Uncertainty ‘stymies coal miners’

• CEO says South32 applying a risk premium to SA due to empowerment demands that could hinder growth

SA’s major coal miners are grappling with a number of uncertainties about empowerment obligations that could hinder their growth and heighten operational risks, says South32 CEO Mike Fraser.

Eskom has been demanding 51% black ownership from its coal suppliers for a number of years, but the major coal companies have long-term contracts that are not affected by these demands. Anglo American was unable to find a way around this requirement for its New Largo mine and supply contract that it has now put up for sale with its other Eskom-contracted mines.

Uncertainties remain on the short-term contracts Eskom will agree with the big producers that supply up to 80% of its coal and how its 51% black ownership demand meshes with the Mining Charter’s 26% black ownership hurdle to qualify for a mining right. “There’s a misalignment between Eskom’s policy and the charter requirements. Somehow we’ve got to break through that … we’ve got to say whether that policy will inhibit the development of mines, which will enable affordable and low-cost coal into Eskom to deliver low-cost power to the country,” Fraser said, arguing coal was the cheapest option for electricity.

Due to these uncertainties and others such as a still unsettled regulatory environment, South32 regarded its exposure to SA differently to its exposure to other countries.

South32 was unbundled from BHP Billiton, which hived off assets in SA, Australia, Mozambique and South America.

“We do apply a risk premium to SA, which is common practice. In certain jurisdictions we will apply a risk premium relative to other parts of the world, and that gets applied in modelling of the potential portfolio returns we look at for opportunity sets,” Fraser said.

“We have not made a decision that says that for political reasons it’s off the radar and we won’t make investments.

“So, we will continue to apply our model, with the appropriate risk ratings. As long as the hurdles are met we will continue to be committed to investing,” he said. Regarding the asset suite in SA, its coal portfolio presented the best growth opportunities compared to its aluminium smelters in Richards Bay, its manganese mines near Hotazel in the Northern Cape and its ferroalloy furnaces, of which one out of four was operational.

There could be “incremental growth opportunities” in primary aluminium output, he said, while manganese output was likely to remain at 2.9-million tonnes a year in a greatly volatile pricing market driven by quickly fluctuating supply and demand fundamentals.

“We are quite comfortable there are returns in the coal portfolio to be achieved that would deliver superior returns to our shareholders,” Fraser said. Growth could come from the mines supplying Eskom and from export-focused production, he said.

“I think you’ll see a shift of some of SA’s production into domestic production because it will look relatively attractive for some time if we can get alignment with Eskom, especially as the seaborne-traded coal market will become increasingly competitive because coal’s relative share of energy production will reduce in time.”

THERE IS A MISALIGNMENT BETWEEN ESKOM’S POLICY AND THE CHARTER REQUIREMENTS