Anglo’s Port Exit Makes Indian Billionaires Last Backers

Anglo American Plc’s decision to quit plans for a coal port expansion in Australia leaves Indian billionaires G.V. Krishna Reddy and Gautam Adani as the last major investors left looking at extending the terminal.

Anglo, the world’s fourth-biggest miner by market value, follows BHP Billiton Ltd. and Rio Tinto Group in pulling out of Abbot Point in Queensland state. GVK Group and Adani Enterprises Ltd. are studying expansions at the port to export power station coal from separate mine projects they are planning inland in the Galilee Basin at a total cost of about $17 billion.

Anglo’s move comes as thermal coal prices trade close to September’s four-year low amid a global supply glut swollen by increased output from major producers including Glencore Xstrata Plc. GVK’s Reddy, 76, has been in talks since 2011 to sell stakes in the $11 billion project, while Adani said in 2012 it had received approaches for minority stakes in its $6.4 billion development designed to supply its power plants in India.

Anglo’s decision “further erodes confidence that the major mines being proposed in the Galilee basin can happen in the current price environment,” Matthew Trivett, a Brisbane-based analyst with Patersons Securities Ltd., said by phone. “The ongoing weakness in the coal market makes it difficult for the returns to be adequate for the massive capital expense required to bring some of these peripheral basins like the Galilee into production.”

Long-Term Outlook

London-based Anglo said yesterday it had told the Queensland government of its withdrawal from the AP-X coal terminal development. The company said it’s studying port options in the state, adding that its requirements would be determined by a range of factors, including the long-term coal market outlook.

Glencore Xstrata, the world’s biggest shipper of the fuel, last year halted work on the Balaclava Island export terminal also in Queensland, citing poor low coal prices, overcapacity and concerns about the medium-term outlook. Lend Lease Group, Australia’s biggest publicly traded property developer, last month said it wouldn’t take part in an expansion at Abbot Point after its mandate for the project lapsed.

The port expansion also has drawn ire from environmental groups who are campaigning against a plan to dump dredging waste from the expansion of Abbot Point within the waters of the Great Barrier Reef Marine Park.

Closer to Ports

As well as port expansions, another major challenge for the mine proposals is the Galilee Basin’s 500-kilometer (310 mile) distance from the coast, requiring construction of a new rail road through Australia’s sparsely populated outback. Other major coal mines in Australia, the world’s second-biggest exporter, are located closer to ports.

“The Australian coal projects require large allied infrastructure investment and high leverage, making it challenging to achieve financial closure,” said Debasish Mishra, a Mumbai-based partner in Deloitte Touche Tohmatsu’s energy and resources practice in India. “Some of the Indian players who have invested in Australia may be better off exiting these investment even at a loss.”

GVK bought the coal assets in 2011 for $1.26 billion from Gina Rinehart, Asia’s richest woman, who retained a 21 percent stake in the Alpha mine. The builder of highways and airports plans to supply coal to Asian consumers, betting on rising energy demand. Adani, 51, who heads up India’s biggest power-station coal importer, bought the Carmichael project in 2010.

Bear Market

GVK is completing a joint-venture rail and port deal with haulage provider Aurizon Holdings Ltd., the company said yesterday in an e-mail. Adani wasn’t immediately able to comment on its proposed development.

GVK Power & Infrastructure Ltd., a publicly traded unit of GVK Group, fell 1.1 percent to 9.10 rupees at 9:12 a.m. in Mumbai. Adani Enterprises gained 0.5 percent.

Thermal coal has been in a bear market since March 2012 after dropping 20 percent from its peak in January 2011. Prices slid as low as $76.70 a ton in September, 61 percent below a record $194.79 reached in July 2008. They were at $77.18 in the week ended Feb. 28, according to data from globalCOAL.

“For these projects to be attractive investments, you need to be quite bullish about thermal coal prices,” said Christian Lelong, a Sydney-based commodity analyst with Goldman Sachs Group Inc.“If you’re a power company, and you’re wanting to secure sources of coal, there’s plenty of coal in the market.”

Before it's here, it's on the Bloomberg Terminal.