Eskom on Sunday denied having “blindsided” Exxaro in granting a contract to supply the Arnot power station to Tegeta Exploration and Resources – owned by the Gupta family and President Jacob Zuma’s son Duduzane.
This was after City Press reported on Sunday that this Eskom contract worth R564m lies at the heart of a “spectacular” turnaround of Optimum Coal. Optimum Coal is situated in Mpumalanga and is currently in business rescue. It was sold by Glencore to Tegeta in April for R2.15bn. This was after the business rescue practitioners of Optimum projected in March that the mine would likely lose R100m a month.
In April Eskom awarded the contract to Tegeta to supply the Arnot power station with 1.2 million tonnes of coal over six months. According to City Press, Tegeta received this contract after a 9-month delay by Eskom in awarding a permanent supply contract to replace an Exxaro contract that had expired at the end of 2015.
Eskom said on Sunday that City Press “offers no evidence to support its wild allegations”. Eskom emphasised that all its contracting relationships “are concluded on sound commercial principles and considerations” and that all the Tegeta coal contracts with Eskom have been extensively audited by various agencies, including National Treasury.
Eskom pointed out that Exxaro had a 40-year contract with Eskom for the supply coal to the Arnot power station, which expired at the end of December last year.
“The cost of coal at expiry was R1 132/tonne. The tonnages supplied under the contract were below contractual volumes necessitating Eskom to supplement the supply with other contracts to mitigate security of supply which was a continuous challenge,” explained Eskom.
“In anticipation of the expiry of the contract, a Request for Proposal (RFP) was issued to the market in August 2015. This RFP is currently under evaluation and is expected to be awarded by September 2016. It should be noted that Tegeta has not responded to this RFP.”
As for a claim in the City Press report that coal meant for the Hendrina power station under an existing contract of Optimum Coal (at R174 per tonne) is diverted to Arnot where Eskom is paying much more per tonne, Eskom said it actually relates to the export grade coal (with a base price of R470 per tonne) that is not suitable for Hendrina power station.
“Optimum Coal Mine produces coal for both domestic and export markets. Because of the low commodity demand, Tegeta is selling some of that coal to Arnot. There’s nothing untoward about it,” said Eskom.
“While the evaluation of the long-term contract is still underway, and expected to be completed in September this year, Eskom has in the interim contracted seven suppliers to deliver coal to Arnot until September. Although the media has generally focused on one supplier, namely Tegeta, Eskom has named the other six suppliers as well, and they are: South32 (BECSA), Exxaro, Glencore, Keaton Mining, Hlagisa Mining and Umsimbithi Mining.”
In April, four of the seven suppliers, namely Exxaro, Hlagisa, Umsimbithi and Tegeta remained supplying Arnot while the balance of the suppliers indicated were redirected to supply their original designated power stations, according to Eskom.
Hendrina coal stockpiles are currently 40 days, which is already higher than the target of 35 days. It added that the commitment from Optimum, going forward is to meet the Hendrina burn requirements.
Tegeta and Umsimbithi transaction
Eskom said in a statement that independent intelligence obtained of a potential protest action at Rietkuil and surrounding areas increased the security of supply risk, prompting a declaration of an emergency in December 2015.
Continued monitoring of the security of supply risk from January to March revealed the need to build up stock requirements also coincided with strike action at Umsimbithi. This placed a further strain on stock levels prompting an immediate need for additional coal.
Subsequently initiatives were pursued which resulted with several suppliers, namely Hlagisa, South 32 (BECSA), Exxaro, Umsimbithi, Glencore, Just Coal, Keaton Mining, Vunene Mining, Tegeta Brakfontein, Optimum Coal Mine supplying coal to the Arnot Power Station in January 2016.
According to Eskom, this was a temporary and sub-optimal measure as the coal was not all of the required coal quality for Arnot Power Station. An alternative solution was needed to source the required coal quality due to the adverse effect on generation plant performance and maintenance.
In April 2016 Exxaro, Hlagisa, Umsimbithi and Tegeta (Optimum) remained supplying Arnot, while the balance of the suppliers were redirected to supply their original designated power stations.
