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R2.3bn Anglo coal sale to Seriti may hit Eskom ownership snag

Seriti CEO Mike Teke

Seriti CEO Mike Teke

Photo by Duane Daws

10th April 2017

By: Martin Creamer

Creamer Media Editor

     

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JOHANNESBURG (miningweekly.com) – A new aspirant South African mining champion on Monday announced its intention to purchase Anglo American’s Eskom-tied domestic thermal coal operations in South Africa, which would position the majority black-owned start-up as the potential second-largest provider of coal to the State electricity utility.

Seriti Resources, the company Anglo named as the proposed buyer of three Eskom-tied coal mines and four closed coal assets, is a new 79% black-owned company, which easily ticks the transformation boxes demanded by both Eskom and Department of Mineral Resources (DMR).

The Eskom-tied mines being sold by Anglo for R2.3-billion ($164-million) are the New Vaal, New Denmark and Kriel collieries, and also part of the deal are four closed collieries, which Seriti sees as having reopening potential.

Anglo has signed a binding sale and purchase agreement with Seriti in a deal that has been two years in the making.

However, Eskom spokesperson Khulu Phasiwe said the question of the ownership of the mines remained a “sticking point” and that Eskom would be seeking an urgent meeting with Anglo to understand how the issue could be resolved.

Interim Eskom CEO Matshela Koko said recently that Eskom had received an asset register from Anglo confirming that the State electricity utility owned assets at the mines in question, but that these assets were not reflected on its balance sheet. The utility had also conducted an audit of all its mining assets, but had not yet disclosed the value or nature of the assets.

“However, we definitely believe we have a right to have a say over what becomes of those assets,” Phasiwe said in a telephonic interview with Mining Weekly Online.

He also stressed that it was the issue of ownership, rather than the nature of the buyer, that would be the main focus of the upcoming “one-on-one meeting" with Anglo.

Headed by CEO Mike Teke, Seriti is owned jointly by four equal anchor shareholders made up of Teke’s Masimong Group Holdings, Thebe Investment Corporation, headed by executive chairperson Vusi Khanyile, Zungu Investments Company, led by Sandile Zungu, and the black-women-led Community Investment Holdings Projects, which was established in 1995 by Dr Anna Mokgokong and Joe Madungandaba.

Seriti is also undeterred by South Africa’s credit rating downgrade headwinds as it sees the acquisition of the Eskom-tied Anglo assets as the starting point of the creation of a large new diversified South African mining giant.

“We’re interested in building a massive mining company in this country,” Teke said.

“We see an opportunity for these assets and we believe that this is a platform going into the future to build a South African mining champion. We do have other opportunities beyond what you’re seeing today, beyond what we have secured, and hopefully at the end of 2017 and the start of 2018, we’ll bed down this transaction, and beyond that also others, for the good of our country,” said Teke, who was born in the East Rand's KwaThema township 52 years ago, and who has had a meteoric rise up the business ladder since his first job in 1984 as a R76-a-week labourer for Van Leer, in Springs.

Anglo American South Africa deputy chairperson Norman Mbazima said, during a media briefing in which Creamer Media's Mining Weekly Online participated, that Anglo had been keeping Eskom advised about the sales process “hopefully to make it a lot easier”.

“I think we’ll have to have the discussions with Eskom going forward. We have read some past pronouncements in the press regarding ownership and we’ll have to deal with that when we speak to Eskom from now onwards,” Mbazima added under journalist questioning.

Teke, who is the current president of the Chamber of Mines and until recently also chairperson of the Richards Bay Coal Terminal, said the acquisition would be funded by a combination of shareholder equity and debt from South African banks.

Teke committed Seriti to maintaining Anglo’s world-class operating standards and said that Seriti was looking forward to partnering with Eskom and operating and developing with a focus on ensuring the ongoing cost-effectiveness and sustainability of the coal mines acquired.

Under his leadership, Sereti has already also expressed interest in acquiring the undeveloped New Largo coal project, which is earmarked to provide coal to Eskom’s new Kusile power station, under construction, in Mpumalanga.

Anglo owns and operates seven mines in South Africa – Goedehoop, Greenside, Kleinkopje, Landau, New Denmark, Isibonelo and New Vaal – and has a 73% shareholding in Anglo American Inyosi Coal, which took full ownership of the Kriel operation, the Zibulo multi-product mine and the New Largo, Elders and Heidelberg greenfield projects.

Included in the Anglo American Inyosi Coal business is the Phola coal washing plant, a 50:50 joint venture (JV) with South32. Anglo also has 50% of Mafube, a JV with South African diversified resources group Exxaro.

In 2015, Anglo’s South African coal mines produced a total volume of 50.3-million tonnes, with export production totalling 17.4-million tonnes. Export coal is routed through the Richards Bay Coal Terminal, in which Anglo holds a 23.2% stake.

Seriti would also like to acquire non-coal assets like Anglo’s Kumba Iron Ore, which is also up for sale.

Mbazima said the sale to Seriti supported transformation objectives for the industry as well as the country, while ensuring a sustainable, reliable and cost efficient supply of coal to Eskom by a company with operational capability and the ability to attract investment for further development.

The operating mines had extensive resources attached to them, which could extend their lives significantly.

He described the price of R2.3-billion as being appropriate and that Anglo was continuing to study the many options around the sale of its export coal mines in South Africa

Under the terms of the transaction, the amount payable would be adjusted for cash flows generated by the operations between January 1, 2017, and the date on which the deal was completed, which would determine the final payment to be made by Seriti on completion.

Anglo American CEO Mark Cutifani said the transaction formed part of Anglo’s ongoing commitment to reshape and upgrade its global asset portfolio, and described the deal as one that realised appropriate value while demonstrating the company’s “long-standing support for the development and sustainability of South Africa's mining industry”.

Mbazima said that the DMR had been consistent in trying to achieve the kind of transformation that the Seriti deal embodied.

“We’ve had very good discussions with the DMR and we will be submitting a Section 11 application shortly and see what happens thereafter,” he added, referring to the section of the Mineral and Petroleum Resources Development Act that deals with the transfer of ownership from one company to another, which the DMR controls.

A large number of companies bid for the coal assets and over the period of shortlisting the bidders, Anglo was "proud" to have settled on Seriti.

“For confidentially reasons, I wouldn’t go into who bid and who did not, but we consider that we've selected the very best. It was a very large number of bidders, it wasn’t ten, it wasn’t 20, it was north of that,” Mbazima said in response to Mining Weekly Online.

Teke outlined that the consortium was working with Standard Bank and various other banks with which the individual shareholders had relationships.

“If you ask me if this is the right time to do the deal, I would say that there has never been a better time. Every situation comes with opportunities. From a funding point of view, I understand what we’re going through as a country, and we’re very concerned about the credit-rating status that the country finds itself in from a financial point of view. I think we’ll work hard to make sure that this works,” Teke added to Mining Weekly Online.

Mbazima said the operating coal mines' resources were all subject to coal supply agreements (CSAs) with Eskom and any export potential in them was thus irrelevant because all production would go to Eskom for as long as the CSAs continued to exist.

“Our commitment is to fulfil the coal supply agreements,” Teke added.

Although Anglo had given until year-end to finalise the deal, it was hoping to do so significantly sooner than that, Mbazima said.

“The first criterion was transformation and 79% in black hands is as good as it gets in the mining industry. The second was operational capacity and we feel confident that these mines will continue to produce 25-million tonnes efficiently and cost effectively,” said Mbazima.

Some of the mines were coming to the end their lives, for example, Kriel was close to the end of its life, but there were significant resources that could make these mines go on for decades into the future.

The arrangements that Seriti had with funders and the level of equity individual Seriti entities were able to bring to the transaction was crucial, Mbazima said.

“Our structure brings together an experienced team capable of operating and developing large scale thermal coal assets and provides a unique mining opportunity for black women. The team looks forward to managing and growing the operations going forward, with a focus on ensuring their ongoing sustainability, given their strategic importance,” said Teke.

But Eskom’s consent for the transfer to Seriti of the CSAs that govern the supply of coal to Eskom must be obtained for the deal to go through. – With reporting by Engineering News Editor Terence Creamer.

Edited by Creamer Media Reporter

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