Australia lures $21b bet on coal rebound

Coal's worst slump in seven years has failed to deter GVK Group and Adani Enterprises Ltd from pressing ahead with a $21 billion bet on Australia's Galilee Basin as other companies shelve projects amid rising costs.

GVK, controlled by India's GV Krishna Reddy, plans to have financing as early as this year for its Alpha mine in Queensland's Galilee region and is scheduled to begin exports by 2017. Coal at the Australian port of Newcastle, the Asian benchmark price, has slid 4.4 percent in 2013 to $86.65 a metric ton on May 17, extending a 19 percent slump last year, the most since 2005, according to IHS McCloskey data.

While Glencore Xstrata Plc is among miners canceling projects and cutting workers to cope with escalating production costs and slumping prices, GVK and Adani are preparing to meet Asian demand that's forecast to increase 24 percent by 2018. About 15 percent of Australian coal is extracted at a loss below $90 a ton, according to CIMB Group Holdings Bhd.

"GVK and Adani have reached a point of no return," said Debasish Mishra, a partner and head of the energy practice at Deloitte Touche Tohmatsu India Pvt in Mumbai. "It's very difficult for them to exit."

Adani, India's biggest power-station coal importer, and GVK are the most advanced in a group of companies planning to spend more than A$33 billion ($32 billion) to export the fuel from the Galilee region.

Biggest producer

Covering more than 247,000 square kilometers and containing an estimated 14 billion tons of the bulk commodity, Galilee may become the largest producing area in Queensland, according to Aurizon Holdings Ltd, Australia's largest transporter of coal by rail. Five proposed mines may bring combined capacity of 200 million tons a year, it said on its website. Companies in Queensland produced 237 million tons of thermal and steelmaking coal in 2011, government data shows.

Adani is scheduled to start construction this year on the Carmichael mine as part of its A$6.8 billion project, with first output set for 2016, according to a Dec 13 statement on the Gujarat, India-based company's website. Harsh Mishra, chief executive officer of its Australian unit, declined to be interviewed for this story.

GVK's $11 billion plan includes construction of a 495 kilometer rail line to transport the fuel to the Abbot Point harbor, where it intends to build an export facility to load as much as 60 million tons a year. GVK and Aurizon signed a non-binding agreement in March to develop the rail and port jointly.

Asian demand

The Indian company's Kevin's Corner mine may start production about six months after Alpha, according to Mulder. Kevin's Corner is valued at A$4.2 billion by Australia's Bureau of Resources and Energy Economics in Canberra. The two projects will have combined output of about 62 million tons a year, according to a presentation on the GVK website.

Australian billionaire Gina Rinehart's Hancock Prospecting Pty owns a 21 percent stake in Alpha, the presentation on the GVK website shows. Waratah Coal, controlled by mining entrepreneur Clive Palmer, is also proposing an A$8.8 billion mine, while Bandanna Energy Ltd is planning a Galilee project valued at A$4.2 billion by the bureau.

"To keep the lights on, coal is still going to need to be produced," said Paul Mulder, the managing director of infrastructure and coal at GVK Hancock, the company's Australian unit. "In China, India, South Korea and Japan, thermal coal forms a massive foundation of energy," he said in an interview from Brisbane, the capital of Queensland.

Emerging economies

Asian coal imports are forecast to increase to 824 million tons by 2018, up from 665 million tons in 2012, the Australian bureau said in a March report. Shipments to China are projected to rise 22 percent, while exports to India are predicted to increase 83 percent to 185 million tons, it said.

The lower cost and reliability of coal-fired electricity generation makes the fuel appealing to emerging economies expecting rapid increases in energy demand, the bureau said. India, which generates 57 percent of its electricity from coal, plans to add 118 gigawatts of capacity in the five years ending March 2017, according to I.A. Khan, an energy adviser at India's planning commission.

Miners cut

Glencore Xstrata, the world's biggest shipper of the fuel, halted work on the Balaclava Island export terminal this month in Queensland, citing poor market conditions, overcapacity and concerns about the medium-term outlook. The company, based in Baar, Switzerland, also shut its Brisbane office in March after flagging in September that it would cut about 600 jobs.

Peabody Energy Corp, the largest US coal company, has taken control of most of its Australian sites from contractors to limit losses, the St Louis-based company said in a statement announcing its first-quarter earnings last month. Early-stage projects continue to be deferred, with timing dependent on market conditions, the company said.

'Increasingly remote'

Development of the Galilee Basin looks increasingly remote, Macquarie Group Ltd, Australia's biggest investment bank, said in a May 1 research note. Prospects for project paybacks look extremely poor, the bank said. Further delays are likely unless "deep pocket" backers are able to ignore conventional economics, Sydney-based Macquarie said.

Thermal coal is needed to generate electricity while the metallurgical or coking variety is utilized for steelmaking.

Retrenching coal developers are taking a short-term view of a mature industry with bright long-term prospects, said GVK Hancock's Mulder, adding that the company will be able to deliver coal at a cost of about $55 a ton.

"If you look at what China's done in the last two years, going from 2010 to 2012, they've become a net importer of coal of some 250 million tons per year," he said. "South Korea is lifting and Japan is starting to expand its baseload also. There's going to be cyclical ups and downs."