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FEATURES/Cross Border | Jan 15, 2013 | 13230 views

GVK's Big Australian Bet

GVK has to raise $7 billion in debt to succeed in its venture to mine coal Down Under and fight off stiff competition
GVK's Big Australian Bet
Image: Patrick Hamilton Photograhy
FIRE POWER Sanjay Reddy wants Australian coal to transform GVK from a middling infrastructure company to a mining major

T

he Great Barrier Reef, off the coast of Queensland, is one of Australia’s greatest natural gifts. The coral reef system stretches for 2,600 km and can be seen from outer space.

But, head inland into Queensland and into the outback and the contrast cannot get sharper: Giant excavators, three stories high and weighing hundreds of tonnes, work at mines of Brobdingnagian proportions. The newest of these basins is Galilee. The prize here is millions of tonnes of quality thermal coal, and a bunch of aggressive miners from India and China are staking multi-billion dollar bets to snag it.

Leading the charge across three of the mega-mines in the basin is an unlikely Indian entrepreneur, who’s a newbie in the mining business. GV Sanjay Reddy, vice chairman of the GVK Group, first went to Australia looking for fuel for his power project in India. He switched tracks when he saw an opportunity in the huge, unconstrained mines available there.

By late 2011, he paid Hancock Prospecting, one of Australia’s biggest resource companies, $1.3 billion for Alpha, Kevin’s Corner and Alpha West. His plan is to transform GVK from a middling Indian infrastructure player, struggling with debt and cash flow problems, to a mining major by 2025, which will produce 84 million tonnes of coal a year. To put the number in perspective, India’s total thermal coal imports in 2012 were about 100 mt.

Reddy did what few entrepreneurs as leveraged as him would do (GVK’s long-term borrowings were Rs 11,094 crore in FY2012): He announced he would find $10 billion, to fund the coal extraction, build rail lines and a port terminal needed to carry the coal to energy-hungry utilities in Japan, Korea, Taiwan and China.

But the past 15 months—since the deal was signed—have been tough. The economic environment got worse, coal prices fell from a peak of $120/tonne to about $90, funding dried up, and Reddy was unable to complete the financial closure as planned. There aren’t too many people who have the courage to back Reddy’s audacious bet.

Right now, he needs to raise debt of about $7 billion to achieve financial closure—and he doesn’t have much time. The clock has begun ticking on the $1 billion borrowed for the mine acquisition. Competition is keeping up the pressure as well. Right next door is Gautam Adani, who had actually reached Galilee before Reddy, and planted his flag at the Carmichael River. AMCI-Bandanna, a joint venture between a coal exploration company and a private equity firm, is the closest in terms of clearances. Among his most vociferous rivals is Aussie mining tycoon Clive Palmer, promoter of China First (Waratah coal).

As of now, GVK has a lead over the others. Galilee is about 500 km from the sea. With environmental clearances in place, Reddy’s integrated pit-to-port project is best placed to carry the coal to the markets.

Both Adani and Palmer have been trying, so far in vain, to get exclusive rail and port linkages. The Queensland government declared the Alpha mine, a ‘project of state significance’, which makes land acquisition easier. Except the mining lease, most approvals are in place and land deals have been locked in with stakeholders.

But with every day of delay, Reddy’s first-mover advantage could get whittled. And the prospect of more capacity coming on stream makes it tougher for him to sign long-term deals with buyers.

Analysts have also criticised the way in which Reddy has structured his Australian venture. Ninety percent of the project is owned by the GVK family, and not the listed Indian company GVK Power and Infra (GVKPIL). However, half the risk (debt of about $1 billion) is on GVKPIL’s books. This leads to an unfavourable risk-reward to minority investors, says BNP Paribas analyst Vishal Sharma, in his reports on GVK.

So, the only way that Reddy can prove his critics wrong is by pulling off his audacious gamble. But, can he?

Georgina on my side
“Doing business Down Under is, in many ways, easier than in India,” says Reddy. Australians tend to speak their mind and what you see is what you get, he says.

The Alpha mine project is top priority for the group. Reddy has travelled to Australia 27 times in the past 24 months. “It was not possible to leave it to anyone else at this stage,” he says.

For much of 2012 it was impossible to get investors interested in the Alpha project for another reason: In May, the federal government in Canberra ‘stopped the clock’ on environmental clearance for the project, after the Queensland government cleared it. When environment minister Tony Burke said the project was ‘shambolic’, quite a few hearts at GVK Hancock almost stopped beating. The federal agency SEWPaC (Sustainability, Environment, Water, Population and Communities) wanted more details on the environmental impact of the mine and the Abbot Point port on the Great Barrier Reef.

