The phrase “buyer beware” is a particularly pertinent one for fossil fuel investors in the current market. The combined effects of global climate action, renewables growth, economic decline and pollution reduction have worked to dampen growth and sap investor confidence, as well as sparking a global divestment campaign that is catching on faster than many in the industry would like to admit.
It is in this environment that a $1.25 billion debt issuance will be offered to help refinance Adani Abbot Point Coal Terminal in Queensland, the 99-year lease for which was bought by a subsidiary of India’s Adani Group for $1.8 billion in May 2011.
The bonds would enable Adani to pay down $1.14 billion in debt to a collection of domestic and international banks (including Commonwealth Bank, NAB and Westpac), converting it into more manageable debt instruments payable to… well, whoever is comfortable buying a claim on a coal port in this day and age. It’s an unusual step, given that their existing loan matures in three years and Adani are already trying to replace it with a new debt issue.
It’s not been a good week for investors in coal ports, with the news that Commonwealth Bank and Westpac are among those facing losses on the $3 billion to the Wiggins Island Coal Export Terminal. Although the take or pay arrangements at Wiggins Island would usually give certainty to creditors, this might be too much to bear for some of the smaller miners, struggling to find ways to sell their coal on the open market. If the coal companies go up in a puff of smoke, so does the banks’ money.
While Abbot Point is actually operational, it too faces underutilisation issues. North Queensland Bulk Ports reports 17.7 million tonnes exported in 2012-13, effectively 35% of the port’s capacity. So far this financial year volumes are up, but are still tracking towards about 22 million tonnes exported through Abbot Point, leaving more than half of the port’s capacity idle.
This could become a significant issue for Adani’s debt. Moody’s rated it at (P)Baa3 stable and as Matthew Moore, a Moody’s vice-president senior analyst said, “The rating could face negative pressure if the company is unable to ramp up throughput at the terminal to the full 50mtpa run rate or if our base case expectation regarding contract renewals does not materialize”.
This brings into play an array of risks investors will need to consider before buying into Adani’s US$1.25 billion excursion. The terminal is already a loss-making venture, with a pretax loss of $68 million listed in a recent Adani Ports prospectus.
This does nothing to help the fact that the asset is heavily over geared, another issue cited by Moody’s as potentially leading to a downgrading. Earlier this year the Adani family bought Abbot Point off its own publicly listed company – for US$235 million. This is contrasted against a debt of around US$1.9 billion means it is geared at around 8:1. Bringing throughput up to capacity and making the asset profitable will be vital to the security of the port and debt products associated with it.
The Wall St Journal lists BHP Billiton, Rio Tinto and Glencore Xstrata as the main contractors to Abbot Point with Moody’s noting that the next major contract matures in 2020, worth about a quarter of total throughput at Abbot Point. Major miners have been visibly stepping back from their ambitious coal expansion plan of a couple of years ago. Xstrata took their own Balaclava Island coal export terminal proposal off the table in May this year and have since shelved the 30 million tonne per year Wandoan project. BHP have made it clear they are not looking at new coal projects in Australia.
The international coal market appears in the doldrums for years to come, with Citi and Bernstein among those predicting rapidly shrinking investment horizons as China faces peak coal possibly as early as 2015. Major, established mining companies are used to responding to market signals so it’s no surprise to see Xstrata and BHP scaling back.
This leaves most major new projects being pushed forward by companies with little to no experience in mining in Australia, and the projects’ costs vastly outweighing the companies’ available capital. Adani is a case in point. While its 60 million tonne per year Carmichael mine and rail project could help make up for any shortfall in throughput at Abbot Point, its future is far from certain. Investment banks and analysts such as Macquarie, who have been close to companies pursuing coal projects in the Galilee Basin have described the chances of the Galilee being opened up to coal mining as “increasingly remote”. Even if it does proceed, the Bureau of Resources and Energy Economics lists the cost of the Carmichael mine and rail project at $7.1 billion – hardly the sort of financial burden that would help Adani’s debt/equity ratio.
And then of course there are broader reputational risks. Since Commonwealth Bank and Westpac joined six others to refinance the loan that secured Adani the existing terminal, Abbot Point has become a focal point for controversy and community concern over the coal industry’s expansion plans.
Civil society groups and local community members from Bowen are concerned about the port from perspectives as diverse as climate change to impacts on the local fishing industry and damage to seagrass beds. Earlier this year, Greenpeace brought its ship the Rainbow Warrior to Abbot Point to raise awareness of the environmental values of the area that are threatened by Abbot Point Port – which followed a blockade of the port by another Greenpeace ship in 2009. Investors buying into this debt facility will be in the spotlight of the growing movement targeting financial institutions that fund or invest in projects that threaten the Great Barrier Reef World Heritage Area, exacerbate land-use conflicts between mining and agriculture and drive the extraction of unsustainable levels of fossil fuels.
Julien Vincent is Lead Campaigner at Market Forces and Erland Howden is Climate and Energy Campaigner at Greenpeace Australia Pacific