The proposed sale by South32 of its South African Energy Coal (SAEC) division means the loss of a second large balance sheet by South Africa’s domestic coal sector following last year’s proposed sale by Anglo American of the mines it has dedicated to Eskom.
What this means is that the country’s ability to fund expansions or add new sources of thermal coal for power generation will become harder to finance, because the buyers of Anglo’s mines and, most likely, South32’s division, are new and so-called pure-play, black-controlled entities.
Diversified mining companies such as South32 and Anglo American have multi-geographic and commodity mixes, which reduce the risk and cost of capital in the event of capital-intensive projects, such as thermal coal mines.
Though desirable from a transformation aspect, black-owned companies with no assets but a thermal coal mine put pressure on the government and Eskom to provide that funding. The power utility has been wary of doing this of late, for obvious reasons.
All is not lost though, according to Graham Kerr, CEO of South32, who told finweek that new thermal coal mines – one thinks of the proposed R20bn New Largo coal mining project owned by Seriti Resources – could be managed if Eskom adopted an appropriate funding mechanism.
Said Kerr: “It depends to some degree on what cost curves Eskom is going to buy coal at. We are the lowest coal supplier [to Eskom] by a magnitude. If Eskom has a more rational approach to buying domestic coal, then companies will have a bankably feasible project.
“And Eskom needs the coal,” Kerr added.
Eskom said in January that it was facing a coal supply shortfall of an estimated 750m tonnes from now until 2040. This excludes the coal allocation of two contracts which are out on tender, one of which consists of coal supply of 10m tonnes a year.
At the moment Eskom manages the supply of 120m tonnes a year and controls the cost and operational performance at five cost-plus mines, producing a total of 42m tonnes annually.
Around 45m tonnes of its short- or medium-term coal supplies a year are sourced from emerging miners. Ayanda Nteta, Eskom senior general manager for primary energy, said 60% of Eskom’s medium-term coal contracts (those between five and 10 years) were serviced by emerging miners.
Eighty percent of supply contracts shorter than five years had been awarded to junior miners.
But before selling its South African thermal coal mines, South32 will establish the unit as an independent business. It will then set about finding an appropriate buyer. Kerr was reticent about the details.
“We are focused on the first half of the calendar year in which we will set up the business, put the right structure and leadership team in place.
"Only in the second half will we look at ownership structures,” he said in response to a finweek question on whether the group would prefer a cash deal or one in which South32 financed the deal.
“We are conscious of our being in South Africa. What we do needs to be sustainable and it must enhance our reputation.
“So we would ideally like to see an ownership model in which we have a strategic black partner. We would then like to include communities and, if the market was right, IPO [initial public offering] the structure so that all South Africans have a chance to own it,” he said.
He added that the extension of Klipspruit, predominantly an export mine, would proceed after announcing the R4.3bn development during the first six months of its current financial year.
“We are continuing to spend money on Klipspruit and contractors are being appointed. Mike [Fraser, chief operating officer of thermal coal, aluminium and alumina] and team are on schedule. It is going ahead regardless of the final ownership structure,” Kerr said.
This article originally appeared in the 1 March edition of finweek. Buy and download the magazine here.