Eskom refutes allegations of “blindsiding” Exxaro in the Arnot coal contract

Sunday, 12 June 2016: Despite a sensationalist headline titled “How Eskom bailed out the Guptas”, the City Press newspaper offers no evidence to support its wild allegations.

In a desperate effort to substantiate its claims, the newspaper alleges that Eskom had “blindsided” Exxaro Resources by informing them that their contract to supply coal to Arnot power station would not be renewed. The newspaper further states that Eskom’s decision to delay the awarding of the long-term contract until it has satisfied itself that all bidders met all the conditions stipulated in the tender was evidence that “Eskom is helping to bail out Tegeta’s new mine.”

Eskom would like to emphasise that all its contracting relationships are concluded on sound commercial principles and considerations.In addition, all the Tegeta coal contracts with Eskom have been extensively audited by various agencies, including National Treasury.

As far as the Arnot coal supply contract is concerned, the City Press has deliberately downplayed the fact that Exxaro had a 40-year contract with Eskom for the supply coal to the Arnot power station. The contract was not cancelled as has been insinuated, it actually expired at the end of December last year. In August last year Eskom issued a request for proposals (RFP), and bids from all interested parties were received before the closing date of October 2015. The cost of coal at expiry was R1 132/ton. The tonnages supplied under the contract were below contractual volumes necessitating Eskom to supplement the supply with other contracts to mitigate security of supply which was a continuous challenge. 

Exxaro has previously been quoted in media reports as saying that it has not submitted its bid, and so did Tegeta. Any suggestions that Eskom had “blindsided” Exxaro are baseless, malicious and misleading.

The reported coal diversions to Arnot power station from the Optimum coal mine actually refer to the export grade coal that is not suitable for Hendrina power station. Optimum Coal Mine produces coal for both domestic and export markets. Because of the low commodity demand, Tegeta is selling some of that coal to Arnot. There’s nothing untoward about it.

The Optimum-Hendrina product is a blend of Run of Mine and a washed product and the base price for this product is R150/ton (base price is the coal price at inception of the period).

The second product, Optimum-Arnot, is an export product, higher quality and a washed product). The base price for this product is R470/ton.

Whilst the evaluation of the long-term contract are still underway, and expected to be completed in September this year, Eskom has in the interim contracted seven suppliers to deliver coal to Arnot until September. Although the media has generally focused on one supplier, namely Tegeta, Eskom has named the other six suppliers as well, and they are: South32 (BECSA), Exxaro, Glencore, Keaton Mining (Pty) Ltd, Hlagisa Mining, and Umsimbithi Mining. 

In April, four of the seven suppliers, namely Exxaro, Hlagisa, Umsimbithi and Tegeta remained supplying Arnot while the balance of the suppliers indicated were redirected to supply their original designated power stations. 

This information was provided to the City Press, with details of how much coal each of these companies had supplied to the Arnot power station for the month of April. City Press chose not to use this information because it would stand in the way of their scoop. It is for this reason that we’re considering taking the matter to the Press Ombudsman for adjudication.

Eskom is not diverting coal from Hendrina to Arnot. The annual contract is 5.5mt which is then phased over the twelve months from January to December. Coal deliveries early in the year were reduced by Eskom due to a lower burn requirement at Hendrina power station, and the need to reclaim coal from the live stockpiles. The average monthly supply is thus 458kt. The plan for June is 425kt which is 33kt lower than the contract volume and relate to the planned burn requirement at Hendrina of 425kt.

Hendrina coal stockpiles are currently 40 days, which is already higher that the target of 35 days. The commitment from Optimum, going forward is to meet the Hendrina burn requirements.

ENDS

EDITORS’ NOTES ON COAL PREPAYMENTS

1. Prepayment is a common commercial practice that is used widely and not unique to Eskom contracts. It is used in in large projects, coal mining contracts and emergency supply contracts. The first Eskom coal emergency arose is 2008 after load shedding due to constrained coal supply conditions. 

