Share

Glencore blames Eskom deal for Optimum woes

Cape Town - Financial strain caused by an agreement with Eskom has resulted in a Glencore coal mine entering debt rescue proceedings.

In a statement released on Tuesday, global diversified miner Glencore [JSE:GLN] announced that Optimum Coal Holdings and Optimum Coal Mine (Optimum) have resolved to commence business rescue proceedings and place both Optimum Coal Holdings and Optimum Coal Mine under supervision because of "continued and unsustainable financial hardship".

Despite taking various steps over the past six months to restructure its operations and reduce costs, including downscaling operations and reducing production, Optimum has continued to experience difficulties as a result of the agreement with Eskom, said Glencore.

"Optimum is contracted to supply 5.5 million tons per annum to Eskom following an agreement signed in 1993. This agreement has resulted in Optimum supplying coal to Eskom at a cost significantly less than the cost of production for a number of years," said Glencore.

Funding by shareholders - who have advanced about R900m to Optimum in addition to R2.5bn of bank funding - has enabled Optimum to sustain operations while talks with Eskom continued.

Glencore said over the years, Optimum has engaged in extensive discussions with Eskom to renegotiate the agreement to a level which is sustainable for both parties. However, Eskom informed Optimum in June 2015 that it is not amenable to renegotiation, and terminated the framework agreement.

The framework provided the platform on which the renegotiation discussions were being conducted and an interim supply of coal to Eskom was being made.

"Whilst fully aware of the unsustainable nature of the agreement and Optimum’s precarious financial situation, Eskom served a notice on Optimum in July 2015 in which it asserts its rights to claim significant historical penalties from Optimum and to impose future penalties," said Glencore.

"Eskom is enforcing specifications in the supply agreement which Optimum is unable to meet on a sustainable basis and which were the subject of the recent renegotiation discussions."

Coal for R1 per tonne

The penalties Eskom seeks would result in Optimum supplying coal for an effective price of R1 per tonne, said Glencore.

While Optimum is disputing Eskom's claims, it cannot operate the mine and supply Eskom. Glencore said it has  therefore resolved to commence business rescue proceedings "which allow for independent parties to assess Optimum’s financial position and contractual obligations, and determine how best to rescue Optimum".

Glencore said it believed there is a reasonable prospect of this if the Eskom supply agreement can be renegotiated.

Asked for comment, Eskom said it has become aware of the situation via the media and "is awaiting formal notification as per the prescripts of the law".

Said Eskom: "Optimum has not yet officially notified Eskom of this point; Eskom has an existing coal supply and offtake agreement with Optimum and we expect the terms to be honoured."

This comes as Mines Minister Ngoako Ramatlhodi has ordered Glencore to suspend all operations at the Optimum coal mine because of the way it planned to carry out job cuts, according to a report by Reuters.

Ramatlhodi said on Tuesday that the 10 million tonne-a-year mine should be shut because Glencore did not follow legal procedure in the process of cutting jobs, said Reuters.

Meanwhile, the Department of Mineral Resources announced on Tuesday that Ramatlhodi has called an urgent meeting of leaders in the mining industry (organised business as well as organised labour) to address the issue of job losses on Wednesday.

This follows recent announcements by several mining companies of their intention to retrench workers, said the department.

Glencore shares closed 1.28% lower on Tuesday at R39.49.


We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.98
-0.4%
Rand - Pound
23.97
-0.3%
Rand - Euro
20.51
-0.2%
Rand - Aus dollar
12.37
-0.1%
Rand - Yen
0.13
-0.5%
Platinum
904.37
+0.8%
Palladium
1,014.65
+1.3%
Gold
2,211.77
+0.8%
Silver
24.71
+0.3%
Brent Crude
86.09
-0.2%
Top 40
68,332
+1.0%
All Share
74,512
+0.8%
Resource 10
57,108
+2.6%
Industrial 25
104,079
+0.8%
Financial 15
16,481
-0.3%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders