Glencore coal supply deal with Eskom suspended

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Johannesburg - Administrators for Glencore's [JSE:GLN] South African coal mining subsidiary suspended the firm's supply agreement with national power utility Eskom on Thursday while the mining unit undergoes a financial rescue programme.

Glencore has said that Optimum Coal Mine, which produces 10 million tonnes a year, is under financial strain because it was selling coal to Eskom for less than the cost of production.

South Africa's business rescue law allows a financially distressed company to temporarily delay creditors' claims against it or its assets.

Optimum has offered to temporarily supply coal to Eskom at the cost of production, higher than what Eskom currently pays, while a new deal is negotiated, V-Squared Business Rescue Services, the business rescue practitioner, or administrator, said in a statement.

"We believe that it will be in the best interests of all parties for a new agreement to be concluded between Eskom and Optimum mine, because if Optimum mine is forced into liquidation it will result in interrupted coal supply to Eskom, job losses and other negative consequences and ultimately could result in substantially higher costs for Eskom," Piers Marsden, one of the administrators said in a statement.

The Glencore unit sells half its output to Eskom's 2 000-megawatt Hendrina power station under a supply contract which is due to run until 2018. Eskom has also complained about the low quality of coal from Optimum, a claim disputed by Glencore.

Eskom spokesperson Khulu Phasiwe said the utility was under its own financial strain and could only renegotiate the current contract when it ends in 2018.

"At this stage we cannot make any alterations to the contract, we have communicated to Glencore that we may renegotiate in 2018," he said.

Phasiwe said the company would consult its lawyers on the decision to suspend coal supplies.

Hendrina power station has coal stockpiles for up to 40 days and will come up with a plan in case the issue is not resolved within that time, he said.

Global coal prices have fallen by around 10% this year, partly due to oversupply, extending losses seen since 2011.

Eskom is renegotiating most of its coal contracts and borrowing money to ease financial pressures as it struggles to provide enough power to keep the lights on in the Africa's most advanced economy.

Separately, Glencore, which reported a 29% slump in first-half earnings on Wednesday, said on Tuesday it was considering closing its South African Eland platinum mine owing to falling prices.

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