110211 Eskom Camden power station in Ermelo which was supplied coal by the nearby Usutu coal mine is now supplied by trucks from other mines in the area.photo by Simphiwe Mbokazi 2

Johannesburg - Glencore has cited “financial hardship” as a result of its coal supply deal with Eskom as the reason behind its placement of local Optimum Coal Holdings and Mine under business rescue.

The miner, which in January said it was pondering closing some of its local units, leaving 1 070 people out of work, says it has been trying to restructure Optimum for the past six months.

Glencore is one of the world’s largest global diversified natural resource companies and a major producer and marketer of more than 90 commodities. Its operations comprise more than 150 mining and metallurgical sites, oil production assets and agricultural facilities.

It has a footprint in more than 50 countries.

In its statement, issued Tuesday morning, it says it will now move ahead with business rescue proceedings and place both Optimum Coal Holdings and Optimum Coal Mine under supervision.

The company blames Eskom for this hardship, saying its agreement with Eskom has led it into this dilemna.

“Optimum is contracted to supply 5.5 million tons per annum to Eskom following an agreement 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.”

The miner says it has been trying to renegotiate this deal so it is sustainable for both parties, without success.

Eskom, which was not available for comment on Tuesday morning, has been seeking more money from government and consumers to cover the costs of running expensive diesel generators and buying from private contractors to keep the lights on when the baseload power stations break down.

Business Report also recently revealed the parastatal wanted its suppliers to give up a 30% equity stake to a its Rotek unit, without any payment.

Glencore notes Optimum’s shareholders have, since September, provided R900 million in funding to Optimum to enable it to continue operating and supplying Eskom. “This is in addition to R2.5 billion of bank funding which Optimum drew down prior to September 2014.”

The miner explains this money enabled Optimum to continue operating while talks with Eskom were ongoing. However, in June, Eskom said it would not renegotiate the deal and terminated the framework agreement. It also, last month, issued notice on Optimum, asserting its claim significant historical penalties from Optimum and to impose future penalties, says Glencore.

“Eskom is enforcing specifications in the supply agreement which Optimum is unable to meet on a sustainable basis and which were the subject of the recent renegotiation discussions.”

Optimum is disputing Eskom’s claims, but its continued financial hardship means it Optimum cannot continue operating the mine and supplying Eskom on an unsustainable basis. “The directors are of the view that if the Eskom supply agreement can be renegotiated, there is a reasonable prospect of rescuing Optimum.”

Update: Subsequent to publication, Reuters reports that Eskom said on Tuesday it would renegotiate contracts with coal suppliers because it was paying too much given a recent drop in commodity prices.