Adani, with an asterisk

Back in December, Gautam Adani came to Queensland and gave a very positive view of the proposed Carmichael coal mine in the Galilee Basin. Things went pretty quiet for a while after that, but it appeared that a final announcement on the project would be made in April. Now, Anna Palaszczuk and a number of lesser dignitaries have been to India and brought back the news that the project will shortly be approved by the Adani board, at least if Mr Adani has his way, which seems guaranteed.

That came as a surprise to those of us who have long argued that the project is hopelessly uneconomic, even on the optimistic view that the current uptick in the coal price will be sustained.

But it turns out that there’s an asterisk. The approval will be subject to finance. Anyone who’s ever sold a house knows that means nothing is guaranteed. In Adani’s case, the initial stages of the project will need $2.5 billion in bank finance, as well as a concessional loan of up to $1 billion from the Commonwealth’s Northern Australia slush fund.

You might think that at least the second of these is a safe bet. But Aurizon (the former Queensland Rail) has come up with a competing proposal, which doesn’t have the problems associated with Adani’s opaque (to put it mildly) financial structure.

The real problem though is with the banks. Of the big Australian banks, Westpac is the only one that hasn’t ruled itself out. But they will presumably want only a small share of the risk, as part of an international consortium and there are no obvious candidates. Moreover, given the combination of reputational and project risk associated with a massive coal mine at a time when coal is clearly on the way out, any sane lender would demand a hefty rate of interest and lots of security. It’s hard to see Adani coming up with either.

So, I’m guessing Adani is still playing for time. We’ll probably see a very big announcement with a very small asterisk. Crunch time won’t come until June, when they need to come up with some real money.

20 thoughts on “Adani, with an asterisk

  1. The ABC is reporting that there are also big question marks about the entity that has applied for the $1 billion government loan, which is apparently a shell company owned by an entity in the Cayman Islands and which is not part of the publicly listed Adani Enterprises Group:

    http:// au/ news/2017-03-22/adani-facing-growing-pressure-investors-may-have-been-misled/8376794

  2. I just realised you had already alluded to the issues with Adani’s corporate structure. Still, interesting that the ABC is reporting on it.

  3. Would the $1B Govt. loan be conditional on the real money being securely available?
    Otherwise there would be a fair chance it might just disappear.

  4. What is in it for Gautam Adani? Face means a lot to billionaires, cerainly a few millions. But he can’t have got where he is by taking decisions based in wishful thinking, which at this point covers the Carmichael mine as a commercial proposition. I see two possibilities:
    – Adani is hoping denialist Australian politicians will subsidize the project with raxpayers’ money enough to make it pay;
    – He has written the project off but is determined to pass the blame for cancellation to somebody else, either Australian politicians or evil bankers.

  5. @James Wimberley

    I’ve long been attracted to the second of these explanations. The politicians having fallen over themselves to push the project, I guess he will have to blame the banks.

    And, I suppose he thinks, something might turn up.

  6. Option #3: the whole thing’s a money-laundering exercise, and if it’s profitable — “money returned to investors” — it’ll give the game away.

  7. If Adani builds the rail line (with or without a subsidy), Adani’s coal gets transported to the port.

    If Aurizon builds a rail line (with or without a subsidy), Adani’s coal gets transported to the port. So does Gina Rinehart’s coal from her Alpha and Kevin Corner mines, and so Clive Palmer’s from his China First mine.

    Be careful what you wish for.

  8. The ALP know the project is doomed. But because they don’t want to be seen as anti-jobs, they are letting the project fester until the banks say no to the finance. That way, it was the bloody bankers that said no, not the politicians.

  9. Jim @8, that view has also been expressed by ALP-aligned commentators with good access to key ALP players. Palaszczuk and Shorten have been walking both sides of the street on this issue.

  10. @John Quiggin

    And, I suppose he thinks, something might turn up.

    Now do we actually have any sound evidence that Adani is not just another Trump doing the coal equivalent of a Tower Baku in Azerbaijan ?

    [ See the New Yorker magazine for /2017/03/13/donald-trumps-worst-deal ]

  11. My guess is that they’re going for a greenmail strategy.

    You pretty up the numbers using lots of asterisks. You find some banks who are in on the con so will publicly promise you the money, but with lots of asterisks (so they can bail out if the con doesn’t work). That gets the Aust government to commit financially to the project.

