Clash of the titans: Eskom vs Glencore
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.