Doubts about Eskom bailout of mine
Documents reveal red flags about deal to ensure coal supply
● A new Eskom plan to bail out a struggling coal supplier, Australian mining giant South32, could cost up to R40bn.
This is even though an investigation by a law firm retained by the state power utility concluded South 32’s difficulties were due to mismanagement.
South32 is selling all its local coal-mining assets, which are housed under South African Energy Coal (SAEC), to South African mining company Seriti Resources.
Since 2019, SAEC has threatened to put operations at its Wolvekrans Middelburg complex into business rescue unless Eskom agreed to pay more than the contracted price of R269/ton. This would jeopardise 2,500MW of electricity from the Duvha power station, which it supplies. SAEC claimed to be losing money on the contract.
Details of the new plan to save Duvha’s supply are contained in internal documents from Eskom’s primary energy division, whose officials have been negotiating with Seriti for four new coal supply agreements involving Seriti’s other mines in an effort to help it deliver on the Duvha contract. The contracts are for:
● A four-year deal at Duvha for 30Mt at R550/ton;
● A cost-plus management fee of R20.50/ton at Kriel power station;
● A 10-year deal at Kendal power station for 47Mt at R396.50/ton; and
● A five-year deal for either Kusile or Majuba power stations for 9.2Mt at R640/ton. As these contracts are outside normal coal procurement processes, Eskom will need Treasury permission to sign them.
The Sunday Times has seen an Eskom document signed by primary energy senior managers Snehal Nagar and Sagie Chetty which seeks permission from Eskom’s mandate execution control committee to present the proposal to governance committees.
The primary energy division was mandated last October by the Eskom board’s investment & finance committee to conclude the transition of the utility’s supply contract from SAEC to Seriti, subject to due diligence investigations.
These investigations identified red flags, the document said, including:
● The hardship claimed by South32, for which the Treasury recently agreed to a nine-month price hike at a cost to Eskom of R1.8bn, was driven primarily by poor SAEC management decisions;
● Seriti would not have “the ability to step into the shoes of South32 with respect to the suretyships and guarantees provided by South32 under the Duvha coal supply agreement, and is without critical guarantees and surety required to mitigate risks of operating the mine”; and
● Seriti will inherit critical legacy issues at SAEC mines related to contract interpretation nd disputes with Eskom that are at different stages of resolution.
“Seriti will not have the ability to fund the capital expenditure to sustain the SAEC business over the short term. Seriti will require an increase in the coal price in order to break even,” the submission also said.
To mitigate some of the financial issues, the report said, South32 had agreed to a R10bn vendor-support package that will cover a South32 shareholder loan of R4.8bn, R3.1bn in rehabilitation funding and R729m in working capital support.
The balance consists of amounts that were due to South32 as part of the sale agreement but which the company has forfeited.
In a statement on Thursday after it received questions from the Sunday Times, South32 confirmed a support package.
“In order to fund working capital requirements and investment in improvements to SAEC operations, Seriti also intends to enter into a five-year working capital facility of up to $120m with a South African commercial bank, which will be supported by a South32 subsidiary guarantee,” said the statement.
Energy analyst Ted Blom said the developments showed everything possible was being done to buy Seriti a mine it could not afford. “The whole of South Africa will be dependent on the financial sustainability of Seriti,” he said.
Eskom spokesperson Sikonathi Mantshansha said commenting on “very confidential internal documents and processes regarding transactions that have not yet been concluded” would not be in the company’s interests. “The leaking of these confidential internal documents is highly unethical, and unbecoming of any Eskom employee,” he said.
Seriti spokesperson Alan Fine said the company would be able to provide the operational suretyships required by Eskom.
“Our initial sense is that this [the leak] is part of a carefully orchestrated campaign by individuals, acting through other parties, who have a vested commercial interest in damaging the prospects for the South32-Seriti transaction,” he said.