The business rescue practitioners at the struggling Optimum coal mine, in Mpumalanga, announced last week that the coal-supply agreement with Eskom’s Hendrina power station would be suspended for the duration of the business rescue proceedings.

The joint business rescue practitioners, Piers Marsden and Peter van den Steen, said in a statement that they were obligated to minimise the immediate cash losses to provide scope and time for the development of a business rescue plan for the mine, which supplies Eskom with 5.5-million tons of coal yearly.

Eskom confirmed receipt of the suspension notification and said it was looking into what legal recourse it had, noting that the contract was only due to expire in 2018.

“We have about 40 days of coal stockpiles at Hendrina, and therefore the operations of the power station will not be affected in the short term,” Eskom spokesperson Khulu Phasiwe said.

The contract was entered into in 1993, with Optimum providing coal directly to the Hendrina power station through a dedicated conveyer-belt system.

But Eskom was seeking to impose penalties of R2-billion on Optimum, owing to the poor quality of coal it had supplied from the Glencore mine. The penalties would mean, Glencore had said previously, that Optimum would be supplying coal to Eskom for an effective price of R1/t.

“Suspending onerous contracts is a mechanism that legally entitles business rescue practitioners to release the company under business rescue from lossmaking contracts and, in this case, [it] is a necessary recourse if we are to have any prospect of rescuing Optimum Coal,” the business rescue practitioners said.

As an interim measure, Marsden and Van den Steen said Optimum would offer to supply Hendrina at the mine’s cash cost of production.

“We hope this interim agreement is a viable solution which will enable the parties to negotiate a long-term contract that will facilitate the sustainable supply of coal to Hendrina into the future,” they added.

Eskom had reported in mid-August that Hendrina had a coal stockpile of nearly 40 days, but it had also indicated that it was looking to source coal from other mines that were able to satisfy the power station’s quality and quantity requirements at a lower price.

The day before the suspension announcement, Glencore CEO Ivan Glasenberg said it was important that the Optimum Coal issue be resolved. Responding to media questions after the mining and trading company’s presentation of half-year results, Glasenberg said that Optimum’s business rescue practitioners working with Eskom needed to find a solution at Optimum.

Marsden argued that it would be in the best interests of all parties for a new agreement to be concluded, because “if Optimum mine is forced into liquidation, it will result in interrupted coal supply to Eskom, job losses and other negative consequences and ultimately could result in substantially higher costs for Eskom”.