Eskom has moved to again justify its decision to terminate a 40-year cost-plus coal supply contract with Exxaro’s Arnot mine on the basis that it will be able to secure coal for the power station at a far lower rate than would have been possible from Arnot.
It has also justified the inclusion of Optimum – which is in the process of being bought out of business rescue from Glencore by Tegeta Exploration and Resources, a company linked to the politically connected Gupta family – among the interim substitute suppliers.
Eskom allowed the Arnot contract to expire on December 31, owing to the mine’s inability to supply the contractual requirement of 4-million tons a year at a competitive price.
Group executive for generation Matshela Koko reported on Wednesday that the mine had been unable to deliver on its full 4-million commitment since 2011 and was delivering only about 1-million tons by time the contract ended.
The mine’s cost of production had also surged and the contract price was forecast to rise to over R1 300/t should it be extended.
Koko said it would have been financially imprudent for Eskom to continue to purchase coal from Arnot, while CEO Brian Molefe argued that the executives would have been vulnerable to charges that they were failing to exercise their fiduciary duties.
“It did not make sense to renew the contract,” Koko averred.
The utility had issued an open tender to identify replacement suppliers for Arnot, but was, in the interim, procuring coal from seven suppliers, including Optimum, which supplied about 15% of the coal delivered to Arnot in January.
The other suppliers include Anglo American, South 32, Exxaro, Keaton Energy, Hlagisa Mining and Umsimbithi Mining.
Prices vary, with the Anglo-Exxaro Mafube colliery, supplying coal by road at R182/t and by conveyor at R132/t. The other contracts range from R406/t through to R523/t, with Koko stating that the contract for Optimum was settled at R406/t.
“I must emphasise that our fiduciary duty is to Eskom. And when you have a contract of R900/t coming to an end, and there is a possibility to buy at R400/t or less, it does not require a lot of thinking to make a decision, especially if the prospect of negotiating with the incumbent will take you R1 396/t,” Molefe argued.
“If we had signed such a contract we could actually justly be charged in terms of not exercising our fiduciary duty to Eskom. So we think our signing of short-term supply agreements at those prices is defensible.”