Thursday, 4 May 2017

How soon will Adani go broke in the Galilee Basin?

Reading the information set out below leads me to wonder how the Federal Government and Queensland Government will cope, both politically and economically, if the Adani Group's Carmichael Mine and Rail Project leads to a massive derelict mine site with its twenty-six Australian subsidiaries under administration or in receivership.


The Adani Group is highly geared:
 Against an external market capitalisation of US$5.17bn, The Adani Group has an estimated US$12bn of net debt, a significant portion of which is US$-denominated with limited hedging.
Adani Power is of particular concern, being loss-making with net debt over 300% of its current market capitalisation.


The project would require a massive and improbable infusion of debt, but a growing number of global banks key to most major coal-mining investments have eschewed it, mostly because of the risk it would pose to the Great Barrier Reef. (The 11 banks that have taken a public pass on the project include Deutsche Bank; HSBC; Royal Bank of Scotland; Barclays; Morgan Stanley; Citigroup; Goldman Sachs; JP Morgan Chase and most recently Societe Generale, BNP Paribas and Credit Agricole. In May 2015 Bank of America announced it would move to exit coal lending entirely.

With the Carmichael coal proposal commercially unviable at current or forecast thermal coal prices, the project is increasingly unbankable. Fifteen of the world's largest financial houses have either ceased working on this proposal or ruled out involvement, including both CBA and Standard Chartered, where advisory mandates have expired.

Continued momentum in technological developments underpins the scaled up commercial rollout of renewable energy and energy efficiency globally. As such, the strategic 'moment' for large-scale export-focused greenfields coal mines has passed.


Shareholders and financiers of Adani Enterprises face substantial risks due to the company's continuing development of the controversy-plagued Carmichael coal project in the face of major adverse structural shifts in market conditions.

The proposed mine, in Australia's remote Galilee Basin, remains a high-cost, high-risk project that is reliant on substantial public subsidies for it to be remotely financially viable. Even with concessional loans, IEEFA analysis shows the project is likely to be cash flow negative for the majority of its operating life.

Shifts in Indian energy policy and pricing have materially increased the risk of Carmichael becoming a stranded asset. Legal challenges and community opposition to the project persist and are likely to escalate if the project moves to construction.

With a market capitalisation of just US$1.9bn and net debt of US$2.5bn, Adani Enterprises Ltd will struggle to contribute equity for this A$5bn project. The project risks over-extending the balance sheet of Adani Enterprises to an extreme degree, creating a high level of financial risk to both shareholders and potential financiers……

In the years since Adani purchased the lease for the Carmichael mine, Indian government energy policy has shifted radically. Energy Minister Piyush Goyal has stated repeatedly that it is government policy to cease thermal coal imports—a policy that brings into question the very point of the proposed mine…..

* The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute's mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.
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The Hindu, 5 May 2016:

"PSU banks are owed about Rs 5 lakh crore by corporate houses and of this roughly Rs 1.4 lakh crore are owed by just five companies, which include Lanco, GVK, Suzlon Energy, Hindustan Construction Company and a certain company called the Adani Group and Adani Power," he said.

The amount owed by this group "called the Adani Group" both in terms of its long term and short term debt on Thursday is around Rs 72,000 crore, he added quoting reports.
"Yesterday it was mentioned that the entire amount that the farmers need to pay as crop loans is Rs 72,000 crore. The Adani Group itself owes to the banks Rs 72,000 crore," he said.

The Hindu, 8 May 2016:

The billionaire Gautam Adani's Adani group, with Rs 96,031 crore debt [est. AUD $1.9 billion], is under pressure to sell its stake in the Abbott Point coal mines, port and rail project. The Adani Group's debt stands at Rs. 72,000 crore [est. AUD $1.4 billion]. Last year, Standard Chartered bank had recalled loans amounting to $2.5 billion as part of its global policy of reducing exposure in emerging markets. Global lenders have backed out from funding the $10-billion coal mine development project. State Bank of India has also declined to offer a loan despite signing an MoU to fund the group with $1 billion. An Adani spokesperson declined to offer any comments on the issue.

