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ANALYSIS: State Capture Inquiry - How to hijack a mine

Feb 27 2019 21:30
Ferial Haffajee, Fin24

Former Glencore SA CEO Clinton Ephron on Wednesday revealed on the record for the first time how the Optimum Mine and its related holdings were effectively hijacked by a powerful consortium.

In seven hours of testimony before the commission of inquiry into state capture, Ephron told the story of how the global commodities giant was, in effect, forced to sell Optimum to the Gupta family with the connivance of Eskom executives and the assistance of the former Mineral Resources minister Mosebenzi Zwane. 

While some of the information has been in the public domain, this is the first time that Glencore, a notoriously secretive company, has come out publicly to shed light on how the Gupta family came to own and then later abandon Optimum. 

Senior Glencore executives with a phalanx of lawyers attended Wednesday’s hearing. Optimum is now in a sorry state; it is in business rescue and miners have not been paid for so long that hunger afflicts their families and furniture repossessions stalk their homes, as Carte Blanche reported a fortnight ago. 

The mine is not producing for the Hendrina power station and it is at least one reason for the blackouts experienced earlier this month.

Molefe puts the screws on Glencore 

Optimum is what is called a “tied mine” – its production is tied to the Hendrina power station and it has for decades operated on a cost-plus coal pricing model. 

This is typical of South Africa’s economy where the energy system is closely tied to the mining industry and through which companies like Glencore had long-term supply contracts.

“Cost-plus was normal for Eskom at the time because of the reliance Eskom places on the mine. (The) cost-plus model keeps everyone honest. You build the power station because the mine is there,” Ephron told the Zondo commission of inquiry.

Eskom CEO Brian Molefe wanted to shift these old supply lines to benefit a new generation of black coal-miners, but, when it came to Optimum, he appeared to be serving a different interest as the commission of inquiry chaired by deputy chief justice Raymond Zondo heard on Wednesday.   

Optimum got into trouble with the cost-price model as coal prices dipped and the mine began to run at a loss. It fell into what the industry calls “hardship” which triggers a renegotiation. 

Optimum sought to renegotiate the contract with Eskom and a new addendum to the old contract had been approved by Eskom’s executive committee. Eskom’s primary energy executive Johan Bester told Ephron that it seemed a go and was a signature away from approval. 

By then, Molefe had been appointed CEO and he put the kibosh on the plan. Molefe refused a series of meeting requests with Glencore. Eventually, two meetings were held, but they were dispensed with quickly: the first in 10 minutes, the second in 45 minutes. 

“Eskom can’t renegotiate this contract,” said Molefe. The commission of inquiry’s evidence leader Vincent Maleka quizzed Ephron about Molefe’s approach. 

“Eskom is a public entity and it exercises public power for a public benefit, not for their private power. Brian Molefe did not give you reasons. Was it not surprising?”

Ephron responded, “Of course it was surprising. We told him so. It was a stonewall negotiation.” From then on, Molefe, with his then head of generation, Matshela Koko, turned the screws on Optimum. Stiff penalties, amounting to R2 billion, were imposed on the company related to the size and quality of its coal.

While Glencore and Eskom were still in dispute and in arbitration, Eskom withheld payment on Optimum’s coal supplies of R58 million in July 2015 and then R38 million a month later. 

“Our position was that the calculation (of penalties) was wrong. What we couldn’t deal with was that Eskom would apply a set-off mechanism while we were in arbitration to resolve the matter. We had hit the saturation point,” said Ephron.

By this, he meant that Optimum was no longer viable and the squeeze on it was too hard.  Coal was being sold below cost to Eskom, the mining giant claimed and the penalties had eaten all revenues. While this was going on, KPMG made an unsolicited offer to buy Optimum on behalf of a mystery bidder. The price-tag: R1-billion.

Glencore told KPMG to take a hike as they thought the negotiations with Eskom were more important.

Guptas make a mining play

In fact, the two sets of events facing Optimum and its owner, Glencore, were linked. The mystery bidders were Oakbay, the Gupta family’s company which held their mining assets.  The oldest brother, Ajay Gupta, had years before sketched a revenue flow plan as he planned to build up the simple merchant family into a global player and he had hit on coal as their black gold. He was striking, using his long relationship with Molefe as his weapon. That relationship has been detailed in former Public Protector Thuli Madonsela State of Capture Report. 

