Cost-plus pricing was best coal supply model for Eskom, albeit ‘not normal’

FORMER chief executive of Glencore, Clinton Ephron, yesterday said that the cost-plus pricing model for contracts that Eskom entered into with coal mines was the best model even though they were “not a normal transaction”.

Ephron was giving a background into long-term contracts that Optimum Coal Mine had entered into with Eskom to supply it with a minimum of 3 million tons and maximum of 6.5 million tons per annum of coal at Hendrina power station on a cost-plus basis.

This was before Optimum was acquired by Glencore after which the pricing changed into “fixed price” model, which makes the mining company bear all costs and losses, and takes into account an inflationary adjustment. Optimum Coal Mine was owned by Trans-Natal Collieries when this 25-year-long contract was entered into in 1993. Ephron said that the advantage of cost-plus operation was the best for Eskom, because if they controlled the production they would always be paying a fair price for coal and not be reliant on market prices, and it ensured the sustainability of the mine.

“In the simplest of terms, in cost-plus Eskom will be responsible for all the costs regardless of what they are, plus an agreed upon margin for the mining house. A fixed price, the mine is wholly responsible for all the costs and would sell to Eskom at a price regardless of its costs and margin,” Ephron said.

Probed by the inquiry’s chairperson Deputy Chief Justice Raymond Zondo on whether this was a normal standard business arrangement where the client was responsible for the supplier’s costs, Ephron said the cost-plus model was not an anomaly.

“If we are talking about a costplus, it was a normal arrangement for Eskom at a time and it made sense, I believe at the time, because of the reliance that Eskom places on the mine and the coal is right next door,” Ephron said.

“It’s not a normal transaction, but if managed correctly I believe it makes sense, because you are building a power station right there on the resource. The costplus is not an anomaly, rather look at it as a partnership. Eskom is paying a lot more these days than if they had stuck with the cost-plus mines.”

Ephron is expected to reveal details of how rogue Eskom executives assisted the Gupta family’s hostile takeover of Optimum from Glencore in a deal believed to have been orchestrated by former mineral resources minister Mosebenzi Zwane.

In 2016, the Gupta family’s Tegeta Resources bought Optimum Coal Mine from Glencore for R2.15 billion.