Black-controlled coal mining company Exxaro last week confirmed its status as a signatory of a take-or-pay rail contract with State-owned logistics group Transnet Freight Rail (TFR) for the railing of its coal to the Richards Bay Coal Terminal (RBCT), in KwaZulu-Natal.

This follows BHP Billiton Energy Coal South Africa’s (Becsa’s) announcement of its ten-year, R24-billion take-or-pay transaction with Transnet in September last year to rail 18-million tons of Becsa coal yearly along the coal export channel to the privately owned RBCT.

Exxaro executive head: carbon operations Mxolisi Mgojo said in response to Standard Bank mining and metals research head Tim Clarke’s question at the company’s presentation of its 2014 results that Exxaro, which exported 5.3-million tonnes of coal through the RBCT last year, had signed the take-or-pay contract with TFR two years ago.

This came against the background of TFR spokesperson Sandile Simelane saying last week that TFR was close to concluding contracts “with the entire industry” after Glencore CEO Ivan Glasenberg had cautioned that such agreements might have the unintended consequence of inhibiting the supply of coal to TFR’s fellow State-owned company, Eskom.

It is understood that coal-fired power stations in Australia, at times, pay above-export-parity prices and foot the bills for the rail penalties that coal miners face if they fail to take up their export-rail allocations laid down in take-or-pay arrangements.

“I think this is a thing both government and ourselves have got to worry about. We don’t want to be in a situation like Australia, where suddenly you sign these take-or-pays and you have a better outlet for the coal on the local market, but you can’t supply the local market because you’re paying a $15/t penalty on your take-or-pay,” Glasenberg said in response to a question by Creamer Media’s Mining Weekly during a global media teleconference last week.

Simelane said, however, that TFR remained confident of concluding take-or-pay contracts with 36 coal-line customers before the end of its financial year, March 31, and declined to comment on concerns raised by Glencore about the take-or-pay model at a time when Eskom was facing what is termed a “coal cliff”, which could arise owing to the fact that many of its coal contracts are either set to expire, or are associated with mines that require recapitalisation, or face closure.

There is also some concern around the growth in demand for certain coal grades previously consumed only by the South African power utility but now exported in greater volumes for use in Indian power plants and also for blending.

Glencore South Africa coal head Clinton Ephron told Creamer Media’s Mining Weekly during the teleconference that Glencore had not yet signed a take-or-pay agreement with TFR and was in discussion with Transnet “as we speak”.

In response to a question by Standard Bank’s Clarke, Mgojo said that any contract with TFR was almost like a uniform contract with all the other signatories and anything realised in negotiations with one signatory would have to be amended and applied to all other participants.

“Being a monopoly, they’ve got a uniform contract with regard to take-or-pay,” he added.

Clarke also wanted to know whether Total Coal South Africa, which has been acquired by Exxaro, had a take-or-pay contract with TFR.

Mgojo was, however, not at liberty to share that information ahead of the Section 11 transfer of ownership process, currently under way, being completed by the Department of Mineral Resources.

“When Section 11’s done, you can ask me that question and I’ll give you the answer,” he added.

At the media roundtable that followed, Mgojo said, in response to a question from Creamer Media’s Mining Weekly, that he did not foresee any coal supply issues arising for Eskom as a result of take-or-pay agreements with TFR.

He said that Exxaro belt-conveyed the bulk of its coal to Eskom and only in two relatively small instances was coal railed to Eskom or transported by road.

Contracts with Eskom would ensure that coal was delivered to the power utility and he did not foresee Eskom being at a supply disadvantage as a result of take-or-pay agreements coal companies had with TFR.

Many of the contracts the coal mining industry had with Eskom were either in place or being renegotiated.

“All the coal producers, especially the major coal producers, have taken the view that it will be suicidal not to continue to support Eskom for the benefit of the country.

“But someone is going to have to pay for the capital that’s going to be required to continue supplying Eskom. The real question is: At what price are coal producers incentivised to continue investing in coal? – and that’s a contractual discussion that each player will have with Eskom,” Mgojo added.

Although Exxaro recorded a R3.2-billion net operating loss in 2014, mainly on its pretax impairment of the suspended Mayoko iron-ore project, in the Republic of Congo, CFO Wim de Klerk outlined at the company’s presentation of results that revenue from its coal operations had risen 21% to R16.2-billion in the 12 months to December 31.

Its net operating profit from coal had risen 14% to R3.3-billion on a 1% higher production of 39.1-million tons and weaker export prices.