Meanwhile, Glencore put Optimum into business rescue to insulate themselves against Eskom’s squeeze. The company tried to meet Molefe “many times” during this period said Ephron, but they were rebuffed. That was until the business rescue practitioners, who don’t mess around, stopped the coal supply to Hendrina.  

On September 3 2015, Ephron was summoned to a meeting with Molefe and Koko. 

“It wasn’t very pleasant,” Ephron recalled. They instructed him to immediately fire up the coal plants and get the power station running, but he pointed out that that decision now lay with the business rescue people. 

“We agreed to turn the conveyor belt back on,” said Ephron.  

Mining minister blasts Optimum 

By this point, Oakbay had made a second and third play for Optimum – their price tag after the third offer was R1-billion. This was way underpriced, said Ephron who rebuffed the Guptas twice more. Optimum coal may have hit the skids at this point, but it was still a jewel in the mining crown. This is because Optimum Holdings owns a 9.5% stake in the Richards Bay Coal Terminal which services the majority of coal exports and is a honey-pot. In mining terms, this is the pay dirt and throughout their negotiations, the Guptas always made sure to insist that the coal terminal stake was included.

With the business rescue guys hard-balling on a sale, the Guptas had an ace up their sleeve.  His name was Mosebenzi Zwane and as the #Guptaleaks emails have shown, the family was an instrument in getting him into former President Jacob Zuma’s cabinet as the Minister of Mineral Resources. 

Zwane wasted no time in getting to work on behalf of his patrons. He used the mines inspectorate to repeatedly get Optimum mine shut using Section 54 of the Mines Act which can be invoked when there is a threat to life on a mine. 

“The entire mine must stop. The entire mine,” said Ephron as he explained how seriously a Section 54 order impacts on production. In effect, the inspectors used regulatory power to squeeze Glencore out of the market. Evidence before the state capture commission on Wednesday showed that the mine’s operations were stopped on grounds which included “(operating) a mini-truck without a licence; safety belt not used by truck-driver; operator’s seat not adjusted; four trucks found without First-Aid kits; a cracked windscreen”.   

“Section 54 is the most extreme form of punishment. Section 54’s are meant to stop an entire mine. It’s a very good tool because the safety of life is paramount, but these were frivolous notices,” said Ephron. 

Faced with the pressure of a quarantined and silent mine, Glencore caved. It started the process to take Optimum out of business rescue by an injection of capital from the company’s Swiss headquarters and decided that it needed to support the sale of Optimum Coal Mine holdings. 

In effect, the mine had been hijacked through a mix of Eskom’s belligerence on pricing and Zwane’s misuse of regulatory power. All of this, the public record has shown, was done to serve the Gupta family’s growing interest in mining.  

A Switzerland meeting

On December 1 2015, Zwane met Glencore CEO Ivan Glasenberg in Zurich, Switzerland at the Dolder Hotel. There were two unexpected guests with him: Ajay Gupta and the family fixer and strategist Salim Essa.  Essa was introduced as Zwane’s advisor although he never formally held such a role. The deal was done. That day, Glasenberg called Ephron, who was still in Johannesburg, and told him to get on a flight to Switzerland to meet another brother, Tony Gupta, to seal the deal in final negotiation. They settled on a price of R2.1 billion. 

“There was substantial risk and we decided to sell,” Ephron told the state capture inquiry on Wednesday. A few days later, Essa called Ephron and told him they were R600m short and that Eskom would make up the balance. He also said that the banks were being approached to finance the shortfall.

The banks refused, but in a series of midnight meetings, the Guptas' friends at Eskom made an unprecedented R600m coal prepayment to the company Tegeta which enabled it to take over Optimum. Today, Optimum is no longer producing coal as it is in search, yet again, of a new owner.    

Epilogue 

Last weekend, reports said the Guptas were hosting a lavish R100m family wedding in Abu Dhabi, the Emirate next door to their Dubai home. Business rescue practitioners reckon that Optimum’s workers are owed just over R90m in back-pay.  

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