Eskom took its time to agree to a new, amended coal supply agreement for its Duvha power station. In the end, the amended deal with Seriti Resources, an acquisitive mining house with ambitions to become a black-owned SA mining champion, is sensible, judging by what has been publicly disclosed.
Seriti, which has been scooping up coal mines from international companies under pressure from insurers, lenders and environmental campaigners to show their commitment to combating climate change, emerged as the winning bidder in 2019 after Australia’s South32 put it on the chopping block.
But there was one problem. South32’s Ifalethu mine, built to supply coal to the power station, has been losing money for years, undermining the commercial logic of adding it to Seriti’s portfolio and prompting Seriti boss Mike Teke to insist on a tweaked supply deal before he could take it off South32’s hands.
Eskom was aware even before Seriti emerged as the winning bidder that the mine was facing the real prospect of failure because four months earlier South32 declared hardship, a standard contractual clause that can be triggered when one of the parties suffers undue adversity, as the mine had negative cash flow, or more outgoing than income money, of about $600m over the last three financial years.
Eskom’s own due diligence confirmed the pit was in serious financial trouble, hence it proposed a new 14-year deal to pay enough for the supply for coal from the shaft to remain in business. That proposal was rightly turned down by the Treasury as it would have locked it in a supply agreement without having checked if it could source cheaper coal elsewhere, or wringing certain concessions out from the owners of the mine.
The final agreed supply contract, under which Eskom agreed to pay an extra R4bn for 30-million tonnes of coal from the mine over the next four years, bringing the total to R16.5bn, is not ideal but it is pragmatic. It gives Eskom enough time to look for alternatives suppliers, and prevents job losses in the area.
In addition, it ensures that the power utility does not have to overhaul its offloading systems to receive coal from third parties because Seriti will allow Eskom to use the conveyor belt that links the mine and the power plant when the agreement expires in 2024.
To some, Eskom’s dangerously lopsided capital structure can ill-afford anything, let alone an extra R4bn as it grapples with a mountain of debt that has exposed SA’s fiscal constraints and set it on collision course with unions as it pleads poverty to their pay increase demands. Yet, faced with the alternative of letting the mine be tossed into bankruptcy protection and choke coal supply to the power station that pumps more than 2,000MW to the national grid, enough to power 1.3-million homes, Eskom was left with a few unpleasant choices.
One of them was to let the mine tumble into business rescue just as it did during the state capture years when it refused to alter a similarly onerous deal with Glencore’s Optimum Coal, which emerged briefly from the process after being snapped up by the Guptas only to return months later as former president Jacob Zuma’s friends’ empire began to unravel.
Optimum, built purposefully next to the Hendrina power station, remains in business rescue to date, leaving Eskom to haul coal from elsewhere with masses of trucks at an extra cost. Seriti’s newly acquired mine is to Duvha what Optimum was to Hendrina. It is the obvious supplier with a conveyor belt link to the power station.
The other option was to spend that R4bn to put in use more of its diesel-guzzling hydroelectric and gas turbine power stations, which operate as backup during peak hours or if the system is under duress. But that would have left Eskom with little energy buffer to react quickly to changes in demand when more people put on their heaters in winter or switch on their air conditioners in summer.
It is safe to assume that subjecting the country to more economic growth-sapping load-shedding was never discussed as an option. From where we stand, the amended supply agreement is the best of the worst.
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