There is some regrettable news afoot for the governments of Tony Abbott and Campbell Newman: the financial statements of Adani.
This very news, however, will be relished by the enemies of progress: the tree huggers, basket-weavers and the dreaded Great Barrier Reef protectionists.
Adani is the prime player in the biggest thermal coal project in Australian history, Galilee Basin. The Galilee coal is to be shipped to India from terminals at Abbot Point where, controversially, the plan is to dredge the port and dump the spoil out to sea.
Without putting too fine a point on it, this is shaping up as the whitest of white elephants. No, more than this, this is an elephant which does not merely lack financial viability but which is also a calamity for the environment.
If balance-sheety stuff is not your thing, skip to the next item. Otherwise, get a load of this from the accounts of Adani Mining Pty Ltd for the year to March:
Interred in the notes, one discovers a $516 million loan priced at “Libor + 4.25 per cent”. This loan and its interest are payable to another subsidiary of the Adani Group in India, Adani Minerals. In contrast, the loans in another vehicle, Adani Abbot Point, are all priced at 1.9 per cent to 2.2 per cent above their respective benchmarks.
Getting the drift? Adani the parent borrows from the banks 2 per cent more cheaply that it charges Adani Mining the subsidiary in Australia for internal loans. Why would these loans be priced so far above commercial rates? Surely not to rack up losses in Australia and rip out equivalent profits to India? Some $10 million a year thereby transferred – 2 per cent on $516 million – tax free to the subcontinent?
Well, that could only happen if the project stacks up.
Delving further, Adani Mining P/L borrowed $516 million from Adani Minerals P/L (India), which in turn borrowed from Standard Chartered Bank.
Adani Mining P/L had no revenue and booked a pre-tax loss of $112 million in 2013-14. It spent $75 million on exploration and evaluation of the mining area, which was capitalised, along with $41 million of interest, into the balance sheet rather than expensed against the profit and loss. This is accepted procedure. It is a massive project, the type that inevitably incurs large losses at the front end. It does show the cash burn though.
Adani Mining’s red ink of $112 million mostly relates to currency losses. All loans are in US dollars with no hedging, giving rise to a loss every time the Australian dollar declines (the common view is the Aussie is on its way down).
There was little in the way of material assets acquired last year; property, plant and equipment was up $2 million for the year to $79 million in total. The total investment so far by Adani Enterprises in Adani Mining is now $984 million and shareholder equity is negative to the tune of $45 million which reflects net borrowings of $1.015 billion in this Australian subsidiary alone.
$15 billion question
So what do we have here? A company with $1 billion in debt, negative shareholders funds, zero revenue and high cash burn – albeit whose accounts are signed by Ernst & Young – with $15 billion still to spend.
The cost of developing the project is slated at $18 billion all up. Adani has spent $2 billion buying Terminal 1 and $1 billion in Adani Mining. Terminal 0 is the big one. Where does Adani get a cool $15 billion?
The banks perchance? Unlikely. Thermal coal at a four-year low of $70 a tonne, cost of production $50 a tonne, quality of coal, to put it delicately, not the best. Cash cost of production roughly equals revenue. Then there is the small matter of finding $1 billion a year to fund the interest on the debt.
Tim Buckley, director at the Institute of Energy Economics and Financial Analysis, puts it bluntly: “This project is not commercially viable”. Apart from the financial deficiencies of the main participants, he says thermal coal is in structural rather than cyclical decline.
If the banks are loathe to part with that $15 billion, how about equity funding? Not much of that in evidence – no equity at all in Adani Mining. Might the parent, Adani Enterprises, tip in? Unlikely – it has debts of $US12 billion on an external market cap of $US12 billion.
Adani, alas, is not the only obstacle to Galilee. The other crucial Indian company GVK has spent $800 million so far on its $10.4 billion project. The rub is that it is due to pay Gina Rinehart $US560 million next week but it has no cash and its market cap is only $US412 million in toto.
This is a white elephant with purple polka dots.
Amid the project viability and majestic funding schism, the worst eventuality is that Adani and GVK dredge up the Barrier Reef before they themselves blow up and ho-tail it back to India.
Campbell and his 2IC, Jeff Seeney, would not have much luck chasing Adani to Ahmedabad for a stoush in the local courts, especially as founder Gautam Adani is a close mate of India’s Prime Minister.
In case another red flag were in order, Linc Energy accepted $155 million from Adani last week for its option in the project. It is worth asking why Linc boss Peter Bond would sell a royalty of $2 billion over 20 years – perhaps worth $600 million today – for just $155 million.