Eskom re­thinks coal sup­ply model, spurns Exxaro

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

It will be eas­ier said than done for Eskom to move its coal sup­pli­ers from cost plus con­tracts to more com­mer­cial terms. That’s t he im­pli­ca­tion of com­ments made re­cently by Exxaro Re­sources.

The firm be­lieves that ne­go­ti­a­tions with Eskom will be rel­a­tively com­plex and time-con­sum­ing and could in­volve hav­ing to com­mis­sion a full bank­able fea­si­bil­ity study for each op­er­a­tion where a fixed-cost ar­range­ment is in place.

Fixed-cost sup­ply of coal was a way of fi­nanc­ing new coal builds at a time when South Africa and Eskom were in a very dif­fer­ent place. Back then, in the 1980s, Eskom was cash-rich and coal sup­plies were shal­lower and cheaper to ac­cess.

The ar­range­ment was for Eskom to pay for the cap­i­tal cost of build­ing the mine, usu­ally near its planned power sta­tions, and lock in a coal price from the min­ing com­pany that was sev­eral per­cent­age points above the cost of pro­duc­tion.

Brian Dames, the for­mer CEO of Eskom, com­plained from time to time that this ar­range­ment was be­ing abused by coal pro­duc­ers. He be­lieved t hat ow­ing to the fact the mar­gin was f i xed, min­ing com­pa­nies ap­pointed their less ca­pa­ble mine man­agers t o s uc h oper­a­tions.

Act­ing CEO, Brian Molefe, how­ever, has taken the mat­ter fur­ther, say­ing that he will move away com­pletely from the cost plus model and buy coal from who­ever can sup­ply it the cheap­est.

Said Molefe in June: “If I were to be there [at Eskom] be­yond the mid­dle of Act­ing CEO of Eskom July, I would say we must have a ten­der for the sup­ply of coal of a cer­tain grade to an Eskom power sta­tion.

“It might not be from the mine next door, but from who­ever can sup­ply coal of a cer­tain grade to Eskom. If the mine next door is 5c more ex­pen­sive, and the mine 200km away can de­liver it 5c cheaper, and it is the right grade, we must buy it from there,” he said.

Mean­while, there’s some con­cern that Exxaro’s coal sup­ply to Medupi, Eskom’s 4 8 0 0 MW L i mpop o prov i nce power st at i on pro­ject, may be fur­ther in­ter­rupted.

This is based on the com­ments of HSBC an­a­lyst, Der­ren Maade, who ob­served in a re­cent note that Eskom has pro­vided some R8bn for penal­ties in terms of take-or-pay agree­ments whereas Exxaro has only booked R3bn. Take-or-pay agree­ments oblige Eskom to pay a penalt y i f it can’t ac­cept Exxaro’s coal; in this case be­cause Exxaro has built its Grootegeluk coal ex­pan­sion on time, but Medupi’s units were not be­ing com­mis­sioned. This meant Exxaro had to de­lay rev­enue even though it had spent cap­i­tal on Grootegeluk, hence the com­pen­sa­tion of the take-or-pay agree­ment.

Mzila Methan­jane, head of strat­egy f or Exxaro, s a i d t here had been ques­tions about the ap­par­ent ano­maly in f ig­ures be­tween his com­pany and Eskom. “We can’t re­ally com­ment on it be­cause we don’t know what pro­vi­sion Eskom is mak­ing.”

Said Maade: “We bel i eve t his r ep­re­sents up­side t o t he c ur r ent con­tract a nd may s i gnal f ur t her ex­pected de­lays to Medupi’s ramp-up.”

Eskom had not com­mented at the time of go­ing to press.

TAKE-OR-PAY AGREE­MENTS

OBLIGE TO PAY A PENALTY IF IT CAN’T AC­CEPT EXXARO’S COAL.

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