GVK’s 65,000 cr Oz coal dream in doldrums

Hyderabad: Gunupati Venkata Krishna Reddy's dream of making it big on the global coal mining landscape seems to be in doldrums now.

• In 2011, GVK bought stake in Hancock Prospecting’s coal assets for $1.26 bn
• 3 coal projects have 7-bn tonne coal reserves
• Plans were afoot to produce 60 million tonne a year

Nearly six years ago, GVK Reddy, as the founder of the city-based diversified GVK Group is popularly known, embarked on an ambitious task of developing three massive coal projects in Galilee Basin of Queensland state in Australia that entailed total investments of nearly $10 billion (nearly Rs 65,000 crore).

But the future of these projects hangs in balance with Hancock Prospecting Pty Limited, which sold majority stake in the projects to GVK group for a whopping $1.26 billion, expressing doubts over whether they would proceed ‘anytime soon’. The mining giant owned by Australia’s richest woman Gina Rinehart even wrote off 650 million in Australian dollars that GVK group failed to pay it as a part of the acquisition deal.

Uncertainty surrounding GVK’s Australian coal dreams heightened when Aurizon, Australia’s biggest coal rail company, wrote off its investments worth A$30 million in a railway line that it decided to build in joint venture with GVK group to evacuate coal from the three projects.

GVK’s quest for Oz coal began in 2011 when GVK Coal Developers purchased majority stake in Hancock Prospecting's coal assets in the mineral-rich Galilee Basin. According to GVK Hancock Coal website, GVK family owned 90 per cent stake and GVK Group's flagship GVK Power and Infrastructure Limited (GVKPIL) the rest 10 per cent in GVK Coal Developers.

Under the deal, GVK agreed to pay $1.26 billion (Rs 8,300 crore at current exchange rates) for 79 per cent stake in Alpha and Alpha West coal projects while remaining 21 per cent stake in these two projects is with Hancock Prospecting. The deal also included 100 per cent stake in Kevin's Corner coal project as well as rail and port access interests.

The three coal projects - Alpha, Alpha West and Kevin's Corner - between them have over 7 billion tonnes of coal reserves. GVK wanted to mine 60 million tonnes of coal a year from the three mines, starting from 2014, and ship it to other countries including India. It's like building a mining company equivalent in size to that of the Hyderabad-based Singareni Colleries Company Limited (SCCL) from the scratch.

For record, SCCL produced 60 million tonnes of coal last financial year (FY17). If GVK's ambitions fructified as planned, its coal mines in Australia would have been producing that much coal a year by now.
GVK group paid $500 million (Rs 3,200 crore) as the initial payment towards the acquisition.

The infrastructure group was supposed to pay a second installment of $200 million a year later in 2012 with the final installment of $560 million scheduled at the time of financial closure or three years after the deal. GVK group failed to meet the payment commitments, forcing Hancock Prospecting to write off the debt in its books in 2014 itself.

“It is increasingly unlikely that these accounts (amount) will be received from GVK,” Hancock Prospecting was quoted as saying in its 2014 annual statements. A year before Hancock wrote off GVK’s debt from its books, GVK Hancock Coal signed a deal with coal rail freight company Aurizon Holdings Ltd in March 2013 for the construction of a 500-kilometre long railway line from the Galilee Basin to Abbot Point, a deepwater coal port in Australia.

As per the agreement, Aurizon was to own 51 per cent of Hancock Coal Infrastructure that would construct the railway line and other infrastructure at an estimate cost of A$6 billion. But, with global coal prices on a downward spiral, Aurizon developed cold feet and wrote off its investments of about A$30 million made into the railway project in 2015. “At 31 December 2015, an impairment of $30 million was recorded in relation to the Brownfield expansion of the Central Queensland Coal Network (CQCN).

The amount represents directly attributable development costs such as engineering designs, environmental and building approvals, which could be recovered through the regulatory process at a future date,” the railway company said in its 2016 annual report. However, a decision has been made to impair these costs due to uncertainty surrounding the project’s timing and the current market outlook. The carrying value of the project is now nil, it further stated.

The success of the GVK's Oz coal dream would have provided a huge relief to the infrastructure major weighed down by a debt pile of over Rs 3,000 crore; but as things stand now, the coal projects are unlikely to take off in near future. The one factor that worked against the interests of GVK is the global coal prices which hovered around $130 a tonne when it signed the deal in 2011. The price fell to $53 a tonne in February 2016 before recovering to $80 now.

A detailed questionnaire on the mega project sent to GVK Group went unanswered despite repeated requests over the past few weeks. A similar request was made by The Hans India to Gina Rinehart's Hancock Prospecting, but the Australia’s mining giant did not reply. “The prices of the coal have significantly fallen since GVK Coal had acquired stake in the coal mines.

GVK Coal has not been able to achieve financial closure resulting in delay in commencement of mine development activity when compared to schedule date,” GVK PIL said while announcing its Q4 results recently. Further, certain lenders of GVK Coal have classified the loan as non-performing, it added.

By P Madhusudhan Reddy