Australia's biggest-ever mine is close to fruition

Published by MAC on 2014-08-15
Source: Reuters, Business Spectator

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

By Sunainaa Chadha

Reuters

11 August 2014

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, the promoters of Adani Group are planning to sell off their coal terminal in the country at 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 terminal in 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 to fund 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 requires billions 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 the Carmichael 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.

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Carmichael mine is a game-changer for Australian coal

John Rolfe

Business Spectator

30 July 2014

The Carmichael coal project, approved this week by environment minister Greg Hunt, is unprecedented in its scale, and also represents a significant shift in Australia's coal industry.

If the mine goes ahead - Adani is yet to make a final commitment - it will be Australia's largest, and represents the start of the opening up of Australia's Galilee Basin, one of Australia's richest coal reserves.

Most of the environmental concerns have focused on climate, groundwater, and indirect impacts on the Great Barrier Reef. The mine was approved with 36 conditions, many to offset damage to water; potential impacts on the Great Barrier Reef and climate were considered in the approval process but not included as development conditions.

However it is likely that the greenhouse emissions are a zero-sum game; even if the carbon emissions generated from burning the coal in India were included in the assessment, India would source coal from somewhere else.

Australia's largest coal mine

The most notable feature of the new project is its sheer scale. If constructed, it will become the biggest mine in Australia, and one of the biggest in the world, producing an estimated 60 million tonnes of steaming coal each year over an estimated life of 60 to 90 years.

This dwarfs most existing mines nearby. There are currently almost 50 coal mines operating in the Bowen Basin, most producing between 5 and 10 million tonnes per year, and most with relatively short life spans of 10 to 30 years. The proposed mine is six to 12 times bigger than most operating mines, and will operate for at least twice as long.

Along with the change in the scale of operation come significant economic impacts. Queensland produced 284 million tonnes of coal with a total operating workforce of almost 29,000 people in 2013. This mine alone is set to have an operating workforce of 3,920 jobs, meaning that coal output and coal-mining employment would increase in Queensland by 21 per cent and 13.5 per cent, respectively.

The economic benefits will multiply back through regional, state and national economies. The varied location of coal employees and business suppliers, and the flow-on impacts to Government revenue, including royalties to the Queensland Government and company and income tax receipts to the Australian government, mean that the positive economic benefits will not only accrue to mining areas but much more widely across Queensland and Australia.

The proposed mine is remote from established communities in central-western Queensland, and development would be a welcome respite to businesses and workforce grappling with the recent downturn in the fortunes of the mining sector.

The big questions will focus on where the fly-in/fly-out (FIFO) workers will be sourced from and how much economic stimulus can be injected into regional communities. While the regional cities of Rockhampton, Mackay and Townsville are closest to the mine site, trends towards sourcing FIFO workers from further afield and capital cities do not guarantee that employment be sourced from the closest regional areas.

Linking Australian coal to Indian power

The Carmichael coal project is a proposal of Indian energy company Adani. Unlike most of Australia's coal producers, Adani is essentially a power generator that is looking to secure energy sources into the longer term and to meet the growing demands for electricity in India.

This explains why, when prices for steaming coal are depressed internationally, Adani appears committed to the new mine and the scale of the infrastructure development needed, even though raising capital is challenging in the current environment. Currently exports to India at about 27 million tonnes each year from Queensland account for about 10 per cent of the State's coal production, so the new project would more than triple that level.

Most of the coal producers in Australia are content to specialise in their mining operations and then deal with the vicissitudes of market prices, as compared to investments by countries like China into Africa where control of supply chains is a primary driver.

Adani is yet to make the final investment commitment to the project, but if it does, it will signal the emerging importance of supply chain integration in the Australian mining sector.

Opening up the Galilee

The scale of the project is tied to another notable feature of this development; it will establish mining in the Galilee Basin. Unlike the Bowen Basin further to the east, the Galilee Basin has remained undeveloped because of its remoteness and because its vast reserves of coal are suitable for power generation (steaming coal) rather than the more valuable coking coal used for steel production.

To develop the mine requires associated development of a rail corridor through to the coast for an additional $2.1 billion, as well as the extension of the Abbott Point coal export at Bowen.

To meet the costs of these major infrastructure needs, there has to be enough coal. The size of the Carmichael proposal, and other proposed mines in the Galilee Basin by GVK Hancock (the Alpha Coal Project) and Clive Palmer (China First Coal Project) are at the scale needed to justify the huge infrastructure costs required.

Benefits outweigh the risks

This change in the scale of development also has implications for the environment.

These can be separated into four main groups: the impacts on terrestrial biodiversity of mine and rail corridor development, the potential impacts on groundwater from the mining operations, the impacts of the port development, including the dredging activities, and the greenhouse emissions associated with extra coal development and combustion.

Although the latter is the focus of criticisms from many environmental groups, emissions are essentially a zero-sum game if Indian power companies such as Adani simply source their coal from other sources.

A generation ago, the potential impacts on terrestrial biodiversity would probably have been the key environmental concern in Australia for a development of this kind. There are some substantial biodiversity impacts identified for the Carmichael Coal project, but the careful impact assessment process that is now required, the conditions imposed by both the Queensland and Australian governments, and the system of offsets that have to be established addresses these much more thoroughly than in the past.

It is notable that the headline environmental concerns now seem to be more focused on the issues where the impacts are much harder to predict with certainty - the groundwater and port development impacts. Again, the Queensland and Australian Government approvals come with strings attached. Adani has to comply with major conditions and offset the predicted impacts.

Ultimately both government approvals processes have judged that the risks of environmental impacts can be managed and that the large economic benefits outweigh those risks.

John Rolfe is deputy dean of research, School of Business and Law at Central Queensland University

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Galilee Basin coal rail line approved by Queensland government

Andrew Fraser

The Australian

14 August 2014

QUEENSLAND has approved a railway linking what will be one of the world's biggest coal mines to a port on the Great Barrier Reef coast.

Continuing development of the Galilee Basin, the state government has backed the construction by Indian company Adani of a 300km rail line from its proposed Carmichael coal mine in Queensland to the coal port of Abbot Point.

Queensland's endorsement comes only two weeks after Federal Environment Minister Greg Hunt gave approval for the development of the mine itself.

The Carmichael project is a massive operation involving both an open-cut mine and an underground mine. At full capacity it would be capable of providing 60 million tonnes of coal annually.

Today's approval of the railway line means that Adani now only needs to get approval by the federal government of the same rail link to have all its approvals in place for the construction of the mine and transporting coal to port.

Fellow Indian company GVK has received all of its state and federal government approvals and is waiting to finalise its financial package for its two proposed mines in the Galilee Basin, some 400kms inland from the central Queensland coast.

Deputy Premier and State Development Minister Jeff Seeney said that up to 2,400 jobs could be created following the state government's approval of the rail line.

"The multi-billion dollar coal projects proposed for the Galilee Basin have the potential to create the next wave of resource sector jobs in Queensland and dramatically boost our state's coal exports," Mr Seeney said.

He said the rail line would take about two years to build and pump up to $790 million into the Mackay region and over $900 million into the state economy during its construction phase.

The proposed standard gauge greenfield rail line will cost $2.2 billion and be able to transport 100 million tonnes of coal a year.