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Eskom hints at more deals with unconventional coal suppliers amid strong defence of Gupta deal

Eskom CEO Brian Molefe defends Tegeta coal deal, while slamming banks and media. Camera Work & Editing: Nicholas Boyd. Recorded: 5.6.2016

15th July 2016

By: Terence Creamer

Creamer Media Editor

  

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Eskom CEO Brian Molefe went on the offensive last week against critics of the State-owned utility’s recent coal contract with the Gupta-family-linked Tegata Exploration & Resources, likening the role of the banks and the media in the “hullabaloo” to that of a “kangaroo court”.

Speaking at the release of the electricity producer’s annual results, Molefe offered an elaborate exposition of how and why Eskom extended prepayment terms to Tegeta, which is now supplying Optimum coal to the Arnot power station at R470/t – a price described by some commentators as exorbitant.

Tegeta controversially bought Optimum out of business rescue from Glencore, which conflicted with Eskom over a prevailing R150/t fixed-price contract to supply the Hendrina power station until 2018. Glencore described the contract as onerous and financially unsustainable.

Separately, and following the termination of a 40-year, cost-plus supply agreement with the Exxaro-operated Arnot colliery in December, Eskom entered into short-term supply contracts with coal suppliers Anglo American, South 32, Exxaro, Keaton Energy, Hlagisa Mining, Optimum and Umsimbithi Mining.

“While they were supplying us, the transaction to sell Optimum took place . . . and Tegeta inherited the Glencore contract to supply Arnot,” Molefe said, noting that the seven companies continued to supply until April this year.

In April, six of the suppliers said they were no longer in a position to supply Arnot, with only Umsimbithi indicating it could continue to do so. Tegeta, however, offered to continue to supply Arnot from a portion of the Optimum mine (which supplies Eskom and the export market) not being mined at the time, owing to poor export prices.

“Tegeta said: ‘We will mine it, but we have a problem. We don’t have the capital to restart those operations . . . because our bank accounts have been closed; nobody wants to give us credit and we have just paid Glencore for the Optimum mine. Would you consider advancing to us the money to re-open the export side and we will give you the coal?’ We agreed, because we have no reason not to do business with Tegeta,” Molefe said.

Eskom took the shares of Tegeta as security, he added.

Tegeta had been supplying ever since then, at a price that was “more than half” the R1 132/t Eskom was paying Exxaro at the termination of the Arnot contract.“I do not see anything wrong with that transaction. It has been done before. It is normal business practice,” Molefe argued.

Meanwhile, the utility had been adjudicating a tender for a longer-term supply arrangement at Arnot. It indicated previously that Tegeta did not respond to the tender, which should be awarded in September.

In the absence of reasons for the decision of the South African banks to close the accounts of the Gupta-linked companies, Molefe also felt it would be unfair to discriminate against Tegeta. “It is against the spirit of our law and it is a dangerous thing to do things without reasons. The Constitution says the public must be protected from arbitrary administrative decisions.”

Molefe even went so far as to suggest that the “high priests of this kangaroo court” would be elated if Eskom were to disconnect electricity to Gupta firms, while likening the hostility to his experience of witch-burning in Limpopo. “It is a very dangerous culture and it does not make it right just because it is being done by people with power, such as the banks. It does not make it right that it is being done by the intelligentsia and the media of our country.”

Eskom also indicated that it would continue to overhaul its current coal supply arrangements and that it would not hesitate to cancel other cost-plus contracts, as it did with Arnot.

Group executive for generation Matshela Koko said that, besides the tender for the replacement of Arnot coal, a request for proposals would be issued to replace supply to Hendrina, to be followed by an enquiry to replace supply from Anglo American’s Kriel mine, where the contract expires in 2019.

“We dealt with Arnot because Arnot was costing us over R1 000/t. The next station that is going to preoccupy us – and we will deal with it in the same way we’ve dealt with Hendrina and Arnot – is Tutuka. We are paying R1 600/t at Tutuka and it’s a cost-plus mine, and it’s an Anglo American mine,” Koko said, describing the price as “unacceptable”.

“We will change and we will go to unconventional suppliers – and we won’t apologise for that,” he added.

However, Anglo American questioned Eskom’s Tutuka costs, saying in a statement that, between April 2015 and March 2016, its New Denmark colliery invoiced Eskom at an average of R668/t, “in line with the contract, mine progress and agreed budget between Eskom and Anglo American”.

Koko indicated, meanwhile, that Eskom had also not come to terms with Anglo American Inyosi Coal on supply to the Kusile power station, which is still under construction in Mpumalanga.

“We have contracted coal for Kusile for up to Unit 3 . . . we have indicated previously that we will go into the market and look for coal for Kusile because we are not reaching an amicable solution with Anglo American Inyosi.”

Asked whether Eskom would consider prefunding Exxaro’s Matla, or to restart the Arnot mine, Molefe argued that it had extended prepayment to Exxaro in the past through its cost-plus model.

“Whether they would like to negotiate another one now, they are welcome to come and talk. I don’t know what the results of those discussions would be, but I wouldn’t like to start negotiating through the media.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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