AFTER more than 18 months of bidding, Seriti Resources has emerged as South32’s chosen one: the company that has the right to buy control of its 28 million tons (Mt) a month in South African coal production of which half is sold to Eskom.
More than 50 companies bid for the assets, collectively known as South African Energy Coal (SAEC). In the end, it boiled down to two: Sibambene Coal, backed by Swiss commodities trader, Mercuria and Menar Holdings; and Seriti, a black-owned consortium headed by the former Minerals Council South Africa president, Mike Teke via his Masimong Group. Thebe Investment Group is also a shareholder, among others.
Teke is cautious about the process. Seriti has been chosen as the preferred bidder; it is not yet the de facto owner, he says. So in the next 12 months, his company has to conclude and finance the purchase of the asset which involves not only paying an upfront fee – still to be agreed with South32 – but also winning the support of Eskom.
Eskom has a seat at the table because it is the counter-party of coal sales agreements over domestic coal SAEC produces. A change in SAEC’s ownership requires Eskom’s signature.
The transaction also needs the support of the Department of Minerals & Energy and the Competition Commission, both of which should be forthcoming if Eskom agrees, making the state-owned power company kingmaker of the transaction.
Teke’s conservatism aside, there’s little to suggest Seriti will stumble from here. That’s because in selecting Seriti, South32 has massively derisked Eskom’s coal procurement.
But what does this mean?
In 2017 and 2018, Seriti bought for just over R3bn the Eskom-dedicated coal mines of Anglo American – worth about 21Mt per year in production – and the New Largo coal project, earmarked to supply Eskom’s Kusile power station. New Largo’s development is crucial. As a result, the interests of Seriti and Eskom are already closely aligned, even before Seriti’s purchase of SAEC.
With so much in common, Seriti is also perfectly positioned to negotiate the best possible deal with Eskom on existing SAEC contracts, especially a coal supply agreement from SAEC’s Wolverkrans Middelburg Complex (WMC) to Eskom’s Duvha power station. This contract is loss-making; grievously so, reading between the lines. Renegotiating this contract with Eskom is a far easier task for Seriti than it might be for another company, because of the existing business ties between Eskom and Seriti.
Another, broader, consideration is the impact Seriti’s ownership will have on the footprint of Eskom’s coal procurement.
Including supply of coal to Eskom by another company, Exxaro Resources, roughly 72% of Eskom’s total 120Mt per year coal burn will be in the hands of two companies. This may seem like the complete opposite of what’s intended by broad-based economic empowerment, but in these economically straitened times, it’s exactly what Eskom (and the country) needs.
Mike Fraser, COO of South32’s African division, believes it’s important that Eskom’s coal supply is more concentrated. The 17% increase in primary energy costs of the state-owned firm’s 2018/19 financial year was partly down to its previous policy of sourcing coal from as many different suppliers as it could manage. This was done in the interests of broad-based empowerment, but it’s meant that more coal is being supplied via haulage truck which is more expensive.
“Eskom needs to get coal off the road and on to the conveyor,” he says, referring to the fixed cost coal mine model Eskom used in the past where coal mines were built next door to power stations which all but removed transport costs. “This would certainly change the trajectory of Eskom’s coal costs,” said Fraser. Eskom said at its year-end presentation that double-digit coal costs were likely for the current financial year.