A scathing new report out today outlines just how risky some of the world's largest coal export projects are. Funnily enough, they're not the risks environmentalists care about - the fact that they're going to be built inside the Great Barrier Reef for instance. No, what the report is concerned with are the risks to the billions in investment at stake if the projects go sideways. If I had my money on the line (which I might if U.S. Ex Im Bank President Fred Hochberg uses U.S. taxpayer dollars to subsidize this boondoggle), I'd pay attention because the report doesn't come from just anyone, but from financial industry heavyweights Tom Sanzillo (former New York State Comptroller) and Tim Buckley (former head of Australasian equity research at Citigroup).
Before we get into the risks outlined in the report, let's start with the project as the developer (GVK) sees it: India has 300 million people without electricity, the country is facing a supply crunch of epic proportions, and the government is hell-bent on building a massive pipeline of projects. GVK is well suited to help fuel this pipeline and alleviate the supply crunch by developing one of the world's largest integrated coal mine, rail, and export projects in nearby Australia. Seems pretty cut and dry right?
So what exactly has these analysts so worried? Leverage, leverage, leverage. It turns out GVK is trying to pull a fast one on Australian investors by getting them to pony up the cash for the project to cover the holes in their own balance sheets - which are enormous. Check out the graph below comparing the project's costs ($10 billion) with the current market capitalization of GVK ($243 million). That combined with net deb t of ~$2.7 billion and GVK faces a whopping 1,149 percent debt to market ratio. For the financially illiterate - it's a financial crisis waiting to happen.