Clash of the ti­tans: Eskom vs Glen­core

Finweek English Edition - - IN THE NEWS -

It’s ques­tion­able whether Eskom will have any suc­cess ex­tract­ing R2bn in penal­ties from Glen­core, a claim for non-per­for­mance that is as fraught as it is com­plex. The t wo com­pa­nies have been at log­ger­heads on two counts.

Firstly, Glen­core has been tr ying to ne­go­ti­ate a bet­ter sales price for the 5.5m tons a year of coal it sup­plies Eskom’s Hen­d­rina power sta­tion from Op­ti­mum mine, a col­lier y which is held in the 66% Glen­core-con­trolled Op­ti­mum Coal Hold­ings.

Se­condly, and for its part, Eskom has claimed the qual­ity of coal from Op­ti­mum mine has been de­clin­ing for years.

The penalty in ques­tion re­lates to about two years’ worth of coal bought f rom Op­ti­mum mine and burned by Hen­d­rina which Brian Molefe, Eskom CEO, said had dam­aged the power sta­tion. Molefe also wants to is­sue penalty claims to Glen­core for fu­ture coal from Op­ti­mum that may fall be­low con­tract spec­i­fi­ca­tions.

Glen­core’s re­sponse to Eskom’s penalty was to place Op­ti­mum Coal Hold­ings and Op­ti­mum mine into busi­ness r e s c ue pro­ceed­ings – a de­ci­sion that im­per­ils over a thou­sand jobs. That comes at a bad time in SA where min­ing com­pany dis­tress has sent gov­ern­ment reach­ing for the worry beads.

Its part i n t he af­fair, how­ever, was to im­me­di­ately over­re­act, with the depart­ment of min­eral re­sources sus­pend­ing Op­ti­mum’s min­ing right. It then, al­most as quickly, re­traced its de­ci­sion, re­al­is­ing that the only en­tit y to suf­fer f rom such a move was Eskom it­self. The de­bate about Eskom hav­ing suc­cess in its sum­mons, how­ever, comes f rom t he ba­sic misun­der­stand­ing t hat i n sum­mon­s­ing t he con­tract holder, Op­ti­mum Coal Hold­ings, Eskom’s le­gal team must take its place in a queue of cred­i­tors, as­sum­ing that the busi­ness prac­ti­tion­ers de­cide to liq­ui­date the f irm.

Since debt i n Op­ti­mum Coal Hold­ings has been col­lat­er­alised by the mine, it’s quite likely a bank will stand f irst among equals in the cred­i­tors’ queue; cer­tainly not Eskom’s claim.

The other share­hold­ers i n t he com­pany are Pem­bani/Shan­duka with a 10% stake, as well as a fur­ther 22% in black eco­nomic in­ter­ests, in­clud­ing an em­ployee share op­tion pro­gramme.

Will t he busi­ness prac­ti­tion­ers liq­ui­date Op­ti­mum Coal Hold­ings? They may well.

Ac­cord­ing to Clin­ton Ephron, head of Glen­core’s SA coal busi­ness, Glen­core’s hope of dou­bling the price of Op­ti­mum coal (to about R300/t) would still re­sult in the mine mak­ing a loss.

The rea­son times are so hard for Op­ti­mum Coal re­lates to a de­ci­sion i n May t o shut down i t s e x por t coal sec­tion fol­low­ing a slide in the in­ter­na­tion­ally traded price to about $60/t. The fact of the mat­ter is that the en­tire mine needs a far higher ex­port price to stay af loat.

Glen­core had pumped R900m into Op­ti­mum Mine in the last year alone to keep it liq­uid.

It mean­while promised to ex­tend the coal sales agree­ment to Eskom to 2021 from the cur­rent 2018 con­tract ex­piry if it agreed to the dou­bling in

CEO of Eskom t he sa l e price. Eskom de­clined.

In an in­ter­view with Fin­week, Molefe said it may be pos­si­ble to sue Glen­core di­rectly, and not Op­ti­mum Coal Hold­ings, if there was ev­i­dence that the mine’s demise was re­lated to de­ci­sions wholly taken by Glen­core.

The view at Glen­core is that it’s a long shot.

Glen­core may have a point and i l l ust r ate s i t t hrough c or po­rate history. It was Gen­cor that de­cided in the 1980s that in­stead of ex­clu­sively sup­ply­ing Eskom, Op­ti­mum ought to be ex­panded so that it could sell ex­port-qual­ity pro­duc­tion. Why not, Gen­cor rea­soned: Richards Bay Coal Ter­mi­nal was ag­gres­sively ex­pand­ing a nd t he e x por t mar­kets were i n buoy­ant fet­tle.

That de­ci­sion, how­ever, meant Op­ti­mum mine’s r es­ources were ex­hausted quicker than they might have been and re­sulted in the cur­rent fall­ing coal qual­i­ties for which Eskom wants rec­om­pense.

Mean­while, there are per­haps more press­ing wor­ries for Eskom than the penalty.

If Op­ti­mum mine is shut, Eskom will have to source 5.5m tons a year of coal for Hen­d­rina.

Given t hat Op­ti­mum sup­plies the coal by con­veyor into Hen­d­rina, it ’s pos­si­ble t he t rans­port cost of al­ter­na­tive coal sup­plies may make the ex­er­cise just as ex­pen­sive as a R300/t con­tract with Glen­core.

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