ESKOM, the South African utility, has given its approval for an increase in the cost of coal from the Ifalethu coal mine to its Duvha power station – a development that will see the sale of South32’s majority stake in South African Energy Coal (SAEC) to Seriti Resources concluded on June 1.
Eskom said today the South African National Treasury supported the coal price increase on May 1 and that its agreement today would provide it with interim coal from the Mpumalanga province mine to Duvha whilst it sought potential alternative coal supply.
The increase in the Ifalethu coal contract – a doubling to about R550 per ton – is controversial owing to Eskom’s aim of reducing its primary coal costs amid a worsening financial position. It has debt of at least R450bn and is struggling to service its loans.
South32 supplies about 8.5 million tons (Mt) in coal a year to Duvha mined at the Ifalethu operation, part of Woverkrans Middelburg Complex – a domestic and export colliery. South32 has a 91% stake in SAEC.
The mining group, which is headquartered in Australia, said that if the coal supply agreement (CSA) to Duvha were not improved, SAEC would fail and the sale of the company to Seriti, a black economic empowerment company that successfully bid for the mine in 2019 – would be cancelled.
Graham Kerr, South32 CEO, said today that it was critical that SAEC was sustainable and that it was sold to a black-controlled company. “For South32, completion of the divestment is an important milestone that will see us significantly simplify our business, reduce our capital intensity and improve our underlying operating margins,” he said.
South32 expected to book a loss on sale of the stake in SAEC of between $125m and $175m, it said today. The group’s net cash balance is also expected to reduce by approximately $180m following an adjustment to the sale agreement in which South32 would supply a minimum of $250m in cash and finance to Seriti.
South32 announced earlier this year it would pay $200m to Seriti in 10 installments, the first to be made in July, for the rehabilitation of coal assets. The coal mines supply about 28Mt 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.
Commenting on the approval of the adjusted Duvha coal supply agreement, Eskom said the modification of the CSA “… secures the continued use of SAEC’s infrastructure at the mine so that alternative coal supplies can be delivered over conveyor into the power station”.
It added that modification gives Eskom sufficient time to seek alternative coal supplies, if required, and to resolve the coal delivery infrastructure constraints at the power station.
“Of critical importance to Eskom is to secure the continued delivery of coal for the Duvha Power Station, and this agreement provides that security of supply at a price that is affordable to Eskom,” said André de Ruyter, group CEO of Eskom.
“Prior to this transaction being concluded, Eskom conducted an independent due diligence exercise on Seriti, led by a firm of attorneys. Eskom is satisfied the new owners of SAEC have the capacity to fully discharge their obligations to Eskom, in terms of the CSA,” he said.