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Anglo American, Eskom lock horns over coal contract

ANGLO American is involved in a confrontation with Eskom over the coal supply contract for the Kusile power station because of revised black economic empowerment (BEE) requirements imposed by the Department of Public Enterprises, which controls Eskom.

If not resolved in time, the dispute could lead to delays in development of the mining operation at the New Largo colliery, which has been chosen to supply about 16-million tonnes of coal yearly to Kusile when it is at full output.

That, in turn, could have serious consequences for the entire country in potential power shortages, should bringing the six generating sets at the vast 4,800MW power station on line be delayed any further. South Africa is already teetering on the brink of renewed power blackouts because of the delays to construction of the Medupi power station.

The main reasons blackouts have been avoided so far are lower-than-forecast growth in power demand — because of the slowdown in the global and South African economies — and Eskom’s campaign to cut power consumption.

New Largo is owned by Anglo American Inyosi Coal — a black empowerment company in which Anglo owns 73% and the Inyosi consortium 27%.

The Inyosi consortium is headed up by Pamodzi Holdings and Lithemba Investments.

While a 27% BEE shareholding meets the empowerment requirements of the Mining and Petroleum Resources Development Act, Eskom is now implementing a mandate from the Department of Public Enterprises to source up to 64% of its coal from "emerging miners", which are defined as having a BEE ownership of 50% plus 1 share.

The new policy was laid out in December by Public Enterprises Minister Malusi Gigaba in a speech where he said Eskom would "increase black ownership as a means to transform the (mining) industry" and would do so by entering into discussions "to increase black ownership participation by utilising various commercially acceptable levers."

Anglo American has not yet signed a supply contract with Eskom for Kusile, and neither has it started development of the major new opencast mining operation that must be built at New Largo.dd

The first generating set at Kusile is due to start in December next year and, according to Eskom, will be supplied during the commissioning stage from "various sources in the vicinity of Kusile".

In reply to e-mailed questions Eskom said that, to date, it had concluded two medium-term contracts with (Australian Securities Exchange-listed junior miner) Universal Coal and African Exploration Mining Finance Corporation, the state mining company, with a potential to supply 5-million tonnes a year, which would be enough to supply Kusile until New Largo comes on line.

According to Eskom, New Largo is due to come on line in 2017. According to an Anglo American spokesman, "timelines and costs will not be available until the project has gone through all the approval processes."

A senior mining industry source said getting a colliery the size of New Largo on line by 2017 is already a difficult proposition because it could take three to five years to build the mine. "That’s from the time you start digging. It does not take into account the planning stages," he said.

Another mining executive said New Largo will need a walking dragline, a large and expensive shovel used in open pit coal mines. "There’s a delivery delay of at least two years on those from the time you place the order," he said.

Anglo American and Eskom have both declined to provide direct answers to questions on the empowerment status of Anglo American Inyosi Coal.

Asked whether the delay in signing the supply contract resulted from Mr Gigaba’s policy on emerging miners, Eskom said: "Both companies have to get internal approvals for the draft agreements." In response to the same question Anglo American said: "Both Eskom and Anglo American Inyosi Coal announced last year that negotiations were at an advanced stage and that they would be taking the draft agreement through the approval processes within their companies.

"The outcome of the Eskom approval process was conditional; as a result both parties are now engaging to find appropriate mechanisms to satisfy (the) conditions."

There was no reply to requests for clarification of these answers.

Mining sources say Eskom is playing a dangerous game given the problems experienced by all junior mining companies in raising capital under present market conditions.

Eskom is also risking alienating one of the few major South African mining groups with the financial clout and expertise to build the size of mine required to supply Kusile.

Eskom said it was putting together an Emerging Miners Fund which will focus on early exploration and early stage projects.

"However, once a project is deemed bankable, on the back of an Eskom supply contract, there should be no reason why the project cannot obtain commercial funding, based on Eskom’s principle of a fair return for efficient mining," it said.

Source: www.bdlive.co.za