Loaves and fishes (updated)

Readers who attended Sunday School will remember the story of miracle of the loaves and fishes, performed by Jesus on the Sea of Galilee. A couple of fish and a few loaves of bread proved sufficient to feed a multitude.

Something similar appears to be happening in the Galilee Basin, where large, but economically marginal, coal mines are supposed to produce massive wealth for everyone. The Courier-Mail has a report of a court case in which the Alpha mine, owned by GVK Hancock, is claimed to be capable of generating $44 billion in royalties. The royalty rate in Queensland is 10 per cent for coal prices below $100/tonne (prices above that level will almost certainly never be seen again). At the current price of around $65/tonne, that’s $6.50/tonne. Alpha claims to be able to produce 32 million tonnes a year. If realised, that would make a little over $200 million a year. That is, to realise the amount claimed, the mine would have to produce at its maximum capacity for over 200 years.

But that’s the least of the problems. GVK Hancock’s own estimate of the cash costs of extracting coal is $55/tonne and others are as high as $70/tonne (I don’t know if this includes royalties. So, even at the most optimistic estimates of cost and extraction rates we are looking at a margin of $10/tonne for 32 million tonnes or $320 million a year, out of which a variety of corporate overheads will have to be paid. The capital cost of the project will be at least $10 billion. So, at current prices, the gross return on capital before interest, depreciation and amortisation (and tax, if any is paid) is at most 3.2 per cent, barely equal to the rate of interest on Australian government bonds. Obviously, no sensible lender or equity investor would look at this project.

A similar analysis can be performed for Adani’s Carmichael mine, which has apparently lost the $1 billion in funding proposed to come from the State Bank of India, as well as $300 million in equity promised by the Newman LNP government.

Adani claims cash costs of less than $50/tonne, but this seems very optimistic, being dependent on the assumption that other coal projects will fall over, reducing wages and other input costs. But it has a much higher projected output, around 50-60 million tonnes by 2022. So, it could be generating $900 million a year in EBITDA. But it’s hard to see that covering depreciation and interest on a $10 billion project. And of course, another $10-$20 off the coal price would kill the project completely, taking the lenders’ money with it.

In essence, these projects are being kept on life support in the hope of a recovery in coal prices to levels near those that were prevailing when the projects began. That really would be a miracle

19 thoughts on “Loaves and fishes (updated)

  1. We should think of Galilee Basin as a pre-sequestered carbon reserve and hope it stays that way (i.e. underground) for millions more years.

    I see overtones of colonialism in suggestions by LNP heavyweights that Carmichael coal is needed to elevate India from poverty. We big note ourselves at climate conferences about moral challenges the inference being we as an ‘advanced nation’ are weaning ourselves off coal as fast as humanly possible. By implication the other poor blighters aren’t as advanced as we like to think we are.

    We’re spewing out roughly 24 m X 20t per capita of emissions. Imagine 1,267 m X 20 tonnes for India. By luck or judgement however our population is more matched to our resources. Perhaps India should renounce coal then show us how to do it.

  2. But John you forget there are many ways to create dodgy figures. And the fact that most people including politicians are ennumerate as their lack of understanding of climate change demonstrates.

    One trick would be to include an inflation figure and forget to mention that like news current affair reporters who havent heard of CPI increases.

    A quick spreadsheet calculation will show assuming 2.5% inflation + 2.5% increase in price per annum due to rising energy costs (lots of ways you can justify that in a model) gives you exactly $44 billion in exactly 50 years.

    Another way might be via compensation. You use the above figures to claim what you would have made if it wasnt for an evil carbon tax being introduced. You then sue the Commonwealth and make about 440 billion as compensation, 44 billion of which goes in a brown paper bag to the poor Queensland Government who were treated unfairly a bit like the WA government at present.

    If you think the latter is ludicrous just consider the water buy back schemes.

  3. Perhaps the slump in commodities is a blessing in disguise? There will be a slowing down of disruption to agricultural regions initially, then a slow down of carbon emissions, later.

    At the same time, people will return for a second look at other, less destructive energy sources and technologies.

    If it is true, we will certainly curse the waste and the time lost because of the troglodyte policies of the last decade or so.

  4. Suppose one were to reverse the chronological order entailed in the analogy of stories, we may get an estimate of how many people actually received any fish and bread.

  5. It’s a vexed question in traditionalist theology whether Satan can perform miracles. Evangelical Christian websites like this one suggest that Old Nick can produce a fair simulacrum. Aquinas held that demons can produce wonders but not real miracles. So a Satanic miracle wonder making the Galilee mines profitable is conceivable.

    However, you have to ask what would be in it for Satan. After all, he has already bought the souls of the promoters and their hired politicians.

  6. Thanks JQ for the enlightening analysis. I assume the financiers will be able to do the same simple maths, or will they simply calculate their cut if they can spruik the deal.