    But later, about say three months before an election, you discover that – to your total surprise and shock – those bastards of bankers are now saying they’re going to exploit those asterisks and so the project is in peril! Will no White Knight step in to save the jobs of those workers in marginal electorates?

  12. @Smith

    It’s not a question of wishing, but of stating the facts

    Still, the Aurizon proposal is good news in the short run because it reduces the likelihood of Adani going ahead, which in turn means that the Aurizon bid must be contingent on the rest of the Galilee Basin projects, none of which are anywhere near as far advanced as Adani.

  13. @GrueBleen
    Gautam Adani has turned modest help from his large birth family of Gujarati businessmen into $7.1 billion. Trump has parlayed a huge inheritance into at most $3 billion, and some claim that on a fair valuation he is not a billionaire at all. I don’t think there is any real comparison. Adani doesn’t sell steaks (strike that as a Hindu he wouldn’t anyway, say branded curry powder) or bogus degrees, penny-ante cons.

  14. @James Wimberley
    Are you sure about that, James ? Who audited Adani to certify his value, and what is it exactly – shares in Adani ? How ‘yuuuge’ was Trump’s inheritance ? A $billion ? Or just a few $tens of millions ?

    But let us not be distracted by these side issues, if you read what I wrote you could see that I wasn’t comparing Adani with Trump, or Adanai’s fortune with Trump’s, I was noting a deal apparently made by Trump in Azerbaijan which is apparently a something of a failure – though presumably Trump didn’t make the deal intending it to be a failure, maybe he thought it would be a success – and the ‘deal’ Adani is making in Australia which he also possibly thinks will be a success.

    Just two wealthy capitalists showing the world how to successfully conduct ‘big business’, right ?

  15. I don’t know the background of Sri (Mr.) Adani. However, I do know a little of the background of Trump and Clive Palmer. The first common element is that they both made money from real estate (undeveloped or developed). The second common element is that they then branched out to become businessmen in other ventures. The third common element is that their new ventures all or mostly did very badly.

    From this I draw the lesson that real estate salesmen and scions who acquire some money and then make some lucky deals (both T. and P. made some lucky deals early career) then have no idea how to run real businesses. They usually make a complete mess of them. Have a look at Palmer Coolum Resort, what a white elephant and big money loser he turned a reasonable business into. Have a look at the nickel refinery, what a clusterf**k that was and is. These guys are very poor businessmen. They gambled and got lucky early in their careers and thought that that proved they were business geniuses. None of their subsequent performances have lent any credibility to that theory.

  16. OT, but the Hillary campaign often pointed out that if he had put his entire inheritance into a bog-standard tracking fund for the S&P 500 and just sat back in the Bahamas and cashed the cheques he would now be considerably wealthier than he claims to be. As you would expect of an entitled narcissist he was in fact a lousy businessman.

  17. @derrida derider

    But he wouldn’t be President.

    And he probably wouldn’t be married to Malia.

    And by the time he’s finished being President he (or his family) will be considerably wealthier than he would have been investing his inheritance into a tracking fund.

    It’s all about playing the long game.

  18. @Smith

    The long game? “In the long run we are all dead.” – Keynes.

    The construction I put on this is that acting purely selfishly is existentially refuted by individual death. Acting unselfishly with an eye to the future of others to come after us is not so refuted. Acting to gain offspring immense and undue wealth is refuted and made meaningless if the world is wrecked in the process. Any way one looks at it, Trump is a selfish fool.

  19. @Ikonoclast

    Any way one looks at it, Trump is a selfish fool.

    And Adani is ?

    I’m quite happy to label Trump a fool and a poor businessman, but nonetheless, he’s a lot richer than me. How do I explain that to my wilting ego ?

  20. Good afternoon John,
    At the time Anna Bligh was privatising government owned enterprises you strongly advised against it and were proved right. It was poor economics and poor politics. It appeared that Anastasia got the message as she campaigned strongly on not selling the community silverware.
    The Qld government’s support for the Adani project sends mixed messages.
    I wonder if she supports Adani to retain votes in the coalfield, but really believes that the project will fail on economic grounds, in which case she can say (with some credibility) ‘It was not my fault.

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