Eskom group executive for generation Matshela Koko reports that the utility has taken an in principle decision to migrate from investing in cost-plus coal mines, which are increasingly underperforming, to fixed-price coal contracts.
Speaking exclusively to Engineering News Online, Koko also insisted that the group no longer faced a so-called “coal cliff”, reporting that it had secured 80% of its needs for the next five years, as well as all of its requirements for 2015/16 and 2016/17. This included 11-million tons in the form of short-term contracts.
He acknowledged that the main reason for the reduction in coal-supply risks related to lower-than-forecast electricity demand and, therefore, coal burn.
Eskom’s coal burn fell from well above 120-million tons in previous years to 119-million tons last year and consumption was expected to fall further during the 2015/16 financial year, which ended in March.
The move away from the cost-plus model – which had hitherto helped bolster supply security and stimulated the development of a large coal export industry – had been driven primarily by Eskom’s weakened financial position.
The utility still had major balance-sheet constraints notwithstanding a near quadrupling of tariffs over the past ten years and several support packages from government. In that context, a potential R39-billion recapitalisation bill for its six cost-plus mines was viewed as unsustainable.
OWNING BAKERIES TO BUYING BREAD
Therefore, the utility would move from “owning the bakery” to simply “buying the bread” and would continue to invest capital only at cost-plus mines that had years to run, or were delivering both the volumes and qualities of coal demanded. Some of the contracts would continue until 2029.
The first outward sign of Eskom’s changed coal procurement strategy became apparent towards the end of last year, when Eskom confirmed that it had decided to allow a 40-year contract with Exxaro’s Arnot mine to expire, issuing a request for proposals in August to buy-in coal for the Arnot power station instead.
The contract had been for four-million tons a year, but by the time of its termination, the mine was only supplying around 1.1-million tons, with the three-million-ton balance being sourced elsewhere.
Exxaro’s future plans for the mine were not immediately known, but Koko confirmed that Eskom would be liable for any closure costs if and when such costs were incurred.
A similar cost-plus contract with Anglo American’s Kriel mine was set to expire in 2019 and Eskom would issue an enquiry to the open market for replacement coal before the end of the year. The utility, Koko indicated, was also unhappy with the performance of the New Denmark colliery, also operated by Anglo.
The diversified mining group was, however, in the throws of it own far-reaching restructuring of South African and global operations and a number of the Anglo mines that currently supplied Eskom could well be sold in the coming months.
In December, Anglo CEO Mark Cutifani said any cash-negative asset would not remain in operation and that the market would be updated in early 2016 as to which assets would remain in the group’s portfolio.
“Obviously, it's a tough market in iron-ore, a tough market in coal. We will have to look at every asset and decide whether it can be competitive in the market in which it operates and we'll make the decisions and let people know in February," Cutifani said.
Nevertheless, Eskom was pushing ahead with negotiations on a supply deal for the Kusile power plant with Anglo American Inyosi Coal. The Kusile project was currently under way in Mpumalanga and, despite the corporate uncertainty, both sides were aiming to complete a deal before the end of March.
Koko was sanguine over Kusile’s future supply, indicating that coal stocks were already being built up ahead of the start of the first unit in 2018.
There were also plans to rail coal originally destined for the much-delayed Medupi project for use at Kusile and/or Kendal. Medupi would burn 14-million tons a year once all six units were operational, but Eskom was actively seeking alterative outlets for take-or-pay coal being supplied by Exxaro.
UNDER NEW MANAGEMENT
Eskom was also standing firm with regard to a R150/t fixed-price contract with Optimum, a mine previously owned by Glencore, but which entered business rescue in August 2015, owing to what Glencore described as the onerous nature of the contract.
In December, Tegeta Exploration and Resources, which is linked to the Gupta family’s Oakbay Investments Group, concluded a R2.15-billion transaction to buy all the assets of Optimum Holdings.
Koko said Eskom had insisted on three conditions when approached by the business rescue practitioners: “The price stays the same, the R2-billion in penalties still applies and there will be no discussions about coal supply to Hendrina beyond 2018.”
Questioned on how it was feasible for Tegeta to honour a contract considered onerous by a far larger group, while also absorbing the penalties, Koko said he did not know, but that Tegeta had taken the decision to buy Optimum following a due diligence process.
Koko believes there is still significant opportunity to secure coal for its power stations from the Highveld coalfields and acknowledges that new mine investment would be required.
“But Eskom will contract with those mines on a fixed-price basis and will not be investing capital.”