Coal cost isn’t the problem, Eskom

While the government urges coal miners to cut their prices to Eskom, and Eskom chair Jabu Mabuza exhorts them to put the country before their bottom lines, Eskom "should and could" be doing a lot more to save itself, says Minerals Council SA senior executive Tebello Chabana.

"There are issues we've got to resolve relating to the supply of coal to Eskom, but Eskom itself has to urgently consider and implement measures to improve its efficiency," he says.

Cutting its other costs, including a R32bn wage bill, is a "key component" of this.

"Coal only makes up 30% of Eskom's costs. There are other costs. The restructuring of Eskom to improve efficiencies is really the core matter here that needs to be addressed."

The Minerals Council has been providing experts to government task teams set up for this purpose, and Chabana acknowledges there's some frustration that more progress hasn't been made.

"We think things should and could be moving a lot quicker."

He suggests Eskom has itself to blame for the high costs it is paying for coal.

"Cost-plus worked very well for Eskom, as opposed to coal of varying quality being trucked in from various sources." Cost-plus refers to the discarded Eskom model in which power stations were built on top of coal mines that Eskom invested in, developed and bought coal from on a cost-plus basis.

Coal only makes up 30% of Eskom’s costs … The restructuring of Eskom to improve efficiencies is really the core matter here.

"Eskom has gone a long way down the road in changing its procurement model, and that model is not working for it and the system has to be changed," says Chabana.

Reverting to the cost-plus model to bring down Eskom's coal costs is doable "but is certainly going to be a challenge".

Mining companies, which have suffered a crippling 523% increase in electricity tariffs since 2007, are desperate to develop alternative energy sources to reduce their dependence on Eskom. They've long complained that the government is not allowing them to do this to the extent that would make a real difference.

Permissible levels have been increased, but painfully slowly and well short of what the industry needs and the Minerals Council would like to see.

"We'd certainly welcome government ensuring that it happens a lot faster," says Chabana.

"The mining sector will always be dependent on Eskom for its base load, but we would certainly prefer a lot more flexibility in being able to bring on stream other forms of energy. Certainly it would be a plus if government were to allow that to happen."

A bigger and more urgent battle for the industry is getting the department of mineral resources (DMR) to remove the re-empowerment clause from the latest Mining Charter, Mining Charter III.

This obliges companies to renew their empowerment deals every time a mining right is transferred or has to be renewed. The charter gives no recognition to previous empowerment deals.

The Minerals Council won a declaratory order in court last year recognising the continuing consequences of previous empowerment deals, the so-called once empowered, always empowered principle.

But the department has been given the right to appeal, which, as minister Gwede Mantashe made clear at the recent Johannesburg Mining Indaba, it fully intends to do.

The government will not back down, he warned the industry, raising the spectre of a war of attrition in the courts if necessary.

"We're going to stay in court all the time," Mantashe said.

This came as no surprise, says Chabana.

"We know this is an issue that is highly contentious for the minister."

But he says the mining industry won't back down either.

The number of junior miners listed on the stock exchange in Canada, against SA’s 12.

—  1,200

"We're in agreement with 95% of the charter, but the empowerment clause is absolutely key. It's the critical one."

The industry will go to the Supreme Court of Appeal and the Constitutional Court if that's what it takes. "It is that critical."

Meanwhile, ongoing regulatory uncertainty around this and other issues is costing the industry and SA billions in lost investment, he says.

"We asked our members, if we were to resolve the regulatory issues and resort to best practice in terms of performance, how would it change their investment decisions? They were willing to improve their investment in SA by between 80% and 84%."

He says the minister knows the numbers. So why is he vowing to "stay in court all the time"?

"I can understand the political challenge of him accepting once empowered, always empowered", but he needs to put the country's economic growth first, Chabana says.

"One of the best things he can do now is to drop that appeal, so that certainty can prevail. One of our biggest issues would then be resolved."

Nonetheless, in spite of appearances to the contrary, Mantashe "is working with us to try to resolve the challenges we have in the mining sector", says Chabana, who joined the Chamber of Mines as it then was in 2016 after working at Kumba Iron Ore and Anglo American.

The fact that exploration companies are now exempt from the charter is proof of this, he says.

"That was an important win for the industry."

But the department is still hounding them for noncompliance.

"It's not clear whether all DMR officers are understanding the position of the new charter. It's something we're going to work on."

They've had less success persuading Mantashe to exempt junior miners whose obligatory compliance with the charter is cripplingly onerous.

The current turnover threshold of R150m, above which junior companies must comply, is "way too low".

"It's one of the things we really want the minister to work with us on, because we really want to stimulate the junior and emerging mining sector."

Canada has 1,200 junior miners listed on its stock exchange, Australia has 800. SA has about 12.

"It's a sector that is not yet fully understood or catered for. Nobody in the department understands the extent of their challenges."

Mantashe has said he's willing to engage, but given the sector's potential contribution to the economy, that's not good enough.

"Engaging is one thing, now let us resolve the issues," says Chabana.