Seriti Resources, the mining group run by Mike Teke, will take over South32’s SA coal assets in June now that Eskom has agreed to pay 33%, or R4bn, extra for coal supplied to its Duvha power station in Mpumalanga.
The sales agreement between the two miners was signed in November 2019 and the renegotiation of the coal supply agreement between South32’s SA Energy Coal (SAEC) and Duvha was the final remaining condition for the deal to close. At the revised price Eskom, which is technically bankrupt, will pay R4bn more for the 30-million tonnes of coal it will receive from Seriti over the coming four years.
At the new price of R550 a tonne, the utility will pay R16.5bn for the coal. At the earlier price — reported as R416 a tonne — the utility would have paid R12.5bn for the same supply. The previous agreement was, however, loss-making for South32, which in mid-2019 declared hardship, warning that the operations would be put into business rescue if it could not fetch a higher price for Eskom coal.
A renegotiated contract, with a proposed price hike extending to 2034, was rejected by the Treasury. The new agreement, which extends to 2024, was approved on May 1.
“The price of R550 a tonne was arrived at pursuant to a very in-depth, extensive and independent due diligence exercise that was performed by a suite of Eskom consultants,” Seriti CFO Doug Gain said on Monday.
“And we’re of the view that renders the Ifalethu coal mine [which supplies Duvha] to be at a breakeven level and to ensure the sustainability of supply into Duvha until December 31 2024.”
As part of a “basket of concessions” Seriti has agreed to give Eskom use of its infrastructure to bring in coal from third parties when the supply agreement expires.
“The revised arrangement provides Eskom with absolute maximum flexibility,” said Gain.
Beyond 2024 Eskom has full flexibility to buy from the market as it chooses. But it has also secured a one-way first right of refusal on the production from SAEC to 2034. In addition, it has secured an entitlement to use the mine’s infrastructure, which includes a conveyor belt, as a way to bring in third-party coal, should it so wish.
“Eskom is in a very good position for Duvha come the end of December 2024,” said Gain.
Xavier Prévost, senior coal analyst at XMP Consulting, said the revised price was fair “considering the current inland prices and that South32 coal for Duvha is not only greatly needed but also coming from a reliable supply source and is very consistent in quality”.
Eskom said the modified agreement gives it enough time to seek alternative coal supplies, if required, and to resolve the coal delivery infrastructure constraints at the power station.
“It will also prevent huge job losses at the mine, while securing coal supply for Eskom at an affordable price,” the utility said.
The sales deal with South32 originally required Seriti to make an upfront payment of R100m, with deferred payments based on the mines’ future cash flows of a maximum R1.5bn a year.
In April, in an effort to smooth the sale, South32 adjusted the upfront payment to a nominal amount and agreed to forgo the deferred consideration.
South32 will provide Seriti with a facility of up to $50m to fund the restructuring of loss-making mining areas and will provide $200m over 10 years to fund environmental rehabilitation and closure liabilities.
On acquiring the assets, Seriti, which already supplies Eskom from three operations acquired from Anglo American, will become the largest supplier of coal to the utility, delivering 35-million tonnes a year. This trumps Exxaro Resources which supplied Eskom with 30.8-million tonnes in 2020.
The SAEC assets include entitlement at the Richards Bay Coal Terminal, giving Seriti access to export markets.
Teke said he was excited to close the deal. “We look forward to hit the ground running on June 1 and make sure that we support Eskom into its future and [hopefully for] load-shedding to become history one day.”
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