Coal producers turn away from Eskom
THE PROBLEM IS THAT NEW BLACK ECONOMIC EMPOWERMENT LAWS, WHICH DEMAND 50% PLUS ONE SHARE EMPOWERMENT FOR NEW PROJECTS AND SUPPLIES OF COAL, JUST MAKE EXPANSION UNWORKABLE FOR MINING FIRMS.
Supplying coal to Eskom ought to be good business, but that doesn’t seem to be the view of some of the country’s largest coal producers with BHP Billiton and Anglo American quitting the sector.
A t hird coal producer, Exxaro Resources, has made it plain that it doesn’t want any more exposure to Eskom, adding that Eskom will have to do all the running if the parastatal wants to secure the future of the Arnot colliery.
The way coal supply to Eskom works is largely dominated by the so-called ‘cost plus’ mines, which were financed by Eskom and operated by the mining firms on the basis of a fixed margin.
Anglo American announced i n February that it wanted to exit all its cost plus Eskom mines, including a yetunbuilt project – New Largo – while BHP Billiton has already announced plans to demerge its South African coal assets into South32, a company that will be listed in Perth, London and Johannesburg. Asked if Exxaro might be an interested bidder for t he coal mines Anglo American wants to sell, Mxolisi Mgojo, head of Exxaro’s coal business, said nothing could be further from the truth.
“The question is, strategically, would I want to put all my eggs in one basket?” said Mgojo. “Historically, we said that when we want to invest in coal, it is for exports, or to grow the Waterberg [business], and to increase our international footprint or build our existing products,” he said. “None of those four points talks to increasing exposure to Eskom.”
There also appeared to be some reticence to breathe new life into Arnot, a cost plus mine that supplies Eskom and which is heading towards the end of its mine life. Said Mgojo: “Eskom has got to make land and capital available to develop Arnot out further as a cost plus mine.
“They will have to make a decision on the cost of mining and whether it’s worth continuing (with a 4mtpy [million tons per year] contract). They may pump other mines harder instead. Arnot technically has a life to 2023. They will have to make calls on developing it.”
The problem is that new black economic empowerment laws , which demand 50% plus one share empowerment for new projects and supplies of coal, just make expansion unworkable for mining companies. For Anglo American, it makes a solid annuity business ex-growth in a heartbeat.
Unless, of course, you’re Glencore. One of the reasons Glencore is negotiating hard on a take-or-pay agreement (see box) with Transnet is because it stops Glencore diverting unprofitable export coal to Eskom. “We don’t want to be in a situation as in Australia in which we sign ‘take-or-pays’ and then find we have a better outlet in the local market, but we can’t access it as we have to pay $15/t [in penalties],” said Ivan Glasenberg, CEO of Glencore.