As fossil fuel prices collapse, there is growing speculation that Adani might throw in its Carmichael operation to buy BHP’s massive Mount Arthur thermal coalmine instead. By Paddy Manning.
Could Adani drop its Qld mine and head to NSW?
The coronavirus pandemic is roiling energy markets worldwide, triggering a slew of multibillion-dollar corporate losses, but Indian giant Adani’s vast Carmichael project in Queensland appears to sail on regardless of the laws of supply and demand or shifting investor sentiment against thermal coal.
A report this week from Global Energy Monitor found that, for the first time, the number of coal-fired power stations in the world reduced in the six months to June. It found this was due to the Covid-19 downturn and record closures in the European Union. The price of top-quality thermal coal from Australia has more than halved to $US51 a tonne and Glencore, the world’s biggest exporter of the fuel, just flagged it will need to slash production here. A third of its mines are operating in the red.
Gautam Adani – a close ally of Indian Prime Minister Narendra Modi and the country’s fifth-richest man, according to Forbes magazine – is fully aware that a green energy revolution is under way. Indeed, he is a key player in the transformation, hoping to make Adani the world’s biggest renewables company by 2030. In an op-ed at the end of May, Adani wrote about the “urgency of a green revolution in the energy sector”, arguing Covid-19 presented an opportunity “to pause, rethink, and design a new and faster transition to a low carbon future”. The price of solar modules has dropped by 99 per cent in the past 40 years, Adani wrote, and “given what I see, I expect prices to drop by an additional 99 per cent over the next 40 years – probably reducing the marginal cost of electricity to zero”.
Nonetheless, ever since the $2 billion Carmichael project received final approval from the Queensland government in June last year, after a decade of planning and controversy, construction of the open-cut mine north-west of Clermont has made steady progress. Some 700 workers are said to be employed across the mine and rail works, and this week Adani was trumpeting the first shipment of Australian-made steel it needs to build 200 kilometres of new track to cart coal to its export terminal at Abbot Point and ship it off to fuel its own power plants in India. That vertical integration makes the economics of Adani’s operation different from any other coal exporter in Australia.
“The commercial seaborne cost of coal is not materially relevant if you are a vertically integrated player,” says Tim Buckley, a director of energy finance studies at the US-based and philanthropically funded Institute for Energy Economics and Financial Analysis, which campaigns for sustainable energy and has opposed the Carmichael mine. “Whether the coal price is high or low, in a pit-to-plug strategy, which is what Adani originally started with and is still working towards, is effectively irrelevant.”
Yet although Adani maintains the Carmichael project is going full steam ahead, and despite continuing bipartisan support for it at state and federal level, the group’s Australian operations have recently suffered a series of setbacks. A string of Asian lenders have ruled out refinancing the heavily indebted Abbot Point operation. These include Taiwan’s Yuanta Securities and South Korea’s Hanwha, which on Monday joined conglomerate Samsung and other firms that have stopped lending to Adani’s coal operations.
Website InQueensland reported Adani still does not have an access agreement with haulier Aurizon, whose rail network it needs to transport coal the last 300 kilometres to Abbot Point. In a written response to questions, Adani said it was “progressing arrangements” to connect to Aurizon’s network but had alternatives, including “undertaking the work ourselves or contracting a third party”. Both sides are believed to be reluctant to commit to a multi-decade, take-or-pay contract. Last month Adani suddenly lost its local mining chief executive, Lucas Dow, who quit without explanation after missing his long-promised March 2020 deadline for “first coal” from Carmichael. Also in July, Bloomberg reported Adani was among the low-ball bidders for BHP’s massive Mount Arthur thermal coalmine in the New South Wales Hunter Valley, which remains on the market. The significance of the bid was underappreciated: Adani’s new mining chief, David Boshoff, who joined the company in November, previously ran the Mount Arthur operation.
Tim Buckley has prepared a 33-page financial report, which suggests the deal could suit both companies. “Go back to first principles,” he says. “Adani needs coal.”
