ESKOM WOES CHAS­ING AWAY COAL SUP­PLI­ERS

Un­cer­tainty at Eskom means many coal com­pa­nies find it hard to main­tain a re­la­tion­ship with the power sup­plier. This could re­sult in pro­longed coal deficits.

Finweek English Edition - - In Depth - By David McKay Ed­i­to­rial@fin­week.co.za

the man­age­ment cri­sis at Eskom, whilst deeply trou­bling if not en­ter­tain­ing, raises the ques­tion as to who’s around to make the ex­ec­u­tive de­ci­sions, es­pe­cially im­por­tant ones that are re­lated to pri­mary en­ergy pro­cure­ment.

The feed­back from the SA coal in­dus­try is es­sen­tially to put a brave face on the mat­ter. There’s no mis­tak­ing the dif­fi­cul­ties, how­ever.

“When we started talk­ing to Eskom, the CEO changed twice,” said Nor­man Mbaz­ima, deputy chair­man of An­glo Amer­i­can South Africa, a com­pany in the throes of sell­ing some 25m tonnes/an­num (mtpa) of do­mes­tic coal to a new black-owned con­sor­tium, Ser­iti Re­sources, a com­pany in which for­mer Cham­ber of Mines chair­man Mike Teke is in­volved.

“Then the chair­man also changed,” said Mbaz­ima, re­fer­ring to the al­most dizzy­ing turnover in per­son­nel at Eskom’s top ta­ble. Brian Molefe made way for in­terim CEO Mat­shela Koko who, in turn, made way for the cur­rent act­ing boss, Johnny Dladla, fol­low­ing a se­ries of al­le­ga­tions re­lat­ing to cor­rup­tion and mal­ad­min­is­tra­tion. There was also the change in chair­man from Ben Ngubane to Zethembe Khoza. (Also see page 8.)

“But there hasn't been proper en­gage­ment tak­ing place even be­fore the CFO was ap­pointed [Anoj Singh],” said Mbaz­ima. This was the fact of the mat­ter at the time of fin­week’s in­ter­view with Mbaz­ima. It’s an in­dex of just how un­sta­ble Eskom has be­come that Singh was put on leave amid pres­sure from lenders, in­clud­ing the Devel­op­ment Bank of South­ern Africa, which threat­ened to with­draw a R15bn loan to the power util­ity.

Mbaz­ima in­sists the sale of An­glo’s do­mes­tic coal mines to Ser­iti is press­ing ahead, but it does in­volve the trans­fer of a coal sales agree­ment (CSA) with Eskom. An­glo has al­ways made it clear that Eskom is no by­stander in this ar­range­ment so it re­mains to be seen how long the process is go­ing to take.

As de­scribed in an ar­ti­cle pub­lished in the 29 June is­sue of fin­week, some coal min­ing ex­ec­u­tives de­cline to sell coal to Eskom at all, given the un­cer­tainty and rolling cri­sis at the or­gan­i­sa­tion. “There’s no-one who isn’t cap­tured at Eskom,” was the view of Vus­lat Bayo­glu, CEO of un­listed miner Canyon Coal, which pro­duces 3.5mt of coal an­nu­ally and has am­bi­tions to take this to 10mtpa.

Grow­ing at­ti­tudes of this ilk will even­tu­ally pose a risk over the se­cu­rity of Eskom’s pri­mary en­ergy sup­ply – some­thing of which Molefe was fairly san­guine. He didn’t be­lieve Eskom would suf­fer much of a coal sup­ply deficit. It’s not a view shared by Exxaro Re­sources CEO Mx­olisi Mgojo, whose com­pany has taken a con­certed ef­fort to re­duce its ex­po­sure to Eskom-re­lated busi­ness.

“This deficit [in coal sup­ply to Eskom] is go­ing to con­tinue to in­crease if the en­vi­ron­ment is not con­ducive for any fur­ther in­vest­ment by big play­ers who are cur­rently sup­ply­ing Eskom,” Mgojo said in an in­ter­view with fin­week. “They may de­cide that they just can’t put their money there.

“That deficit will con­tinue to in­crease, which means that there’s go­ing to be a con­tin­ued short­age of coal. Then, of course, some of these re­sources are be­ing de­pleted, and so over time we will have this chal­lenge.”

Mgojo has per­sonal ex­pe­ri­ence of this “chal­lenge”, hav­ing failed to per­suade Eskom to rein­vest funds in Exxaro’s cost-plus Arnot mine which sup­plied Eskom’s Arnot power sta­tion. The mine was even­tu­ally closed and ar­bi­tra­tion over clo­sure li­a­bil­i­ties is cur­rently un­der­way.

