Eskom's refusal to budge on Optimum agreement saw coal supply dry up

Business rescue practitioner Piers Marsden told the state capture inquiry on Wednesday how Eskom refused to renegotiate its coal supply agreement with Glencore's Optimum mine - with then Eskom chief executive Brian Molefe apparently placing no urgency on resolving issues between the power utility and the mine.

This came at a time when Glencore placed its entities, Optimum Coal Mine and Optimum Coal Holdings, into business rescue - bringing the coal supply between the mine and Hendrina power station to a grinding halt in 2015.

With the cost of coal production exceeding the price that Eskom was paying for it three times over, as well as a controversial R2.1bn fine imposed on the mine by Eskom, Glencore was eventually forced to sell to Gupta-owned Tegeta Exploration and Resources, which was actively lobbying for its purchase.   

Marsden told the commission that when he started, he found that the mine was supplying coal to Eskom at R150 per ton delivered (as per its contract); but it cost R430 to R450 per ton to produce. The mine was relying on its major shareholder, Optimum Coal Holdings, for funds to bridge the gap.

Marsden and Peter van den Steen were both appointed as business rescue practitioners at the mine in August 2015.

Marsden said one of the first things they did was attempt to engage Eskom on a number of issues, including the arrangement of an interim coal supply agreement and, thereafter, a long-term solution that "would have resulted in a more sustainable business for the mine".

"We had made numerous attempts to meet. We had finally got to the point where we did have a meeting. There were really no clear points of going forward. We didn't get the view that the urgency placed on us as practitioners was necessarily reciprocated by Eskom," said Marsden.  

"One of the key features of business rescue is the ability to suspend obligations in the contract. We elected to use that mechanism on Eskom and we effectively suspended the coal supply agreement which obliged us to supply coal at that rate to Eskom ... in order to create some urgency and get the attention of Eskom. It also sought to illustrate that we did not have an open cheque book."

He said Eskom remained "steadfast" that the agreement would remain in place until its expiry in 2018 - even though Eskom had no legal right to do so, as business practitioners are by law entitled to suspend the terms of a contract.

"I think that we attempted to provide a number of different solutions ... Eskom’s position was steadfast and unmoving with regards to the fact that they had a contract until 2018 and they expected that contract to be delivered on. There was no movement on that particular issue," said Marsden.  

During these negotiations, Eskom was no longer receiving coal from the mine.

Marsden corroborated a testimony by Glencore chief executive Clinton Ephron, who testified that he met Eskom executives Molefe and Matshela Koko on September 3 2015.  

"I received the phone call from the chief executive Molefe for a meeting at Megawatt Park. I was requested to ensure Ephron was invited as well … Ephron was called to a meeting and Peter van den Steen and I were left outside drinking coffee," said Marsden.

Ephron previously told the commission that the meeting "wasn’t very pleasant" and that Molefe advised that Optimum must immediately restore the supply of coal to Hendrina.