Eskom woes trickle down to would-be coal barons

As Eskom prepares to shut down five power stations in Mpumalanga, it has also emerged that the state-owned power supplier abandoned its plans to establish a R1bn fund that was intended to solve the scarcity of investment capital for would-be coal mining entrepreneurs and emerging black miners. 

The revelation that the Black Emerging Miners Development Fund, unveiled in 2014, never got off the ground is seen as a blow to efforts to open up the coal industry to emerging players, who were banking on accessing capital from the fund on favourable terms. 

Eskom has confirmed that it turned its back on the mooted fund as a result of a slump in electricity sales and a reduction in coal orders from coal mines due to the inclusion of independent power producers (IPPs) in the parastatal’s supply chain, where the IPPs are now feeding wind and solar power into the national electricity grid.

The fund was meant to provide equity and loan finance to emerging miners that have off-take contracts to supply coal to Eskom for its power stations, a plan that would have enabled emerging miners to generate sufficient revenue to meet their debt obligations and other operating expenses. 

When the fund was announced, it was projected that it would boost Eskom’s strategy of sourcing more than 50% of its coal from emerging miners over a four-year period to 2018. 

It is hardly surprising that the electricity parastatal – which spends roughly R200bn annually procuring coal – is nowhere near this target at the moment, and it is highly unlikely it will reach it next year. 

“Noting that the fund did not materialise, Eskom’s expenditure in financial year 2016 with emerging miners was 15.71% of total coal spending. For financial year 2017, the target is 20% of total coal expenditure,” said Eskom spokesperson Khulu Phasiwe. 

The drop in coal sales, which is having far-reaching consequences across Eskom’s coal value chain, has been attributed to a stagnant South African economy that has led to a decline in electricity consumption by consumers. As a consequence, the power supplier will be shutting down the Grootvlei, Kriel, Camden, Hendrina and Komati power stations in Mpumalanga over the next five years to reduce the costs it incurs to generate electricity. 

Eskom is also pulling back on using coal transporting companies that move coal from mines to its power stations via road. In early March, about 2 000 coal truck drivers protested in the country’s capital, Pretoria, against the decision by the parastatal not to renew coal transportation contracts when they expire in May next year. The truck drivers and trade unions say the closure of five mines in Mpumalanga could lead to the coal sector losing 30 000 jobs.

Phasiwe said coal mining operators that require funding for their ventures must approach state-owned funding agencies such as the Industrial Development Corporation (IDC) and the National Empowerment Fund (NEF), which have divisions that specialise in financing mining-related businesses. 

“Thus Eskom concluded that, given the context, development funding institutions were better placed to provide the necessary funding for coal resource development,” Phasiwe pointed out. 

The South African Mining Development Association (Samda), which represents junior miners and black-owned mining firms, said the coal fund could have relieved the pressure on capital-starved emerging miners had it been launched. 

“We can speculate that it [the fund] could have made a positive impact, but it never took off. The issue of funding remains a challenge for emerging mining companies. We have been proposing for the formation of a resources bank, funded from a portion of the royalties that the government levy on mining companies, as a solution for addressing the funding challenge for emerging miners,” said Samda chairman Peter Temane. 

Phasiwe said Eskom will focus on its core business of generating electricity instead of risking being distracted from its mandate by getting bogged down in mine development and operations of the companies that it buys coal from. The power supplier will deal with coal suppliers as “arm’s length” coal sellers. 

With the fund now abandoned, the problem of scarcity of investment capital for early- exploration projects is likely to persist. This problem often leads to many entrepreneurs who hold coal-mining rights battling to convert these rights into viable coal-producing mines, stalling or shattering their dreams of becoming coal barons. 

Others apply for mining rights only to then sell them to established mining houses that turn them into multibillion-rand projects. Applying for mining rights and subsequently selling them at a profit has encouraged a practice of hoarding the rights, particularly by emerging miners that do not have the capital to develop them into operational mines. 

In a bid to stem the hoarding practice, the department of mineral resources (DMR) instituted a “use it or lose it” policy to prevent people from accumulating the mining rights for profit purposes with no intention of ever developing them into mines. 

Andile Ntingiis CEO and co-founder of GetBiz, an e-procurement and tender notification service. 

This article originally appeared in the 2 March edition of finweek. Buy and download the magazine here.  

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