SYDNEY// 17 July, 2014: Adani Mining Pty Ltd is understood to have signed an engineering, procurement and construction (EPC) contract with POSCO Engineering and Construction of Korea to build the greenfield rail line from the proposed Carmichael Coal project to Abbot Point in Queensland, Australia.

This rail line is reported as being 388km and would have a construction cost approaching A$3bn.

“Adani suggests a key aspect of this agreement is that POSCO will provide some equity financing for the rail project, and that POSCO’s involvement should open up debt project financing from Korean banks,” Tim Buckley, IEEFA’s Director of Energy Finance Studies, Australasia said.

“This project requires a thermal coal price well in excess of US$100/t to be commercially viable – it is currently sitting at US$60/t- US$70/t.

“We note that that adding 60Mtpa of additional supply will have a materially adverse impact on the global seaborne price of thermal coal. 60Mtpa equates to a 6% expansion of global supply, at a time when most coal mining companies are evaluating mine closures.

“Opening up the Carmichael project will help facilitate upwards of 200Mtpa of additional thermal coal supply.

Combined, a 30% expansion of global supply over the medium term will see the global thermal coal remain under pressure, and could in isolation drive the long term coal price permanently down 20% from current commodity analysts’ projections.

“This must surely send a shiver down the spine of any investor who has their money in global coal debt or equity investments, and rightly so,” Mr Buckley said.

“I also note that the Abbot Government’s proposed Korea-Australia Free Trade Agreement, as is currently being debated by the Australian Senate, will provide POSCO the right to sue the Federal and Queensland Governments in an international tribunal beyond the Australian legal system, should the government undertake any law or policy that POSCO deems to harm their rail investment.

“Adani Mining is yet to detail how it proposes funding a new $4-5bn 50Mtpa coal export terminal at Abbot Point, nor the $5-6bn required to construct the 60Mtpa greenfield thermal coal project at Carmichael.

“The remote location requires a massive capital outlay for greenfield construction of the mine, the railway and the coal export terminal, plus the associated water, road, airport, power and water infrastructure.

“This has been identified by Adani Mining as totally A$16.5bn.

IEEFA estimates the cash cost of production free-on-board (FOB) will be north of US$60/t including maintenance capex, rail and port charges and Queensland government royalties.

Given the low energy content of the Carmichael coal (identified by Adani Mining at 5,200-5,400kcal NAR) and the very high ash content (identified as mostly in excess of 25%), the Carmichael coal is likely to be sold at a 20-30% discount to the Newcastle benchmark (with a 6,000kcal NAR, 11-14% ash content).

“Given the Newcastle benchmark is currently trading at well below US$70/t, Adani Mining would be looking at revenue of below US$50/t, giving rise to a material cash loss on every tonne of coal sold,” Mr Buckley said.

The Adani Group has been reported to be seeking shareholder approval for a 16,000 crore (US$2.6bn) equity raising across the three Adani listed vehicles – Adani Enterprises, Adani Ports and Adani Power.

“Any international investor considering participating in this capital raising should carefully review the purpose of the raising.

The Adani Group has the attraction of providing strong leverage to the long term development of India’s power, ports and infrastructure markets.

“If the proceeds of the issue are then redirected to funding Australia’s biggest thermal coal mining complex, right on the edge of the Great Barrier Reef UNESCO listed World Heritage area, investors beware,” he said.

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

 Mr Buckley has produced a detailed report on Adani: