The decision to approve expansion of the Rix’s Creek coal mine by the New South Wales (NSW) Independent Planning Commission (IPC) was based on a lopsided cost benefit analysis that minimised tax benefits and cost externalities to the people of NSW, a wrongful representation understating the mine’s rehabilitation needs, and extraordinary pressure from NSW government ministers following a campaign led by the NSW Minerals Council.
In 2013 Bloomfield Collieries applied to expand and extend open-cut mining at Rix’s Creek in the Hunter Valley, NSW until 2040 to produce an additional 25 million tonnes (Mt) of thermal and semi-soft coking coal for export over the life of the mine. That application was approved by the IPC on 4 October 2019. A few hours later, the IPC reversed its approval. On 12 October the Rix’s Creek Extension Project was again approved by the IPC, less than 24 hours after new submissions were received.
Over 2019, four key coal mining decisions – Rocky Hill, Dartbrook, United Wambo and Bylong – appeared to change the way mining applications were assessed in NSW, particularly in consideration of the climate risks and community costs – both local and exported – posed by carbon emissions. Until the Rix’s Creek decision.
A smear campaign was waged by the foreign funded coal lobby group, the NSW Minerals Council.
In response to a smear campaign waged by the foreign funded coal lobby group, the NSW Minerals Council, the NSW Planning Minister Rob Stokes called for a two-month review of the IPC on the day Rix’s Creek was approved, then followed it up with a bill to Parliament preventing the IPC from imposing conditions seeking to control downstream carbon emission or other climate change impacts occurring outside Australia, on NSW mining projects.
In IEEFA’s view, the KPMG cost-benefit analysis (CBA) for the Rix’s Creek Extension Project overstated many of the benefits and understated many of the costs, while failing to quantify the compounding effects of extensive coal mining activity across the Hunter Valley region, ignoring both the cumulative cost externalities to be borne in perpetuity by the people of NSW, and the intergeneration equity evaluation grounds the IPC was meant to evaluate (that are now to be removed from its terms of reference).
The cost-benefit analysis lacks credibility
IEEFA notes the global cost of Rix’s Creek Extension Project scope 3 emissions to be 1,808 times the cost included in the CBA undertaken by KPMG.
KPMG used an outdated European Union carbon price taken from March 2017
KPMG used an outdated European Union carbon price taken from March 2017 when it was at a near record low, a quarter of the current price in October 2019. It then calculated NSW’s population on a pro rata basis as a share of the world total to take what would otherwise be a total scope 3 carbon emissions cost of $832m, and reduced it to a NSW share of just $0.46m. Given there is only one global atmosphere, NSW communities wear 100% of the costs of more frequent, more extreme weather events.
In isolation, the incremental current market value of carbon emissions imposed on the global community from the Rix’s Creek Extension Project of A$832m exceeds the net production benefits of $614m that KPMG calculates, even without considering KPMG’s overestimate of other net benefits.
A negative CBA should have been a red flag to the approval body
This gives the Extension Project a negative CBA which should have been a red flag to the approval body. IEEFA surmises that this was behind the NSW Minerals Council’s subsequent pressure on the NSW government to shut down further exploration of the real costs of Scope 3 emissions into the future.
The financial, legal, and fiscal costs of increasing emissions have been well articulated by the Reserve Bank of Australia, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investment Commission (ASIC) and in Australia’s legal system.
As global banks, lenders and insurers increasingly restrict coal sector financing, a recent study by Ernst & Young found mining companies are under increasing investor pressure to secure a social licence to operate, including taking responsibility for scope 3 emissions.
This trend globally has been ignored by the IPC and the NSW government.
Corporate tax has been minimised
Most CBA mining approvals rely on proponent-created “models” that assume 100% equity financing of every coal project, including KPMG’s analysis for the Rix’s Creek Extension Project, ensuring the corporate tax benefits implied are massively overstated. Standard industry practice includes using substantial debt leverage to legally minimise tax expenses, thereby maximising the proponent’s return on equity invested.
KPMG assumed the Rix’s Creek Extension Project would generate $159m of corporate tax based on 100% equity financing, and taking 32% of this, allocates a A$50.9m benefit to NSW. In doing this, KPMG assumes away Rix’s Creek’s all too likely interest expense deductions to zero. If a real world norm was applied to Rix’s Creek, this benefit would be reduced by up to 100%.
Based on this modelling, the same corporate approach would likely see a similar near zero cash tax paid on the Rix’s Creek Extension Project.
Coal prices have collapsed this year
IEEFA evaluated the financials of the top two listed NSW coal mining firms – Yancoal and Whitehaven Coal. Similar to other Australian operated coal mining firms, both have paid almost no corporate tax over the last six years, largely due to the ongoing use of significant interest expense deductions.
As a leading corporate tax advisor, KPMG is all too familiar with the tricks of the tax avoidance game. This NSW Planning farce should be removed immediately from all CBAs submitted to the IPC.
Dramatic coal price declines during 2019
KPMG relied on (at the time) credible industry forecasts of the long term nominal price estimate for thermal coal of US$73.80/tonne and for soft coking coal of US$111.10/t, in addition to an exchange rate of US$0.75, giving an A$98/t and A$148/t price respectively.
However coal prices have collapsed this year. Thermal coal prices have halved since the start of 2018 to US$64/t, and coking coal prices have dropped more than 40% to-date in 2019. Industry leaders including Cerrejon and NextEra Energy are warning a terminal structural decline is underway, consistent with the International Energy Agency’s (IEA) Sustainable Development Scenario modelling. The move into bankruptcy by Murray Energy this week perfectly illustrates the end result of this transition.
Dramatically increasing oversupply at a time of increasing cost competitiveness of zero emissions alternatives is undermining coal pricing.
Figure: Seaborne Soft Coking Relative to thermal Coal Prices (US$/t)
A sustained weakness in coal prices erodes project revenues. This further erodes coal royalties that are due to the NSW Government, thereby overstating the CBA assumptions.
The collapse in coal prices, the significant likely drop in royalties, and the oversupply of the market appears not to have been factored in by the IPC.
Mine rehabilitation and the un-costed final void
The proponent argues that rehabilitation will be completed progressively, and then in full upon mine closure (assuming the site is not left in permanent ‘care and maintenance’ or abandoned entirely as is standard industry practice), and that those costs will be worn by the proponent.
A sustained weakness in coal prices erodes project revenues
Combined with leaving a huge un-costed final void, KPMG somehow found a net financial benefit to the proponent of $16m by modelling a reduction in the net present value (NPV) of mine rehabilitation.
KPMG’s modelling highlights the incremental ‘value add’ of deferring clean-up for up to two decades while ignoring final void costs completely. Proponents in NSW have estimated the cost of filling final voids – the pit left after mining ceases – from $130m to $2,000m. Avoiding final void rehabilitation leaves such unfunded costs to NSW rate payers.
That this intergenerational equity principle is assigned a zero cost in KPMG’s CBA is a key failure in Bloomfield’s application, and should have been a reason for rejection by the IPC.
Recent coal price declines are likely to see renewed Hunter Valley workforce reductions
Recent forecasts from the Australian government chief economist and the IEA highlight thermal coal is in terminal decline if the world is to successfully deliver on the Paris Agreement.
The NSW government is racing against the tide, showing themselves to be beholden to the mining industry and lobby groups.
The government needs to prepare for the inevitable transition and stop investing in even more fossil fuel capacity when existing supply is more than sufficient.
Tim Buckley is director of energy finance studies with IEEFA.