South32 signs hardship clause with Eskom on coal contract, starts work on new export mine

Eskom's Kusile project under construction

SOUTH32 had begun early work on development of a 1.5 million ton (Mt) to two million ton a year export-dedicated thermal coal mine, the company said.

“Pegasus is a resource that’s highly attractive,” said Mike Fraser, COO of South32 in an interview at the group’s Johannesburg premises.

“It’s only fairly small – about 14Mt – but it has a low strip ratio and is high quality export coal. It just sits near Middelburg so it’s not contiguous directly to our operations.” Pegasus is the name of the property given to the prospect.

Pegasus will be one of the options open to Seriti Resources which has been selected for exclusive negotiations ahead of buying South32’s South African Energy Coal (SAEC), the business unit earmarked for sale about 18-months ago.

Fraser said it was up to Seriti to decide whether to proceed immediately with Pegasus, or hold development of the prospect given other capital obligations it might have. The capital requirement to build Pegasus was not believed to be significant.

First though Seriti would have to contend with a coal supply contract from SAEC’s Wolverkrans Middelburg Complex (WMC) to Duvha, an Eskom power station. Fraser said South32 had been at pains to point out the criticality of the contract to SAEC.

“The one area to call out – we’ve been really clear with Eskom and Seriti – is … that the Duvha contract is a material drag on this business,” said Fraser. “Whether we own it or anyone else owns it, Eskom has to help us resolve this significant loss-making contract”.

South32 had, with the guidance of Eskom, initiated a hardship clause regarding the WMC coal supply agreement to Duvha, said Fraser. Seriti would have “multiple ways” of solving the contract “… not just contractually through the hardship provisions but maybe there are offsets,” he said.

“Maybe they [Seriti] sign a deal on New Largo which helps them to lift overall tons. So, there is a multitude of things that can be done and we expect that Eskom will need to help to de-risk the entire transaction by addressing the Duvha contract,” he said.

New Largo is a project Seriti bought as part of a consortium with the Industrial Development Corporation and Coalzar in 2018 for R850m from Anglo American. The project has long been associated with Eskom’s Kusile power station which it is supposed to supply.

“If you get those tons to break even, then you have completely de-risked WMC,” said Fraser who added that with SAEC’s Khutala mine, which sells to Eskom on a cost plus basis, SAEC would generate a healthy cash margin.

“So, then all of a sudden, you’ve de-risked this portfolio of assets which you merge with Seriti. Then you’ve got a much better platform,” he said.

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