Two-year-old black-owned coal producer Seriti Resources is set to become Eskom's second-largest supplier of coal, accounting for more than a third of the coal Eskom's power stations burn each year if its deal to buy South32's coal assets goes ahead as planned.And though the deal could raise concerns about "concentration risk" for Eskom and prompt competition scrutiny, the two companies say it will be good for the power utility, creating a strong and sustainable supplier that will be able to meet the demand more efficiently and affordably.Seriti and South32 announced on Wednesday that Seriti, which was created to buy the Anglo American coal mines that supply three Eskom power stations, will buy South32's 91% of South African Energy Coal (SAEC) for R100m upfront plus a chunk of the cash flow from the SAEC mines that depends on the rand coal price but could go up to R1.5bn a year, out to 2024. The two coal mines to be acquired from South32 supply Eskom's Kendal and Duvha power stations. Seriti's existing mines supply Eskom's Lethabo, Tutuka and Kriel power stations. The combination would see Seriti's share of Eskom's coal supply increase from 25Mt a year to 42-43Mt, about 35% of the 120Mt that Eskom burns each year. The deal would increase Seriti's headcount from 3,000 to about 15,000 employees. It will also make Seriti SA's second-largest coal exporter, after Anglo American, given that the South32 mines produce both export and domestic coal.Seriti CEO Mike Teke conceded the combined entity would have a sizeable share of Eskom's supply. However, he said: "We are creating a black business that is going to be dependable, with a strong balance sheet - it is better for Eskom to sit in a room with a strong counterparty with a strong balance sheet."We are a South African company with a South African focus and we expect to be able to get efficiencies out of this business."South32 COO Mike Fraser said most would agree that Eskom's procurement strategy over the past decade has not been efficient at all, with contracts often going to companies supplying the wrong quality and at the wrong price and transporting the coal by road - whereas a company like Seriti could satisfy demand from Eskom for a long time and at affordable cost, putting the coal on conveyor belts and on rail.The deal is, however, subject to a variety of regulatory approvals and, crucially, to South32 resolving its dispute with Eskom over pricing for the Duvha coal. The Wolwekrans mine at Duvha, which has a contract to supply 8.5Mt/year to Eskom for the next 15 years, has been operating at a significant loss and is not sustainable over the life of the contract. South32 is in discussion with Eskom and neither Fraser nor Teke would spell out what the options would be if no agreement is reached. Mergence Corporate Solutions director Peter Major pointed out that the structure of the SAEC deal - an upfront payment with upside for the seller linked to the commodity price and profitability - is similar to Sibanye's acquisition of some of Anglo Platinum's mines a few years ago, and he predicted that the deal AngloGold Ashanti is negotiating to sell the last of its South African gold assets - as announced by AngloGold Ashanti this week - will be a carbon copy.Said Major: "It's a very good deal for Seriti - it's a small, undercapitalised company which doesn't really have a history and is getting tens of millions of tons of coal and contracts for just R100m upfront - but it's the only way to find a buyer in this environment." Fraser said: "We think the business is worth more but we didn't want to encumber our counterparty with a huge upfront transaction fee, given the uncertainty and volatility of the coal price. It was not just about value but about ensuring a sustainable business going forward."We wanted to make sure it would be a major black-owned business, in support of our support for transformation in SA," Fraser said, though he emphasised that South32's decision to sell reflected its desire to exit thermal coal globally rather than being an exit from SA. Seriti also owns the New Largo resource at Eskom's new Kusile power station and has started work on a R10bn mine which could produce its first coal in April 2020 and will ramp up to 10Mt/year. ..