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Mar 11, 2013, 05.21 PM IST | Source: CNBC-TV18

Queensland projects to begin by FY14: GVK's Sanjay Reddy

GVK Hancock, has agreed to sell 51 percent stake in its rail and port projects in Australia to Queensland-based Aurizon Holdings Ltd for an undisclosed sum. In October 2011.

They have a very strong balance and we jointly came to an agreement that they will take a 51 percent stake in the rail and port project.

Sanjay Reddy

VC

GVK Power & Infra

GVK Hancock, part of the GVK Group has agreed to sell 51 percent stake in its rail and port projects in Australia to Queensland-based Aurizon Holdings Ltd for an undisclosed sum.

In October 2011,  GVK Power and Infra acquired majority stake in coal assets owned by Australia's Hancock Group for USD 1.26 billion.

Also read: GMR cuts debt by Rs 2500 crore post Singapore arm sale

The GVK group company and Aurizon have signed a non-binding term sheet to jointly develop the rail and port projects to unlock the Galilee Basin coal reserves, said Sanjay Reddy, vice chairman, GVK Power and Infra in an interview to CNBC-TV18.

He further said Aurizon will pay a portion of the total sum at completion of the transaction and deferred payments at the financial close of each phase of the projects. " I Expect construction on the projects to commence by FY14-end," he said.

In addition to rail and port facilities, the GVK Group has invested in the Alpha, Alpha West and Kevin's Corner mines in Queensland that have total resources of 8 billion tonnes of thermal coal. 

Earlier, both companies in a statement had said that they will jointly manage the projects, which collectively could represent an investment of  USD 6 billion for Queensland

Below is the edited transcript of Reddy's interview to CNBC-TV18.

Q: If you could just tell us about the term sheet that you have signed with Aurizon? How much will it alleviate a balance sheet concerns for you and how much has the stake sale been done for?

A: Our Australian acquisition consists of three mines, a 500 kilometer railway line and a port. One of the biggest challenges of the Galilee Basin in which our mines exists is the lack of infrastructure to be able to export the coal whether to India or the rest of Asia. This has always been a big challenge for the last few decades.

We have been able to develop the infrastructure of both rail and port to a significant extent where last year we got all our approvals. These approvals include environmental approvals from the state and central level in Australia. We were looking at getting an appropriate investor into the rail and port projects.

We looked at investors from across the world, but we found Aurizon, which is the largest rail company in Australia and also headquartered in Queensland, as the ideal partner. This is because they bring a lot of value. They are a 145-year-old company and they are growing at a very rapid pace. They have a very strong balance and we jointly came to an agreement that they will take a 51 percent stake in the rail and port project, but it will be an equal management, wherein we will have equal management rights going forward.

Q: How are you selling the stake? Is it existing shares that you are selling? Will that company issue new shares? Is it bringing any money to you as the owner, the erstwhile 100 percent owner of that mine?

A: No, I think there will be some element of money which comes to us, but a majority will go into the company to build the rail and port. The key issue here has always been in this asset people never saw the value of the infrastructure assets and they could never understand the value. With this transaction, we will be able to show that there is significant value in the infrastructure asset. Once we are at a later stage, we will be able to announce more details.

Q: How are you selling the stake? Is it existing shares that you are selling? Will that company issue new shares? Is it bringing any money to you as the owner, the erstwhile 100 percent owner of that mine?

A: No, I think there will be some element of money which comes to us, but a majority will go into the company to build the rail and port. The key issue here has always been in this asset people never saw the value of the infrastructure assets and they could never understand the value. With this transaction, we will be able to show that there is significant value in the infrastructure asset. Once we are at a later stage, we will be able to announce more details.

Q: Can you give us any idea at all. What really if it brings to GVK?

A: It brings significant certainty to the project because we are also talking to a number of investors in our coal mines. Now the only issue, which investors had were two-fold, firstly, the environment approval which was critical in Australia. Investors were always concerned about that and secondly, how would one build the infrastructure because it is a USD six billion investment and they were worried how that would happen. With this current transaction we would address that concern as well. Therefore, now the next step would be for us to tie-up the coal investors and once we do that then the project will get off the ground.

Q: Coal investors, you mean coal buyers?

A: This will be a combination of people who would enter into long-term coal offtake, as well as invest that required capital. Our strategy has always been that we will raise enough capital to be able to cover our entire equity stake that we need to put into these projects.

Q: But you would yourself need the coal, isn’t it? So you would be one of the buyers?

A: Yes, we would be one of the buyers.

Q: When will it start yielding coal? When will it hit your plant?

A: Yes, it is a three year construction period. We expect that before the end of this year, we should start construction.

Q: Any timeline of the investment that Aurizon will put in? Any kind of upfront consideration that you have discussed ?

A: Yes, there is an upfront consideration and there is what’s called deferred consideration. The upfront consideration will be paid to GVK and from then onwards, they will then partake in whatever expenditure that is ongoing till financial closure. At financial closure they will bring the deferred consideration.

The biggest advantage of Aurizon is that it is a USD 10 billion balance sheet. It is very strong and has a very low leverage of only 16 or 18 percent. So, once they come in the ability for them to be able to bring the financial certainty in terms of financial closure is very high.

Q: So when is the financial closure of this deal expected?

A: As far as the deal is concerned, we have signed a term sheet.  In the next two months, we should be able to sign definitive agreements, as far as the project is concerned. Aurizon has a very significant existing infrastructure in railway infrastructure and we are looking into it. So, we are evaluating what is the optimum solution combining our proposal and their existing infrastructure and what would be the most cost-efficient, time-efficient solution. Once we arrive at that solution then we will fix the financial closure.

Q: What will the listed entity get now after all you do have a good Rs 50-60 crore that you will pay as interest every year. Is there any relief coming here?

A: It will only be when we get the upfront consideration.

Q: That would be when?

A: That would be in the next few months.

GVK Power stock price

On October 31, 2014, GVK Power & Infrastructure closed at Rs 11.72, up Rs 1.07, or 10.05 percent. The 52-week high of the share was Rs 20.85 and the 52-week low was Rs 7.10.


The latest book value of the company is Rs 15.69 per share. At current value, the price-to-book value of the company was 0.75.

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