The curious case of Jabu Mabuza and Eskom’s coal policy

Denies policy that ‘drove majors out of industry’ ever existed.

When Eskom chairman Jabu Mabuza last week stated that everybody is to blame for the current load shedding, there was quite a reaction.

The week before, at Eskom’s interim results presentation, he made another strange statement that went mostly unnoticed.

Mabuza told journalists and analysts that Eskom doesn’t have a policy that coal suppliers must be majority black-owned.

This requirement was however the subject of much controversy a few years ago, with Eskom wanting, for example to see Exxaro in 2016 when the mining major’s black shareholding was expected to fall to 30% on the expiry of its BEE deal.

When Moneyweb asked Mabuza when Eskom dropped this black ownership requirement, he denied that it ever had such a policy.

This sounded strange, and a quick Google search dug up an Eskom statement dated December 5, 2016, in response to the Exxaro ownership situation.

Eskom policy does indeed have ‘a black ownership target’

In the very first sentence, Eskom makes it clear: “Eskom’s coal procurement policy requires all the mines that supply coal to its power stations to have a black ownership target of more than 50% throughout the life of the mine.”

According to the statement “Eskom partnered with the Departments of Mineral Resources and Public Enterprises in December 2012 in the development of the Black Emerging Miner (BEM) Strategy.”

At that time Brian Dames was the CEO of Eskom and Malusi Gigaba, the public enterprises minister.

According to Minerals Council senior economist Bongani Motsa it was this very policy, together with Eskom’s decision to end long-term coal supply contracts, that turned the local coal mining industry on its head. It in fact drove some of the majors out of the industry, Motsa told Moneyweb, and is largely the reason why Eskom is now battling with coal supplies.

Policy pushed aggressively to ‘pursue corruption’

He says Eskom under the Zuma administration was pushing BEE aggressively “to pursue their corruption programme”. It refused to renew long-term supply contracts with the coal majors when they expired, which together with the misalignment of its black ownership requirement with the 26% requirement of the mining charter, resulted in untenable policy uncertainty.

Anglo American Coal sold all its Eskom-tied coal mines and now focuses on exports. The mines the company sold are New Vaal, New Denmark, and Kriel, all sold to Seriti for R2.3 billion. New Largo was sold for R850 million to a Seriti-Coalzar joint venture, Motsa says.

Three of South32’s four coal mines – Khutala, Middelburg and Wolvekrans – are currently on the market for an estimated R12 billion.

And, of course, Glencore was forced to sell the Optimum mine to Tegeta for about R2.15 billion.

Glencore is still in the coal mining space. It owns the Goedgevonden Complex (an open-cut mine, in a joint venture with ARM Coal), the iMpunzi Complex, Izimbiwa Coal, and the Tweefontein Complex, according to Motsa.

The only coal major that has not sold any assets is Exxaro, which is, in fact, looking to buy some of the coal assets from South32, says Motsa.

Coal mines sold – at a cost

Motsa says some of the coal mine sales were concluded at major discounts due to the policy uncertainty.

In addition, investment in coal mining dwindled, also due to policy uncertainty. In 2009, for example, the industry invested R7.4 billion, but in 2017 only R3.8 billion.

This, even though the international coal price grew higher than the local price as benchmarked by Eskom, says Motsa.

Since the political leadership changes this year and the appointment of a new Eskom board, the utility has begun to override the 51% requirement and it is once again signing long-term contracts.

Moneyweb has learnt that Eskom now offers the coal majors on average R300 per ton, which they find acceptable. They can expand operations due to the long-term offset agreement and sell the extra coal at higher prices on the export market. The export price is currently between R900 and R1 100 a ton, says Motsa.

However, it takes time to develop or expand coal mines and delivery in terms of these new contracts will not start immediately.

Small to medium miners, meanwhile, get closer to R200 per ton from Eskom, which leaves these miners frustrated and limits their production.

Will now buy coal from ‘anybody’ regardless of black ownership

Mabuza said at Eskom’s interim results presentation that the utility abides by the Preferential Procurement Policy Framework Act (PPPFA) and the Mining Charter, and “will buy from anybody who will sell us coal and mine legally”.

The coal mining industry has, however, burnt its fingers with Eskom and a sudden reversal of policies or even a denial of earlier policies cannot undo the turmoil Eskom’s conduct caused within the industry. This industry has long lead times and a sudden change of heart at Megawatt Park won’t result in new coal deliveries tomorrow.

Actions have consequences, and that is what Eskom is now experiencing.

Why Mabuza denied the existence of the policy is not clear. When Moneyweb asked Eskom’s media desk, it merely confirmed that the requirement was based on its shareholder BBBEE compact and endorsed in the Eskom coal sourcing strategy in 2012.

According to Motsa the policy has not been formally withdrawn.

Perhaps Mabuza should take note that mining companies sold assets worth billions of rands on the basis of this policy that he denies, formally inform the coal mining industry that it has been scrapped, and then try to start building a new relationship with the industry.

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