State-owned electricity utility Eskom moved to clarify its statement that Anglo American’s New Denmark colliery had supplied coal to the Tutuka power station between April 2015 and May 2016 at R1 600/t – a level that group executive for generation Matshela Koko described as “unacceptable”.
In a statement, Anglo said that, “for the period in question (April 2015 to March 2016) we invoiced Eskom an average of R668/t, in line with the contract, mine progress and agreed budget between Eskom and Anglo American”.
However, Eskom insisted that the total cost for the period was R1 600/t, once the costs of operating the mine, as well as the amortisation costs of historical capital expenditure were included.
Koko reiterated his statement, made on July 5, that it was unacceptable for New Denmark coal to be “more than double Eskom’s average cost of coal, and possibly one of Eskom’s most expensive coal contracts”.
Even if the R668/t quoted were correct, Koko added, the price is “more than 70% above Eskom’s average price of coal”.
The New Denmark colliery is one of the utility’s cost-plus contracts, which have come under scrutiny in recent months. Eskom said the model had been pursued with the intention of providing a strategic advantage to Eskom in relation to security of supply, and pricing.
“This arrangement is currently not yielding the intended benefits. Eskom therefore urges Anglo American to radically change the performance of the mine to be in line with intended expectations.”
Eskom’s statement comes amid a change in the coal-sourcing strategy by the utility, which recently decided to terminate a 40-year cost-plus sourcing model with Exxaro’s Arnot mine in favour of a tender process.
The utility, which burnt 114.8-million tons in 2015/16, has historically relied on cost-plus contracts to source a significant portion of its coal. However, as these operations have matured, it has been reluctant to inject further capital, resulting in lower volumes and higher costs.
The shift in strategy precipitated the controversial sourcing of coal from the Gupta-family-linked Tegeta Exploration and Resources, which bought the Optimum mine out of business rescue from Glencore.
There was a public outcry when it emerged that Tegeta received prepayment from Eskom to begin mining a portion of the Optimum mine, which supplies Eskom and the export market, not being operated at the time, owing to poor export prices.
Koko announced on July 5 that, following the termination of the Arnot contract, Eskom would issue requests for proposals to replace other cost-plus contracts that were nearing the end of their lives.
A tender would be issued on July 8 to replace supply to the Hendrina power station, which would be followed by an enquiry to replace supply from Anglo American’s Kriel mine, where the contract expires in 2019.
“We will change and we will go to unconventional suppliers – and we won’t apologise for that,” Koko said at the group’s annual results presentation.