Gina’s Bollycoal (Ad)venture

When Julie Bishop, Barnaby Joyce and Teresa Gambaro collectively claimed more than $12,000 in “overseas study” allowances to pay for flights home from a wedding they attended in India in June 2011 as Gina Rinehart’s guests, the public were rightly outraged.

Public sector governance expert Stephen Bartos said that the legitimacy of the trip would “depend whether there’s any real conflict of interest. It’s a little bit different for backbenchers. If Julie Bishop or Barnaby Joyce aspire to be ministers one day, then the question is, is there anything involved with this that might come back to haunt them? If there was any possibility that this would be a deal that would require regulatory approval by the parliament that would be a problem,” citing the recent nixed ASX takeover that required legislative changes.

Under intense pressure from the media, the politicians agreed to repay the money (or some of it anyway), so everything should be tickety poo. Or is it?

Mrs Rinehart was about to clinch a $1 billion coal deal with the bride’s grandfather – G.V. Krishna Reddy, the founder of GVK, an Indian energy and infrastructure company.

GV Krishna Reddy first came 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 here.

Three months after the wedding, 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 million tonnes.

During 2011-12 Reddy travelled to Australia 27 times.

In India, GVK’s operational as well as financial performance has been deteriorating. Singapore’s Changi Airport Group pulled out of a joint deal in 2012, and constraints on gas supplies and a high interest burden have complicated matters. Its gas-based power projects are facing serious supply constraints and all its operating power projects are operating at alarmingly low levels of load factors.

After the deal with Rinehart had been signed, 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. In June 2012, when the Australian Federal government halted environmental clearances for GVK’s proposed coal mine in Queensland’s Galilee Basin, it became almost impossible to get investors interested. In January last year it was reported that Reddy needed to raise debt of about $7 billion to achieve financial closure.

Forbes India pointed out the importance of Reddy’s personal connection with Rinehart.

“But mining industry insiders say GVK is lucky to have one of the toughest Aussie voices on its side: Gina Rinehart, owner of Hancock and the world’s richest woman on the Forbes global billionaire’s list. Rinehart is one of Australia’s biggest climate sceptics, a vociferous opponent of carbon taxes, and has lobbied for allowing foreign labour in Australian mining. The reticent heiress has developed a great relationship with the Reddy family and has made at least six trips to India last year.”

Under a subheading of “Reinventing the rules”, Forbes goes on to say

“Reddy’s biggest challenge is to overhaul the bloated cost structure that has made Australia among the most expensive places to mine in. Customers are turning to cheaper supplies from Indonesia and elsewhere.

Trying to turn his inexperience into an advantage, Reddy is now questioning every convention and every assumption of Australian miners.

For starters, he has set a clear target: His team has to aim for a price of $50/tonne (freight on board). [Current production costs are about $70/tonne and rail contracts about $8-10/tonne]

Reddy hired McKinsey to help attack the cost culture within the Australian mining industry.

“The kind of equipment you order can make all the difference,” he says. His communication to the Australian team, led by group managing director and CEO Paul Mulder, is clear: “‘Good enough’ is what you need, not ‘best available in the world’.”

Bringing the Australians around to GVK’s way of working was a gradual process, says Reddy.

Reddy says it is silly to look at such a project with “today’s eyeglass”; you have to look at it for the long term. He admits it was touch-and-go till recently. But with environmental clearances in place, it is only a question of taking key strategic calls, he says. Over the next 50 years, the opportunity is enormous in a country with very low political risks.”

In June 2013, Times of India reported that

“Infrastructure firm GVK’s $10-billion Alpha coalmine, port and rail project is uneconomical and represents an unacceptable level of risk to potential investors, says a report by the US-based Institute for Energy Economics and Financial Analysis (IEEFA).

Titled ‘Stranded: A financial analysis of GVK’s proposed Alpha Coal Project in Australia’s Galilee Basin’, the report comes as Australian rail operator Aurizon negotiates to partner with the Indian conglomerate on the construction of the rail and port components of the Alpha project at a cost of $6 billion.

Commenting on the risk profile of the project, former first deputy comptroller of New York and the report’s co-author, IEEFA’s Tom Sanzillo, labelled GVK, “a weak investment partner” and the Alpha project “a quagmire, not an investment”.

