Press release – Investor alert: Queensland Land Court recommends rejection of GVK Alpha Coal Mine

GVK’S US$10 BILLION AUSTRALIAN ALPHA COAL PROJECT REMAINS ‘UNECONOMIC’ SAYS INSTITUTE FOR ENERGY ECONOMICS AND FINANCIAL ANALYSIS

Alpha Coal project in Galilee Basin in central Queensland. AAP: Greenpeace/Andrew Quilty

SYDNEY, 8 APRIL2014:  A six month court challenge initiated by farmers and community groups objecting to Indian giant GVK’s 30 megatonne GVK Alpha coal mine in Australia’s Galilee Basin concluded today, with the Land Court of Queensland referring the decision on approval of the mine to Qld Resources Minister Andrew Cripps. The Court recommended that approval be refused or granted only on the basis of a rigorous set of conditions relating to water, including that the mine proponents obtain water licences such that “all concerns pursuant to the precautionary principle are resolved”.

It is likely that the water concerns may not be able to be resolved to the satisfaction of the rigorous standards of the precautionary principle, putting a cloud of uncertainty and increased risk around the project, and raising question marks as to whether GVK will ever achieve final approvals.

Tim Buckley, IEEFA’s Director of Energy Resource Studies, Australasia, authored last year’s report Stranded, An Analysis of GVK’s proposed Alpha Coal Project in Australia’s Galilee Basin. Tim Buckley said today that, “The decision of the Land Court of Queensland on GVK’s Alpha coal mine should be a red flag to investors, putting additional hurdles in the way of the project’s approval”.

The test pit at the GVK Hancock Alpha coal project in the Galilee Basin west of Rockhampton. By Patrick Hamilton

“Now, even with the addition of new partners or other developments, the cumulative picture of cascading multiple risks and inevitable delays around the Alpha project means that there is limited investment potential.

“As currently structured, GVK simply cannot afford to participate in the Alpha project due to its lagging stock price, overleverage, and poor track record on other projects, amongst other factors. In short, it lacks the financial capacity to deliver.

“IEEFA carried out analysis of the US$10 billion Alpha coalmine, port and rail project last year and concluded it was ‘a quagmire, not an investment’,” said Mr Buckley.

“GVK announced its non-binding memorandum of understanding with Aurizon Holdings on the Galilee Rail corridor back in March 2013, but more than a year later there is no sign that this joint venture will progress. Aurizon has since written off its Galilee rail corridor development investments in its December 2013 half year results.

GVK is seeking to raise a total of US$10 billion capital to build the Alpha Coal project, Australia’s largest black coal mine, in Queensland’s remote, untapped Galilee Basin; construct 500km of rail infrastructure across agricultural land and floodplains to the coast; and develop a highly controversial coal export terminal through the iconic, UNESCO World Heritage listed Great Barrier Reef.

The IEEFA report, Stranded: A financial analysis of GVK’s proposed Alpha Coal Project in Australia’s Galilee Basin, showed that GVK:

• has never successfully built or operated a coalmine or any business outside of India.
• is over-committed, with 16 greenfield infrastructure projects worth $20 billion across six asset classes.
• is highly over-leveraged, carrying debt of US$2.8 billion with a market capitalisation of only $243 million.
• faces a lagging stock price, which has underperformed the Indian stock market index by 65% since 2010.
• had an excessively low EBIT (earnings before interest and tax) to net interest ratio of 0.44x in 2012/13, and that this has shown no sign of improvement in 2013/14 to-date.
• confronts potentially insurmountable regulatory, environmental, operational, logistical and financial hurdles, including the possibility of further legal battles, that will likely delay the project and escalate costs to the extent that the project is unviable even for a company with a healthy balance sheet.

Despite positive commentary from the Queensland government and apparent positive momentum for GVK’s Alpha project’s environmental approval process, all of the signals from the Alpha project indicate that it has stalled and that GVK’s financial distress is building. To-date in 2014, it has been reported that:

• GVK is looking to sell down its holding in the Mumbai Airport and/or the associated landbank surrounding the airport;[i]
• GVK is looking to sell stakes in two tollroad infrastructure projects;[ii]
• GVK has relinquished its offshore India oil and gas exploration permits it held in joint venture with BHP Billition;[iii]
• GVK is talking with NTPC Ltd to sell its partially built, 540MW Goindwal Sahib coal-fired power generation project in Punjab;[iv] and
• GVK had approached Coal India Ltd to buy into GVK’s Galilee Basin coal projects. It was reported that Coal India “spurned the proposal because of risks related to project implementation, the strengthening A$, weakening markets and the high cost of production”.[v]

“GVK talks about progressing this Galilee project but clearly the company’s original logic of an integrated coal mine to coal-fired power generation strategy is no longer in place,” said Mr Buckley.

“The cost side of the project is equally troubling. The impacts of the proposed export terminal on the Great Barrier Reef, the massive rail infrastructure and mining cost factors remain excessive relative to the low projected cashflows of the project.”

GVK purchased its Galilee Basin coal deposits from Hancock Prospecting in 2011 for US$1.26 billion near the peak of the coal price cycle of $133 / tonne, a deal for which it was awarded “Asia Deal of the Year”. Two and a half years later, the project remains little more than an unfunded proposal.

With the collapse in the Indian Rupee on the back of the increased fiscal and current account deficits in India, stagflation suggests India’s need for huge new expensive thermal coal import sources has materially diminished. With lower Indian wholesale and retail electricity prices comes even less scope for Indian power plants to utilise expensive imported coal that is over three times the price of domestic coal supplied by Coal India Limited.

The internationally traded thermal coal price has slumped 45% since the 2011 peak, with Bank of America Merrill Lynch forecasting a four year low of US$74 per tonne average for Australian exports in 2014.

“Coal markets continue to weaken, and a sustained comeback is looking less likely in the face of the maturation of renewable energy, the changing nature of growth in many countries and public concern over coal’s health and environmental impacts,” said Mr Buckley.

“The Alpha project is clearly at risk of being stranded as the thermal coal price continues to decline and the Australian dollar remains stubbornly high relative to history.  No investor should take part.”

ENDS
The Land Court’s judgment on the GVK Alpha coal mine legal challenge is here: http://www.landcourt.qld.gov.au/documents/decisions/MRA082-13-etc-4-12.pdf

IEEFA REPORT ON ALPHA: Stranded: A financial analysis of GVK’s proposed Alpha Coal Project in Australia’s Galilee Basin

INTERVIEWS: All contacts on Sydney, Australia time (EST).
Tim Buckley, Director of Energy Resource Studies, Australasia, Institute for Energy Economics and Financial Analysis – 61 408 102 127

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Annemarie Jonson – +61 428 278 880
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