'Black' coal backfires on Eskom

Coal mining companies are not black enough to supply Eskom, which has allegedly sparked an epidemic of fronting as these miners are now using black traders as go-betweens to sell coal to the utility.

These sensational claims emerged on the sidelines of the McCloskey coal conference in Cape Town, which focused largely on how traders are subverting the spirit of empowerment to get coal to the country's largest buyer, Eskom.

"We can all see it happening in the industry, but there is nothing to be done really," said one senior source inside Eskom.

"Black coal traders are colluding with some mining companies to secure coal supply contracts for mining companies with Eskom. Some of the black traders are not even involved in the business and only get a salary to ensure the mines get a supply contract from Eskom, but we have no formal evidence yet."

To mine coal in South Africa, mining companies need to be 26% black-empowered in line with the mining charter. But to supply Eskom, the biggest user of coal, companies need to be 50% black owned.

To get around this, some coal mining companies have brought in "middlemen" or black trading companies, which then buy the coal from the companies and on-sell to Eskom at a premium. So taxpayers are effectively subsidising these extra payments for coal while helping coal firms subvert the empowerment rules.

This is an unintended consequence of Eskom's strategy of bringing in black traders to advance transformation in the industry.

Asked about claims of fronting this week, Eskom replied that it did "financial reviews" and checked for valid BEE certificates as part of its due-diligence procedures.

Eskom presentations leaked to Business Times confirm the utility's strategy of increasing black participation in the coal mining industry.

The documents show that the plan was to use its purchasing leverage to demand that coal suppliers be 50% black-empowered, which would bring new black traders into the industry.

To make sure this happened, Eskom appointed a work team to change its internal policy and procurement procedures.

The cash-strapped utility also approved making financial contributions to a mining development fund.

The leaked presentation shows that this fund would "sacrifice some enterprise value in favour of new entrant black emerging miners by only taking minority equity positions".

The government recently agreed to give Eskom a R20-billion bailout to help finance its R225-billion shortfall.

But at the same time, the difference between mining licence requirements and supply conditions has made it difficult for the utility to secure future coal supply agreements.

In the next 10 years Eskom will need about 4billion tons of coal, of which more than half - at least 2.17billion tons - has not been secured.

The empowerment rules have made life difficult for a number of companies, including Anglo American's Nyosi Coal, which has been battling to secure a contract with Eskom to provide coal to the new Kusile power station from its New Largos project. The main hurdle between Anglo and Eskom is empowerment.

Anglo Nyosi is 73% owned by Anglo and 27% by the Nyosi BEE consortium headed by Pamodzi Holdings and Lithemba Investments. Eskom is trying to force Anglo to up its black shareholding in Anglo Nyosi and the contract negotiations have now run over schedule.

Kusile is to start generating power from its first unit this year, but Anglo has not yet started construction of the New Largo Colliery.

This week, Mineral Resources Minister Ngoako Ramatlhodi (above) said a memorandum of understanding was signed in December between Anglo and Eskom. Ramatlhodi admitted that there had been similar empowerment problems with companies trying to mine in the Waterberg area.

"There is no way that a company like the Waterberg Coal Company will get a supply contract with Eskom without having that 50% plus one share black ownership, which has proven to be a challenge for the Australians trying to mine in the Waterberg," said an industry source.

Waterberg Coal Company is 26% black-empowered through Sekoko Coal - in line with the mining charter, but short of Eskom's targets.

Referring to the contradiction in black ownership, Ramatlhodi said that government talking with "two voices" needed to be corrected.

He said the ministers of public enterprises, energy, environmental and water affairs and mineral resources were in discussions to try to align policies.

The issue could also be addressed through amendments to the Mineral and Petroleum Resources and Development Act to declare coal a strategic resource and place restrictions on exports of coal. The controversial act was recently sent back to parliament.

Ramatlhodi said there were no plans to increase the BEE requirement from 26% to 51% - the original goal under the Mining Charter.