While the Adani Group’s proposed development of the Carmichael mine is controversial, FIIG Research views it as having no impact on the Adani Abbot Point Terminal (AAPT) bonds in the near term
Proposed Carmichael coal mine, North Galilee Basin, Queensland
While the Adani Group’s proposed development of the Carmichael mine is controversial, FIIG Research views it as having no impact on the Adani Abbot Point Terminal (AAPT) bonds in the near term. We believe there is good visibility of the company’s likely performance over the next couple of years, given current conditions in the coal sector and likely limited downside risk relating to the current mediation covering the tariff reset.
AAPT has issued two AUD denominated bonds and one USD denominated bond, all available to trade. The issuance of the USD 2022 notes in December 2017 significantly decreased the refinancing task facing the company, with only about AUD300m maturing in late 2018.
Below are the bonds at a glance by maturity date and relative yield to worst (Figure 2).
|December 2022 USD bond ||May 2020 AUD bond |
|ISIN ||USQ0102FAD70 ||AU3CB0221422 |
|Minimum amount ||USD200,000 ||AUD10,000 |
|Denominations ||USD1,000 ||AUD1,000 |
|Coupon type || Fixed ||Fixed |
|Structure || Senior secured ||Senior secured |
|Rate ||4.45% ||6.10% (stepped up to 7.10% in March 2016) |
|Maturity date ||15 December 2022 ||29 May 2020 |
|Call date ||No call date ||Callable at any time, subject to a “make whole payment” if the bonds are called at least 180 days prior to the maturity date |
|Payment || Semi annually ||Semi annually |
|Issue credit rating || BBB-/BBB- (S&P/Fitch) ||Not available |
|Factsheet || View Factsheet ||View Factsheet |
Source: FIIG Securities
Note: The 2020 maturity bond is available to retail investors. The other bond maturing in 2022 is available to wholesale investors only.
Source: FIIG Securities
- Every five years, AAPT is required to determine the terminal tariff paid by contracted users. Notification of the last tariff applied in July 2017, led to objection of four of the eight users who proceeded to arbitration. The legal proceedings are expected to conclude in the coming months, but if the users win, a lower tariff is likely to be charged as well as a refund to them for paying the higher charges since July 2017
- Rating agencies Standard and Poor’s, Moody’s and Fitch believe that the downside risk of a negative arbitration outcome is limited
- AAPT exports a mix of thermal and metallurgical (or coking) coal. Company estimates show that about 60% to 65% of contracted throughput will be coking coal, meaning continued strength for the price of both thermal and metallurgical products remain relevant
- Coking coal currently trades at about USD200 and thermal coal at USD90. At these levels, we believe that the AAPT users still generate adequate margins, as all coking coal and thermal coal producers have cash costs below USD100 / t and USD70 / t, respectively
- In FY18 (AAPT’s financial year ends 31 March), AAPT exported a solid volume of 24.5m tonnes of coal, equivalent to an annualised rate of about 26.7m. This is broadly in line with historical volumes of 26.3mt and 26.9mt exported in FY17 and FY16, respectively
- The 2022 USD notes issued in December 2017, have reduced AAPT’s debt maturing in November 2018 to about AUD300m. We believe the risk of AAPT being unable to raise the required AUD300m is limited, even if a negative outcome on the tariff reset arbitration eventuates (see Sector specific update). AAPT’s current liquidity cushion will mitigate the refinancing risk with:
- AUD245m of cash (including AUD53m of restricted cash)
- Free cash flow that it will continue to generate
- The 2022 notes issuance
- Prior to the 2020 and 2022 maturities, only the Glencore contract expires, which has a current contracted capacity of 13m tonnes per annum (mtpa). AAPT and Glencore have agreed to extend the contract to June 2022, although the contracted volume for the 2-year extension to 2022 will be unknown until June 2018
- If Glencore nominates a volume in line with AAPT’s current production, this could decrease the contracted capacity to about 7mtpa, causing an estimated tariff increase by about AUD1.5 /t for all the terminal users. In the context of current coal prices (see Sector specific update), this increase would be manageable for all remaining users
Speculation continues around the Carmichael mine project to be developed by the Adani group in Queensland’s Galilee basin. We reiterate that the project has no impact on the AAPT bonds in the near term for the following reasons:
- The Carmichael mine is unlikely to produce and export before 2021 that is beyond the maturity of the 2020 notes
- AAPT has some exposure to Adani Mining (the proposed developer of the Carmichael project), but this exposure is not expected to materialise until July 2022, increasing the contracted tonnage. This increase would result in a lower tariff for all users compared to current levels (all else being equal). As such, termination of the Adani Mining contract (if Carmichael does not proceed) would not materially impact the other users since they don’t benefit from a tariff step down
AAPT is located in the Port of Abbot Point, approximately 25km north of Bowen, Queensland, with a current export capacity of 50mtpa. AAPT’s proposed Carmichael coal mine in Queensland’s Galilee Basin would be the biggest coal mine ever built in Australia and would be among the biggest in the world. Adani Mining states that it intends to mainly ship the coal to India for use in power generation, however environmental concerns have been argued by public activists.
AAPT is a wholly owned subsidiary of Mundra Port Holdings Trust (MPHT), the guarantor of the notes issued by AAPT. MPHT holds the 99 year long term lease on the Abbot Point Coal Terminal (acquired from the Queensland Government in June 2011) which is then sublet to AAPT.
Both AAPT and MPHT are ultimately owned by the Adani group, a global integrated infrastructure company headquartered in India with diversified businesses in the resources, logistics, energy and agricultural sectors. AAPT currently has nine long term, take-or-pay user agreements with companies or joint ventures operating coal mines in the Newlands and North Bowen Basin areas. The high quality and low cost characteristics of metallurgical and thermal coal from this region supports the global export demand for coal in this region.
AAPT’s terminal continues to be operated by its incumbent operator, Abbot Point Bulk Coal Pty Ltd (APB) under the Adani group’s ownership following the sale of APB to Abbot Point Operations Pty Ltd (APO) by Glencore in September 2016.