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On-The-Air (14/08/2015)

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14th August 2015

By: Martin Creamer

Creamer Media Editor

  

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Every Friday morning, SAfm’s AMLive’s radio anchor Sakina Kamwendo speaks to Martin Creamer, publishing editor of Engineering News and Mining Weekly.  Reported here is this Friday’s At the Coalface transcript:

Kamwendo: Optimum Coal’s plunge into business rescue could result in hundreds of megawatts of power being lost.

Creamer: Yes, a lot more clarity is needed around the issue of Optimum Coal. Being in business rescue now puts us in a risk because there is 2 000 MW at stake. Will it come out of business rescue? Looking at it now, it seems unlikely, because what it is standing to get for its coal is R1 a ton, which is really not sustainable. This is because the penalty imposed on it by Eskom for not meeting specifications. A lot of pragmatism is needed here, because if this goes into liquidation, which is the worst case scenario, but seems the likely scenario at the moment, who is going to win out of this? Certainly the R2-billion penalties that Eskom is looking for is unlikely to be realised and also not being a preferrent creditor, Eskom is going to have to stand in the queue with all the other creditors and probably get a few cents in the rand, as these liquidations usually work out. I think someone who is pragmatic needs to come between these two, Eskom on the one hand and Optimum Coal on the other. Both seem to be willing to talk, but both seem to have different ideas of what is happening at Optimum Coal. From the Eskom side, they say that this is a cost-plus mine and they don’t want to be involved or rescue this mine. Optimum says they have never been a cost-plus mine. If they had been a cost-plus mine, they would not be in trouble because their cost will be covered and still have a margin. That does sound logical so perhaps there is a little bit of misinformation around this. In the meantime, we don't want loadshedding to be worsened by 2 000 MW coming out of the system. There are 40 days left of coal so it is not an immediate security problem, but 40 is really few. They need to get down and talk, because you have got the infrastructure there and a long standing power station Hendrina, south of Middelburg. So, let’s try and keep this going.

Kamwendo: Eskom has unveiled a new coal-sourcing strategy, which puts an end to the old cost-plus arrangement.

Creamer: Eskom’s new strategy indicates that it does not want to be involved with cost-plus mines. It does not want to be a miner of coal, it wants to be a buyer of coal, which is fine. That old era doesn’t serve it well anymore where it would go into 30-year agreements with various mining companies and it would work on getting a good price from them while the mines also export some of their coal, Eskom is assured of getting coal on the basis of cost plus. This is not working for it anymore. The mines aren’t performing to Eskom’s liking. The coal that is being offered is of low quality and Eskom says it is damaging its plants. Eskom wants to move away and have a tender process, so it will be at arm’s length. It will invite tenders for coal that is fit for purpose and will set up infrastructure to give equitable access so that there can be competition among the coal miners. This makes a lot of sense because we see that Eskom is paying a lot more for its coal. Even though it is using less coal, it is paying more. It is a big issue and it wants to move away from the old era and go into the new era of arm’s length business dealing. How long it is going to take to do that is another point. That shows you a different face to Eskom now wanting to get away from the mining side, not capitalise mining at all, but be a buyer of coal and a burner of coal.

Kamwendo: The demand for gold is expected to be well up in the next two quarters of this year.

Creamer: The second quarter was a terrible quarter, it was the worse demand in six years for gold and mainly on the back of India having a lot of weather problems and not having the usual harvests and having to buy gold in the usual way like they used to. Also, China, a lot of Chinese investors were focussed on the stock market, where, there was a crash, but still this let gold down in the second quarter. In the third and fourth quarters, the World Gold Council (WCG)  is very optimistic that gold demand will improve not only because China has bought 57% more gold for its Peoples Bank of China, which is now sitting on 1 658 t and has just bought an additional 604 t of gold, which is a 57% increase, making it the 6th biggest holder of gold as a central bank. Also, we see a rush for coins in the United States. July saw a record number of these American Eagle Coins bought, 170 000 oz of those. Various other factors now building up in India make it look like the second half will have a much firmer demand for gold. The WGC is far more optimistic about gold demand in the second half of this year.

Kamwendo: Thanks very much. Martin Creamer is publishing editor of Engineering News and Mining Weekly, he’ll be back with us at the same time next week.

 

Edited by Creamer Media Reporter

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