*This is an excerpt from the report, Stranded out west: The imminent failure of Lanco Infratech’s investment in Griffin Coal, published by the Institute for Energy Economics and Financial Analysis and authored by Tim Buckley.
The acquisition of Griffin Coal by Lanco Infratech at the peak of the coal boom is at serious risk of becoming a stranded investment with potential negative impacts on investors, Western Australian taxpayers and the local community of Collie.
Analysis by IEEFA of Lanco Infratech’s financial position indicates that Lanco Infratech’s local subsidiary, Lanco Resources Australia Pty Ltd. faces a likelihood of insolvency in early 2015.
Requests for public subsidies to prop up the business are unlikely to have a material impact on the underlying financials of the business and should be resisted by policymakers.
The imminent failure of Lanco Infratech’s Griffin Coal business points to an increasingly urgent need for Federal and State Government planning to prepare for the economic and social impacts of the structural decline of coal.
A stranded investment?
Much public attention has focused on the two Indian proposals in the Galilee Basin in Queensland by the GVK and Adani groups. This report focuses on a third, that being Lanco Infratech’s A$750m acquisition of Griffin Coal in Collie, West Australia. Our analysis shows this acquisition runs the real risk of being another stranded asset.
When Lanco Infratech acquired the Griffin Coal mine in February 2011, it was in poor operating and financial shape, having been run by an administrator since the global financial crisis. Lanco Infratech’s A$1bn expansion plan for Griffin Coal was optimistic, particularly in the face of what appears to be a structural decline in the global seaborne thermal coal market.
Griffin Coal continues to operate at below gross cashflow breakeven, such that it is struggling to pay for equipment maintenanceii and the interest, let alone have scope to repay the capital on $600-800m of debts outstanding against the local Australian entity. In the absence of an equity injection from Lanco Infratech, administration looks like a distinct probability if the global thermal coal market remains depressed. Trading while insolvent is an issue that Directors and officers of the company should be monitoring closely. A likely catalyst for restructuring is the pending A$150m final deferred payment due February 2015.
A number of factors mitigate against any sale of Griffin Coal:
1. The depressed state of the global seaborne thermal coal markets, with potentially a permanent, structural decline in demand;
2. The lack of large scale existing coal export facilities close to the Collie operations;
3. The lower than benchmark energy content of the Collie Basin coal;
4. The loss-making state of the business for much of the last five years;
5. The long term fixed price nature of the domestic coal supply contracts in Western Australia;
6. Existing debts secured against the Australian coal business (possibly as much as US$663m);
7. A $20m unfunded mine rehabilitation charge outstanding; and
8. A $150m final payment due February 2015 to the creditors of the last insolvent business structure that owned Griffin Coal.
IEEFA would be surprised if there were many potential buyers of the Griffin Coal business. A return to voluntary administration is a possible eventuality given we would estimate that with a negative EBITDA and significant net debt, the Australian subsidiaries have a negative equity value approaching the sum of the debt and the rehabilitation liabilities combined.
This report raises three wider public policy questions that are evident from an analysis of Griffin Coal:
1. Taxpayer funded subsidies to coal: IEEFA examines the recent A$240m coal mine subsidy granted by the Western Australian government to Griffin Coal’s key competitor, Yancoal Australia in October 2014. We note the November 2014 announcements by the Queensland State Premier of similar taxpayer funded subsidy proposals being offered to Adani Mining for their Galilee Basin venture, including the many hundreds of millions of dollars of equity funding for the proposed railroad, and the generous provision of water infrastructure, dredge spoil removal and / or a coal royalty holiday. Given coal is a mature industry that argues for a level playing field, we question the rationale for taxpayer subsidies. IEEFA recommends that Western Australian policy makers reject any request to provide additional subsidies to support Griffin Coal.
2. The need for a community transition plan: The evident structural decline of the coal industry highlights the need for long term national and state level energy plans, and an associated plan to support local communities transition towards industries of the future. Failure to predict and plan for the transition will only lead to worse economic and social outcomes and the failure to develop alternative economic opportunities. IEEFA recommends that Australian Federal and State Governments begin developing transition plans for coal dependent communities in light of the structural decline of coal markets globally.
3. The need for stronger enforcement of mine rehabilitation bonds: IEEFA notes the absence of any material environmental remediation bond protection at Griffin Coal. West Australian taxpayers could well end up with yet another significant unfunded mine remediation liability of well over $20m. IEEFA Recommends:
a. stronger independent review and enforcement of the new mine rehabilitation laws in Western Australia, and a review of the State Agreement Act and other regulatory arrangements for the Collie Coal mines, to bring them in line with contemporary regulatory environment for mining;
b. Remediation bonds should equal the likely commercial costs (rather than relying on Directors’ valuations);
c. Remediation bonds should be fully funded at the start of any project as it is generally too late if this issue is delayed until the mine hits financial difficulties once operating.