Billionaires Vie for Railway to $40B Coal Region
The race to open a $40 billion coal region in Australia is being led by billionaires Gina Rinehart and Clive Palmer. Victory depends on who wins approval to build a 500-kilometer (310-mile) railroad to the coast.
Rinehart, 58, Asia-Pacific’s richest individual, and Indian billionaire GV Krishna Reddy’s GVK Group are developing a $10 billion mine, rail and port project in the landlocked Galilee Basin in northern Queensland state. Adani Enterprises Ltd. (ADE), India’s biggest coal importer, has a competing $6.8 billion plan to build Australia’s largest coal mine in the same area.
The proposed Galilee railroad will allow Australia, already the world’s second-largest shipper of coal for utilities, to more than double exports as China and India compete for supplies. Palmer’s China First Pty has threatened an A$8 billion ($8.5 billion) lawsuit against a fourth rail proponent, QR National Ltd., the nation’s largest coal train operator.
“There is enormous money to be spent on connecting the mines to the port and everybody wants their own solution,” Andrew Harrington, resources analyst at Patersons Securities Ltd. in Sydney. “There’s been strong tension between the Hancocks and the Clive Palmers and Adanis about where the line goes. And now QR National (QRN) has come in as a fourth.”
Mining companies are being forced to dig further inland to profit from the rising consumption in China and India, the two fastest-growing major economies. China will account for 63 percent of the increase in global coal demand through 2016, the International Energy Agency said in a December report.
Electricity demand in Asia, excluding Japan, will triple by 2025, with thermal coal remaining the main fuel for generation, according to Royal Bank of Scotland Plc. Australian thermal coal exports may rise 48 percent over that period, the bank said.
Rinehart, whose $18 billion fortune tops Forbes Asia’s rich list, is set to become the world’s wealthiest woman this year, surpassing Wal-Mart Stores Inc.’s Christy Walton. She’s spent two decades expanding assets inherited from her father, Lang Hancock, who discovered mines that made Australia the world’s biggest iron ore exporter. She now controls closely held Hancock Prospecting Pty.
Palmer, 57, is the fifth-richest Australian, worth A$5.05 billion, BRW magazine said in May. He amassed his first fortune in real estate before moving into resources. In 2010, he rewarded workers at his Queensland nickel refinery with bonuses including 700 vacations in Fiji and 50 Mercedes-Benz sedans.
One Rail Option
“Clive Palmer and Gina Rinehart -- I think the cast in this drama is the difficult part,” said Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management Ltd. in Sydney, including QR National shares. “They may need a compelling reason to collaborate, and that compelling reason may be the government insisting on one set of infrastructure if they want to develop their tenements.”
The Queensland government wants only a single rail corridor, state Coordinator-General Keith Davies said in a Jan. 27 statement that revealed QR National’s A$2 billion proposal.
Mark Hairsine, a spokesman for QR National, declined to comment on the threatened lawsuit. Hancock Prospecting, which asked that requests for comment to be sent in writing, didn’t respond to an e-mailed message.
Miners in the basin should build a jointly owned railway to save costs and speed development, Vale SA (VALE), the world’s biggest exporter of iron ore, said in November. The company may build a $10 billion project in the region. AMCI Capital LP, planning the $4.1 billion South Galilee project, also said in November that the miners needed to cooperate.
Proximity to Ports
“These basins are getting further and further away from the coast,” Tom Price, commodity analyst at UBS in Sydney, said by phone. “The freight factor becomes critical.”
The Galilee basin covers more than 247,000 square kilometers and contains more than 14 billion metric tons of coal, according to Hancock’s website. Adani, controlled by billionaire Gautam Adani, 49, may spend as much as $6.8 billion on its Carmichael project, which is expected to produce 60 million metric tons of coal. This would make it Australia’s largest coal mine, according to UBS.
“It’s not unnatural given the scale and the nature of the interest that there is a tension,” Lance Hockridge, chief executive officer of Brisbane-based QR National, said Feb. 16 on a call with reporters. “I wouldn’t like to predict what will happen.”
Price, the UBS analyst, said he was optimistic the area will be opened.
“This coal will get into the market because it’s better than anything the Indians are consuming, and it’s better than about a third of the Chinese market, and it’s on par to a little bit better than a big chunk of Indonesian exports,” he said.
In India, shortages of local coal have prompted power producers to rely on imported fuel for new plants. Since 2007, companies including Tata Power, GVK Group and Reliance Power have announced $4.4 billion of coal-mine acquisitions in Indonesia and Australia, according to data compiled by Bloomberg.
Rinehart last year got the backing of GVK, which agreed in September to pay $1.26 billion to buy the Kevin’s Corner coal project, 79 percent stakes in Alpha and Alpha West developments as well as all of Hancock’s rail and port project.
“Our rail corridor is the most advanced in the Galilee basin,” G.V. Sanjay Reddy, vice chairman of GVK Power & Infrastructure Ltd. (GVKP), the group’s publicly traded unit, said yesterday in an interview by phone from Brisbane. “Who will be selected is up to open competition and given that we believe we’re the first, I don’t see why we should be in a disadvantageous position from that point of view.”
GVK shares were unchanged at 17.35 rupees at 12:21 p.m. in Mumbai. The company has dropped 32 percent in the past year.
Andrew Crook, of Crook Publicity, an outside spokesman for Waratah Coal, declined to comment.
Palmer’s Waratah Coal Pty, which incorporates China First, says Metallurgical Corp. of China Ltd. has arranged funding for 70 percent of the $8 billion capital cost of the China First project, according to its website. Hancock, which has sent trial shipments to China and South Korea, expects to see first coal in 2015, and Waratah forecasts first production in late 2014.
The Galilee is estimated to produce more than 200 million tons of thermal coal a year, mostly for export, from at least five major projects, QR National said in a Feb. 16 investor presentation. Global thermal coal exports during 2011 totaled an estimated 783 million tons, according to Morgan Stanley.
Australia shipped 143 million tons of thermal coal in fiscal 2011, as well as 140 million tons for steelmaking, government figures show, making it the world’s biggest steelmaking and second-largest exporter of thermal coal after Indonesia.
“Galilee is going to be a very significant challenge logistically, but I think the coal market will need coal from the Galilee Basin probably toward the backend of this current decade,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said by phone from Melbourne.
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