Exxaro (NBC), Hlagisa, Umsimbithi and Tegeta (Optimum) continued to supply Arnot, however, a deficit of 2.1 million tonnes remained for the winter supply plan, explained Eskom. Exxaro and Hlagisa were supplying the maximum quantities possible from their respective mines and consequently could not increase supply to mitigate the shortfall.
“The two remaining suppliers, namely Umsimbithi and Tegeta, were approached to increase supply to mitigate the shortfall. Both suppliers were able to meet Eskom’s requirements for additional coal quantities at the required coal quality which resulted in approval for extension of both contracts,” said Eskom.
“Tegeta indicated that the required coal quality can only be sourced if they divert their export quality coal to supply Eskom. In addition, there was an indication that additional equipment was needed to reach the required tempo of coal delivery to Eskom that would mitigate the shortfall. These factors led Tegeta to request a prepayment from Eskom.”
Eskom, therefore, concluded a contract with Tegeta to supply 1 250 000 tonnes of coal from April to September 2016 and have approval to extend the contract with Umsimbithi to supply 540 000 tonnes from June to September 2016.
“These two contracts in our view sufficiently address the winter shortfall and security of supply risk relating to coal procurement,” said Eskom.
“The cost of coal from Tegeta was R19.70/GJ and the cost from Umsimbithi was R18.50/GJ, the price difference being explained by the higher rejection level requirement for Tegeta. In both instances we would like to point out that the cost is far lower than the cost of approximately R51/GJ from the original Exxaro Arnot colliery that expired in December 2015.”
Additional conditions relating to the prepayment included a 3% prepayment discount on the coal price and sufficient security guarantees. The coal CV requirement was increased due to the prepayment request. In addition penalties are applicable in the event that Tegeta does not provide the contracted qualities.
According to Eskom, Tegeta performance against the contract indicates that they are supplying coal with the contracted specification and are expected to deliver all tonnes, possibly ahead of the contract period.
“These transactions have enabled Eskom to commit to no load shedding during the winter peak period which is a significant commitment to the country,” said Eskom.
“Prepayment is a common commercial practice that is used widely and not unique to Eskom contracts. It is used in in large projects, coal mining contracts and emergency supply contracts.”
Coal qualities issue
Eskom said it continues to measure and monitor the coal qualities from all its suppliers. Tegeta coal qualities are monitored in accordance with Eskom’s Coal Quality Management Procedure.
This includes Tegeta Brakfontein Colliery and Optimum Coal Mine. The Brakfontein colliery is dedicated to Majuba and it meets Eskom’s coal quality requirements.
“This coal, like any other, is periodically diverted on a short term basis to alternative power stations to meet minimum coal stock requirements,” explained Eskom.
The Optimum Coal Mine provides two coal qualities to Eskom. The Optimum – Hendrina supply is a blended product of run-of-mine and washed product. This is supplied under the existing Optimum-Hendrina contract that expires in 2018.
The second product from Optimum is from their export mining compound. It is a higher quality coal and this is supplied to Arnot under the current short term agreement.
“It should be noted that Eskom has a claim against Optimum for R2bn relating to out of specification coal delivered. Eskom has vigorously pursued this claim with the previous owners of Optimum, registered its rights with the business rescue practitioners and also indicated its intention with the new owners of Optimum being Tegeta that Eskom will be pursuing this claim,” said Eskom.
Eskom said in general it has experienced numerous coal quality challenges with various suppliers, including long-term tied collieries. To mitigate this exposure, it has, over time, improved on coal quality monitoring, assurance, and lately risk transfer. That is why a number of changes are being considered and will be implemented for all new contracts and renegotiated for all contracts.
“Eskom continues to engage the industry on coal quality, as well as coal pricing, in order to ensure receipt of an optimal coal product at the right price. To this end, current coal contracting discussions are aligning coal pricing and escalations in line with Nersa coal cost determinants,” said Eskom.
“Commercial decisions that consider security of supply, risks associated with coal costs and optimal cost of coal continue to be balanced, ensuring that the optimal decisions are in the interests of Eskom and the South African consumer.”