Things were different in 2011. Coal prices were at a record, China was hoovering up coal all over the globe and green power was still a costly affair. The Indian government, too, was encouraging power companies to invest in coal assets overseas.

That was when billionaire Gautam Adani scooped up the Carmichael coal project in Australia for nearly A$800 million. The group was to develop the mine at the Galilee Basin in Queensland state and lay a rail line to transport coal to the coast at a total cost of $16.5 billion.

It seemed like a good bet on the rising energy prices.

Adani wasn’t alone in the coal rush. GVK Power and Infrastructure Ltd invested $1.25 billion in the Alpha Coal proposal, Lanco Infratech Ltd bought the Griffin coal mine for A$740 million in west Australia; and Jindal Steel and Power Ltd acquired 80% of Wollongong Coal in New South Wales in Australia.

Adani, however, ran into a wall of opposition over charges that the mine would hurt the delicate ecology of the project area and the Great Barrier Reef.

Environmental activists petitioned the Australian government and moved court.

In the meantime, energy prices crashed, putting a question mark over the coal project.

In India, solar power project bids hit record lows, with the government firmly backing renewable power.

So, it was some relief for Adani when Australia on 15 October re-approved the mine and rail project in accordance with the country’s environment laws, subject to “36 of the strictest conditions in Australian history". On 2 February, the Queensland government approved the project.

The way forward

But the project still has a long road ahead. Adani Mining Pty. Ltd still needs to secure mining leases from the government, achieve financial closure for the project, finalize compensation agreements with landholders and ensure that the project remains viable despite the falling coal prices.

“A number of statutory obligations and outstanding legal issues remain to be addressed before I can consider granting the Carmichael coal project mining leases," said Queensland’s minister for state development and minister for natural resources and mines Anthony Lynham, in a statement on 3 February, a day after his government approved the project.

“Legislation requires that, before I can consider granting a lease, Adani must finalize compensation agreements with the remaining landholders, and with the local government for the affected road reserves under the footprint of the leases. In the meantime, I am taking detailed and careful advice on the next steps for the project," the minister added.

Adani Mining, a unit of the group, aims to dig 60 million tonnes of coal a year from the Carmichael mine. The group’s claims that the mine project will create 10,000 jobs and generate $22 billion in taxes and royalties have not satisfied environmentalists.

On 4 February, The Guardian reported that Adani has frozen its Carmichael investment until world coal prices showed a clear recovery, stating that the company’s executives had indicated this during briefings with stock analysts.

The Adani group denies this.

“Adani is absolutely committed to proceeding with its investments in Queensland, in line with the company’s integrated pit to plug strategy," Jeyakumar Janakaraj, chief executive officer (mining) of Adani Australia, said in an email.

“To the extent comments have been made regarding timelines, it’s important to remember that these factor in when the final approvals from government are likely to be given. We have consistently said that what drives an investment decision here is approvals certainty," Janakaraj said.

A note by Axis Capital Ltd dated 1 February said it does not expect significant capital expenditure for the Galilee mine in the current fiscal year.

“Management mentioned that the company remains committed to the project and further plans shall be based on approvals and market conditions," the Axis Capital note said.

“(There are) four multi-hundred million dollar acquisitions of Australian coal entities that are now all stranded assets. Lanco is losing money on Griffin Coal at the Ebitda (earnings before interest, taxes, depreciation and amortization) level. Wollongong Coal ceased its last coal mine in September 2015, GVK has put its $1.25 billion acquisition on hold, and Adani is close to doing the same," said Tim Buckley, director of energy finance studies (Australasia) at the Institute of Energy Economics and Financial Analysis, a pro-renewable energy firm.

The reason: The plunge in coal prices.

Thermal coal prices have fallen over 60% since 2011 and the forward market suggests the price of export coal will drop another 10% in nominal terms by 2022, Buckley said.

“The average coal mine in Australia is operating at gross cashflow break-even. The scope for Adani’s Carmichael mine to make money in anything like today’s environment is zero. The scope for Adani to raise international finance backing to underwrite a $10 billion greenfield coal mine, power plant, railway line and coal port at Abbott Point is again next to zero," said Buckley, a former Citibank analyst.

Buckley said a part of the reason for this is that the Carmichael coal deposit is of exceptionally low quality by Australian standards.

The average Australian export thermal coal has an energy content of 6,000 kcal (kilo calories) but Carmichael coal has a content of 4,950 kcal, or close to 20% below the industry average.

The ash content in Carmichael coal is 25-30%, against 12% in the Australian benchmark export coal. High ash and the low energy from burning this coal means it would sell for around 30% less than the export price benchmark.

To add to the Adani group’s troubles, India is trying to reduce the need for coal imports.

The present government has stated that coal shortages will be a thing of the past and that India won’t need to import dry fuel by 2017, except to meet the requirements of the power plants located near coastal areas.

Adani did not comment on the prospects of its Adani coal mining programme in Australia.

Dealing with debt

Debt on the books of Adani group firms involved in the project is also a problem.

Referring to Adani Mining’s financials, Buckley said the company has A$1.3 billion in debt, secured against a business with no revenue and almost no tangible assets.

The net equity invested in Australia, according to the accounts lodged with Australian Securities and Investments Commission (ASIC) is negative A$230 million, he said.

According to the October 2015 edition of Credit Suisse’s House of Debt report, the Adani group had a gross debt of 96,031 crore, as of fiscal 2015. The group was among those that saw the steepest increase in debt in fiscal 2015. Within the group, Adani Power Ltd has had an interest coverage ratio of less than 1 for 15 consecutive quarters, the report pointed out.

Close