Eskom woes chasing away coal suppliers | Fin24

Eskom woes chasing away coal suppliers

Aug 25 2017 09:30
David McKay

The management crisis at Eskom, while deeply troubling if not entertaining, raises the question as to who’s around to make the executive decisions, especially important ones that are related to primary energy procurement.
The feedback from the SA coal industry is essentially to put a brave face on the matter. There’s no mistaking the difficulties, however. 

“When we started talking to Eskom, the CEO changed twice,” said Norman Mbazima, deputy chairman of Anglo American South Africa, a company in the throes of selling some 25m tonnes/annum (mtpa) of domestic coal to a new black-owned consortium, Seriti Resources, a company in which former Chamber of Mines chairman Mike Teke is involved.

“Then the chairman also changed,” said Mbazima, referring to the almost dizzying turnover in personnel at Eskom’s top table. 

Brian Molefe made way for interim CEO Matshela Koko who, in turn, made way for the current acting boss, Johnny Dladla, following a series of allegations relating to corruption and maladministration. 

There was also the change in chairman from Ben Ngubane to Zethembe Khoza. 

“But there hasn't been proper engagement taking place even before the CFO was appointed [Anoj Singh],” said Mbazima. 

This was the fact of the matter at the time of finweek’s interview with Mbazima. It’s an index of just how unstable Eskom has become that Singh was put on leave amid pressure from lenders, including the Development Bank of Southern Africa, which threatened to withdraw a R15bn loan to the power utility.

Mbazima insists the sale of Anglo’s domestic coal mines to Seriti is pressing ahead, but it does involve the transfer of a coal sales agreement (CSA) with Eskom. 

Anglo has always made it clear that Eskom is no bystander in this arrangement so it remains to be seen how long the process is going to take.

As described in an article published in the 29 June issue of finweek, some coal mining executives decline to sell coal to Eskom at all, given the uncertainty and rolling crisis at the organisation. 

“There’s no-one who isn’t captured at Eskom,” was the view of Vuslat Bayoglu, CEO of unlisted miner Canyon Coal, which produces 3.5mt of coal annually and has ambitions to take this to 10mtpa.

Growing attitudes of this ilk will eventually pose a risk over the security of Eskom’s primary energy supply – something of which Molefe was fairly sanguine. 

He didn’t believe Eskom would suffer much of a coal supply deficit. It’s not a view shared by Exxaro Resources CEO Mxolisi Mgojo, whose company has taken a concerted effort to reduce its exposure to Eskom-related business.
“This deficit [in coal supply to Eskom] is going to continue to increase if the environment is not conducive for any further investment by big players who are currently supplying Eskom,” Mgojo said in an interview with finweek

"They may decide that they just can’t put their money there.“That deficit will continue to increase, which means that there’s going to be a continued shortage of coal. 

"Then, of course, some of these resources are being depleted, and so over time we will have this challenge.” 

Mgojo has personal experience of this “challenge”, having failed to persuade Eskom to reinvest funds in Exxaro’s cost-plus Arnot mine which supplied Eskom’s Arnot power station. 

The mine was eventually closed and arbitration over closure liabilities is currently underway.

There’s also the risk of another Exxaro mine – Matla – facing a dimunition of resources. Eskom had pleged to fund a R1.8bn expansion of Matla or buy-in the coal shortfall as Matla’s reserves and mine flexibility start to decrease. 

As yet, the funds are waiting on executive approval. However, if Eskom continues to dither, Exxaro may have no other choice but to sell the coal sales agreement, and the mine, to a third party.

The chief operating officer of South32’s Southern Africa business, Mike Fraser, acknowledges Eskom has been in a state of near permanent logjam for months, if not years. 

He thinks, however, that South32, the Perth- and Johannesburg-listed diversified group, has a workaround for its problems. 

It’s good that it does: South32 is contemplating an extension to its Khutala colliery in Mpumalanga, an operation that currently supplies 10.2mt of coal to Eskom’s Kendal power station. 

However, production is set to fall to 8.6mtpa in South32’s 2017 and 2018 financial years, hence the project. 

Eskom is funding the feasibility study for the extension, but there’s been no decision as yet to extend the current reserves, which presently stand at nine years.

Fraser said Eskom had provided capital for an open cut mini-pit operation which would provide additional volumes, and a discussion was underway regarding a short-term underground extension while South32 studies a larger life extension.

“That life extension project ‘scope of works’ is being defined; we’re in feasibility now,” said Fraser. “We believe that in 2018 we’ll be ready for an Eskom investment decision, which gives us sufficient time to develop that into, say, 2021, when we’ll actually need those additional volumes before we really start tailing off on the current underground production.”

Fraser said it is becoming harder for Eskom to award new CSAs than it is to amend existing ones. 

“So our go-forward hypothesis is that we’ll use our current CSA and this will be an addendum because it’s essentially an investment under the existing coal supply agreement,” he said. 

While there may be some slight changes in the agreement – to account for differing coal qualities contained in the expansion project, for instance – it’s thought this would be easier for Eskom to do.
Fraser also believes that even while it was under the guidance of Molefe, there was a growing realisation – assisted by the work of McKinsey & Co which was providing consulting services – that it was still cheaper putting in Eskom’s own capital than inducing capital from lenders because “...then people have to create risk on top of it”. 

That’s why he thinks that in some respects, the so-called cost-plus mines that Molefe disliked so much – those Eskom paid for in return for exclusive supply – make sense.

“It is my hope and my wish that if I’ve not been very good in making it work as Mxolisi… that the next guy will do a better job than me. You just have to do it because 40 years is a long time still to be in a very rocky and bad relationship,” he said.

This article originally appeared in the 24 August edition of finweekBuy and download the magazine here.

anglo american  |  coal mining  |  eskom  |  exxaro  |  coal

4 June issue
Subscribe to finweek