By Peter Ker
June 12, 2018 - Adani's controversial Carmichael mine in Australia would be viable at current thermal coal prices, analysts say, as the Indian company pushes on with efforts to secure federal approvals to extract billions of litres of water from Queensland's Galilee Basin.
Adani has remained committed to building the Carmichael project despite numerous delays, fierce opposition from environmentalists and despite missing a self-imposed March 31 deadline to secure the funding required to build the $6.7 billion first stage of the mine.
The financing struggle comes, ironically, as thermal coal prices trade at six-year highs and as analysts at JPMorgan raised their long-term thermal coal price forecast by 15 percent.
JPMorgan had previously expected thermal coal, which was fetching $US112 a tonne in recent days, to fetch $US67 a tonne long term but raised that to $US77 in recent days.
While coal's role in power generation is falling in many developed economies, JPMorgan said growth in demand from south-east Asian nations and reduced exports from Indonesia (currently the world's biggest thermal coal exporter) would create prices that would act as an incentive to open up the Galilee Basin.
"Growth in coal-fired power generation through Asia is likely to support an additional 100 million tonnes per annum of seaborne demand by 2035. We therefore believe thermal coal prices will need to be strong for a sustained period, in order to incentivize the development of new coal basins such as the Galilee," the JPMorgan analyst Lyndon Fagan said in a note.
Acknowledging its estimates were undermined by Adani's lack of disclosure around the project, JPMorgan said Carmichael would need coal prices to average around $US84 a tonne to generate a 15 percent rate of return.
That assumption was built on the notion that Carmichael's high-ash coal sold at a 10 percent discount to the benchmark Newcastle thermal coal price.
"Under a long-term scenario of lower Chinese imports, lower Indonesian exports, and higher demand from other Asian economies, we believe it is reasonable to expect Australia will at the very least need to maintain current export rates to meet demand. This means that mine depletion from existing assets will need to be replaced," JPMorgan said.
"In our view this is likely to require a new coal basin to be opened up, such as the Galilee Basin."
The opening up of new coal basins is contentious in both the political and financial sectors with Westpac declaring last year it would not fund mines in new coal basins.
Adani is not the only miner with ambitions for the Galilee Basin, with TerraCom, AMCI and companies linked to Clive Palmer having exposure to tenements in the region.
Tim Buckley, an energy finance analyst at the Institute for Energy Economics and Financial Analysis, said the long-term coal price was more relevant to Carmichael's viability than current spot prices.
"The current spot price is much higher than the likely long-term price they would receive over the next 30 years if they built the project," he said.
Buckley said he believed a bigger price discount would be applied to coal from Carmichael.
"My estimate is that Adani's high-ash product would fetch about 30 percent less than the benchmark Newcastle coal price," he said.
In recent days Adani has sought approval from the federal Environment Department to expand a 2.2-billion litre water dam near the Suttor River to 10 billion litres as part of its plan to build a water scheme to supply Carmichael and any other future mines in the region.
The Queensland government has already given Adani a water licence to extract 12.5 billion litres per year from the broader Suttor River catchment, known as the Burdekin Basin.
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