $2 billion at the top of the coal market in 2011, outbidding then-coal baron Nathan Tinkler. But all of the purchase price was borrowed money — a good chunk loaned by Australian banks and the largest tranche from India. The existing terminal has a capacity to export 50 million tonnes of coal a year but current throughput is half that, as production has wound back at existing mines, and the port would be barely profitable after interest. Press reports have Adani looking to sell a stake in the port, possibly to part-fund Carmichael, and the recent privatisation of the Port of Newcastle supports a decent valuation.

Opening up the Galilee Basin is the only rationale for the construction of new port capacity at Abbott Point. Even then it’s line-ball, and Adani recently threatened to cancel the project if the Queensland government did not approve dredging, which it wants to complete between March and June next year.

The problem is that Adani, already heavily geared with more than $10 billion in net debt, needs to raise billions more in project finance — not easy in today’s tough coal markets. Selling down part or all of the existing terminal at Abbott Point won’t be enough to fund the Carmichael mine and rail. Then three weeks ago, Adani pulled a rabbit out of its hat, announcing an agreement with Korean steelmaker POSCO to build the 388-kilometre standard-gauge Galilee Basin Rail Line, through a corridor already declared a state development area. Construction starts early next year. This was a major leg-up for the Carmichael project: a final contract should be signed by the end of this year, giving POSCO will take an equity stake in the rail line and borrow to fund procurement, perhaps from the state-owned Export-Import Bank of Korea.

It may be enough to help Adani leapfrog GVK, which was previously seen as the most advanced proponent in the Galilee.

*Tomorrow: GVK struggles under debt load