South32 overhauls thermal coal sale to Seriti with $250m cash and finance injection

Graham Kerr, CEO, South32

SOUTH32 has overhauled the terms of the sale of its South African Energy Coal (SAEC) business providing buyer, Seriti Resources, with a minimum of $250m (R3.7bn) in cash and finance – a step intended to make the transaction more viable.

A clause in the original agreement – concluded in November 2019 – enabling South32 to participate in thermal coal sales from SAEC has also fallen away giving Seriti the benefit of improvements in the price of the fuel.

The crucial amendments come as the parties wait on the South African Treasury to approve a redrafted coal sales agreement (CSA) between SAEC and Duvha, a power station operated by Eskom, the state-owned power utility. Currently operating under a hardship clause, the CSA is heavily loss-making.

South32 said today that it would pay Seriti Resources $200m in 10 installments, the first to be made in July, for the rehabilitation of coal assets. Situated in Mpumalanga province, the coal mines supply about 28 million tons a year of which about half is exported.

South32 has also entered into a $50m facility with Seriti Resources that will primarily fund the costs of restructuring certain loss-making mining areas.

The South African Treasury has once rejected the terms of the new CSA to Duvha. The cost of coal is a sensitive issue for the South African government owing to more than $450bn of debt on Eskom’s balance sheet which the utility can barely service let alone repay.

The redrafted agreement alters the overall hue and nature of the sales agreement. Whereas South32 was previously parting with the coal assets on the proviso Seriti took on liabilities in the business, today’s agreement sees South32 provide important, post-deal support that acknowledges the legacy risks of running the coal mines.

One of the hazards of coal mining in South Africa is securing a long-term CSA with Eskom, which is proving a difficult business.

According to a report by BusinessLive, Seriti has sunk R400m into the development the New Largo, a project that is intended to supply coal to Eskom’s Kusile power station, currently being commissioned. However, in the absence of a coal sales agreement between it and Eskom, the coal firm had “mined itself into a corner”.

South32 said the restructure facility is expected to be drawn down by the end of 2022 and is repayable over 10 years assuming energy coal prices exceed agreed thresholds.

For its part, Seriti will enter into a five year working capital facility of up to $120m (R1.8bn) with a South African commercial bank aimed at improving the business. South32 will guarantee the loan

“This additional support package moves us closer to completion of the sale,” said Graham Kerr, CEO of South32 in a statement.

Although it has exited the South African coal mines, South32 remains invested in South African aluminium and manganese ore production. The group mothballed manganese alloy production ahead of a possible sales agreement.

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