2. During the 2008 emergency, Eskom Board approved advance payments to the value of R400M to enable suppliers to undertake projects needed to supply coal. To this end, Eskom concluded a coal processing contract with Isambane (Pty) Ltd with prepayment terms. Three loans were granted to Isambane. Isambane was then required over a period of time to conduct beneficiation and stockpiling services. The agreement was that Isambane would perform these services and eventually pay off the prepayment. 

3. Furthermore, a prepayment in the form of a loan was provided to Liketh in 2008 to buy equipment to process coal from Kleinkopje Pit 5 West. The loan was recovered in 12 consecutive instalments from 1 March 2008.

4. Eskom has also entered into loan agreements to assist Rand Mines for capital expenditure. The first loan was payable over a period of 20 years until 31 December 2013. The second loan was in 1998, and it will be paid in full by December 2017. Eskom also assisted another Rand Mines operation with a loan for bridging finance. This loan is paid up.

5. In cost-plus mine contracts, Eskom pre-paid the mines to start up the mining operations. It subsequently pays for the operating costs and a management fee. In return Eskom receives security of supply at the right qualities and volumes. The cost plus mines future investment/prepayment capital requirement is R38bn. The beneficiaries of the R38bn are Anglo, Exxaro and South 32 (formerly BHP Billiton). This up-front payment is in line with the agreed 40 year long term contracts.

6. In October 2015, Exxaro requested full funding of its Matla cost-plus operation capital requirement. The estimated cost requested by Exxaro is R1.8bn for the establishment of a new mining shaft.

COAL QUALITIES AN INDUSTRY-WIDE ISSUE

7. Eskom continues to measure and monitor the coal qualities from all its suppliers. Tegeta coal qualities are monitored in accordance with Eskom’s Coal Quality Management Procedure. This includes Tegeta Brakfontein Colliery and Optimum Coal Mine. The Brakfontein colliery is dedicated to Majuba and it meets Eskom’s coal quality requirements. This coal, like any other, is periodically diverted on a short term basis to alternative Power Stations to meet minimum coal stock requirements. 

8. The Optimum Coal Mine provides two coal qualities to Eskom. The Optimum – Hendrina supply is a blended product of run-of-mine and washed product. This is supplied under the existing Optimum-Hendrina contract that expires in 2018. 

9. The second product from Optimum from their export mining compound. It is a higher quality coal and this is supplied to Arnot under the current short term agreement. 

10. It should be noted that Eskom has a claim against Optimum for R2bn relating to out of specification coal delivered. Eskom has vigorously pursued this claim with the previous owners of Optimum, registered its rights with the business rescue practitioners and also indicated its intention with the new owners of Optimum being Tegeta that Eskom will be pursuing this claim.

ESKOM’S RESPONSE TO COAL SUPPLY CHALLENGES

11. In general, Eskom has experienced numerous coal quality challenges with various suppliers, including long-term tied collieries. To mitigate this exposure, Eskom has, over time, improved on coal quality monitoring, assurance, and lately risk transfer. A number of changes are being considered and will be implemented for all new contracts and renegotiated for all contracts. These changes are as follows:

- transfer of coal quality certification and payment point to receiving point, power stations versus current quality pre-certification at the supply point by an Eskom-appointed and -managed laboratory contractor;

- withholding of payment or coal price adjustment in the event that coal quality at the delivery point is inferior to contractual qualities; and

- up-front payment of a quality deposit by suppliers to Eskom.

12. Eskom continues to engage the industry on coal quality, as well as coal pricing, in order to ensure receipt of an optimal coal product at the right price. To this end, current coal contracting discussions are aligning coal pricing and escalations in line with Nersa coal cost determinants. Commercial decisions that consider security of supply, risks associated with coal costs, and optimal cost of coal continue to be balanced, ensuring that the optimal decisions are in the interests of Eskom and the South African consumer. 

Statement issued by Eskom, 12 June 2016