A deal set to create the second-largest coal producer in SA now hinges on the renegotiation of a loss-making Eskom contract.
South32, an Australia-listed miner that was spun out of BHP in 2015, announced on Wednesday it had concluded a sales purchase agreement with Seriti Resources for its SA Energy Coal business for an upfront payment of R100m.
The parties will now start with work to fulfil a number of conditions, one of which is the renegotiation of a loss-making coal supply contract for Eskom’s Duvha power station on more favourable terms.
The bid to have Eskom pay more for South32’s coal comes as the government is engaging with the industry to lower its costs in order to help the debt-laden utility get a handle on its spiralling debt. South32 COO Mike Fraser said the company had been in talks with Eskom about the "hardship provisions" of the 10-million tons a year Duvha contract and would have raised it even without a sale on the cards.
"Whether it was Seriti or South32, this contract is not sustainable for another 15 years at these prices. It’s the cheapest form of coal to Eskom, and it’s probably one of the best quality," he said.
"Whether it’s ourselves or anyone else, no-one can continue to subsidise the extent of the losses to Eskom."
Fraser would not disclose how much the Ifalethu colliery, which supplies Duvha, loses a month, but said it was "a significant amount of money".
Seriti CEO Mike Teke said the company was seeking a solution that would be sustainable for both the business and the country going forward.
Eskom has said it is in talks with South32 but cannot divulge what the solutions may be until discussions are finalised.
The utility said it had engaged with other suppliers regarding the provisions of the respective contracts, but said tailored solutions were supplier specific and could not be divulged.
Eskom did not want to be in a position where it could be accused of doing a "Tegeta type of transaction", Fraser said, referring to the Gupta family’s acquisition of Optimum coal mine, which was assisted by a prepayment from the utility.
"We are very sensitive that we need to help them through their governance process, which has really been beefed up considerably to make sure that we enter into a transaction that is fair and sustainable to all parties."
If the deal does close, it will see Seriti’s coal production double to more than 50-million tons a year, making it SA’s second- largest producer after Exxaro. The R100m upfront payment would be cash-funded from Seriti’s existing business, Teke said. Beyond that, South32 will receive 49% of the free cash flow generated by SA Energy Coal, up to R1.5bn a year, from the date the transaction is concluded until March 2024.
The sale is also subject to a number of other approvalsfrom regulators such as the competition commission and the department of mineral resources and energy.
"We do believe this still has a high probability of success," Fraser said.
"A lot of work must still happen over the next few months, but we are very committed to seeing this transaction happen.
"We are very pleased we’ve got a partner like Seriti that we believe will be a very good steward of these assets going forward," he said.
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