GVK rejects claim Alpha coal project is 'stranded'
Indian-owned GVK lacks the financial strength to proceed with its Alpha coal project in Queensland's Galilee Basin, in part because of overcommitment in 16 ventures worth $US20 billion, the report by the Institute for Energy Economics and Financial Analysis says.
In addition, the tumbling price of thermal coal on world markets and the environmental hurdles the mine must clear mean the project is likely to be "stranded", the report, commissioned by Greenpeace Australia Pacific, says.
"As currently structured, GVK simply cannot afford to participate in the Alpha project due to its plummeting stock price, over-leverage and poor track record," said Tom Sanzillo, a co-author of the report. "The cumulative picture of cascading multiple risks and inevitable delays and cost blowouts around the Alpha project means that there is limited investment potential."
Coal prices have slumped about 30 per cent in the past 18 months, prompting big companies such as BHP Billiton and Rio Tinto to signal over the past month that they may sell some of their coal assets. GVK paid Gina Rinehart's Hancock Prospecting $US1.26 billion for the Alpha deposit in September 2011 with the price for thermal coal near its peak at $US133 a tonne. The IEEFA report said the Alpha mine would struggle to be profitable with production costs at $US70 a tonne or higher, not far off current prices of about $US80.
GVK, though, rejected the report's findings, telling its banks to expect an "activist-motivated media campaign" lasting several weeks as the mine finalises its environmental approvals.
"Our projects are financially robust, with some of the lowest operating costs in the global coal industry [$US55 a tonne free on board] and represent a very large, high-quality and new source of low-ash, low-sulphur, low-gas thermal coal," it said. It also sought to dismiss links between the performance of its listed arm, GVK PIL, and the mine, noting the development of the Galilee Basin's assets is 90 per cent owned by GVK's private investment arm.
Under the terms of its original deal, GVK bought 79 per cent of the Alpha and Alpha West projects, with Hancock retaining the remainder. It also owns all the nearby Kevin's Corner coal project and must pay 100 per cent of the rail and port development costs to get the coal to export markets.
Frequently Asked Questions about this Article…
The Alpha coal project is a proposed coal mine in Queensland's Galilee Basin. The article describes it as one of Australia's biggest undeveloped coal deposits and refers to it as a roughly $10 billion project.
A report by the Institute for Energy Economics and Financial Analysis (IEEFA), commissioned by Greenpeace Australia Pacific, said GVK lacks the financial strength to develop Alpha. The report argued GVK is over-committed across 16 ventures worth about US$20 billion, that tumbling thermal coal prices and environmental hurdles could leave the project 'stranded', and that the project faces limited investment potential due to likely delays and cost blowouts.
GVK rejected the report's findings, telling its banks to expect an 'activist-motivated media campaign' while environmental approvals are finalised. GVK said its projects are financially robust, claim some of the lowest operating costs in the global coal industry (about US$55 a tonne FOB), and described the deposit as a large, high-quality source of low-ash, low-sulphur thermal coal.
The IEEFA report said Alpha would struggle to be profitable if production costs are US$70 a tonne or higher. The article notes thermal coal prices slumped about 30% in the past 18 months; current prices were reported at about US$80 a tonne, while prices were near US$133 a tonne when GVK bought the deposit in September 2011.
Under the original deal, GVK bought 79% of the Alpha and Alpha West projects from Gina Rinehart's Hancock Prospecting in September 2011 for about US$1.26 billion, with Hancock retaining the remainder.
Yes. GVK also owns the nearby Kevin's Corner coal project. The article states GVK must pay 100% of the rail and port development costs needed to get Alpha's coal to export markets.
Coal prices have fallen about 30% in the past 18 months, prompting majors such as BHP Billiton and Rio Tinto to signal recently that they may sell some coal assets. Those market pressures were cited in the IEEFA report as factors that could undermine Alpha's investment case.
Based on the article, investors should note the report's concerns about GVK's financial leverage and over-commitment to other ventures, falling thermal coal prices, potential for production cost pressures (reported break-even concerns around US$70/tonne), environmental approval hurdles, and the requirement for GVK to fund rail and port infrastructure. GVK disputes these points, saying its operating costs are low and the project is high-quality.
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