GVK undecided on Hancock coal for power cos

Hyderabad-based GVK group is upbeat on the prospects of its Australian asset, one of the largest coal and infrastructure projects in the world. Going forward, it could prove to be a platform to develop a large resource business, G V Sanjay Reddy, vice chairman of GVK Power and Infrastructure Ltd, said in an interaction. Excerpts:

On strategy for building a resource business
Hancock project in Australia has three coal projects, a rail project and a port project within itself. In two coal projects, GVK has 79%, while in all other projects, GVK has 100% stake. Two of the coal projects would be developed first, in addition to the rail line and the port project.

This is one of the largest integrated coal supply chain projects in the world. Everything is in our control including mining and logistics.

This project will be a platform for us to someday build a global resource business. This is our first major project in the resource business and hopefully this will be the stepping stone for many more. Our belief is that there is a long-term and strong demand for seaborne thermal coal driven by demand in countries like China and India.

We have enough projects on hand, including Hancock. Maybe next year, we will look at expanding our coal business.

Today, we have our main focus on infrastructure. Once the Hancock project gets off the ground, the natural next step is to expand in the resource business.

As part of our resource strategy, we have entered into oil & gas exploration. In the oil & gas business, we have an Australian connection with BHP Billiton owning 26% of our oil & gas interest. Prospects of those blocks are looking good and there are several international majors approaching us, asking if we are interested in doing a farm-out in those blocks. We are still not discussing with them.

On why the resource business is important
We find the resource business interesting because it is somewhat similar to real estate. If you buy land and want to sell it, the value is not going to be zero at any point. It can only go down or increase. Either you will get a higher price or a lesser price. Resource business is something of that type. Though we are not even thinking of anything like that, even in a worst-case scenario, if we want to sell away the project, there are enough buyers for the project.

On coal supplies from Hancock to India
Our strategy traditionally has been that in India it will be only GVK that would buy coal from Hancock to expand its power business. In India, for the private players to set up gas-based or coal-based projects, we are finding it very difficult because we have signed fuel supply contracts and we are not able to get the fuel. That’s a big challenge. The reason why we went into this originally was that we wanted our own coal to expand our power business.

But when we looked at the project, it is very large and we can use the entire coal. Hancock had already done marketing for selling the coal. So we continue to pursue them and some part of the coal will come to India to fuel GVK power plants. However, in the last 3-4 months, considering the uncertainty over the supply of coal from various sources, including those in Indonesia, many Indian companies have also approached us, asking for long-term coal supply contracts. That is something on which we have not yet taken any decision.

On the risk in investing $10 billion on Hancock project
I am not saying that there is no risk in any business. I am not saying that things could not go wrong in this project. Anything can happen. But what is the probability it will happen, is the question. In the case of Hancock, we have the environmental approvals in place and we are expecting the federal approval shortly. There are two other approvals and we don’t see any problem.

The other issue is financing. We are right in the sweet spot since we see an opportunity to negotiate with the contractors, since most of them have no work unlike in a boom situation. The other issue is market and there is significant demand for coal in just two countries — India and China. At least today, I can’t see anything that can go wrong in the project. At the most, the project can get delayed.