Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 1 May 2015

5 loaves of bread & a few fish

Sea of Galilee jobs?

Property advisers have been recommending speculative buys in the Galilee Basin for longer than I'd care to remember, due to a promised 22,000 new jobs in the region from coal mining forays.

As opined here at least a thousand times, probably more, this is not necessarily an idea which will pay off.

To re-cap on some of my reasoning from across the past year:

Nobody doubts the sheer scale of the resource which sits to the west of Mackay, the Galilee Basin covering an astonishing expanse of nearly 250,000 square kilometres.

There is more than 25,000 million tonnes of coal out there somewhere.

Yet there are many reasons why the Carmichael Project may not, and arguably should not, get up.

Some are climate related, others are linked to environmental concerns.

But as we know, when it comes to resources projects, money talks, and by far away the biggest risk to this project attracting a green tick is that it's not financially viable.

With a thermal coal price which was crashed and lost well over half of its value since its peak of $142/tonne, the cash costs of production are too high for it to be otherwise, even if borrowed money from India can somehow account for the outlandishly high construction costs.

Few jobs...

From The Grauniad:

“In the leadup to the Queensland state election Campbell Newman’s Liberal National party promised to deliver 22,000 jobs in the Galilee Basin, of which Adani’s Carmichael mine alone was supposed to provide 10,000.

These claims were used to justify an injection of government equity into a rail line connecting the mine to the Abbot Point coal terminal.

With the election behind us, and the LNP out of office, this bonanza has suddenly shrunk.
Appearing in the land court of Queensland, Adani’s economic consultant, Jerome Fahrer of ACIL Allen, presented modelling estimating that the project would create a grand total of 483 extra jobs in the Mackay Isaacs Whitsunday region, where the proposed mine, rail line and port are located.

An increase in employment of almost 500 jobs is trivial in the context of region where total employment is around 80,000.”
...and fewer profits

Continues The Grauniad:

“How about profits on taxes? GVK Hancock’s own estimate of the cash costs of extracting coal is $55/tonne and others are as high as $70/tonne. 

So, even at the most optimistic estimates of cost and extraction rates we are looking at a margin of $10/tonne for 32m tonnes or $320m a year, out of which a variety of corporate overheads will have to be paid.

The capital cost of the project will be at least $10bn. So, at current prices, the gross return on capital before interest, depreciation and amortisation is at most 3.2%, barely equal to the rate of interest on Australian government bonds. 

Even if lenders can be found, there’s not going to be lot of profit on which to pay tax.”