South32 battles red tape over Eskom contracts
Businesses could fail if renegotiations continue to stall at Treasury and Nersa
As SA’s power crisis deepens, two of South32’s SA businesses — one a critical supplier to Eskom and the other a major power consumer — face the risk of failure as their new contracts remain stuck in administrative limbo.
Speaking to the FM on the sidelines of the Investing in African Mining Indaba on Wednesday, South32 CFO Mike Fraser says the multinational mining company is waiting for the outcome on a renegotiated contract with Eskom for the supply of coal to Duvha power station, as well as a new power supply contract for its Hillside aluminium smelter.
Fraser says that though South32 and Eskom have reached an agreement on both matters, the coal supply contract has hit a blockage at National Treasury, while the Hillside power supply contract is stranded at the National Energy Regulator of SA (Nersa).
“The worst outcome is that both contracts are rejected and both businesses fail,” says Fraser.
It would be bad news for crisis-stricken Eskom, which needs stable coal supply and struggles to procure coal of the right quality and at the right price. It can also little afford to lose major customers like Hillside as its electricity sales continue to decline.
The loss-making coal supply contract with Duvha has been flagged by South32 as a major risk to the sustainability of its SA Energy Coal business, a large supplier of coal to Eskom which South32 is in the process of selling to empowered local coal miner Seriti Resources.
The 10Mt coal supply contract runs to 2024 with an option for Eskom to run it a further 10 years. At a price of between R230 and R250 a ton, the coal is some of Eskom’s cheapest, but South32 is incurring a loss of R1bn a year, which is not sustainable for itself or any new owner.
“Eskom has guided us to use the provisions of the contract, which is a hardship provision, to actually review that price,” says Fraser.
The utility further agreed to an interim price increase which would translate into a longer-term price hike, though subject to Treasury approval.
A report by the Mail & Guardian said the Treasury refused to hike the price in order to add R1.2bn to the R39bn contract, but Fraser says the matter has gone through the Eskom board and it is now up to the utility continue the engagement with the Treasury and present the full rationale.
“We think the rationale is very clear. Even with the price lift, this is still some of the cheapest coal you are going to be able to secure — and rather procure that 10Mt for as long as you can — because if you take that coal away you are going to have to procure far more expensive tons,” Fraser says.
If the coal prices are not hiked, the deal with Seriti will fail as it is contingent on the Duvha coal supply contract being favourably renegotiated.
The other contract in question is a new power supply contract for South32’s Hillside smelter in Richards Bay which consumes 1300MW of power, just over 3% of SA’s installed capacity.
The legacy contract between Eskom and Hillside — previously owned by BHP, from which South32 was spun out of in 2014 — has been controversial as it was linked to the aluminium price and caused Eskom to incur significant losses when the commodity price was low.
South32 previously said it accepted that the contract needed to change but that a good deal had to be struck to ensure Hillside’s sustainability.
A new agreement has passed through the Eskom board but has been stuck at Nersa for several months.
“Nersa has asked for a long-term energy tariff policy for energy-intensive users from the department of mineral resources & energy [DMRE],” say Fraser. “There is no policy framework which enables this contract with Hillside.” The contract has been a standing agenda item at Nersa board meetings for six months now. Fraser denied reports that the contract had been rejected. “That’s not really the case, it’s just still in the holding pattern until the DMRE comes up with the tariff policy,” he says, noting that he understood the department to be working on it.
Fraser says the two contracts are not related in any way and have always been treated on their own merits by Eskom. However, he still notes that “the lift that we need for Duvha is almost the same for the increase price we will pay at Hillside, so in a way it’s cash flow neutral from Eskom’s point of view”.