k-coal...you ripper!, page-27

I have been involved in a bid from the DPI in the past. Here is my take on events.

These types of government funds typically look very favourably on co-contributions. A key selection criteria is applicant:government ratio in terms of funding. The reason is two-fold:
- governments want private players to have significant skin in the game.
- contributions from industries players indicate faith in the technology. This is particularly important with new technologies as the government does not want to APPEAR to be picking winners (although that is exactly what they do).

The game, then becomes, one of trying to get as many industry partners as possible on your application and, more difficultly, getting them to stump up some hard (non-contingent) cash.

Industry partners only want the upside risk. In this case, K-Coal are contributing equity only if the project is successful. In these circumstances, they are getting a very cheap option on ESI getting a whole heap government money.

However, K-Coal's very involvement would strengthen ESI's application, albeit marginally. Real cash, up-front is more likely to convince the assessment panel of the robustness of industry support and, ultimately, the minister. The fact that K-Coal represents a conduit to an export market is also important, given this is about getting the Latrobe Valley to export its way out of the problems caused by a transition to a new low carbon economy.

Overall, this announcement is a small positive in the sense that it strengthens ESI application. The sell off makes little sense unless one assumes that the market was expecting a much better announcement. If so, the short-term speculators should exit and the share price should recover somewhat in the coming days/weeks.