India's Adani to press ahead with Australia coal plans

AHMEDABAD, India Tue Sep 25, 2012 1:02pm EDT

AHMEDABAD, India (Reuters) - As global mining giants scale back their ambitions in Australia's coal sector, Indian billionaire Gautam Adani is showing no such caution in pushing full-steam ahead with a $4.5 billion project in a bet on rising Indian demand.

The mine is central to plans by Adani, a college-dropout who by last year was worth more than $8 billion, to secure coal to feed an expansion of the Adani Group's power production capacity in India, which suffered massive blackouts in July and August as the country struggles to meet electricity demand.

Adani expressed confidence in being able to secure funding for the Carmichael coal mine in Queensland by the end of the year even as lenders turn their backs on other projects in the resource-rich country. Adani aims to start production in 2014 and build up to output of 60 million metric tonnes by 2020.

"Our Australia plan is completely on the dot, as per schedule," Adani told Reuters in an interview in his modest-looking office in the western Indian city of Ahmedabad.

"We have our ready market, our own consumption, our own trading, country's need, country's need will improve, as well our aspiration of also entering the global trading market," he said.

Despite the upbeat comments, investors have been less than impressed. Shares in the group's loss-making power firm Adani Power Ltd (ADAN.NS) have fallen close to 18 percent this year on concerns over debt and lack of pricing power as the main benchmark index .BSESN has gained more than 20 percent.

He said his Adani Group could reduce its debt-to-equity ratio to below one by 2015 from more than two now if Adani Power is allowed by Indian authorities to pass on more of the increasing cost of imported fuel to end users. The issue is under adjudication.

Adani's plan to spend $4.5 billion developing the Carmichael coal mine comes as global mining giants such as BHP Billiton (BHP.AX), Rio Tinto (RIO.AX) and Xstrata XTA.L have put investments on hold and cut jobs in Australia after a sharp fall in iron ore and coal prices.

A slide in China's demand growth has prompted miners and lenders to reassess prospects for the sector in the next few years. A $246 billion pipeline of planned mining investments in Australia is on increasingly shaky ground as the price falls tighten operating margins and put a spotlight on cost cutting.

Adani acquired the Carmichael tenement in Galilee basin and the Abbott Point coal terminal at the top of the Australian resources boom in the past two years.

The Adani Group imports most of India's imported coal, operates power stations in India and the country's biggest private-sector port, an integrated business structure that Adani said will help offset risks in developing the Carmichael coal mine.

The project's cost of production will be about $60 a tonne, estimated Ronald Siyoni, an analyst at brokerage K.R. Choksey Securities in Mumbai.

That suggests a healthy margin, for now, of $30-$35 a tonne compared with market prices, Siyoni said.

An Australian banker with direct knowledge of Adani's fund raising said the mine stood a fair chance of going ahead. He declined to be identified because he is not authorized to speak to the media.

Adani said a fall of as much as 20 percent in labor and equipment costs in Australia's mining sector since the sector slowdown began was also offsetting some of the risks.

"Our focus is not on short term. We are not looking at today's price and deciding," said the soft-spoken 50-year old, who ranked seventh in Forbes list of richest Indians last year.

His India-centric business made him different from global miners, said Adani, who started out as a diamond trader. "The project will last for generations. For that, $100 million of pain here and there doesn't make any difference," he said.

The group is in talks with export credit agencies, including the U.S. Export-Import Bank, Australian lenders, as well as State Bank of India (SBI.NS) and Standard Chartered (STAN.L), and expects to tie up funds for the project by the end of 2012.

He said there is "no negativity" in the talks with lenders to suggest financing may be a problem.

Adani said the group could sell a stake in the Abbott Point Port, the export point of the coal, in one to two years' time. He had no plan to sell a stake in the mine, but would consider listing it on a stock market at a later date.

POWER SECTOR CONCERNS

Adani is betting big on the business of feeding power-deficient India. He plans to have 20,000 MW of power production capacity built by 2020, but he's facing expansion pains due to uncertainties that have plagued the sector over the past year. This includes unreliable coal supplies from domestic producers and helps explain why more than 60 percent of his coal needs are met by imports.

However, his firm is locked into long-term power purchase agreements with some state electricity boards that do not allow him to pass on increases in the cost of imported fuel and is in adjudication proceedings to change the tariff agreements.

If the adjudication by the country's central electricity regulatory commission is in favor of the company, Adani said he was confident of reducing the current group level debt-equity ratio to less than one by 2015.

However, if the tariff issue is not settled, Indian power projects risked becoming financially unviable, he said.

Adani Power posted a loss of 7.9 billion rupees in the previous quarter ended June, widening from 2.9 billion in the preceding quarter, and compared to a profit a year earlier.

Of the 31 analysts covering Adani Power, 18 have a "sell" or "strong sell" rating on the stock, according to Thomson Reuters StarMine.

The outlook is far more relaxed in case of Adani Enterprises Ltd, which holds the Australia projects, with eight of the 11 analysts covering the company putting a "buy" or "strong buy" rating on the stock.

India approved a plan on Monday for a $35 billion debt restructuring of cash-strapped power distributors to improve their financial health.

Adani said he is also keen to build on the success of the group's Mundra port, India's biggest private-sector port, which is located on the west coast.

He is eyeing opportunities to expand his operations into Odisha and Chennai on the east coast. He said he was interested in buying a majority stake in Dhamra port in Odisha, whose current owners -- Larsen & Toubro Ltd (LART.NS) and Tata Steel Ltd (TISC.NS) are keen to sell.

Adani's meteoric rise has often been credited in media reports to his closeness to politicians, especially in his home state of Gujarat. When asked to respond, he said a rapport with politicians and bureaucrats was important.

"Any infrastructure project you require very formal positive support of the state establishment. Otherwise you cannot succeed," he said. "You have to keep a good rapport with government machinery."

(Additional reporting by Narayanan Somasundaram in Sydney; Editing by Neil Fullick)

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