Adani’s Carmichael proposal a long way from reaching financial close: IEEFA

Tim Buckley, Director of Energy Finance Studies, Australasia for Institute of Energy Economics and Financial Analysis: The latest political manoeuvrings by Adani has wedged the Queensland government into conceding a massive taxpayer funded $575m loan in the form of a royalty deal. This is yet another taxpayer subsidy to a foreign billionaire, alongside the Federal Government’s Northern Australia Infrastructure Facility (NAIF)’s $900m. However, after seven years of talking, Adani Enterprises has not demonstrated how it intends to reach a legally binding, fully funded “Financial Close” on the Carmichael proposal.

  • The Queensland Government has gifted Adani a $575m royalty loan
  • Australian Resources Minister is backing $900m NAIF subsidy
  • Adani Power’s financial distress mocks the “Pit-to-Plug” strategy
  • Adani’s pending “Investment Decision” merely involves some earthworks
  • Traditional Owners still fighting Adani in court
  • “Financial Close” is nowhere to be seen

The Queensland Premier Annastacia Palaszczuk has reneged on her Party’s election commitment to not provide any financial support to the Adani proposal. The press today reports Adani has secured a five-year royalty holiday, paying just $5m annually. At 25 million tonnes per annum (Mtpa) for five years, IEEFA estimates the royalties of A$5/t equate to $600m, less $5m pa or $25m over 5 years i.e. a A$575m royalty deferral (effectively a $575m loan to Adani).  This loan will materially assist Adani Enterprises in its overall A$5bn capital raising requirement. The Queensland Government’s endorsement of this coal project is key in trying to convince global financial institutions to support this project proposal.

Senator Matt Canavan has vocally and repeatedly endorsed the Carmichael proposal and verbally assured potential backers that the NAIF $900m low interest loan subsidy is likely to be approved. While the timing of this approval remains as opaque as the governance structure of NAIF, the Federal Government’s subsidy of another 20% of the $5bn capital cost of the 25Mtpa project is a major capital risk transfer to taxpayers. For a government committed to a technology neutral energy sector approach, this subsidy of even more export thermal coal capacity flies in the face of its Paris Climate Agreement commitments, and will only serve to undermine the viability of existing Australian thermal coal export operations.

Much has been made in the media that the proposed Adani coal mine in Australia is set to receive yet another “Investment Decision” from its Indian Parent, Adani Enterprises Ltd (AEL). However, in a Bombay Stock Exchange release on the 23 May 2017, AEL clarified to its Indian investors that this “Investment Decision” involved just “certain internal budget approvals for pre-construction activities”. Further, in AEL’s full year to March 2017 annual results release on the 24 May 2017, the Carmichael proposal did not warrant a single mention in the 19-page document.

IEEFA finds this omission bizarre in the context that Carmichael represents more than 50% of the net book value of equity of the AEL group. The level of disclosure in India is very different to that in Australia.

As to AEL funding a A$5bn project, again IEEFA would note that AEL has net debts of US$3.4bn against book value of equity of US$2.2bn (gearing of 156%), and an interest coverage ratio of 1.56 times. The financial capacity to fund a A$5bn project is not at all clear to IEEFA.

A vote on the Native Title Bill will not occur until mid June, at the very earliest. While in India last month, Australian Prime Minister Malcolm Turnbull promised Mr Gautam Adani that he would deliver changes to Australia’s Native Title regime to ensure Adani could secure an Indigenous Land Use Agreement (ILUA) over the Traditional Owners. Given most global financial institutional majors adhere to the Equator Principles, lack of consent by Traditional Owners is likely to be a major obstacle to financial close.

The Adani group has made a number of references to the vertically integrated “Pit-to-Plug” nature of the Carmichael proposal. IEEFA viewed the 2015 US$10bn restructuring of the AEL group into four separate listed entities, each with independent shareholders and boards, can be viewed as a value-creating move for the Adani family, but represents a major corporate impediment to Financial Close on this proposal.

AEL proposes to build the coalmine, partly funded by the Queensland taxpayer $575m loan. The private Adani family proposes to build a railway line, using an Australian taxpayer subsidy. The coal is proposed to be exported out of the existing under-utilised 50Mtpa Abbot Point Coal Terminal (T1), where this port is owned by either Adani Ports & SEZ or a Cayman Islands company (ASIC doesn’t appear know which), and Adani Power’s 4.6 gigawatt (GW) Mundra power plant is most likely the majority buyer, aiming to import the coal to generate and sell electricity.

However, Adani Power Ltd’s full year to March 2017 results show the company is in financial distress, with net debt to equity of 16.4 times and a net interest cover of 0.63 times. The Auditors issued a Qualified Opinion and the group reported a net loss of US$984m (A$1.3 billion) for the year, the fifth annual net loss since 2012.

With an average coal-fired power tariff of Rs3.74/kWh in FY2017, Adani Power is losing money. Yet the latest solar tariffs in India are 30-40% lower, coming in at Rs2.44-2.62/kWh, while wind is newly competitive at Rs3.46/kWh. Adani Power cannot make money using imported coal currently, yet the outlook is likely to get worse as Indian wholesale electricity tariffs move even lower. The Adani Power management noted that a key solution will be to take advantage of Energy Minister Piyush Goyal’s new coal policy “SHAKTI” to deliver enhanced, lower cost domestic coal linkages to help drive down coal-fired power tariffs to make it more competitive with new low cost renewables.

The “Pit-to-Plug” strategy is critically hinged on the viability of Adani Power Ltd as the key coal off-taker for the Carmichael proposal. Global financial institutions are likely to have an issue with the non-bankability of the off-taker, apparently unlike the NAIF.

The stranded asset risk warnings of both the Norwegian Government Pension Fund and more recently BlackRock, the two largest investors globally, support the February 2017 warning by the Australian Prudential Regulatory Authority (APRA).  The Adani group does not have the financial resources to fund this project internally, and even public subsidies are unlikely to convince private investors to invest in opening up the largest new thermal coal export basin globally.

In light of the Supreme Court decision against expensive imported coal tariff relief, Adani Power is not a bankable off-taker for the Carmichael proposal. Coupled with the already heavily leveraged state of Adani Enterprises and with 2019 forward prices for thermal coal of just US$64/t, IEEFA remains of the view that the Adani Group continues to be unviable and unlikely to attain Financial Close without even more public subsidies and capital support. The Carmichael project remains in limbo seven years after Adani acquired this project proposal and promised first coal by 2014.

 

HoldfastAdani’s Carmichael proposal a long way from reaching financial close: IEEFA