Adani Mining feels heat over $14b Galilee Basin coal mine gap

Can you trust a company to run a clean and profitable coal mine when its financial controller has a case of the vagues?

If the testimony of Adani executives in the witness box in the past few days is any indication, the prospects for Australia’s biggest coal project are not very bright.

The Indian conglomerate is facing a challenge from a conservation group in the Land Court of Queensland to stop it proceeding with its $10 billion Galilee Basin thermal coal mine and infrastructure project. Taking the stand on Friday was Adani Mining’s financial controller Rajesh Gupta whose performance when cross-examined ranged from unconvincing to embarrassingly vague and forgetful.

Among the key things to emerge so far: Adani had previously announced the conditional sale of T1, its terminal at Abbot Point, to the Bombay Stock Exchange. Now, as revealed earlier this year by Fairfax Media, Adani has confirmed the sale has not happened.

Gupta did not deny that the recent restructuring of Adani had shrunk its balance sheet and consequently its capacity to borrow by 80 per cent. He also confirmed the enterprise was no longer a vertically integrated mine to power station structure, which was part of the original logic for doing the deal.

Adani Mining in Australia is owned by an Adani company in Singapore, which is in turn owned by an Adani company in Mauritius.

Adani’s financial controller and head of tax did confirm that Adani Mining’s Singapore parent was on a concessional corporate tax rate of 5 per cent in the tax haven of Singapore although he did not know what the tax rate in Mauritius was:

Saul Hunt QC, counsel for conservation group Coast and Country: “Are you aware of the effective tax rates in Mauritius?”

Gupta: “No. I don’t know.”

Hunt: “You’re not aware of that. I suggest it’s 3 per cent?”

Gupta: “OK.”

Hunt: “Would you agree or disagree with that?”

Gupta: “I’ll take your word, yep.”

Asked by Hunt whether Adani’s strategy (also used by BHP, Rio Tinto and Glencore) was to sell coal to Singapore where some of the profit would be realised in Singapore before it was onsold again, Gupta responded:

“I’m … I can’t comment on any specific item, about any particular company.”

All this goes to the overarching issue of whether the project, which many critics believe does not stack up on financial let alone environmental grounds, will deliver a decent economic benefit to Australia.

Adani had submitted that its Carmichael Mine in the Galilee Basin would deliver $22 billion in taxes and royalties to Australia. Under cross-examination, however, Adani’s financial controller did not reject a calculation of $7.8 billion – a $14 billion disparity.

Hunt: “So we have Dr Fahrer’s report (mining economist Jerome Fahrer) that suggests over 30 years we’re going to have $7.845 billion in Australian real, right?”

Gupta: “Mmm.”

Gupta was similarly vague when it came to the coal price assumptions. Being a prospective coal mine, coal prices might be deemed to be material inputs in any financial modelling.

Hunt: “Let me just press you slightly harder on that, because you’ll be aware that the coal prices dropped by about 50 per cent since 2011?”

Gupta: “I won’t be able to comment about the percentage, but, yes, it has dropped in … the prices have dropped since 2011.”

Hunt: “And you wouldn’t dispute a characterisation of that at around 50 per cent, from a high of about US$140 per tonne?”

Gupta: “I’m … I won’t be able to comment on that number.”

On the issue of how a company with a market capitalisation of $US2 billion could fund a project with a total capital cost of more than $US10 billion, the Adani representative was similarly vague.

Coast and Country’s barrister put to him that the recent restructure of the Adani group – which took out Adani Ports and Adani Power – would reduce the profits of Adani Enterprises by 80 per cent, and consequently its capacity to borrow, Gupta said, “No, as I said previously, I don’t have any idea about what would be the impact on the overall valuation of Adani Enterprises Limited.”

Hunt: “Now, the reduction in segment results are 80 per cent … by about 80 per cent have a significant impact, doesn’t it, on the market valuation of the company?”

Gupta: “See, I’ll be just guessing what is the impact on the valuation unless the valuation has been done for the standalone Adani Enterprises Limited for restructure.”

One of conditions of approval for the project was that it was in the interests of Queensland to proceed. The Environmental Defender’s Office and Coast and Country are contesting the approval on grounds of environment, financial bona fides, economic benefits, climate change and risk to water.

Among other things to emerge from the cash so far, Rajesh Gupta confirmed the major lender was Standard Chartered Bank and that the cost of borrowings was 4.25 per cent or 4.5 per cent above Libor.

Another clanger was confirmation that Adani’s sale of T1 did not actually have approval as its Foreign Investment Review Board approval had lapsed.

Adani’s economic expert is expected to be cross-examined this week on the Adani advertising which claims 10,000 Queensland jobs will be created from the project. The case continues.