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Adani’s ‘pit-to-plug strategy’ is fraying at both ends

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IEEFA

adani-lines-up-1bn-for-australias-carmichael-coal-complex

Gautam Adani, the chairman of the Indian conglomerate Adani Group, has long argued that the Carmichael coal proposal in the Galilee Basin of Australia is a key part of his company’s “integrated pit-to-plug strategy.”

The Adani logic for the Carmichael project assumes that the traded price of seaborne thermal coal is irrelevant to the commercial viability of Carmichael because the coal would be used within the Adani family group of companies.

The company line is that Carmichael venture needs to be viewed, in other words, strictly in the context of the overall profitability of the pit-to-plug  strategy.

IEEFA sees Carmichael as both unviable and unbankable if it is tied to actual coal markets (with the forward price of thermal coal back down to US$66/t), which is why the pit-to-plug strategy Adani talks up is the linchpin said to be holding the proposal together.

It’s a shaky foundation on which to proceed, however. Last week Adani Power reported that its core asset —the 4.6 GW 100 percent import-coal-fired power plant at Mundra—is no longer viable, news that brings what was an already questionable argument for Carmichael into further question.

In IEEFA’s view, any decision to walk away from Carmichael would require a A$1.4 billion (US$1.05billion) write-off for Adani Enterprises (AEL), a very unpalatable outcome for Adani Group bankers owed a collective US$15 billion, particularly if Adani Power (APL) were forced to also take a US$1 billion write-down on Mundra on top of the US$954 million net loss just reported.

  • Adani Power’s financial distress is growing, which is why it has just recorded that US $954 million loss, a result of the Supreme Court of India ruling that the Mundra plant’s contractual obligations to supply electricity are valid, notwithstanding the entirely predictable rising cost of imported coal. APL’s 2016/17 result briefing included the statement that APL would undertake negotiations with the government over allocation linkages that “will allow us (APL Mundra) to access domestic coal.” Also telling is that APL’s average tariff realization was Rs3.85/kWh, well above the cost of new solar, which is down 30 percent year on year to a recent record low of Rs2.44/kWh. The company’s huge financial leverage only adds to significant tariff pressures.
  • The company’s financial leverage is unsustainable, a point on which the chart below does the talking on how Adani Power’s US$7.6 billion net debt is 16 times equity.
Source: APL 2017 Annual Results, IEEFA Calculations

Source: APL 2017 Annual Results, IEEFA Calculations

  • The Indian national strategic need for Carmichael has disappeared, as evinced by Energy Minister Piyush Goyal repeatedly reiterating policy that would have India cease thermal coal imports this decade. NTPC Ltd., the country’s largest thermal power producer, has reduced its coal imports radically, from 16Mtpa in FY2015 to 1Mtpa in FY2017. Under Goyal’s direction, Public Sector Undertakings or PSUs will cut imports to zero in FY2018. More broadly, Indian coal imports peaked at 212Mt in FY2015 and have declined steadily, with May 2017 imports  down 6 percent year on year to 18.15Mt.
  • The coal-fired power sector pressure across India is under extreme pressure, given the government’s policy drive to diversify the electricity grid into less emissions-intensivegeneration combined with the rapid renewable energy deflation. Something on the order of $15 billion in coal-fired power plant assets are for sale with no buyers, and the thermal power sector has become a major obstacle to sustainable growth in India. This problem is clearly evident in the 95 percent year-on-year decline in State Bank of India 2016/17 consolidated results, driven by a tripling of bad debt provisions and, incidentally, further undermining the Adani Group’s ability to get State Bank of India to make good on a $1 billion Adani Australia loan commitment.
  • “Defer, delay and pray,” appear to be the unspoken Adani watchwords now as the company keeps pushing out the Carmichael timetable, offering one excuse after another on why it hasn’t happened yet. ‘First coal’ was due originally by 2014/5, now the company says 2021. It was only this past December that Adani said a “Financial Investment Decision” would come out in March but then, two months later, Adani announced it would delay that decision because the Queensland Government was refusing to grant a five-year royalty holiday, a taxpayer subsidy estimated to be worth $A370 million. And while as of this month Adani Enterprises has “green lighted” its “Financial Investment Decision,” the fine print says it depends on “certain internal budget approvals for pre-construction activities.” Getting an $A1 billion Northern Australia Infrastructure Facility subsidy is required now to reach financial close by March 2018, and that decision won’t come until the end of 2017, probably arising due to the reputational risk issues that have emerged. As recently as May 2017 Adani had talked about financing being in place by June 2017.  In fact, financial close will be very difficult to secure given the leverage-on-leverage nature of the Adani Family group, with margin loans on the promoter’s shareholdings in each of the group’s four listed entities, which in turn all have significant financial leverage. The off-balance sheet Adani Abbot Point Coal Terminal that would support the Carmichael project has extensive borrowings too. Other hurdles to financial close include outstanding coal import invoice fraud allegations and the billions of dollars in write-downs concurrently at Adani Enterprises and Adani Power will be problematic for Adani bankers.