There’s also the risk of an­other Exxaro mine – Matla – fac­ing a dimu­ni­tion of re­sources. Eskom had pleged to fund a R1.8bn ex­pan­sion of Matla or buy-in the coal short­fall as Matla’s re­serves and mine flex­i­bil­ity start to de­crease. As yet, the funds are wait­ing on ex­ec­u­tive ap­proval. How­ever, if Eskom con­tin­ues to dither, Exxaro may have no other choice but to sell the coal sales agree­ment, and the mine, to a third party.

The chief op­er­at­ing of­fi­cer of South32’s South­ern Africa

“That deficit will con­tinue to in­crease if the en­vi­ron­ment is not con­ducive for any fur­ther in­vest­ment by big play­ers.”

busi­ness, Mike Fraser, ac­knowl­edges Eskom has been in a state of near per­ma­nent logjam for months, if not years. He thinks, how­ever, that South32, the Perth- and Jo­han­nes­burg-listed di­ver­si­fied group, has a work­around for its prob­lems.

It’s good that it does: South32 is con­tem­plat­ing an ex­ten­sion to its Khutala col­liery in Mpumalanga prov­ince, an op­er­a­tion that cur­rently sup­plies 10.2mt of coal to Eskom’s Ken­dal power sta­tion. How­ever, pro­duc­tion is set to fall to 8.6mtpa in South32’s 2017 and 2018 fi­nan­cial years, hence the project. Eskom is fund­ing the fea­si­bil­ity study for the ex­ten­sion, but there’s been no de­ci­sion as yet to ex­tend the cur­rent re­serves, which presently stand at nine years.

Fraser said Eskom had pro­vided cap­i­tal for an open cut mini-pit op­er­a­tion which would pro­vide ad­di­tional vol­umes, and a dis­cus­sion was un­der­way re­gard­ing a short-term un­der­ground ex­ten­sion whilst South32 stud­ies a larger life ex­ten­sion.

“That life ex­ten­sion project ‘scope of works’ is be­ing de­fined; we’re in fea­si­bil­ity now,” said Fraser. “We be­lieve that in 2018 we’ll be ready for an Eskom in­vest­ment de­ci­sion, which gives us suf­fi­cient time to de­velop that into, say, 2021, when we’ll ac­tu­ally need those ad­di­tional vol­umes be­fore we re­ally start tail­ing off on the cur­rent un­der­ground pro­duc­tion.”

Fraser said it is be­com­ing harder for Eskom to award new CSAs than it is to amend ex­ist­ing ones.

“So our go-for­ward hy­poth­e­sis is that we’ll use our cur­rent CSA and this will be an ad­den­dum be­cause it’s es­sen­tially an in­vest­ment un­der the ex­ist­ing coal sup­ply agree­ment,” he said. Whilst there may be some slight changes in the agree­ment – to ac­count for dif­fer­ing coal qual­i­ties con­tained in the ex­pan­sion project, for in­stance – it’s thought this would be eas­ier for Eskom to do.

Fraser also be­lieves that even whilst it was un­der the guid­ance of Molefe, there was a grow­ing re­al­i­sa­tion – as­sisted by the work of McK­in­sey & Co which was pro­vid­ing con­sult­ing ser­vices – that it was still cheaper putting in Eskom’s own cap­i­tal than in­duc­ing cap­i­tal from lenders be­cause “... then peo­ple have to cre­ate risk on top of it”. That’s why he thinks that in some re­spects, the so-called cost-plus mines that Molefe dis­liked so much – those Eskom paid for in re­turn for ex­clu­sive sup­ply – make sense.

Com­ment­ing on Exxaro’s re­la­tion­ship with Eskom, Mgojo is philo­soph­i­cal. “My view is that Eskom-Exxaro will be around long after the cur­rent lead­ers of ei­ther or­gan­i­sa­tion are there be­cause there’s a 40-year agree­ment that both will need to hon­our.

“It is my hope and my wish that if I’ve not been very good in mak­ing it work as Mx­olisi… that the next guy will do a bet­ter job than me. You just have to do it be­cause 40 years is a long time still to be in a very rocky and bad re­la­tion­ship,” he said. ■

Mike Fraser

Chief op­er­at­ing of­fi­cer of South32’s South­ern Africa busi­ness

Mx­olisi Mgojo

CEO of Exxaro Re­sources

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