Correction: This article has been updated for corrections from the version that appeared in the print magazine.

This article appeared in the Forbes India magazine issue of 25 January, 2013
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Comments (13)
Syed Khasim Jan 27, 2013
we hope and pray that GVK group will succede in this crisis with their professionalism.
Basawaraj Jan 21, 2013
Need to be careful at this juncture, but I am sure they will come out if this crisis as they are real professionals. Good luck to them
Shabuddin Jan 20, 2013
we pray/ hope GVK group should succeed in up coming goals
Sri Jan 17, 2013
Gina Rhienhart is a tough businesswomen, rich but absolutely despised in Australia for a comment about Australia's high wages. The fact that she allowed GVK to buy up a rich asset, sounds very suspicious. She is not a person who would want to help another miner get a lucrative asset.
Coal will be in over supply in the next 5 years when the African and Indonesian mines come on stream.. If costs overrun happens the project is absolutely doomed!!
Mike O'connell Jan 16, 2013
For another side of this story visit
www.bimbleboxdocumentary.com
Response to Mike O\'connell:
Cuckoo Jan 18, 2013
Thanks Mike, this is certainly a whole new side. Don't know how I can watch the film, but will certainly follow you guys.
Avishar Jan 16, 2013
A very good and succinct article about the concerns faced by Indian miners in Australia.There are loads of articles which highlight the good news but none/very few delve deep into what is happening at the ground level. I think GVK is taking a very well crafted bet and anyone who has any misgivings about the viability and the future of this project only has to read about the huge coal shortage that is being faced by India. And India is just one country. The prospect for any country/company to secure long term contracts, dependable supply, high quality, reasonably priced coal is too tempting to pass on, despite the recent correction of prices.Renewable energy is indeed the future but for the near-future coal/thermal power will provide the lions share of electricity generation in developing countries.

On another note,i do hope GVK takes all measures so as to not harm the natural beauty of protected regions.It would be a big no-no if it directly harms the Great Barrier Reef.As an Indian, i would love to see this project be successful,but not at the cost of environmental damage your beautiful country.
Response to Avishar:
Cuckoo Jan 18, 2013
GVK says they will make sure they will take all possible care Avishar. But is isn't unspoilt nature rather utopian? Can we get away from the fact that extracting resources- anywhere in the world- leaves a mark on nature. As other comments here show, there are very big concerns among Australians about the impact of opening up Galilee basin.
Sophia Jan 16, 2013
A significant and growing portion of Australians are objecting to further coal exports from their country in light of climate change. The recent extreme heatwave and widespread bushfires have sensitised more of the population to the climate change reality, as well as the connection between extreme climate events and Australia's large coal industry. An open letter that appeared in the Australian media this week, signed by numerous eminent researchers, is testament to that (http://www.greenpeace.org/australia/Global/australia/assets/Let's talk about coal.pdf). Mr Reddy would be better off investing his money in renewable energy if he is interested in an industry that will still be relevant in the future.
Response to Sophia:
Cuckoo Jan 16, 2013
Valid concerns Dawn. But I am not sure if investing in renewables is the answer. Over the next decade, India and China will continue to need huge amounts of energy to heave their massive populations out of poverty. Reddy's bet is that much of this will have to come from conventional energy. Making extraction and power production cleaner and more efficient, is necessary. Coal producers will have to keep working on this.
Response to Cuckoo:
Sophia Jan 17, 2013
Cuckoo - far more respected voices than my own implore that business-as-usual is simply not an option. If supplying energy to get people out of poverty is justified by an interest in human welfare and human rights, then wrecking havoc on the planet and people in the course of providing that energy is profoundly untenable. There is no indication whatsoever that CCS will be deployed fast and wide enough to make any significant difference. In regards to the dangers of climate change - perhaps you have seen the World Bank's recent report "Turn Down the Heat"? And in terms of investing in a truly better future I would highly recomment checking out this program: http://www.abc.net.au/tv/bigideas/stories/2011/08/16/3293620.htm. Coal is an irrelevant dinosaur compared to these ideas and technologies.
Response to Sophia:
Cuckoo Jan 18, 2013
Thanks for the link Sophia. India's power shortage is of the order of thousands of megawatts. This peaks at summer and most of the population has no power for 8 to 12 hours. We are making huge investments in cleantech, but this is just not enough. Most of the ideas have a long way to go before they mature. Though a fuel of the 19th century, coal is very relevant for our present.
Dawn Jan 15, 2013
It will be an excellent project. It is a brilliant move, keep going Mr. Reddy
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