Adani has three coastal coal-fired power stations under construction in India that are unable to source domestic coal supplies and will therefore skirt a national ban on imports. The company could meet its objectives by buying the Mount Arthur mine and getting out of the Galilee Basin altogether. “Do they give a stuff about the Galilee? No. I’m sure Adani would prefer to have never heard of the place.”
Buckley says the world has changed since the Carmichael project was first proposed, and so has Adani, whose personal wealth has jumped tenfold to $US16 billion. The six Adani group companies listed on the Mumbai stock exchange now have a combined market value of $US26 billion. In round figures, Buckley says, Adani’s Green Energy division, which did not exist five years ago, is now worth $US7 billion. Adani Transmission is worth $US3 billion. “The market loves his renewables, and they hate his coal.”
In Australia both Carmichael and Abbot Point – which was once profitable, but now looks risky, and Adani has repeatedly tried to sell it off – are looking like stranded assets. “What we’re dealing with is a 10-year-stale decision to tip $5 billion down the drain buying the world’s largest unbuilt thermal coalmine,” Buckley says. “[Adani] regrets it, I have absolutely no doubt. It’s one of the dumbest corporate decisions he’s made.”
While BHP has Mount Arthur on its books at nearly a billion dollars, it may be prepared to sell for less – particularly because it faces a potentially enormous rehabilitation bill. “Willing buyer, willing seller, and the NGOs would cheer and stop the stop-Adani campaign overnight if he does it. Why? Because he stops the development of the world’s biggest thermal coal basin. The world’s a better place. It’s a win-win-win. The workers at Mount Arthur get a reprieve. It will probably extend the life of [the mine].”
BHP did not return a call for comment and Adani declined to comment on “market speculation” on its bid for Mount Arthur.
In its most recent financial accounts for the year ending March 2020, Adani’s local mining division reported that it had spent $197 million in cash on operations and investments, and that its balance sheet had blown out even further, with liabilities exceeding assets by $786 million. “I’ve never come across it in my 30 years of analysis,” says Buckley of the scale of liabilities, but concedes the company will continue to operate because it is backed by Adani.
In its response to The Saturday Paper, an Adani spokesperson maintained that construction of the Carmichael project was progressing, with more than $1 billion in contracts awarded, and there was no doubting its viability. “Work is continuing in line with state and federal government requirements to manage the risk of Covid-19 and first coal remains on schedule for 2021. The Carmichael Project’s low-cost profile, the quality of the resource and forecast demand from our target markets of India and South-East Asia mean that the project’s economics are strong.”
At a certain point, Adani will have spent so much money on Carmichael that it simply has to go ahead. “Every month that goes past, the balance tips in favour of Carmichael proceeding,” Buckley says.
There are still challenges ahead. The Australian Conservation Foundation has taken last-ditch action in the Federal Court against the Morrison government’s 2019 decision to approve Adani’s North Galilee Water Scheme. That case will be heard in October. Activist group Market Forces, which is behind the global campaign targeting Adani’s investors, insurers and creditors, is vowing to fight on regardless and cites previous examples of controversial projects that were abandoned, from the James Price Point liquefied natural gas terminal on the Kimberley Coast to the Gunns pulp mill in northern Tasmania.
“We still think that because of the climate and ecological impacts of this project it needs to be stopped and there are plenty of examples of projects that have stopped in the construction phase and even after the completion of the construction phase,” says Market Forces campaigner Pablo Brait. “We’d encourage all remaining creditors and insurers of Adani’s Carmichael and Abbot Point coal port to consider the reputational risks involved in remaining in this project, and make a decision to end their co-operation with Adani.”
With staunch union backing for the Carmichael project in Queensland, and a tight state election looming, the political fallout from any decision to abandon the mine would be intense. In a hung parliament, Katter’s Australian Party leader Robbie Katter could emerge as kingmaker and has flagged that opening up the Galilee Basin may determine his decision as to who forms government.
The next few months will decide whether the project finally goes ahead. “It’s a last roll of the dice,” says Tim Buckley.
This article was first published in the print edition of The Saturday Paper on Aug 8, 2020 as "Dig up, stupid".
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