By taking over three Eskom- tied coal mines from Anglo American, Seriti Resources has landed itself in a bittersweet deal with Eskom.
The electricity utility still needs to give the go-ahead for the deal, but Seriti is set to become the second-largest supplier of coal to the state-owned enterprise. Eskom buys about 120 million tons of coal a year, with Exxaro Resources as its biggest supplier.
After a long, ugly dispute with Exxaro last year over Arnot mine and the supply of coal to Arnot power station, Eskom demanded that it should be part of any future decisions on all the cost-plus coal-mine contracts it has with companies, including Anglo American's tied coal assets.
When Anglo American this week announced the sale of its three operational coal assets and four closed collieries for R2.3-billion to Seriti Resources, the power utility said it still needed to have a meeting with Anglo American over the terms of sale.
Eskom spokesman Khulu Phasiwe said: "We don't want contracts to be broken up in any way. Essentially we want the new owners to take over without changing the issues around the volume, the quality, and the quantities of coal that we have in place."
Anglo American also acknowledged that for the transaction to be finalised by the end of the year it needed Eskom's consent, including for the transfer of the Coal Supply Agreements which govern the supply of coal to Eskom.
Seriti Resources CEO Mike Teke, who owns 25% of the company, said he was not concerned about Eskom not giving the green light as he had worked with it before. Given the fact that Seriti had BEE ownership of about 79%, it more than complied with Eskom's BEE requirements, and therefore the relationship between the two parties was not a concern.
"I'm going there with an open mind to say, there is a transaction and 50 plus 1% [Eskom's BEE requirement]. I have that, and I can be one of the largest suppliers, let's talk, so I'm open-minded about it," Teke said. The three operating mines acquired by Seriti are New Vaal in the Free State, and New Denmark and Kriel in Mpumalanga.
Kriel mine's end of life is 2019, the same year its coal contract with Eskom expires. However, according to Anglo American a life-expansion plan for Kriel - if implemented - will give the mine another 16 years.
The complication is that Eskom has said in the past - and continues to reiterate - that it wants to get out of its cost-plus coal contracts because it is a liability for its business.
This means that if Seriti wants to extend the life of mine of Kriel it would have to fund it from its own capital instead of relying on Eskom.
Tied collieries are mines owned by Eskom, which is therefore responsible for investments needed to expand their life, but they are mined by private sector companies.
Exxaro's Matla mine was still awaiting funding of R1.8-billion after Eskom approved its expansion plan last year. Likewise, South32's Khutala mine was still awaiting funding from Eskom for redevelopment.
Teke said Seriti would approach Eskom saying, "We have a coal supply agreement. How would you like to progress? Are we still going to continue to work together to raise capital just like you did with Anglo, or how can we extend the lives of these mines?"
New Denmark's life of mine runs to 2024 and it can be expanded by 10 years while its coal supply contract with Eskom runs until 2029. New Vaal's coal contract expires in 2029 and it has a life of mine to 2030 but can have 30 years added if it is expanded.
Teke said he hoped the company would get more opportunities for growth in and outside South Africa. Although he had not looked at gold or platinum assets, he has an interest in Kumba and other coal assets, such as the new Largo project that Anglo American is to mine to supply Kusile power station with coal. He also has plans for Seriti to expand into the bulk commodities market.
Currently, Kusile gets coal from three coal companies with which Eskom has medium-term contracts of four to ten years.
"Historically we tend to believe that because of black empowerment, businesses will end in South Africa, but no, if the opportunity arose beyond our borders we will take that," Teke said.
The company had discussed listing on the JSE but no arrangements had yet been made, he said. For Seriti to raise capital, it would probably need to go to the market as another avenue to raise capital. "The probability of listing is there. I'm saying within a shorter period than five years", Teke said.
Makwe Masilela, a portfolio manager at BP Bernstein, said Teke had run a coal operation before and that was the beauty of the deal. If he delayed listing on the JSE it could be because "he is parking something very attractive for the investor for when he lists", Masilela said.
Peter Major, an analyst at Cadiz Corporate Solutions, agreed that Teke would list soon. He would have the backing of the Public Investment Corporation as well as the government.
"He got Glencore to buy Optimum so he has proven that he is the guy who can make things happen. He will do more deals like this and will get super support," Major said.
Masilela said that if Anil Agarwal, the Indian billionaire who recently became Anglo American's second-biggest shareholder, wanted to bid later when Anglo American's coal-export assets and iron assets came up for sale, he would have the advantage of being privy to details of those assets.
He had tried in vain before to merge his Vendanta Resources with Anglo American and that plan or something similar might still be on the cards for him.
Major disagreed, saying : "Agarwal does not have a chance with Anglo's South African assets, because the government has made its stance clear and guys like Mike Teke will lobby those deals hard.
"He [Agarwal] has a bigger chance with Anglo American's non-South African assets," said Major.