GVK, Lanco face Australian coal mine hurdles

Both projects lose money as Adani plans to develop a new mine

Even as the Adani Group is gearing up to invest $16.5 billion in a coal mine project in Australia, previous investments by GVK Power & Infrastructure and Lanco Infratech in similar projects have resulted in financial mess, according to bankers and analysts. 

While GVK’s yet-to-be-developed mine would require investments of another $500 million just to set up railway infrastructure, Lanco’s production has virtually collapsed with lenders taking over the project.

Analysts said GVK Power has reported consistent losses since the company became a guarantor to the $1.26-billion acquisition of the Alpha Coal in Australia by its subsidiary based in Singapore. Besides, since the GVK Group failed to pay a final $500-million instalment three years ago,  the project has barely moved forward. “There is no sign of life or progress at any of the GVK proposals, and absolutely no scope for any of them to move to financial close.  It is hard to comprehend why the Indian private sector bank that lent $1 billion from its Singapore branch has still not called in the receivers,” said Tim Buckley, Director of Energy Finance Studies at IEEFA, from Sydney.

In its annual results announced on May 24, GVK Power blamed the stalled project to the fall in coal prices since it made the investments. It said GVK Coal has failed to achieve financial closure resulting in delays in mine development activity, delays in entering into definitive agreements for port and rail development and agreement for sale of coal. “Certain lenders of GVK Coal have classified the loan as NPA and the lenders had abridgement option on the loan either on October 2015 or every year thereafter. The lenders have not yet exercised the option for repayment of loan,” GVK said in a filing to stock exchanges. GVK said it was in talks with non-controlling shareholders to re-align the option exercise dates, looking for additional funding from potential investors and working with lenders to reach to optimal solution.

Even if Adani’s proposal manages to get to financial close and then builds a $2.5-billion railway infrastructure, the GVK coal deposits in the Galilee are 100 km South from the proposed railway line route. GVK would need to invest another $500 million to get a rail connectivity. 

“As such, there does not appear to be any scope for the GVK deposits to be connected to the necessary rail and port infrastructure in the coming decade, if ever. With the thermal coal price forwards down at $64 per tonnes by 2019, the project makes no commercial sense,” Buckley said.

Like GVK, Lanco’s project is also facing similar financial strain. Lanco’s annual coal production in West Australia is now down to 2.5 mtpa, which is a third of when they acquired the project, and a sixth of their targeted production rate. “Griffin Coal has been put in the hands of external receivers and managers, and we would expect that Lanco would be lucky to get even a third of what they outlaid six years ago for the mine. Lanco is suing everyone over this debacle, including the lawyers for failure to get basic dates right through to the financial advisers for failure to disclose material information during due diligence,” said Buckley. Lanco had invested Rs 3,695 crore in Griffin Coal in December 2010.

In fact, according to IEEFA analysis, Lanco had paid two-and-a-half times more than China’s Yancoal which tool over a nearby thermal coal mine called Premier. Though Premier is a superior business to Griffin, it has at least been Ebitda (earnings before interest, tax, depreciation and amortisation) positive post acquisition and it has not seen a similar collapse in production, it said.

In its annual results announced on May 30, Lanco admitted default in loan servicing and said the lenders have appointed receivers and managers on April 27 and have transferred the pledged shares to the security agent of the lenders. “It was clarified by the lenders counsel that transfer was to have legal title of the shares to the lenders with the beneficial interest continued with the company, as part of Singapore laws,” it said.