Hogsback and the pressures Galilee developers face

COST blow-outs and completion delays are so common in the Australian resources industry that Hogsback was delighted to read this week that one company has set itself a target of cutting construction costs by 30%.

Tim Treadgold

Whether it can achieve that goal is another question.

GVK Hancock, the India-controlled joint venture planning to build the Alpha project in Queensland’s Galilee Basin, is the developer with deep cost-cutting on its agenda, which is hardly surprising given the relatively remote location of the mine and the low price of coal.

Without doing something differently, GVK Hancock will struggle to carve out a slice of the Australian coal sector at a time when long-established miners are mothballing pits, cancelling expansion projects and laying off workers.

Pressure on everyone in the coal business is so great that there are some people who wonder whether GVK Hancock will be able to hit its targets of first exports from a new terminal at Abbott Point by 2016.

The man behind the project, GV Sanjay Reddy, is in no doubt he will succeed but perhaps that’s because he has to be an optimist, having already handed over $US1.3 billion to be one of the top Indian players in the Australian coal game.

Reddy’s next challenge is to find another $7 billion to finalise the deal – which will not be easy with banks keeping a tight grip on loan approvals – and to demonstrate that he can build a project at a lower cost than anybody else.

It was with this background in mind that The Hog stumbled across a remarkable report currently circulating in India in which Reddy claims he can hit his targets by selling down equity in the mine as part of the fundraising, sign up customers for the project’s coal and force a cost-cutting culture onto Australian contractors and workers.

“Best of luck”, was the initial reaction to the report carried in the Indian edition of US magazine Forbes, in which Reddy reminds readers that his grand plan is to create a business based on a series of coal deposits that include Alpha and Kevin’s Corner and be exporting a whopping 84 million tonnes per annum of coal by 2025.

If the cash required to get the GVK Hancock project off the ground is not a big enough challenge – and the production target not sufficiently challenging – then what really looks like the toughest job in the resources world is to slash construction and operating costs.

Perhaps it can be done but how it might be achieved caused The Hog to raise his eyebrows several times because some of the comments reported just don’t make sense, such as a claim that GVK Hancock will achieve a 20% cost reduction by “using, for the first time in Australian coal mines, the more efficient draglines … instead of smaller bucket-wheel and other extractors”

It is possible that the author of the Forbes India story misunderstood Reddy and his limited knowledge of coal mining in Australia but the last time anyone in Queensland looked at a big open cut mine, there were draglines all over the place.

As for capital costs, Reddy reckons a fixed-price deal on Abbott Point terminal will deliver the port at a price of $1.8 billion, well below the initial estimate of $2.6 billion.

It goes on: the cost cutting aims include a greater transfer of risk from the project owners to contractors – with all major contracts awarded on an equipment, procurement and construction basis – and a willingness to work with equipment that is fit for purpose but not in the “gold-plated” category.

GVK Hancock chief executive Paul Mulder is quoted in Forbes India saying: “The kind of equipment you order can make all the difference. Good enough is what you need, not best available in the world.”

Mulder is perfectly correct in what he says.

But when added to the overall picture of a project trying to slash capital costs, trying to nail down contractors and trying to attack the super-high wage environment, which has infected all mining projects, then the size of the challenge becomes quite daunting.

As for the big target, the price at which coal can be landed on board a ship at Abbott Point, well that too is interesting because Reddy told his interviewer that $50 a tonne was the aim.

He might do it – and the best of luck in trying – but there’s no doubt it will be a heavy lift.