#EskomInquiry: 6 questions Exxaro wants Eskom to answer

Cape Town – Exxaro CEO Mxolisi Mgojo wants Eskom to clarify reasons why its contracts were not renewed, despite it having presented a good business case.

Mgojo presented evidence before the portfolio committee on public enterprises when the Eskom inquiry resumed at Parliament on Wednesday afternoon.

During his testimony, Mgojo explained how Eskom pushed out Exxaro from coal supply in favour of third parties at a considerably higher cost to the fiscus. He also addressed Exxaro’s experience and understanding of Eskom’s policy on prepayment agreements for coal supply.

“I come here because of the great injustice that I am seeing happening in our country,” Mgojo said. “I have to ask myself, do I stand on the sideline and be pedestrian? Or do I risk whatever it will take for me to play my part in setting the things right.”

In his concluding remarks, Mgojo raised questions Eskom has to answer.

1. Why Exxaro's relationship with Eskom deteriorated when Brian Molefe was appointed CEO? 

Mgojo said that Eskom’s agreements with Exxaro were not being adhered to, and those which were being finalised had been "frustrated". “Despite this, and the fact that Exxaro is the biggest supplier of coal to Eskom, Mr Molefe refused to meet with Exxaro throughout his tenure at Eskom.”

Mgojo explained how Exxaro had tried to meet with Molefe in 2016, after Eskom sent the coal mining company a letter in September 2015 related to the Arnot Mine coal supply agreement. Eskom indicated it would terminate its agreement with Arnot in December 2015.

During the year, Exxaro and Eskom had been engaging in “good faith” on the future of the agreement, up until March 2015. From April 2015, “everything changed” said Mgojo. The termination of the contract saw 1 500 workers losing their jobs, even though there was still coal to be mined.

During questioning by committee members, MP Steven Swart expressed his frustrations at how Molefe had refused to meet with Exxaro, but took 58 calls from Saxonwold instead.

2. Why were Exxaro’s efforts to optimise Arnot mine and its escalating costs ignored by Eskom, while a coal supply agreement with Tegeta was concluded instead?  

The inquiry heard how actions by Eskom in fact led to the escalation of costs at Arnot mine. This ultimately led it to end the contract with Exxaro.

Arnot mine was contractually obliged to provide Arnot power station with 4.02 million tons of coal per year. “The life of the mine depended on the acquisition by Eskom of the land forming part of Arnot mine’s mining rights,” explained Mgojo. Eskom had failed to purchase the required land.

“Had Exxaro been able to mine the land as intended, it would have significantly reduced the cost per ton of coal supplied to Eskom,” said Mgojo. “Eskom was contractually obliged to procure this land. From 2004 onwards, Exxaro persistently and repeatedly pointed out to Eskom the necessity and urgency of doing so.”

Another factor at play was that Eskom limited Arnot’s mining production capability when it did not provide the capital for replacing “critical equipment”.

Eskom had indicated to Exxaro there was a moratorium on capital spend. “In some cases, Eskom advised us to spend the capital as operational costs which further exacerbated the cost of production on a rand per ton basis,” he said.

As a result of the reduced coal production of the mine, the cost of coal supplied increased. Eskom used this as a reason to procure coal from third parties. 

3. Why Eskom terminated negotiations on the extension of Arnot Mine's coal supply agreement?

Following a "dramatic turnaround" during negotiations Eskom terminated the agreement with Arnot Mine, explained Mgojo. The termination also led to the closure of the mine. Eskom did not provide the finances for the closure, which it was contractually obligated to do. 

Mgojo unpacked how Eskom's failure to uphold other contractual obligations which contributed to the escalating coal prices. “This reduction in supply provided the rationale for Eskom to supplement its reserves with coal provided by third-party commercial mines.”

Mgojo confirmed that these “third parties” was Optimum Coal Mine, owned by Gupta-linked Tegeta.

When asked by committee member Natasha Mazzone if there was an attempt to capture SA's mining industry to benefit the interests of the Gupta family, Mgojo said his answer is "definitely yes".

"It is without doubt in my mind that if I say that has not happened, I would be lying to myself. I would not be true to myself. I would not be recognising the situation our country finds itself in.

"I am one of those saying this has to come to an end. South Africa deserves better," he said.

4. Why was the Mafube Mine agreement terminated, despite it being Eskom's cheapest option in Mpumalanga? 

Mafube mine is a 50-50 joint venture between Anglo Operations and Exxaro Coal Mine in Mpumalanga. The mine, like Arnot mine, was strategically located to have coal delivered to Arnot power station via conveyor belt.

“The Mafube mine charged the lowest price for coal delivered to Eskom in the country and could, critically, provide the power station with security of coal supply until the mine’s reserves are exhausted,” he said.

Mgojo explained Mafube and Anglo were prepared to continue supplying Eskom up until 2018.

“Despite this, and the fact that the Mafube mine delivered the cheapest coal in the country, Eskom terminated the CSA (coal supply agreement) in 2015,” he said.

5. Why did the Mineral Resources Minister Mosebenzi Zwane remain silent when Exxaro requested him to intervene on the Arnot Mine closure, where 1 500 jobs were at stake?

Exxaro wrote to Mineral Resources Minister Mosebenzi Zwane twice, once in December 2015 and in February 2016, to intervene on the closure of Arnot mine. Exxaro had not received any response from Zwane.  

“People had to lose their jobs,” said Mgojo. He said it was the “biggest pain” as CEO to have to tell 1 500 workers that the mine would have to close, despite there being coal in the ground that could still be mined.

Committee member Rembuluwani Tseli asked Mgojo if he believed the DMR could have handled the situation differently to save Arnot mine, given how the DMR had helped Eskom expedite the process in granting Optimum Coal Mine its mining licence.

To this Mgojo responded that he wants to believe the minister would be willing to save jobs. “He could have had the engagement also with Eskom to ensure that possibilities could be taken seriously that could enable the engagement around extending the (Arnot) contract and saving the jobs.”

Referring to the way the DMR expeditiously granted Optimum its mining licence, Mgojo said it shows that the DMR could facilitate things to enable certain outcomes.  

“I am hoping a similar type of engagement of facilitating and advising could have happened to create a particular outcome where the mine could have been saved,” said Mgojo.

6. Why Eskom suddenly adopted a prepayment policy for coal, to the benefit of a certain miner? 

Mgojo also spoke on Eskom’s policy on prepayment agreements, which he was unaware of until Matshela Koko mentioned it in his interview on Carte Blanche.

 “Exxaro has not at any time received any prepayments or prepurchases of any nature, including in relation to coal or for capital,” he said.

“As far as Exxaro is aware, Eskom does not make prepayments to any other major miners in the industry. The so-called prepayment to Tegeta for coal, of which Exxaro learned through the media, is the only instance to our knowledge where such so-called prepayment was made.”

He labelled former Eskom CFO Anoj Singh’s evidence on prepurchase agreements as “misleading”. Singh appeared before the committee in January. 

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