Optimum Coal sues Eskom

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[miningmx.com] — OPTIMUM Coal is taking legal action to cancel its contract to supply 5.5 million tonnes (mt) annually to Eskom’s Hendrina power station.

The step appears unprecedented in the history of Eskom’s relationship with the mainstream South African mining industry, which supplies the bulk of the 120mt of coal the utility’s power stations burn annually.

That relationship appears to have soured since the power crisis of early 2008 with Eskom complaining about the poor quality of coal delivered; the rising cost of South African coal and concerns over future security of supply.

Optimum put out a Stock Exchange News Service (Sens) statement on September 14, stating it had given notice to Eskom on May 1 this year of its intention to cancel the coal supply agreement with Hendrina.

The matter has already gone to arbitration, with the first hearings held on August 10.

The statement added: “By reason of factual and other complexities, the arbitration has been postponed to be heard for a further 10 days during March and April 2011.’

Optimum bought the Optimum Colliery in 2008 from BHP Billiton Energy Coal (Becsa) and took over the coal supply agreement as part of the deal.

There was wide speculation in the industry at the time that Becsa had been losing money on the contract to supply Hendrina.

Contracts between Eskom and its coal suppliers are highly confidential and Teke would not provide details at the time, but he indicated the contract was going to be reviewed.

Therein lies the nub of the current legal action, as Eskom has held back R22m in payments due to Optimum as a penalty because the coal supplied did not meet quality requirements.

Specifically, Eskom maintained the coal supplied was too abrasive – a factor which increases wear and tear on Eskom’s plant and equipment.

Teke told Miningmx: “We did review the contract, but the issue of abrasiveness was not part of the new contract.’

Optimum has gone to arbitration to recover the R22m from Eskom, but the utility has disputed that it owes the money and also that Optimum is entitled to cancel the coal supply agreement.

According to the Optimum Sens statement, the company will continue supplying coal in terms of the coal supply agreement until the arbitration is finalised. However, if Optimum wins, it will stop supplying coal.

But Teke indicated to Miningmx that if Optimum wins, the likely outcome is renegotiation of the supply contract.

“We deliver the coal on a conveyor belt system to the power station. I cannot imagine that Eskom would look to procure that coal elsewhere. They don’t have a choice. Are they going to truck in 5.5mt of coal annually by road?’

Optimum’s profit dropped to R229m for the year to end-June 2010, from R747m the previous year.

Although the group increased exports to 5.1mt (previous financial year – 4.2mt), revenues fell overall mainly because of lower export coal prices and the stronger rand/dollar exchange rate.

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