Thread by @davidfickling

I honestly don't understand why we have had nearly ten years of pretending that the Adani Carmichael mine is viable.

Here's some really simple maths explaining why it just doesn't stand up financially:

1. Plan is for a 10m ton per year mine, rising to 20mtpa

2. Galilee coal is ~5,000kcal/kg NAR -- about the same as Indonesian Envirocoal which currently sells for $66/ton before shipping costs (at a time when thermal coal prices are at multiyear highs)

3. So your revenue is ~$660m in the first stage

4. What are the mining costs? Adani doesn't say but BHP's Mt Arthur, a ~20mtpa in the better-located Hunter Valley run by one of the most efficient miners in the world, does $46/ton. So that's ~$460m a year on mining costs, leaving $200m/year left over.

5. But wait! You have to build the mine and a railway first. Again Adani are rubbery on the numbers but the best estimate from the unofficial figures they've put out for the scaled-down project are $1.5bn for the mine and $1.5bn for the railway.

So that's $3bn.

6. Adani owns Abbot Point port, which is a project with a guaranteed customer (Glencore). Its bonds on this yield about 7% which is a good proxy for what they'd pay for the Carmichael project.

7% of A$3bn is US$140m of interest each year.

7. So we're down to $60m of profit. But wait! The railway they're building only gets you halfway to the coast. They'd have to pay Aurizon for the remaining distance which ballpark comes to about $6/ton on 10mtpa of product.

The project is now not making a cent of profit.

8. BUT WAIT! You also have to amortize the loan principal, and depreciate your A$3bn/US$2bn capital asset. Hard to see how accountants would allow a depreciation schedule longer than 30 years and you'd have to amortize over -- guessing here -- ~10.

9. That puts you an extra ~$260m the hole. Adani is losing $26 on every ton it digs up. More if coal prices fall from their current highs.

10. If the output rises to 20mtpa this maths improves, sorta. You have $400m of gross profit. But then subtract the $140m in interest, $260m in D&A and now $120m to Aurizon and you're still losing $6/ton.

11. And the plan is to self-fund the expansion to 20mtpa, which clearly doesn't work because the 10mtpa mine is already losing money so can't self-fund a chook raffle.

12. Now in theory there's ways to improve this:

(a) taxpayer-funded below-market-rate loan from the Australian government. Only really credible on the $1.5bn rail. But hard to see that shaving more than $40m or so in interest, and it wouldn't affect the D&A.

(b) Government builds the railway outright. But a government-built rail line that would push development waaaaay into the future and they'd end up having to charge an access fee which would end up having to cover similar costs.

(c) Adani Group comes up with cash from somewhere to pay it. Maybe, it's a big conglomerate. But why do that? Gautam Adani isn't stupid. There's lots of things he could invest in that generate returns, like ports and solar. Why scrabble together cash to just set it on fire?

(d) "Coal prices in the market don't matter because we're selling to our own coal generators" -- an argument Adani have made.

But of course, they do. Why build a A$3bn infrastructure project to buy low-quality coal from a remote basin when you could buy it for less on-market?

And more to the point, the generator still has to sell *electricity*, and at present coal plants in India are being badly undercut by renewables, operating at loss-making capacity factors, and loading up the entire Indian financial sector with bad debts.

This all raises the question of why everyone has spent all this time pretending it's viable.

My best guess for Adani is that Carmichael is currently an exploration asset worth something like $1.3bn, perhaps more.

If Adani cancels the project that asset has to be written off.

At one point Carmichael was on the books of Adani Enterprises which is listed on Mumbai's Sensex, where companies with negative net assets have to de-list. A writedown would make that perilously close.

iirc it has since been shuffled elsewhere in the group, which is what you'd expect Adani to do if it thinks a writedown might be likely.

As for why politicians pretend it's viable, isn't it obvious?

The Coalition have spent the past decade wedging Labor on the issue, and just in part won an election on it. It's the gift that keeps on giving.

And Labor can't point at the Emperor and says he has no clothes, because that makes their problems even worse. They've suffered enough just being on the fence about Carmichael, without being accused of "talking down coal".

So we all keep pretending it could somehow work, when the numbers have been against it since 2012 or so.

The common belief is that banks won't fund it because they're scared of environmentalists.

Believe me, this won't stop them funding big petroleum projects.

Banks won't fund it because it's a duff project and they don't want to lose money.

They're quite happy to get some good green PR from announcing they won't fund it, but it's about the bottom line.

Only state funding can stave off economic reality. (Ends)

PS an interesting parallel is Glencore's Wandoan mine, a 1.2bn ton 5000/kcal project in the Darling Downs.

It's about half the rail distance to port of Carmichael (and remember that rail freight is one of the biggest cost elements for coal) but Glencore mothballed it in 2012ish

Wandoan is basically a more viable version of Carmichael, but Glencore are convinced that developing it would crash that end of the seaborne coal market and have promised to cap their thermal coal output at current levels.

This isn't because they're scared of greenies -- are you fkin kidding me?

It's because Glencore are really good at forecasting long-run supply-demand dynamics and they don't see sufficient demand to justify additional supply.

People should take that judgement seriously.