S&P Global Ratings revised its outlook on Adani Ports and Special Economic Zone Ltd. (APSEZ) to negative from stable. 

ABC News, 22 December 2016:

The business behind the planned Carmichael coal mine in North Queensland is facing multiple financial crime and corruption probes, with Indian authorities investigating Adani companies for siphoning money offshore and artificially inflating power prices

Companies under scrutiny for the alleged corrupt conduct include Adani Enterprises Limited — the ultimate parent company of the massive mine planned for the Galilee Basin.

Two separate investigations into allegations of trade-based money laundering by Adani companies are underway — one into the fraudulent invoicing of coal imports and the other into a scam involving false invoicing for capital equipment imports.

"They are very serious allegations and they are being conducted by the premier Indian government agency investigating financial crime," Australia's foremost expert on money laundering, Professor David Chaikin of the University of Sydney, told the ABC.

"The allegations involve substantial sums of money with major losses to the Indian taxpayer."

Adani denies wrongdoing.

Rediff, 10 January 2017:

For the past year, Adani Power has been undergoing an overhaul for its debt, including measures such as equity infusion and refinancing. These have helped the company survive the rough times since proceeds from the compensatory rates are yet to come by. 

The firm expects its recent equity infusion, debt refinancing and the compensatory rate to lead to a turnaround in its financial position….

On December 6, the Central Electricity Regulatory Commission granted a compensatory rate for Adani Power's Mundra unit on the grounds of changes in Indonesian coal policy and shortage of domestic coal. 

In the address to analysts, after the September quarter results, the management said: "Once we have clarity in the form of CERC orders, we would obviously have the reason to work with the rating agencies and then we will make our plans."

The CERC order, however, has not led to any change of credit ratings so far for the company as its implementation hinges on the required Supreme Court approval for the same. 

CatchNews, 14 February 2017:

Earlier this year, the State Bank of India reportedly approved a loan of around $1 billion (Rs 6,600 crore ) for the company's coal mine in Australia. However, after much hue and cry in the media due to the highly stressed balance sheet of the public sector bank, the approval was withdrawn.

Hindustan Times, 11 April 2017:

The Supreme Court on Tuesday set aside an order by the Appellate Tribunal For Electricity allowing compensatory tariff to Tata Power Ltd and Adani Power Ltd, sending down shares of both companies.

Shares of Tata Power reversed early gains to fall as much as 6.78%, while Adani Power slumped up to 20% to its lowest since February 21.

The tribunal, in April last year, had said the two companies needed to be compensated as the change in Indonesian laws on coal export prices were outside the control of these companies.

Financial Review, 11 April 2017:

Indian billionaire Gautam Adani has told Malcolm Turnbull his company will seek a taxpayer-funded concessional loan of up to $1 billion to support his proposed $21.7 billion coal mine in Queensland......
Following a meeting with Mr Adani and his executives in New Delhi on Monday night, Mr Turnbull cautioned the loan – to help build a $2 billion railway line to link the mine to the coast – would have to be approved on its commercial merits by the independent board which administers the $5 billion Northern Australia Infrastructure Fund.

The Northern Star, 16 April 2017:

Shares for Adani Power Limited, the Adani Group subsidiary energy provider in India, were trading at 44.25 rupees (AU$0.9) on Monday, but dropped to 32.90 rupees by the end of trading on Friday.
Adani Enterprises, the subsidiary connected with the Carmichael Coal project, traded on Monday for 120.10 rupees ($AU2.46) a share, but has also dropped, reaching 116.85 by the end of Friday.

….the International Energy Association’s (IEA) modelling indicates that under a two degree scenario thermal coal demand will peak in the current decade and decline thereafter…..

However, for new thermal coal proposals we will: Limit lending to any new thermal coal mines or projects (including those of existing customers) to only existing coal producing basins and where the calorific value for that mine ranks in at least the top 15% globally. We define the top 15% as having a specific energy content of at least 6,300 kCal/kg Gross As Received. This value is referred to as the Newcastle high energy coal benchmark.

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