As Adani continues to find multiple reasons to delay progress on Carmichael, one might argue that perhaps it is looking to holdbacks on a hoped-for string of royalty/loan/water subsidies as the excuse it needs to withdraw from the project.

Tim Buckley is IEEFA director of energy finance studies, Australasia.

Source: IEEFA. Reproduced with permission.  

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  • john

    So if the business plan is to use the mine to supply Adani Energy where is the costing done?
    From the Australian perspective besides royalties, which are to be deferred, it would appear no tax liability will be incurred.
    From the Indian perspective how will the costing be accounted for?
    Perhaps this will allow the coal to be on sold to an offshore company from India and Australia then sold to the end users.
    Transferring any tax liability both in India and Australia to a third identity.
    If this method results in a low cost of power to the end user it would work from the companies perspective.
    As the present price of power is being beaten by alternatives that only leaves the scraps to pick up without storage to take even those bits left.
    Frankly it still looks like this is not exactly a business plan to put your money into.

  • Ken Dyer

    At some point, Adani will have to obtain finance in a coal averse financial market. The following article is puzzling yet seemingly puts a positive spin on Adani mine given the numbers quoted in this article.

    http://www.abc.net.au/news/2017-06-13/adani-coal-imports-relunctantly-welcomed-in-india/8611970

    One wonders whether some in the Indian government are in Adani’s pocket???????
    Any ideas?????

    • James Hansen

      Ken, you may be right on the ball. Adani now wants to sell the mine to a subsidiary with the Gujarat government acquiring 51% of the new subsidiary. Adani will have a watertight agreement with the subsidiary that sees Adani paid a fee for every tonne of coal sent along the rail line which Adani will continue to own. A profitable arrangement for Adani and the subsidiary can go bankrupt any time that the Gujarat government decides to stop pouring money into it. Adani effectively hives of the massive debt and the deferred royalty agreement to the subsidiary and never cares if the subsidiary makes a profit or pays tax in Australia or India. In the meantime, any coal transported on the railway generates revenue for Adani which presumably goes effectively to the Cayman Islands. Of course, all perfectly legal and perhaps a sweetener of a loan from the NAIF to build the railway. Perhaps Clive Palmer and Gina Rinehart will send their poor quality coal along the rail line too, further enhancing Adani rail profits, while everyone else is looking at their losses.

      • Steven Gannon

        Where did you hear about the possible sale to Gujurat James? I’d like to pass this on at a protest gathering on Sunday in Cairns, where the NAIF board are meeting, if I can verify it.

      • Joe

        Hang on, isn’t that rail line built with our NAIF $1Billions ours ?

        • James Hansen

          Joe
          The intention appears to be for NAIF to loan the money to Adani to build the railway line and, I expect, repayments to be made only when the rail line makes a profit after Adani “expenses” including high management fees are covered in full.

          • Joe

            James, it was a bit of tongue in cheek in my part. Coal has no future and the whole Adani coal mine project is a crock. If Adani by some chance does get off the ground we will soon end up with a stranded asset of $1BIllions worth of rail line.The Adani coalmine won’t be in business long enough to pay us back ‘our’ $1Billions.

          • Calamity_Jean

            “…repayments to be made only when the rail line makes a profit….”

            That will be shortly after the Devil wins an Olympic skating medal, right?

  • Chris Fraser

    That Adani is a strange basketcase of a species, they seem to have two personalities that constantly lie to each other and the public at large.

  • “any decision to walk away from Carmichael would require a A$1.4 billion (US$1.05billion) write-off for Adani”

    That, right there is your reason ladies and gentlemen.

    They KNOW it’s a hopeless investment and that it will never go ahead and likely have already internally shelved the plan, that’s why they’re ACTUALLY going ahead with solar and renewable projects and just pretending that this whole coal thing is still “totes happening”.

    The second they kill the project, the company effectively “looses” a $1.4 billion dollar asset. Think about that, what company would WANT to loose that amount of value? So there is in fact logic to their apparent stupidity.

    My guess is that they’re hoping to string the project and permits along long enough for another sucker company to come along and buy it from them… given how toxic the whole thing is though that’d have to be one HUGELY stupid company!

    The only other reason I can think of that they’re still (supposedly) pushing forward with this is because it’s something to keep climate change and environmental groups fighting against and attention on etc so that the big oil, gas and coal companies can do other less big things without having so much attention drawn to it.

    Admittedly this sort of seems a bit too tin foil hat like for me… but it’s a very well proven tactic. If you want to hide a big bad act, pretend to do and even WORSE thing to divert attention, then “stop” that worse thing and “apologize” all while your original big bad act goes by unnoticed.

  • Radbug

    Tim, don’t forget the “Middle East India Deepwater Pipeline”, from Charbahar, Iran, to Gujarat (yes, just down the road from Adani’s coal-fired generator!). Due for completion in 2020. Cheap Iranian gas is going to be yuuuge in India!