Mozal spelt 'disaster' for Eskom

Sikonathi Mantshantsha | Thu, 03 Jun 2010 09:30

[miningmx.com] -- Eskom's financial results would have been a catastrophe had it not managed to persuade commodities company BHP Billiton to renegotiate the cumbersome Mozal aluminium smelter contracts.

"To sum it up in one word: it would have been a disaster," said finance director Paul O'Flaherty when asked what the 2010 financial results would have been with the derivative contract still in force.

After renegotiating the power supply contract to BHP Billiton's aluminium smelter in Mozambique, Eskom succeeded in removing the link of its power price to the market price of aluminium. "We now sell electricity to Mozal at a rand price and have taken off any derivatives," said O'Flaherty.

With the new contract, Eskom achieved everything it wanted to. "BHP Billiton was willing to help us solve this cumbersome contract and put the country's interests first," said acting chairperson and CEO Mpho Makwana.

The resultant benefit to Eskom's income statement was a R2.2bn credit, from a R9.5bn loss last year. That meant Eskom was able to show an operating profit before finance costs and tax of R7bn. Last year, that figure was a loss of R11.6bn.

The company was now busy negotiating the three remaining derivatives contracts: the BHP Billiton-owned Bayside and Hillside aluminum smelters, and Anglo Coal's Skorpion mine.

It was easier to negotiate the Mozal one as Eskom showed without difficulty what Mozambique's electricity utility would have charged for its power to the smelter, said Erica Johnson, Eskom chief officer for customer network business.

"Now we have to establish a mechanism on which to price the others."