Carmichael Project: Downsized & Delayed Yet Again, and Still Unbankable

Thursday 22 September 2016: According to reports in today’s Australian Financial Review (AFR), the Carmichael coal proposal has been downsized again to 25 million tonnes per annum (Mtpa), and the investment decision deferred yet again till the end of 2017.

“Despite being downsized and delayed once again, even at a much reduced US$4bn, the Carmichael coal proposal remains unbankable,” said Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis (IEEFA). “Lacking economies of scale, this low quality thermal export coal proposal lacks strategic relevance in India where the installed cost of solar is now lower than that of imported thermal coal.”

When Adani Enterprises first acquired the Carmichael proposal in August 2010, at the absolute peak of the global coal boom, the company announced a 60Mtpa project with a 90 year life, with first coal due in 2014.

The project has been downsized several times since then, with this latest iteration deferring any financial decision until the end of 2017 for a 25Mtpa proposal. However, the Galilee Basin is stranded 400km inland from the coast without any industrial grade power, road, water, aviation or rail infrastructure in place. Shrinking the project 60% converts its original advantage of scale into a millstone that leaves the proposal high cost and unbankable.

Adani Enterprises will still face significant financial obstacles given its US$2.6bn net debt relative to its current market capitalisation of just US$1.2bn, plus a stated total capital expenditure plan across the entire, wider group approaching US$40bn.

Adani Enterprises argues their coal proposal is de-risked by the existence of its sister company Adani Power willing to provide long dated off-take agreements for 80% of the Carmichael coal to its largely yet-to-be-built import coal-fired power plants in Western India. IEEFA would note Adani Power is in financial distress with net debts of over US$7.3bn against a market capitalisation of just US$1.4bn.

India’s Central Electric Authority this week reported that the average thermal power plant operated at a new record low of just 47.0% in the month of August 2016 (52% in the April-August 2016 period). The rising call for India to cancel all new coal fired power plants over the medium term is entirely supported by the stranded asset risks clearly evident on existing Indian thermal power plants.

IEEFA also notes the low energy, high ash thermal coal of Carmichael – refer chart.

Significant washing will be required for this high-ash coal, meaning the newly proposed Queensland water laws will apply to the Carmichael proposal, a critical new legislative development in light of the need for Adani to use significant volumes of water in an arid region.

The very high rail, port and shipping costs of moving low quality thermal coal are prohibitive, particularly given the structural headwinds building against seaborne thermal coal.

Additionally, at the same time as Adani has deferred the Carmichael proposal yet again, Adani Enterprise’s 51% owned Adani Green Energy has accelerated their plans to invest over A$1.5bn to build 1,000MW of solar in Australia by 2021. In August 2016, Adani announced a 140MW stage 1 solar project 5km north of Whyalla in South Australia due for completion by 1Q2018, with two additional projects in central Queensland – 150MW at Rugby Run and 100MW at Crinum Creek.

This follows a massive re-alignment of Adani Enterprises strategic direction to mirror Indian Energy Minister Goyal’s plan to build a recently upgraded target of 225GW of renewable energy by 2022. Adani Green Energy plans to commission 10,000MW of solar by 2021, having just commissioned the largest solar project in the world to-date, that being 648MW in Tamil Nadu. Adani Green is due to commission in October 2016 the largest Indian tracker solar project – a 105MW plant in Punjab. Adani Green has also outlined a multi-stage US$4bn solar cell/wafer/module manufacturing plant in Gujarat combined with extensions upstream into polysilicon and copper smelting.

Energy Minister Goyal has consistently referenced his objective for India to cease thermal coal imports this decade, including a targeted 20% decline to 160Mt in 2016/17 from 200Mt in 2015/16. NTPC Ltd is the single largest buyer of coal in India and it has a stated target to cease  coal imports in 2016/17. The economic objective of reducing the inflationary impact of India‘s current account deficit is one reason. A second is the fact that new Indian solar projects are being built at zero inflation tariffs of Rs4.40-4.80/kWh (US$65/MWh) whereas a new import coal fired power plant would require a tariff of Rs5-6/kWh (US$82/MWh), plus inflation and currency devaluation risks.

Tim Buckley is the Director of Energy Finance Studies, Australasia for IEEFA. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director, Head of Australasian Equity Research.

Tim Buckley (Australia) P: +61 408 102 127 E: [email protected]

Simon Nicholas (Australia) P: +61 405 831 614 E: [email protected]

Media: James Lorenz P +61 400 376 021 E: [email protected]

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IEEFA conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce dependence on coal and other non-renewable energy resources.

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