Eskom, BHP reach power deal

Sapa & Miningmx reporter | Tue, 20 Apr 2010 15:15

[miningmx.com] -- Eskom has reached an in principle deal with BHP Billiton that will release it from a long-term tariff agreement that triggered book value losses of billions last year, acting CEO Mpho Makwana said on Tuesday.

However, attempts to renegotiate a similar contract with Anglo American to remove liabilities also linked to embedded derivatives was proving more difficult.

Eskom finance director Erica Johnson said this was due to the recalcitrance of one of the parties to that contract, the Skorpion Zinc mine in south-western Namibia.

"There has been a bit of a challenge, Skorpion Zinc has been difficult to engage," Johnson told Parliament's portfolio committee on public enterprise.

Anglo has contracts with Eskom that are regulated by tariff codes, with the Skorpion contract being the exception.

"The single contract of Skorpion zinc mine in Namibia has been in place for many years, represents only 6% of Anglo American’s total power off-take from Eskom, or just 80 MW (02.%) of the 40,503 MW of Eskom’s total power output," an Anglo spokesman said.

"This contract, which has guaranteed offtake obligations on Anglo American, is an agreement that has historically been priced at close to the standard Eskom tariff," he said.

Anglo has put its zinc assets, including Skorpion, up for sale as part of a programme to dispose of non-core assets, raise capital and streamline the business.

Makwana said the contract with BHP Billiton to supply electricity to the mining giant's Mozal and Hillside aluminium smelters accounted for 95 percent of Eskom's embedded derivative liabilities that led to a book value loss of R9.5 billion last year.

He said Eskom had "been held to ransom by the long-standing liability" on derivatives that linked the tariff to aluminium prices, causing problems when these plunged in the wake of the global economic crisis.

The renegotiated contract with BHP Billiton was subject to audit and should be signed at the end of May, he added.

But a defensive Makwana declined to answer questions from MPs on whether Eskom had in the past been selling power to Billiton's smelters for less than the cost of generating it.

Instead, he told committee chairwoman Vytjie Mentor he would prefer to respond in writing as the issue was complex.

Makwana also threatened to take legal action against Democratic Alliance MP Pieter van Dalen after he claimed to be in possession of a "secret" internal document showing that Eskom had been supplying power to the Mozal plant at 12 cents per kilowatt-hour.

The acting Eskom boss rejected notions that the company suffered a loss in real terms after aluminium prices tumbled.

Makwana insisted that embedded derivatives would not become an issue had international financial reporting standards not changed in the new millennium and forced the company to foreclose long-term liabilities under the deal.

He said the deals with the mining houses had to be understood in the context of South Africa's political commitments "to empower our neighbours" under the New Partnership for Africa's Development (Nepad) programme launched by former president Thabo Mbeki.

"We are taking this at face value when in fact other components of value were embedded in this".

The deals with BHP Billiton and Anglo American have been blamed for Eskom's cashflow and supply capacity problems, with commentators saying the country's energy woes would be eradicated if the deals were cancelled.

Makwana said the two contracts accounted for just under 10 percent of South Africa's electricity consumption. Public Enterprises Minister Barbara Hogan had put the figure at "approximately five percent" but the CEO said this was because she was referring to their share of peak-hour consumption.

Hogan has consistently refused to divulge finer details of the deals, which were inked from 1994 onwards when South Africa had excess electricity supply and sought to sell power cheaply to attract investment.

The minister said indiscretion would make the country look "silly".