GVK's Australian partner says the timing of rail project still uncertain

GVK's Australian JV partner recently did a $30-mn write-off on the expenditure incurred for a feasibility study, which indicates the project's uncertain status

The decision to write-off $30 million relating to its expenditure on Galilee rail project feasibility study by GVK group's Australian joint venture partner Aurizon on Wednesday comes as a fresh reminder of the uncertainty surrounding the project.

In November last year Australia's Hancock Prospecting, which sold majority stake in Galilee coal prospects to GVK in 2011, had written off an unpaid amount of $656 million due from GVK as it saw remote chances of its Indian partner venturing into the development of coal assets in Australia any time soon.

Two years after this Hancock coal assets deal, Aurizon had signed a non-binding term sheet with GVK to jointly develop the rail and port infrastructure project, which was essentially meant to unlock GVK Hancock's Alpha, Kevin's Corner and Alpha West coal mines. Under the agreed framework Aurizon was to acquire 51 per cent interest in Hancock Coal Infrastructure Pty Limited, which owns GVK Hancock's rail and port projects.

Among several disclosures made about its business, Aurizon said a non-cash impairment of $30 million was associated with the feasibility work for the brown-field expansion of the Central Queensland Coal Network, which was undertaken to advance Galilee Basin development opportunity. The firm had also indicated a weaker coal export volumes, below 3-4 per cent of the previous expectations in the current year.

"While this amount could be recovered through the regulatory process at a future date, a decision has been made to impair the costs due to uncertainty surrounding the project's timing and the current market outlook," Aurizon, Australia's largest rail freight operator, said in a market update. The company stated that the carrying value for this project was now zero.

Commenting on the latest development, Tim Buckley, director Energy Finance Studies, Australia, said they continue to view the Galilee as a stranded asset, and with the collapse in coal prices internationally the chances of these projects reaching a financial closure were remote.

The Institute of Energy Economics and Financial Analysis(IEEFA) last year stated that the huge scale, green field nature and foreign ownership of the two most advanced projects, that of GVK Hancock and Adani Enterprises, in Galilee Basin brings an almost unprecedented level of financial complexity and risk.

GVK had acquired 79 per cent stake in the Alpha Coal and Alpha West Coal Project and 100 per cent stake in Kevin's Corner Project. These projects hold estimated reserves of 8 billion tonnes and a capacity of more than 80 million tonne per annum. GVK also acquired a 100 per cent stake in the 500 km rail line and a 60 million tonne capacity port as part of the pit-to-port logistic solution, which envisages an investment of $ 10 billion, according to the company.

Decline in international coal prices by more than 50 per cent and a dim outlook for the future with China's coal demand expected to peak out in 2016, brought the development of new coal assets in Australia and Africa to a halt.