Tegeta Exploration and Resources has put Optimum Coal into business rescue in a desperate bid to save the jewel in the Guptas’ mining crown from collapse.
The family and their associates Salim Essa and Duduzane Zuma controversially bought the mine in 2016. This was after former owner Glencore put the mine into business rescue and was forced, allegedly by foul play, to sell the mine.
With a crushing sense of déjà vu, the mining company is now once again on the verge of collapse.
On Wednesday, mine workers and contractors at the Optimum mine in Pullen’s Hope, Mpumalanga, went on strike, demanding urgent intervention from government. It is alleged that Optimum is in arrears with salary and supplier payments.
AmaBhungane has now confirmed from company records that Optimum Coal Mine, Koornfontein Mines and Optimum Coal Terminal have been placed into business rescue.
The identity of the business rescue practitioners could not be immediately established.
What happens now?
Optimum consists of three major assets – Optimum mine, which supplies Hendrina power station, Koornfontein mine, which supplies Komati power station, and a six-million-ton coal export allocation at the Richard’s Bay coal terminal.
In August, the Guptas announced plans to sell these assets to an opaque company in Switzerland called Charles King for R2.9-billion. But any sale would require approval from Eskom, the department of mineral resources and the Competition Commission. There is no indication that approval has been given.
Together, the two mines are contracted to supply 7.9-million tons of coal to Eskom per year. Worryingly, both mines are the only major suppliers to the power stations they serve – placing the 2000MW Hendrina power station and the 1000MW Komati power station in a precarious position.
Hendrina has been trucking in virtually all of its coal for months after Tegeta Exploration and Resources, the company through which the Guptas own Optimum, starved Eskom of coal, demanding a higher price.
Last month Koornfontein filed a so-called section 189 notice under the Labour Relations Act, informing unions that the mine planned to cut at least 38% of its workforce – a situation that will likely force Komati to source additional coal from other suppliers.
While the mines are in business rescue they should continue supplying Eskom with coal. If the business rescue practitioners cannot keep the three businesses limping along then the situation gets a lot worse for the mine workers and Eskom.
Should we be worried?
The loss of hundreds of jobs would be devastating.
In addition to this, Eskom cannot afford to place two power stations in cold reserve because Eskom does not have as much excess capacity on the grid as is commonly thought.
Leaked minutes from an Eskom meeting in November last year revealed that Eskom had been forced to run the open cycle gas turbines during November to make up for power shortages.
AmaBhungane understands that at least three times since the beginning of the year the Eskom system was listed as “orange” with shortages of more than 1000 MW in the system. In situations like this, Eskom must rely on reserves or the expensive turbines to avoid load-shedding.
The minutes from November last year also warned: “Around end of February 2018, the system goes into red again” – red being Eskom’s code word for running the turbines – “If the situation doesn’t change, there may be load-shedding.”
Responding to amaBhungane Eskom noted:
“Eskom has received no formal communication that Optimum and Koornfontein have been placed in Business Rescue. There is however a meeting with Tegeta at 14:00 today [February 22 2018] and maybe they might share this information with Eskom.
“Total stock days at Eskom plants is 68 days. This includes Medupi and Kusile stockdays. With Medupi and Kusile excluded the average stock is 40 days.”
However, in this worst-case-scenario, Eskom has options.
When Tegeta captured Optimum from Glencore it took on certain obligations. As part of the sale agreement, Tegeta was required to provide a guarantee to Eskom that Optimum would keep delivering coal to Hendrina until its contract ended in December 2018.
Tegeta supplies Hendrina with 5.5-million tons of coal a year – until recently at R150/ton, although late last year Eskom agreed to a marginal price increase. Koornfontein receives a much better deal at R414/ton, although the coal supplied is of a better quality.
In terms of Tegeta’s contract, Eskom is entitled to claim the replacement cost of coal from Tegeta if the mines fail to deliver on their contracts. In other words, if Eskom spends R500/ton trucking in coal from other suppliers, Tegeta can be held liable for the additional R350/ton that Eskom has to spend.
Yesterday, Eskom refused to disclose how much it has spent on average trucking in coal in recent months, but using R500/ton as a conservative estimate, Eskom could claim almost R2-billion in damages from Tegeta.
Eskom could potentially also add the remaining portion of a R255-million settlement Tegeta agreed to pay arising from a R2-billion penalty inherited from Glencore. Eskom declined to disclose how much of the penalty was outstanding but said Tegeta has so far met its monthly payment obligations.
Provided that Eskom is able to call up the guarantee there should be sufficient assets held by Tegeta to cover any claim from Eskom, the mine workers and contractors.
It is also likely that the mines will find willing buyers in the market – Koornfontein has a R7-billion contract to supply Eskom for the next eight-and-a-half years and Optimum’s loss-making coal contract ends on 31 December 2018, after which Eskom would be required to sign a new contract at a substantially higher price.
However, it is what happens in the short-term that matters and keeping the mines running without financial support from Tegeta will be a difficult task for the business rescue practitioners.