04 January 2016
by Lachlan Barker

Adani’s finances go from bad to worse

Federal and State Governments continue to approve it but the Adani Carmichael project will never eventuate unless an investor with "a financial death wish" can be found, writes Lachlan Barker.

In October 2015, the new Minister for Resources, Energy and Northern Australia, Josh Frydenberg, made a death knell pronouncement on Adani’s Carmichael Coal Mine and Rail Project, indicating that the rail line to the Galilee Basin to serve the mine:

"... wouldn’t be a priority project."

He added that Adani’s project was:

"... a commercial operation and it needs to stand on its own two feet." This makes it pretty clear that the federal government have, at last, recognised that this Adani coal mine has not a chance in hell of making a red cent and federal funding through the Northern Australia Infrastructure Facility (named by opponents as the ”Dirty Energy Finance Corporation”) will not be provided.

Additionally, the banks have indicated that they will not touch this project and the one bank that Adani has constantly pointed to as a source of finance, the State Bank of India (SBI), has not actually said "yes" to the project. The SBI has simply received an application from Adani for financing.

Currently, the SBI are reviewing Adani’s application – as they do with any application – and will, presumably, announce their decision soon.

So, with no banks and now without the Australian Government, Adani were left with the solitary hope that the Queensland Government might come to the "white elephant" party.

If that was indeed their main source of hope, they must have been chagrined when, over the Christmas break, a tiny story appeared on the SBS website, headlined, ‘Adani must fund mine: Qld premier’.

The link takes us to a brief story reprinted here:

Queensland's government has warned Indian mining giant Adani it must finance the controversial Carmichael coal mine on its own.

The federal government on Tuesday approved the expansion of Abbot Point port, which is intended to service the proposed Carmichael mine, prompting Premier Annastacia Palaszczuk to sternly tell Adani not to expect any financial assistance from the state.

"There will be no taxpayers' money going towards this project," she said. At the time of writing, the only entity on the planet prepared to fund the Carmichael mine project – rated as a A$16 billion project (US$11 billion) – is Adani itself.

IEEFA tells us that Adani has already borrowed A$3 billion for the initial investment in the mine and now need to raise the remaining A$13-14 billion (US$9-10 billion). That being the case, the mine looks as likely to be built as environment minister Greg Hunt’s chances of getting an invitation to the Greenpeace Christmas party — for Adani’s financial situation has got worse.

Also, in October 2015, came a story from LiveMint, headlined: ‘Debt continues to weigh down India’s top conglomerates’. It draws upon a report from Credit Suisse labeled ‘House of Debt’, which indicates that Adani’s gross debt has risen 14 per cent year-on-year to 96,031 crore rupees. (In the Indian counting system crore equals 10,000,000.)

With the exchange rate of rupee to U.S. dollars of (approximately) 0.015, we see that Adani’s gross debt is now 96,031 x 10,000,000 x 0.015 = US$14.4 billion — up 14 per cent on last year. So, it can now be said if Adani couldn’t fund this mine/rail/port project before, they defintely can’t fund it now.

And, a big part of the problem for Adani is the crashed-to-hell-and-gone coal price. Back in early 2014, a Background Briefing story 'The Abbot Point Gamble', quoted major banking house UBS as saying the project needed a thermal coal price of A$110 to be profitable. That projection still applies but since then, the thermal coal price has wended its way steadily downhill, now sitting at approximately A$76.

The seaborne coal trade is in structural decline and so this price will never return to the heady days of 2008, when Australian premium thermal coal was fetching about A$200 per tonne.

Furthermore, as it was pointed out to me after a recent story, this price I regularly quote from IndexMundi is for Australian premium coal, high energy, low ash and with low impurities, such as sulphur.

However, the coal in the Galilee Basin is decidedly not that — it is low energy, high ash coal (LEHA) and as such, is referred to as low rank coal which will be priced at approximately 70 per cent of the index price.

This means if Adani were to be mining as of today, they would be receiving US$39/tonne. A price that is well below the cash operating margin – approximately US$70 – in the Galilee and a perfect recipe for Adani to go broke.

Adani recently “won” a court case in Queensland, and gained another, repeat federal approval for dredging the port at Abbot Point to serve the mine but both those issues are neither here nor there. Governments – state and federal – can approve all they like within the laughably titled “strict conditions” but until Adani can get someone with a financial death wish to give them US$9-10 billion, they are out of luck.

The finance is the rate determining step now, as it always was. Once again, opponents of this mine shout with exasperation, "Give it up Adani, this is over".