Markets force sanity onto West Pilbara, Galilee

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The ridiculous plans of Lance Hockeridge at Aurizon are taking heat. First the West Pilbara lunacy, from Prime:

Rail company Aurizon has spent more than $200 million on the West Pilbara iron ore project but says it won’t proceed unless the mine’s economics stack up.

…Chief executive Lance Hockridge sought to reassure investors on Monday, describing the project as a sound and exciting opportunity.

“We are not trying to defy gravity and it will only be in circumstances where the fundamentals of this project stack up … that we would make the commitment to go ahead,” he said.

Those fundamentals include operational, end market, product demand, cost and return on investment targets, he said.

A final investment decision is likely be made in late 2015 or early 2016, Mr Hockridge said.

Just as Roy Hill and Vale launch the second great wave of iron ore expansions – around 150 million new tonnes – crashing the price anew. Good luck.

Meanwhile, on the Galilee, from the SMH:

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“The reality is the go-ahead for the Galilee will be some years down the track,” Mr Hockridge said at an investor briefing that outlined more than $2 billion in capital spending to boost returns over the next few years.

Although Aurizon remained “bullish” on the long-term fundamentals of the thermal coal market, the company did not believe the current pricing environment was “going to be a trigger” for its Galilee project with Indian group GVK Hancock, Mr Hockridge said.

With rival Indian group Adani moving ahead with its $16.5 billion ­Carmichael coalmine in the Galilee Basin, and also planning to build rail links to the coast, significant delays by Aurizon and GVK may mean they end up using Adani’s lines. Coalminers believe that it is not cost-effective to have two rail lines from the Galilee Basin to the coast and that the first company to build a line will end up providing access to competitors.

It’s not economic for one line. If it were, Adani would not be forced to do this, from BS:

Indian conglomerate Adani Enterprises has hired Morgan Stanley to sell part of its stake in the controversial Abbot Point coal port in Queensland, even as the bank has expressed concerns about the environmental impact of the port’s proposed expansion.

…Adani disclosed Morgan Stanley’s role after the bank sent a letter dated October 20 to US-based environmental group Rainforest Action Network saying it doesn’t knowingly finance extractive activities in World Heritage sites. “Morgan Stanley will not lend to or invest in the expansion of Abbot Point,” it said. The letter was viewed by The Wall Street Journal.

Adani said in a statement to the Journal that funds raised from the sale of the existing terminal would be used to finance the expansion.

…The disclosure of Morgan Stanley’s involvement came as three other large US banks distanced themselves from Abbot Point, joining a growing roster of international lenders expressing worries about the project’s potential environmental impact.

JPMorgan Chase, Citigroup and Goldman Sachs have signalled they wouldn’t support new investment at Abbot Point, Australia’s most northerly coal port, potentially complicating the search for funding by Adani and India’s GVK, who want to export coal from planned mines nearby.

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The future of thermal coal prices is terrible, whether you agree with climate change mitigation or not. At $100 breakeven, this project is a pipe dream unless it can be wished into existence by various subsidies bringing the cost down by 30%. Even then it will simply trash the price further ensuring any construction and tax gains are offset by falling income. Australia would be much better served investing in the reef for the new wave of Chinese tourism.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.