Adani Carmichael v Coal & Allied
CHINESE bid will make interesting reading for energy hungry Indians
Wednesday 25 January 2017
If nothing else, the Chinese $3.2 billion bid for Rio Tinto’s thermal coal business confirms that the world’s biggest developing economies think coal is critical to their future energy mix.
However, it also says a lot about what a reliable, accessible, low-cost thermal coal deposit is worth in Australia, which is big news given all the publicity Adani’s yet -to-be-confirmed Carmichael coal project in the Galilee Basin is getting.
Just about every non-politicised estimate of thermal coal use in the future sees China and India consuming more coal due to its affordability, abundance and the ability of high- efficiency, low-emission (HELE) ultra critical coal-driven power stations to cut CO2 emissions.
Australia, with its technological know-how, convenient location, stable government, and of course highly desirable coal deposits is uniquely positioned to supply this coal to both these countries.
Since buying the enormous Carmichael coal tenements in the Galilee Basin, Adani has always maintained it was not just about finding the lowest cost coal, but about securing an energy future for India.
Certainly the enormous scale of the proposed Carmichael coal mine would do that, with annual coal production at full capacity of more than 60 million tonnes of thermal coal a year.
However, that sort of tonnage doesn’t come cheap or without risk.
According to Adani, they need to build a 389-kilometre railway line to Abbot Point Coal Terminal - and the port itself will need to be dredged and upgraded.
They need to build significant water infrastructure, a coal handling and processing plant, a very large workers’ accommodation village and an airport to service the mine.
They also need to build the mine complex itself, and of course pay for the tenements in the first place.
The cost of doing this has varied wildly over the last decade that Adani has been proposing it. Early estimates started around $7 billion, moved to $16.5 billion and more recently settled on $20 billion. Although it should be noted these are at best just theoretically estimates in the public arena - because nothing ever costs what you expect it to and quite frankly no journalist can do the calculations themselves.
So if we do a very rudimentary back of the envelope calculation, how does the cost of a tonne of coal from the Galilee compare to the cost of a tonne of coal in the Coal and Allied thermal business?
Before we do the calculation - we recommend everyone do their own calculations before making any rash decisions or drawing conclusions, because there are endless unknowables like mine life, ramp up tonnages, actual tonnages (in Adani’ case) and so on which could have a huge impact on the result.
However, if we used the $16.5 billion construction estimate most recently quoted by Adani, and add the $110 million purchase price of Moray Downs in 2012, that means the total capital cost (not including variable operational costs) of one tonne of Carmichael thermal coal is roughly $276 a tonne. ($16.6 billion divided by 60 million)
By comparison, Yancoal is looking to pay Rio Tinto $3.23 billion for an extra 26 million tonnes of known operating thermal coal exports a year.
I know it’s just a back of an envelope calculation - but that equates to $124 a tonne - with no surprises.