A proposal from struggling Indian multinational Adani Group to develop a new coal mine in Australia’s north-east is becoming increasingly difficult to justify, not least because Adani is unlikely to be able to contribute much in the way of equity for the $5 billion project.
The Institute for Energy Economics and Financial Analysis (IEEFA) has long been wary of the project, given the massive structural decline of the global seaborne coal-trade industry, but its concerns have only increased in recent weeks, as focus on the Adani Group’s financials have revealed that the company’s equity market capitalization has declined catastrophically in recent years, dropping from $10 billion in 2015 to only $1.9 billion today. Further, the company has a net debt estimated at $2.5 billion, making it unthinkable that Adani would be able to underwrite the massive Carmichael coal mine project — even with a reduced project cost of $5 billion. The Adani Group’s net-indebtedness is estimated to have increased by $3 billion since early 2015, sitting now at $15.9 billion. Adani Power, likely to be the off-taker of the Carmichael project, has net debt of $7.6 billion, and according to IEEFA Adani Power’s “auditors qualified their most recent review of the company with notes on a material weakness in financial controls.”
“Adani’s proposal has all the fundamentals of a feckless entrepreneurial scheme reminiscent of those last seen in Australia in the 1980s,” said Tim Buckley, Director of Energy Research at IEEFA and lead author of report published this week investigating the economics of the project. “Absent massive taxpayer subsidies, no independent investor would give the proposal a second glace given its strategic and financial predicament, particularly set against a rapidly declining market for seaborne thermal coal.”
The Carmichael mine project proposal is to develop an open-cut and underground coal mine in the Galilee Basin of Queensland, in the north-east of the country. The project would theoretically produce a yield of 60 million tonnes of coal per annum.
The IEEFA report, Adani: Remote Prospect: Carmichael Status Update 2017, concludes that the proposed Carmichael mine “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.” This would be a significant burden on the Australian taxpayer in a day-and-age where public support for renewable energy continues to grow, and support for continuing traditional, business-as-usual methods of power generation are increasingly frowned upon — despite the attempts of the current Liberal Government to double-down on coal.
However, according to the IEEFA report, it is shifts in Indian energy policy and pricing which might be the ultimate arbiter of whether the project moves forward. Specifically, policies in Adani’s home country are increasingly likely to ensure the Carmichael mine becomes a stranded asset. Further, the report explains that “complex ownership structures involved in the project create the ability for downside risks to be transferred from privately held family companies to the publicly listed Adani Enterprises Ltd and Australian creditors, creating further risk for shareholders and investors.” This is based around the Indian Government’s intentions to cease thermal coal imports — “a policy that brings into question the very point of the proposed mine.”
Does Adani have anything to worry about from these policies? Definitely! Figures from earlier this year showed that Indian coal imports declined by 21.7% in January. The IEEFA noted in the report that this trend continued, with coal imports dropping by 22% to 25% over the last few months. Add into this India’s near-frenetic renewable energy development, and coal in India’s energy mix, especially imported coal, is looking increasingly unnecessary.
“Gautam Adani [the chairman and founder of the Adani Group] is an ambitious businessman with a broad range of proposals on the table at any one time,” Buckley said.
“Since the purchase of Carmichael in 2010, the forward market value of its coal has declined 50% and thermal coal imports in India are down double digits in line with the government’s stated policy to nearly cease imports entirely by the end of this decade. Adani took a calculated business risk on this speculative project in 2010 but the world has changed since then. No longer strategically aligned nor financially robust, today it is less a gamble, more a shot in the dark.”
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