  7. Good point JQ. Before the boom in coal prices in the middle of the past decade nobody was seriously talking about these deposits being economic to exploit. The speculators picked up the leases for a song for that reason. They were hoping that the boom would last forever, or at least till they sold out. QR also had dreams of their cosy earnings from rail coal haulage lasting forever, hiding their losses on mainline freight.

  8. It is likely that any of these developments will fatten the treasury coffers through royalties. However, the amounts aren’t likely to reach anywhere near these levels. Partly because the royalty rate is 7% and that at least in the Adani case it would be a pit to plant operation. As the coal is not priced then the royalty rate needs to be calculated on a gross value. This is most likely to be substantially lower than the market price for coal exports if that price doesn’t make the project viable as John’s note alludes. Probably end up closer to the direct extraction and processing costs. I also imagine it will be structured in a way which means they will pay little or no company tax. Factor in the potential loss of royalties from crowding out export terminal capacity to higher value met coal and the net royalty benefits are probably a lot lower.

  9. A few years ago it was fashionable to say that no new coal fired power stations would ever be built in Australia again. Recently AGL, Alinta and perhaps others have said they are getting out of the coal biz. Not so in Queensland
    http://www.statedevelopment.qld.gov.au/assessments-and-approvals/galilee-basin-power-station.html
    The 900 MW power station plans for CCS with the CO2 to be injected into another part of the Galilee Basin. This is quite different to plans elsewhere to use deep depleted gas wells that are known to be leak resistant.

    The extra power would presumably be needed to run bucketwheels, coal washers etc if mining went ahead. I suspect both the coal approving Abbott and Palaszczuk governments would allow the power station to be built and the CCS to be installed later at the owner’s convenience. It seems the whole of Australia is getting carbon averse except for holdouts in Canberra and Brisbane.

  10. Similarly, Satan couldn’t create life: as Trevor-Roper says,
    as a pledge of their servitude [witches] were constantly [88] having sexual intercourse with the Devil, who appeared (since even he abhors unnatural vice8) to she-witches as an incubus, to he-witches as a succubus.
    What Gibbon called “the chaste severity of the Fathers” was much exercised by this last subject, and no detail escaped their learned scrutiny. As a lover, they established, the Devil was of “freezing coldness” to the touch; his embrace gave no pleasure—on the contrary, only pain; and certain items were lacking in his equipment. But there was no frigidity in the technical sense: his attentions were of formidable, even oppressive solidity. That he could generate on witches was agreed by some doctors (how else, asked the Catholic theologians, could the birth of Luther be explained?); but some denied this, and others insisted that only certain worm-like creatures, known in Germany as Elben, could issue from such unions. Moreover, there was considerable doubt whether the Devil’s generative power was his own, as a Franciscan specialist maintained (“under correction from our Holy Mother Church”), or whether he, being neuter, operated with borrowed matter. A nice point of theology was here involved and much interested erudition was expended on it in cloistered solitudes. Some important theologians conjectured that the Devil equipped himself by squeezing the organs of the dead. This view was adopted (among others) by our King James. Other experts advanced other theories, more profound than decent.
    But on the whole, Holy Mother Church followed the magisterial ruling of the Angelic Doctor, St. Thomas Aquinas, who, after St. Augustine, must be regarded as the second founder of demonological science. According to him, the Devil could discharge as incubus only what he had previously absorbed as succubus. He therefore nimbly alternated between these postures . . . There are times when the intellectual fantasies of the clergy seem more bizarre than the psychopathic delusions of the madhouse out of which they have, too often, been excogitated.

  11. Is it possible that these or others companies seeking to extract the energy locked up in the coal may change the plan to coal seam gas? I am not familiar with the processes nor the area so apologise if this is hair brained. From a simplistic point of view though it would be lower cost to have some above ground plant extracting gas then a pipeline rather than rail line to the port.

  12. $44 billion in total economic activity over the mine’s life perhaps???

    Governments and developers just love big numbers from economic impact studies. Who cares if the project is marginal or creates massive uncoated externalities. It is the size of the number on the press release that really matters.

  13. Can’t wait to see what Investor State Dispute Settlement cases arise from companies such as Adani if/when they don’t make sufficient profits.

  14. My guess is that they used an current price plus an inflator for annual coal price in their economic model (say 3%). Then totaled the annual royalties to get the $44M figure rather than discounted them back to a present value. But you would need to get your hands on the economic model to find out what sort of tricks are involved.

  15. @Harry
    My guess is that Adani know full well that this is not going to work financially and are already putting structures in place to work out how to extract their profits from the business while leaving most of the creditors, the taxpayers and the general public on the hook, both economically and environmentally. The governments will get their cut and let them get away with it. The bankers will get their bonus and fund the project. The lawyers will then come in and get their fees. It has nothing to do with the fundamentals of the project and everything to do with the gravy train economy.

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