Optimum in dire straits, but there could be hope
The Optimum coal mine is enormous and it is in big trouble, thanks to the Guptas. In its 50-year history, it has mushroomed over 37,000ha of Mpumalanga, measuring 32km from one end to the other. It is actually four different mines: one mined out, one that supplies the international market when prices are high and two that Glencore had managed to operate at a loss to supply the Hendrina power station via a 30km conveyer belt.
Some parts are open cast but in others the coal is deep and costly to access. Overall, Optimum is an expensive and complex operation.
It has been under the Guptas’ control for two years since the family notoriously forced Glencore to sell it to them, using the Department of Mineral Resources and Eskom to extort it from the Swiss conglomerate. The Guptas managed to pay for the mine only with highly unusual and probably illegal financial support from Eskom, then led by Brian Molefe. And now Optimum is back in business rescue, with the Guptas on the run from the police, and in urgent need of a plan to keep operating.
The Guptas’ stewardship is rumoured to have been a mess. Enormous open-cast parts of the mine were stripped of the cheapest sections, leaving mining plans in disarray. Cash has been extracted from the business and the former underground contractor kicked out to save costs. Environmental rehabilitation has been abandoned.
The water-processing plants have ceased operating because contractors weren’t paid. One consequence is that the mine has stopped supplying water to the town of Hendrina, leaving it high and dry.
Maintenance has been cut to the minimum. Workers have not been paid and were on strike last week.
Optimum itself, even if run well, probably has a decade of viable life ahead of it. Its holding company also owns Koornfontein, another ageing mine, which supplies the Komati power station. But perhaps the most valuable asset is its allocation of 8-million tonnes per year of export capacity from Richards Bay Coal Terminal.
It is difficult to know how much value the Guptas extracted from Optimum in their brief stewardship. Eskom contracts were quickly signed on far better terms than Glencore ever enjoyed. Through their Tegeta holding company the Guptas had several other Eskom contracts. Among these were to supply the Arnot power station, which is about 10km from Optimum as the crow flies. Glencore had proposed supplying Arnot from Optimum but this was roundly rejected. The Guptas had much more luck, including a R1bn emergency contract in 2016 to supply coal at much higher prices than it got for supplying Hendrina.
What was actually delivered to Hendrina routinely failed quality checks, but Arnot, which requires higher-quality coal, was probably supplied by an export-grade section of Optimum. Arnot had previously been supplied by Exxaro, which lost several Eskom contracts over the past two years, usually in favour of the Guptas.
By redirecting coal to the highest-priced contracts and supplying low-priced contracts with the worst-grade coal, the Guptas probably extracted billions from Eskom.
The urgent question is what to do with Optimum now. Thousands of jobs and security of supply to Hendrina power station depend on it. Eskom is a major role player in a solution. Glencore could not make the mine work profitability because of the below-cost contracts Eskom held and quality-related fines Eskom dished out.
The last owner to operate it profitably was Mike Teke’s Seriti Resources, which sold it at a R1bn profit to Glencore in 2010. Seriti knows the business and may have an appetite to take it back. Another alternative is Pembani, the investment vehicle of MTN chairman Phuthuma Nhleko, which bid against the Guptas to buy it from Glencore but was blocked by Molefe, who had the power to approve a change in control.
Another potential owner could be Exxaro, which already operates several major coal mines and is Eskom’s biggest supplier, though it has its hands full with several recent acquisitions and new projects.
Alternatively, the government’s African Exploration Mining and Finance Corporation could take it on.
With Richards Bay coal prices having recovered to close to $100/tonne, there is value in Optimum’s Richards Bay allocation and its export-grade coal. The rest depends on Eskom. Any new owner will be cautious because of the potential nightmares it may find. Even if Optimum was sold for R1, it will probably need the Industrial Development Corporation or the Public Investment Corporation to inject funding to get the mine back into good working order.