Optimum rescue chance reasonable if Eskom deal renegotiated – Glencore

13th August 2015

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – The directors of Optimum are of the view that there is a reasonable prospect of rescuing Optimum Coal if the supply agreement with Eskom can be renegotiated, Glencore said on Thursday.

Optimum Coal announced on August 4 that it had begun business rescue proceedings because of its continued and unsustainable financial hardship as a result of its Eskom agreement, with the State utility, in turn, revealing this week that it was claiming R2-billion from Optimum in coal specification penalties.

“We hope the matter will be resolved soon,” Eskom spokesperson Khulu Phasiwe said in response to questions put to the State electricity utility by Creamer Media's Mining Weekly Online.

In releasing its half-year (H1) production figures, the diversified major reported 3% higher South African coal production at 22.3-million tonnes, mainly on coal discard reprocessing at iMpunzi and the ramp-up of opencast operations and continued underground productivity improvements at its Tweefontein colliery in Mpumalanga.

If the supply agreement with the State electricity utility could be renegotiated, Optimum directors believed the rescue chances to be fair, however.

Phasiwe told Mining Weekly Online that Eskom had embarked on a process of engaging with the mines supplying coal to its power stations under the cost-plus agreement, to ensure that these contracts were beneficial to the power utility in terms of quality, volume, price and security of supply.

Phasiwe added that Hendrina power station currently had a coal stockpile of nearly 40 days and the availability of coal was thus not a major concern at this stage.

Optimum is contracted to supply Eskom’s Hendrina power station with 5.5-million tonnes of coal a year until 2018 as part of an agreement signed in 1993, but has been doing so at a price below its cost of production.

Glencore’s total global H1 production of export thermal coal was 1% above expectation, copper production was 2% ahead of expectations and zinc production was in line with expectations.

The company is also tracking in line with newly announced full-year guidance for all the key divisions.

Full-year capital expenditure (capex) is being guided down to $6-billion from $6.5-billion to $6.8-billion – capex was previously at $6.6-billion – primarily on cuts to the rig count at oilfields in Chad, with the corollary a $790-million impairment on the $1.5-billion Caracal acquisition.

H1 capex came in below the $3.4-billion estimate at $3-billion and the company is expected to unveil further capex reductions in 2016/17 during its presentation of results on Wednesday to meet credit rating and dividend commitments.

“A reasonable interim production report,” Investec Securities said in a note, adding that next week’s interim financial results should provide greater insight on how trading has performed and on whether further adjustments in the business profile will be forthcoming to adapt for weakening commodity prices.

Total own-sourced H1 coal production of 68.7-million tonnes was 4% lower than the comparable period last year on a market-driven reduction of Australian thermal production.

Australian H1 coking coal production of 2.7-million tonnes was 0.2-million tonnes down and Australian thermal and semi-soft coal production of 27.7-million tonnes 9% down on the market-driven cutback decision.

Attributable ferrochrome production of 756 000 t was 16% higher on the now fully ramped up Lion 2 expansion project in South Africa’s Limpopo province.

Glencore’s share of H1 oil-asset production of 5.3-million barrels was 68% up on higher production from Chad’s Badilaand Mangara oilfields, where ownership interest is up on last year’s Caracal acquisition.

Amendments have been made to Chad’s work programme to preserve long-term value and cut near-term cash outlay following the sharp decline in oil prices.

Own-sourced copper production was 3% down at 730 900 t and own-sourced zinc production 12% up at 730 300 t on Australia’s Mount Isa and McArthur River expansions. 


Own-sourced nickel production was flat at 48 900 t, with remedial work and a $235-million insurance claim following December’s metal leak at Koniambo.


Own-sourced coal production was 4% down at 68.7-million tonnes on market-driven production cutbacks.


Vanadium pentoxide production was 2% higher at 9.9-million pounds and manganese production 14% higher at 124 000 t on increased use of the company’s plant in France in response to market conditions.

Sherwin produced 581 000 t of alumina, 25% lower than the comparable period, reflecting the decision in mid-2014 to stop production at one of the five digesters in response to market conditions and power failures at the third-party energy supplier.

Running a scenario of $1.50/lb copper, $50/t thermal coal, $0.70/lb zinc, $4.50/lb nickel, 0.65 A$/US$ plus spot for everything else gives 2016 post dividend free cash flow of -$2.8-billion or 8% of combined capex and operating expenditure for the industrial business.

While Glencore acknowledges the need to make some adjustments, it sees the scale of such adjustments as being achievable.

H1 net debt could now be lower rather than flat owing to H1 capex being $0.4-billion lower than forecast and the marketing business releasing cash.

Glencore sees itself as being “the most financially leveraged liquid large cap” and most operationally geared to copper prices.

“So we would view the recent weakness as presenting a potential opportunity into next week’s results,” the company said.

Valuation metrics highlighted include a spot 2015 free cash flow yield of 8.4% and 6.5% in 2016.

With a footprint in both established and emerging markets, Glencore's industrial and marketing activities are backed by a global network of more than 90 offices in 50-plus countries.

Edited by Creamer Media Reporter

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