Johannesburg - Eskom, the embattled power utility, appears to have driven one of its coal suppliers, Optimum Coal, a subsidiary of Glencore, to the wall, sparking a chain of events that forced the company yesterday to launch a business rescue bid.
The development could be a precursor to more pain for local coal miners as they grapple with falling prices. Global coal prices have been sliding by about 10 percent this year.
News of the business rescue bid underscored the limited range of options at Optimum’s disposal, more so after Mineral Resources Minister Ngoako Ramatlhodi slapped the company with a directive suspending its operations on Monday.
The department has accused Optimum of violating the conditions of its mining licence as it retrenched workers recently. Without some form of relief from its creditors and other claimants, Optimum will be left with no alternative but to cease operations altogether.
Business rescue
Glencore said both Optimum Coal Holdings and Optimum Coal Mine would be placed under supervision and through business rescue proceedings because of the financial strain that Optimum had taken amid disagreement over a supply contract with Eskom.
Over the last six months Optimum has had to take various measures to cut costs, including downscaling operations and cutting production, to mitigate the impact of Eskom’s unwillingness to renegotiate a coal supply contract signed in 1993.
“This agreement has resulted in Optimum supplying coal to Eskom at a cost significantly less than the cost of production for a number of years,” Glencore said in a statement.
“Eskom is enforcing specifications in the supply agreement which Optimum is unable to meet on a sustainable basis.”
Optimum is contracted to supply 5.5 million tons per annum to Eskom, which is battling with a funding crunch of its own as it struggles to supply adequate electricity to power up the country.
Eskom sought penalties that would result in Optimum supplying coal to Eskom “for an effective price of R1 per ton”, according to Glencore, which argues that this was unsustainable. Industry sources said the going rate was between R400 to R500 a ton.
Kieron Hodgson, a commodities and mining analyst at London-based Panmure Gordon, said Optimum’s challenges were a reflection of the difficulty in the global coal market. He said Optimum’s only option of survival was to renegotiate the contract with Eskom.
Optimum’s bid to stabilise its finances sparked protests by the National Union of Mineworkers over the company’s decision to cut jobs in recent months.
“The retrenchments of workers at Optimum Coal Mine recently were inhumanely conducted, and disregarded all the legal prescripts which govern the process of retrenchments,” Ramatlhodi said in a statement.
Claims disputed
However, the company disputed Ramatlhodi’s claims, saying that out of 1 067 employees earmarked for retrenchments, 359 employees had been retrenched. It said that about 267 had opted for voluntary severance packages and 86 were redeployed to other Glencore operations.
Glencore added that it had in fact complied with the law and had extended the 60 day legislated consultation process with unions and affected employees to more than 150 days.
“Glencore has agreed to provide funding to Optimum to enable Optimum to pay the full retrenchment cost as tabled at the Commission for Conciliation, Mediation and Arbitration and offered assistance to the affected employees through retraining programmes to enable them to plan for the future.”
Glencore said its shareholders had contributed R900 million towards funding Optimum to enable it to continue operating and supplying Eskom in addition to a R2.5 billion invested previously.
In June Eskom told Optimum it was not willing to renegotiate the agreement and terminated the framework agreement, Glencore said.
It added that the directors of Optimum were of the view that if the Eskom supply agreement can be renegotiated, there was a reasonable prospect for rescuing the company.
Eskom yesterday said it had become aware of the latest developments through the media and is awaiting formal notification as required by law.
Agreement
“Optimum have not yet officially notified Eskom of this point. Eskom has an existing coal supply and off take agreement with Optimum and we expect the terms to be honoured,” Eskom said.
The showdown between government and the mining houses is nothing new. Falling commodity prices and rising costs mean that the companies will be forced to cut jobs, something the government abhors in a country where the official unemployment rate is running at 25 percent. The looming spectre of job losses in the industry has necessitated Ramatlhodi to call an urgent meeting with mine bosses and labour unions in Pretoria tomorrow.
Two days of drama
Monday: The Department of Mineral Resources issued Optimum Coal Mine in Mpumalanga with a section 93(b) of the Mineral and Petroleum Resources Development Act suspension. Ramatlhodi blames the firm for lay-offs without following requirements of the law.|
Tuesday: Optimum says it has resolved to commence business rescue proceedings and that Optimum Coal Holdings and Optimum Coal are under supervision given their continued financial and unsustainable financial hardship.
- Glencore says Optimum has complied with all legal requirements in respect of the retrenchment process and the conditions of its mining right, including extensive consultation with government and the Unions. It adds that Optimum had extended the 60-day legislated consultation process with unions and staff.
* Additional reporting by Ellis Mnyandu
BUSINESS REPORT