Eskom opts for 'crazy' coal deal

In yet another unusual and pricey move by Eskom to secure coal supplies, the utility is trying to snap up 5million tons of export-quality coal from Glencore's Optimum Coal.

Details of the potential deal come amid a multibillion-rand government bailout for the struggling utility.

"I think it is the most crazy thing ... in the past century," said an industry expert who could not be named due to sensitive contracts with the parties.

"That coal is not suitable for Eskom use; it could be used if blended down," he said.

South Africa's power stations cannot burn such high grades of coal, which means it would have to be blended down, a costly process. The 5million tons of the expensive, export-quality coal from Glencore will cost the utility $318.5-million (R3.76-billion) a year.

The power utility was reluctant to answer questions about the deal on Friday, saying that talks were "confidential" and the deal "is still being negotiated and remains subject to approval by the Eskom and Optimum boards".

Where will Eskom get the money, especially at a time when the government announced that it would bail out the power utility with R10-billion by June, another R10-billion in December and yet another R3-billion next year?

It appears the utility is becoming desperate to secure coal at any price.

Energy expert Chris Yelland confirmed this, saying it was "a bit of a surprise" that Eskom would enter into such a deal, and that Eskom could be struggling to get enough coal from its current contracts with coal mines in the area.

Eskom is trying to push through legislation to declare coal a "strategic" resource. This would mean import controls if and when Eskom needed it.

On a national level, this makes sense, but the move would deter companies investing in coal mining at a time when some are trying to get out of the sector.

Eskom said it would need about 22million tons of coal a year from new supply contracts over the next decade, but it could be as much as 40million tons a year, according to some mining bosses.

BEE

The utility wants the majority of this to be supplied by black-owned companies, and it now requires companies with 50% plus one share black ownership to supply it, instead of the 26% black ownership needed for coal mines to secure licences.

Big companies such as AngloAmerican and BHP Billiton are trying to exit the domestic coal market. As a result, Eskom might have to enter into very expensive agreements for export-quality coal - as is now being contemplated with Glencore.

In 2012, Glencore partnered with Cyril Ramaphosa to buy a stake in Optimum Coal.

Ramaphosa, who is deputy president, is now overseeing Eskom's turnaround and trying to fix the country's electricity crisis. There is no indication that Ramaphosa, who no longer holds directorships, stands to benefit from any deal.

Eskom's contract with Optimum Coal for the supply of middling grade coal to its Hendrina power station in Mpumalanga was due to expire. It said that it might be able to extend the life of Hendrina, and was looking to secure a coal contract with Optimum Coal to supply the power station in the future.

Negotiations

Glencore spokesman Charles Watenphul said that the company was always in negotiations with Eskom.

An inside source said that Eskom executive Dan Marokane had taken the proposal for the Optimum export coal to the utility's board.

For Glencore's Ivan Glasenberg it is a perfect deal. Glencore announced late in January that it was looking to reduce its overall South African production by at least 5million tons of coal.

That followed a review of its Optimum Coal operations that have been running at a loss for more than two years, due to the continuing decline inexport coal prices. The move would result in 1000 permanent employees and 500 contractors losing their jobs.

If the deal goes ahead, Glencore will be able to offload its seaborne coal - most likely at a higher price.

Asked if the deal was intended to save jobs at Glencore's Optimum Coal mine in Mpu-malanga, where the company intended to retrench workers, Eskom said the negotiations were focused on the security of its coal supply.

"If the options being explored are viable and sustainable, then job losses can be avoided.

"It is important that whatever agreement is reached, that the outcome is sustainable for all parties," the company said.