Johannesburg - Exxaro Resources is in talks with Eskom to obtain more funds to further develop its Matla coal mine after the electricity provider changed the model it uses to obtain the fuel for its plants.
Large capital projects at Matla in Mpumalanga “remain unfunded” by Eskom Holdings, Exxaro said yesterday.
While the operation’s first mine has been idled because of a lack of funds, its second and third shafts will probably produce 8.5 million tons in the year ended June 30, less than the 10.1 million tons the utility contracted.
“We continue to engage Eskom to provide the required capital funding and are considering available recourse” in terms of the coal-supply agreement, it said.
State-owned Eskom is the country’s biggest coal buyer and uses the fuel to generate 83 percent of the power it produces for the country.
The utility developed many of South Africa’s mines using a so-called cost-plus model, in which it would pay for the cost of mining operations run by companies, plus an agreed profit margin.
The electricity producer is looking to reduce the cost of coal and is re-evaluating supply partners and agreements.
Eskom did not renew a contract with Exxaro’s Arnot mine, which had supplied the power plant by the same name for 40 years, at the end of December, and is using short-term supplies that are providing the fuel for a lower price than what was stipulated in the agreement.
The loss of the contract affected about 1 800 employees, and the company expected to complete talks on job cuts in the third quarter, it said. All production had ceased and the mine equipment had been recovered from underground, Exxaro said.
Exxaro finance director Wim de Klerk said yesterday, in an update covering the operational performance of Exxaro for the six-month period to June, that the group had restricted coal capital expenditure to R2.8 billion.
Exxaro would announce its financial results on August 18.
Exxaro said in relation to its market supply, it expected that domestic thermal volumes would remain at “healthy” levels. Volumes in the metals markets would reduce as steel producer ArcelorMittal stopped production at its market coke battery in Newcastle for emergency maintenance, which was expected to continue into the first quarter of next year.
“Export markets depend heavily on Indian demand for lower-quality coal products, while pricing is expected to remain flat.
“Further growth is expected in the African, Pakistani and south-east Asian markets and the group is well positioned with a strong product mix to supply these market,” it said.
Despite persistent low commodity prices and high input costs that continue to test the resilience of Exxaro’s coal business, De Klerk expected metallurgical coal production volumes for the first half of the year to be slightly higher than the same period last year.
Higher production
Thermal coal production from commercial mine was expected to increase by 12 percent due to the inclusion of Exxaro Coal Central (ECC) and higher production at Grootegeluk and North Block complex, partly offset by lower production from Leeuwpan and the Inyanda mine closure, it said.
Coal buy-ins were forecast to increase by 20 percent due to a shortage of export coal after the closure of Inyanda and before Belfast started production, it said.
Export sales volumes were expected to increase 81 percent mainly due to the inclusion of ECC, it said.
Exxaro intended to divest in non-core assets. It would sell its investment in Black Mountain and Chifeng Kumba Hongye through a disposal process once the lock-in period had expired in the fourth quarter of the year.
“We are also reviewing our coal portfolio as part of our optimisation programme, with specific focus on closure and/or divesting from assets that do not meet our expectation of net present value, robustness of earnings and net operating profit margins that can withstand a low commodity price environment,” Exxaro said.
De Klerk is to join steelmaker ArcelorMittal as chief executive and as an executive director to the board with effect from September 1.
Exxaro’s share price rose by 4.55 percent to close at R64.40 on the JSE yesterday.
BUSINESS REPORT