Eskom coal contract under scrutiny as former Glencore CEO testifies at state capture inquiry
Former Glencore chief executive Clinton Ephron has detailed to the state capture inquiry how its Optimum coal mine tried to renegotiate its contract with Eskom before penalties were imposed on it by the parastatal.
Ephron, whose evidence before the Zondo commission was led by advocate Vincent Maleka on Wednesday, said the mine was "suffering hardship" - as per a hardship clause enshrined in its coal-supply agreement with Eskom - when they entered into negotiations with the utility.
He said Glencore believed the negotiations went well as an addendum was put in place that would see Eskom increase the price it would pay for Optimum's coal to the cost of its production. The addendum would be in place until 2023.
"What we came to realise in 2013 is that the inflationary adjustment used in the contract was no longer representative of the genuine costs the mine was incurring. Eventually there came a time when the costs exceeded the selling price to Eskom," Ephron told the commission.
"There was also a clause that envisaged, because you are talking about a vast resource of reserves in the ground, that there's no way of knowing the qualities of coal [that was] was going to come out as. Optimum geographically expanded over 20 years. What was envisaged at the time was that some of the qualities of the coal may vary. One of those was the sizing. Because the mine had expanded so significantly, the coal was naturally degrading."
Optimum supplies coal to Hendrina power station.
In 2014, Optimum invoked its hardship clause and Ephron said Eskom approached Glencore with the hope of establishing a new agreement. Optimum was also facing penalties from Eskom on the size of the coal it was supplying as well as for the ash content and calorific value of the coal.
"I think Eskom realised at that point that they needed to secure their supply. They realised there was a hardship problem. They thought it was a very good opportunity to secure the supply to Hendrina power station to the end of its useful life," Ephron said.
"We agreed on a fourth addendum. It was felt that a new coal supply agreement was too cumbersome to prepare so we agreed on a fourth addendum."
Little did Ephron know at the time that it would be only two years later, in 2016, that Glencore would need to place Optimum Coal Holdings into business rescue. This was because former Eskom boss Brian Molefe refused to renegotiate the price of a long-term supply contract and reinstated a disputed R2,17bn penalty that Optimum allegedly owed for supplying substandard coal.
This was at the time the Gupta family was actively lobbying for the purchase of Optimum through their company, Tegeta Exploration and Resources.
Ephron's testimony continues.