GVK's big Australian bet
GVK has to raise $7 billion in debt to succeed in its venture to mine coal Down Under and fight off stiff competition.
The Great Barrier Reef, off the coast of Queensland, is one of Australia's greatest natural gifts. The coral reef system stretches for 2,600 km and can be seen from outer space.
But, head inland into Queensland and into the outback and the contrast cannot get sharper: Giant excavators, three stories high and weighing hundreds of tonnes, work at mines of Brobdingnagian proportions. The newest of these basins is Galilee. The prize here is millions of tonnes of quality thermal coal, and a bunch of aggressive miners from India and China are staking multi-billion dollar bets to snag it.
Leading the charge across three of the mega-mines in the basin is an unlikely Indian entrepreneur, who's a newbie in the mining business. GV Sanjay Reddy, vice chairman of the GVK Group, first went to Australia looking for fuel for his power project in India. He switched tracks when he saw an opportunity in the huge, unconstrained mines available there.
By late 2011, he paid Hancock Prospecting, one of Australia's biggest resource companies, $1.3 billion for Alpha, Kevin's Corner and Alpha West. His plan is to transform GVK from a middling Indian infrastructure player, struggling with debt and cash flow problems, to a mining major by 2025, which will produce 84 million tonnes of coal a year. To put the number in perspective, India's total thermal coal imports in 2012 were about 100 mt.
Reddy did what few entrepreneurs as leveraged as him would do (GVK's long-term borrowings were Rs 11,094 crore in FY2012): He announced he would find $10 billion, to fund the coal extraction, build rail lines and a port terminal needed to carry the coal to energy-hungry utilities in Japan, Korea, Taiwan and China.
But the past 15 months-since the deal was signed-have been tough. The economic environment got worse, coal prices fell from a peak of $120/tonne to about $90, funding dried up, and Reddy was unable to complete the financial closure as planned. There aren't too many people who have the courage to back Reddy's audacious bet.
Right now, he needs to raise debt of about $7 billion to achieve financial closure-and he doesn't have much time. The clock has begun ticking on the $1 billion borrowed for the mine acquisition. Competition is keeping up the pressure as well. Right next door is Gautam Adani, who had actually reached Galilee before Reddy, and planted his flag at the Carmichael River. AMCI-Bandanna, a joint venture between a coal exploration company and a private equity firm, is the closest in terms of clearances. Among his most vociferous rivals is Aussie mining tycoon Clive Palmer, promoter of China First (Waratah coal).
As of now, GVK has a lead over the others. Galilee is about 500 km from the sea. With environmental clearances in place, Reddy's integrated pit-to-port project is best placed to carry the coal to the markets.
Both Adani and Palmer have been trying, so far in vain, to get exclusive rail and port linkages. The Queensland government declared the Alpha mine, a 'project of state significance', which makes land acquisition easier. Except the mining lease, most approvals are in place and land deals have been locked in with stakeholders.
But with every day of delay, Reddy's first-mover advantage could get whittled. And the prospect of more capacity coming on stream makes it tougher for him to sign long-term deals with buyers.
Analysts have also criticised the way in which Reddy has structured his Australian venture. Ninety percent of the project is owned by the GVK family, and not the listed Indian company GVK Power and Infra (GVKPIL). However, half the risk (debt of about $1 billion) is on GVKPIL's books. This leads to an unfavourable risk-reward to minority investors, says BNP Paribas analyst Vishal Sharma, in his reports on GVK.
So, the only way that Reddy can prove his critics wrong is by pulling off his audacious gamble. But, can he?
Georgina on my side
"Doing business Down Under is, in many ways, easier than in India," says Reddy. Australians tend to speak their mind and what you see is what you get, he says.
The Alpha mine project is top priority for the group. Reddy has travelled to Australia 27 times in the past 24 months. "It was not possible to leave it to anyone else at this stage," he says.
For much of 2012 it was impossible to get investors interested in the Alpha project for another reason: In May, the federal government in Canberra 'stopped the clock' on environmental clearance for the project, after the Queensland government cleared it. When environment minister Tony Burke said the project was 'shambolic', quite a few hearts at GVK Hancock almost stopped beating. The federal agency SEWPaC (Sustainability, Environment, Water, Population and Communities) wanted more details on the environmental impact of the mine and the Abbot Point port on the Great Barrier Reef.