Seriti Resources, which has been scooping mining assets over the last two years, could become the biggest coal supplier to power utility Eskom as the black-owned miner tries to hammer out a deal to buy the domestic coal assets of global diversified mining company South32.
On Thursday, South32 said Seriti was the exclusive bidder for its local coal assets, giving the company the space to strike a deal without interference from other parties. Seriti was incorporated in 2017 and acquired Anglo American’s Eskom-tied coal mines which supply about 24-million tons or 20% of Eskom’s coal.
The company is led by Mike Teke, who has held a number of noteworthy positions in the industry, such as CEO of Optimum Coal, chair of Richards Bay Coal Terminal and vice-president of the Chamber of Mines. If Teke clinches the deal, South32 said it would supply 39-million tons or 32.5% of Eskom’s coal purchases of about 120-million tons a year.
Kusile coal supplier
Once developed, Seriti’s New Largo project will supply Kusile with 12-million tons of coal.
In terms of cost-plus mines, Seriti and South32’s unit, SA Energy Coal, together account for all but one. Cost-plus mines are operations in which Eskom invested to ensure it has a steady supply and quality of coal at a price that reflects the cost of production plus a reasonable profit margin.
South32 CEO Graham Kerr said a deal with Seriti would be subject to a number of regulatory and other approvals, including from the department of mineral resources for the transfer of mining rights. "They will include Eskom’s involvement and consent, and naturally you would expect it to go through the Competition Commission in SA."
The deal was the best on the table for stakeholders and cost-saving overlaps between the two businesses would unlock resources, he said. "As a consequence I think it is actually in a unique position to help Eskom with some of the challenges around reliable, cost-effective coal for their power situation."
If the deal goes through, Seriti would top Exxaro as the biggest coal supplier to Eskom.
Exxaro sold 32-million tons to the utility in 2018.
Spokesperson for Seriti Alan Fine said the deal would not reduce competition. "These are largely complementary assets mined on an individual basis, dedicated to particular power stations and operated on a cost-plus basis. We don’t believe a combination of the assets lessens competition," said Fine.
Seriti’s offer price has not been disclosed. However, the deal will require the company to make a "modest" upfront payment, with a deferred payment mechanism that allows South32 to benefit from higher export coal prices for a period.
Speaking to analysts on Thursday, Kerr said the rationale for disposing of the SA coal assets had remained unchanged since the process began in late 2017. For one, the attractiveness of thermal coal as a commodity in the long term is "questionable". Although the SA operations did have growth options, these were in the domestic market where black-owned firms, and not multinational corporations, were preferred suppliers.
"If we can have a truly transformed owner and we can transfer all assets and liabilities, I’d be happy to take a dollar."
In fact, before its disposal of SA Energy Coal, South32 had invested in the business to ensure its sustainability. The company has now had to write off that investment and on Thursday reported an impairment charge of $578m after tax.
Eskom said its consent in ceding the agreements from South32 to the successful bidder was one of the conditions precedent to a deal.
“Eskom will undertake its own due-diligence process on the successful bidder and that has been shared with South32 when they informed Eskom of the intent to divest.”
Eskom estimated that, should Seriti successfully acquire South32’s coal assets, their supply share would increase to about 29% and so would be “among the largest” coal suppliers to the utility.
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