Developer Lacks the Capacity to Go Forward on Carmichael
The latest quarterly financial report from Adani Enterprises Ltd. is illuminating in no small part for what it does not say.
Adani is the company that for years has championed construction of the proposed Carmichael project in Australia, a multi-billion-dollar undertaking that would purport to supply coal to India.
Yet the project gets no acknowledgement in Adani’s update this week to investors.
It’s not the first Adani has been conspicuously mum on Carmichael—indeed it seems to have stopped talking much about it last fall, and for good reason.
Into the weeds a bit:
Adani (AEL) reported it’s 3QFY2017 quarterly results to December 2016. Excluding one-off extraordinary items, pretax profit for the quarter was down 33% year on year (yoy) to US$22m due to a 15% yoy rise in net interest expense to US$51m. The year-to-date pretax profit is down 37% year on year to US$84m again heavily impacted by a 11% yoy increase in financing costs to US$167m. The overall operating trends in AEL are adverse, hence we review a one-off item impact separately.
Year-to-date revenue was -3% yoy to US$3.75bn. Trading profits on coal were down 32% yoy, but this was entirely offset by a sevenfold surge in profits from domestic coal mining operations in India.
The near doubling in net profit after extraordinary items for the quarter to US$76m was largely from exceptional income items of US$35m. A key positive item was an unusual accounting profit being booked that “has been recognized by Company’s subsidiary, Adani Mining Pty Ltd, Australia towards acceptance of assignment and obligation of Annual Maximum Tonnage of Coal.” This reflects Adani Mining booking a profit on taking over RIO Tinto’s long term Abbot Point Coal Terminal take-or-pay (ToP) liability.
Adani Mining has booked this as a “profit,” even though all ongoing losses relating to the Carmichael project appear to be capitalized into the balance sheet in the six year deferred expectation that this project will still proceed. It is interesting to see Adani Mining Ltd be assigned this item, rather than the profit be recognized in Abbot Point Coal Terminal, the private family entity that held the contract with RIO Tinto. This appears to be a generous transfer to the publicly listed AEL, albeit the Adani Family owns 75% of AEL. One might consider this a way to use accounting to buffer the otherwise adverse operating and financial trends evident across AEL overall.
Adani Enterprises reports increased domestic coal production noting: “with government policy thrust, it envisages significant growth in domestic coal mining space.”
Adani notes the commissioning of 100MW solar generation in Punjab bringing total operating solar and wind projects to 760MW, and total assets employed in this division almost doubled to US$800m. The project pipeline of solar and wind projects is 1,414MW, consistent with AEL’s target to invest another US$2bn in renewables over 2017.
An update on construction of AEL’s solar manufacturing unit was also provided, although recent press reports suggest this greenfield manufacturing facility is behind schedule, probably a deliberate move given the 25-30% collapse in solar module prices over 2016 means any production is likely to generate negative margins even before interest expense.
IN THE COMPANY’S OVERSEAS OVERSEAS MINING UPDATE, NEITHER AUSTRALIA OR CARMICHAEL GET ANY MENTION, an unusual omission given this huge project proposal is reported constantly in Australia but not even mentioned in passing to investors in India.
Adani reports it is likely to miss its target of 5.5Mtpa of coal produced from its Indonesian mine, again an interesting comment given this mine’s capacity was originally targeted at 12-13Mtpa when Adani first commissioned the coal mine back in 2009. Eight years later AEL’s only material overseas business is still operating at just 40% capacity utilization. This is a clear operating risk precedent that the Carmichael proposal in the Galilee faces. The Adani group is well versed in business operations in India, but inexperienced in foreign business developments.
IEEFA continues to view the AEL balance sheet as financially stretched and lacking the capacity to undertake the Carmichael project, particularly in light of the expansion of efforts by AEL in Indian renewables and Indian coal mining.
Tim Buckley is IEEFA’s director of energy finance studies, Australasia. Simon Nichols is an IEEFA energy analyst.