Exchange rates, spot pricing for thermal coal and interest rates will have a major bearing on the effectiveness of the Queensland government’s efforts to get the Galilee Basin cranking.

With a total forecast investment of $28.4 billion, the Galilee is expected to be capable of supplying over 120 million tonnes a year – even as high as 200Mtpa – of thermal coal into the market for the next few decades, possibly up to 40 years.

Brisbane-based Norton Rose Fulbright partner Robert Milbourne said that the size and scale of the projects in the Galilee Basin, together with recent support announced by the Queensland government, provide hope that the projects will be developed in a timely fashion.

“The reality is you’ve got more resource in the Galilee Basin than in any other untouched coal basin in the world that I’m aware of,” he said.

However, capital constraints, instability and uncertainty as to where the market is going have seen several massive planned projects delayed.

Meanwhile, “a much more detailed focus has occurred on the financeability on major projects, given the challenging economic scenario of the last two years”, Milbourne said.

“The result is that the core infrastructure required of port and rail have been much more difficult to get off the ground, and as time goes on it’s not clear that the prices are going to come down in terms of cost for infrastructure, so it makes it harder and harder to justify the project unless the thermal price goes up, which can happen by the exchange rate going down,” he said.

“So the big issue I would see for both the Galilee and Surat basins over the next year are key economic conditions – exchange rates, spot pricing for thermal coal, and interest rates.”

Swiss investment bank Credit Suisse believes the average thermal price for 2014 will be $US85 a tonne and the long-term price $95/t.

Furthermore, there is still no rail line to connect the Galilee’s undeveloped coal deposit to coastal coal export ports.

The Queensland government is streamlining the rail infrastructure proposals of the previous Labor state government, and is offering a “ramp-up to royalty” initiative whereby it will consider offering reduced royalties for an initial period of time.

It will also offer access to the T2 site at Abbot Point, which the government has identified as the key potential stockpiling and handling site within the priority port development area.

“The six different railway proposals the Labor government had allowed to progress to get the coal to port were unacceptable and would have resulted in more impact on landholders and the environment,” Premier Campbell Newman said when launching the Galilee Basin Development Strategy in November.

The government’s efforts are aimed squarely at first-movers in the basin, with the government mindful, it said, of the magnitude of the investments and long lead times between financial commitment and shipping first coal.

“Once you get the port and rail developed at a not unreasonably high cost, you make viable all kinds of other projects out there,” Milbourne said.

“There are some of the most promising project developments on earth here (in Queensland), and yet they’re not going forward just yet.

You’ve got to wonder why that is; then wonder where do you want to sit if you’re an investor in that curve: do you want to get involved early – and there are a number of companies in the Galilee who are already there.”

These majors include Adani Mining, which plans to export first coal to India from its $10 billion, 10 billion tonne Carmichael mine, rail and port project in the north Galilee Basin in 2016; GVK, whose Alpha coal project has been declared by the Queensland state government as ‘a project of state significance’; billionaire Clive Palmer’s Waratah mine; and Vale, which has the Carborough Downs mine and is part owner of the Isaac Plains mine, both in the northern Bowen basin.

Indian-owned Adani announced in late 2012 it planned to raise funds to refinance Adani Abbot Point Terminal in northern Queensland – which will be used to ship Carmichael material - via a debut five-year $1.25 billion bond in Australia.

However, the funding of the Carmichael project is a very different beast, and both Adani and GVK have struggled to get major funding for their projects.

With project costs of between $2-6 billion it may well take a little more time to resolve all that.

The government is looming as a major player in stimulating proceedings via compulsory land acquisition and streamlined approvals, providing additional infrastructure and other such measures that have been outlined in the Galilee Basin Development Strategy.

However, as ever, a key consideration as to how these projects can get up to kick-start the Galilee is financing.

The Commonwealth Bank announced late last year it is managing the transaction with Deutsche Bank AG and Westpac.

Bonds are certainly proving an attractive option with uncertain financial markets giving miners few traditional funding avenues to rely upon.

Business law firm Debevoise & Plimpton’s managing partner in London James Scoville told Mining Journal that while equity markets for new issues and secondary transactions were “essentially closed”, bond markets had been stronger “as investors continue their quest for yield”

Analysts say the challenge for Adani in Queensland comes down to belief that the operational expenditure is where it says it’s going to be and the long-term thermal price is where it says itwill be. There is a lot of doubt around both.

Many believe that the $50-60/t mark in terms of production landed costs is way too optimistic.

Similarly, there is a question about what the realistic long-term thermal price is going to be.

When the price is around $US80/t, it is estimated that a third of all Australian thermal coal production is not profitable – and the numbers may be even higher.

“If the exchange rate tightens and it goes back up from 90c, then you’re going to see haemorrhaging just continue and projects getting wound up, like US coal giant Peabody Energy’s Wilkie Creek in southwest Queensland,” Milbourne said.

“It had a take-or-pay port contract and they still wound up the mine. So there is going to be a challenge if we’ve got export prices not benefitting from a favourable exchange rate.

“All those factors are going to tie into how any of these players are going to get capital.”