New BEE owners of New Largo could find themselves at the coalface of a struggling sector
The sale by Anglo American of its New Largo coal project is a symbolic moment for the industry, one that touches on key aspects of SA’s coal mining and Eskom stories and raises questions about the future of both.
New Largo, in Mpumalanga, is the coal resource that was supposed to supply Eskom’s new Kusile power station and was part of the reason Kusile was located in that spot. By now, a new mine at New Largo should have been almost ready to supply Kusile.
But perhaps it’s fortunate that Kusile is running so far behind, because the project — whose cost is estimated at R20bn — hasn’t even been started yet.
Anglo has sold New Largo, which comprises an old closed colliery and the new project, to a black economic empowerment (BEE) group led by Mike Teke’s Seriti Resources for R850m.
The deal follows Anglo’s 2017 R2.3bn sale to Seriti of New Vaal, New Denmark and Kriel, which are “tied collieries” that sit beneath the power stations they were built to supply.
The deal catapulted Seriti to being Eskom’s second-largest coal supplier. Assuming New Largo is developed one of these decades, Teke and his partners stand to become even more dominant players in SA’s coal industry — in line with Teke’s vision to become a blackcontrolled mining champion.
With these deals, Anglo has neatly combined the pursuit of its own “radical restructuring” with delivery on its commitment to transformation.
The London-listed group was getting out of coal anyway, as part of the streamlining it launched on in 2015.
The New Largo sale is a historic moment in what left-wing academics used to call SA’s “minerals energy complex”. The coal industry was built on Eskom, which coinvested with Anglo, Gencor and other big players in the new collieries built to supply power stations.
SA’s export coal industry was developed later, using the profits from the domestic supply contracts to Eskom.
And though exporting is much more lucrative than supplying Eskom — export prices are about double domestic prices, and global coal prices have been roaring lately — export coal still accounts for less than 30% of the volume of coal SA produces.
The fact that Eskom looms so large has long driven transformation in the coal industry, going back to the formation of black-controlled Exxaro in the 1990s by Anglo and BHP Billiton. And in recent years, the industry’s big players have been doing deals to create a new generation of leading black coal players.
But Anglo’s exit has been as much about self-preservation in the face of regulatory uncertainty and pressure from Eskom as about a commitment to BEE.
And New Largo is symbolic because it was a poster child for the regulatory shifting of the goal posts that helped to wreck investment in SA’s mining industry long before the latest controversial Mining Charter.
As Eskom was embarking on building Kusile about a decade ago, Anglo had become increasingly reluctant to embark on the huge investment required to build the new mine because the coal prices Eskom was offering, and therefore the returns on the investment, were so low.
After long and difficult negotiations Anglo and Eskom eventually agreed on something resembling the old “cost plus” arrangements Eskom had with many of the earlier coal mines, where Eskom put in some of the capital to develop the mine.
Anglo brought in a 25% empowerment shareholder, Inyosi, in line with Mining Charter requirements.
All seemed fine — until Malusi Gigaba became public enterprises minister in 2010 and began insisting on 51% black ownership for coal suppliers. That, in essence, is why there is no New Largo mine to supply Kusile, whose first unit is now operating with coal from other miners in the area.
So now that new BEE players are to take control, will the new mine finally be built?
A large new coal mine would be quite a thing in an industry that has seen no new projects in recent years, mainly because of regulatory and legislative uncertainty. A 2017 Chamber of Mines survey found that R122bn of additional capital expenditure would go into SA’s mining industry “in a more certain and conducive environment”.
New Largo is included in that number. But the big question is where the funding will come from. There is speculation that Teke is considering a JSE listing, which could enable the consortium to go to the market for funding. But investors would want certainty, not only about the sector’s regulatory regime but also about Eskom and its new build programme.
It could be a tough call in any event because investors globally are becoming more negative towards coal, as climate change concerns grow and renewable energy becomes attractive.
Add to that the question marks that have been raised about whether a cash-strapped Eskom should be pushing ahead to complete Kusile at all, and the future looks even more uncertain. How the new owners of New Largo deal with that will be worth watching.