GVK is seeking to raise a total of $10 billion capital to build Australia’s largest black coal mine in Queensland’s remote, untapped Galilee Basin, construct 500km of rail infrastructure across agricultural land and floodplains to the coast, and develop a highly controversial coal export terminal through the iconic, UNESCO World Heritage-listed Great Barrier Reef.

The IEEFA report emphasized that GVK has never successfully built or operated a coalmine or any business outside of India. It is overcommitted, with 16 greenfield infrastructure projects worth $20 billion across six asset classes.

Besides being highly overleveraged, carrying debt of $2.8 billion with a market capitalization of only $243 million, GVK faces a plummeting stock price, which has underperformed the Indian share price index by 80% since 2010, said the report.”

Despite concerns expressed by water scientists, on November 1 2013, Greg Hunt approved the 37,380 hectare Kevin’s Corner. The mine, to be operated by a joint India-Australia consortium, GVK-Hancock, is the first to be approved since the introduction of a new water trigger rule by the previous federal government.

Greenpeace claims Kevin’s Corner will use more than nine billion litres of water a year and the Lock the Gate Alliance says more information on its impact on Galilee Basin groundwater is needed.

In December Mr Hunt gave the go-ahead for three million cubic metres of dredge spoil to be dumped offshore in the Great Barrier Marine Park, 24km northeast off Abbot Point.

He also approved construction of the Adani-owned terminal 0 at Abbot Point and gave the go-ahead for the Arrow LNG facility on Curtis Island, near Gladstone, and its associated gas transmission pipeline.

Whislt it seems it full steam ahead here (ignoring the small matter of money), Mr Reddy’s other ventures don’t appear to be going so well. On December 10 2013 the Economic Times interviewed Gaurang Shah, Vice President of Geojit BNP Paribas Financial Services, about GVK Power.

“ET Now: It is a single digit stock but it has got some key assets to itself GVK Power, Bombay Airport, Bangalore Airport, some fairly decent road assets as well but of course the mountain of debt crippling it. What would you do with the GVK Power – would you buy it at the current levels?

Gaurang Shah: Absolutely not and these assets howsoever good they are, they get invisible when you look at the mountain of debt as you rightly put it on the company’s balance sheet. Time and again we hear certain news flows as to company is trying to reduce their debt on the balance sheet by getting away or selling out these assets, of course good assets. So, I do not see any reason why I should go ahead and buy a GVK Power or a GMR Infra or a Lanco Infra as a matter of fact and if you do see rallies these are perfect opportunities to off load these stocks if you have it in your portfolio.”

In October 2013, an investigation into illegal mining operations in India was suddenly halted. The investigation had been set up by the government and led to the arrest of public officials for corruption, but was wound up without explanation.

Commencing in 2010, the commission had a mandate to investigate financial transactions between exporters, traders and mining lease owners, as well as illegal practices like mining without a licence or outside lease areas. U. V. Singh, the commission’s primary investigator, said:

“The government has not stated any reason for instructing us to end our investigations. A full inquiry was not possible.”

However, the information gathered so far revealed high levels of corruption in the industry: so much that two former Congress chief ministers of Goa, Digambar Kamat and Pratapsingh Rane, have been indicted for involvement in illegal mining, as well as failure to safeguard the environment.

Vijay Pratap, convener of the think tank South Asian Dialogues on Ecological Democracy, said:

“The commission was exposing too much corruption at government level and risked undermining tightly woven corporate collusion with the political class, which has sadly become endemic in the mining industry. This is why the government aborted the investigation.”

According to Madhu Sarin, honorary fellow of Rights and Resources Initiative, the government’s decision to end the investigation proves a failure to protect vulnerable tribal communities.

“The commission’s termination will have a direct impact on the rights of all those illegally displaced already and under threat of displacement in the future due to non-recognition of their forest rights and being denied the right to decide whether mining in their ecologically fragile homelands should be permitted or not.”

With the increasing interest and investment by foreign mining companies in Australia, some of whom are under real pressure to make money fast, I would suggest it is not a good time to be removing regulations and oversight.