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Optimum mine right suspended, penalties may force R1/t coal supply

Clinton Ephron

Clinton Ephron

Photo by Duane Daws

4th August 2015

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – Financially stricken Optimum Coal has been hit by a double whammy – huge potential penalty claims from State electricity utility Eskom plus a suspension of its mining licence by the Department of Mineral Resources (DMR) for alleged inhumane retrenchment.

In the face of these latest setbacks, Glencore announced on Tuesday that the directors of its subsidiaries, Optimum Coal Holdings and Optimum Coal Mine, had resolved to begin business rescue proceedings under joint business rescue practitioners Peter van der Steen and Piers Marsden.

Glencore stated in a media release that Optimum had been supplying coal to the State power utility at a price “significantly less than the cost of production” for a prolonged period.

Now significantly worsening the situation were the penalties Eskom was seeking, which would result in Optimum supplying coal to the State utility at an effective price of R1 per ton.

Contracted to supply 5.5-million tons a year to Eskom as part of an agreement signed in 1993, Optimum has conducted extensive discussion with Eskom to renegotiate the agreement, until the utility made clear its unwillingness to do so, opting instead to serve a notice in which it asserts its rights to claim significant historical specification penalties from Optimum and impose future penalties.

Glencore Coal South Africa CEO Clinton Ephron told Mining Weekly Online in a telephone interview that Optimum had engaged in extensive discussions with Eskom to renegotiate the agreement to a level sustainable for both parties, including securing the supply of coal to Eskom until the end of the estimated life of the Hendrina power station in 2023.

However, the platform on which the renegotiation discussions and interim supply was being conducted collapsed when Eskom terminated the framework agreement in June.

Despite the termination, Optimum secured additional funding from Glencore in early July to enable it to continue supplying Eskom.

But in view of the latest developments, the directors were of the view that the company should be placed in the hands of independent business rescue practitioners, in the belief that there is a reasonable prospect of rescuing Optimum through renegotiation, should the rescue team succeed in resuscitating it.

“I’m hoping that sense will prevail and that all parties can get around the table to negotiate this huge challenge,” Ephron commented to Mining Weekly Online.

Prior to the business rescue move, Optimum took various steps to restructure its operations, which included retrenchments.

The DMR, which alleges that these retrenchments were carried out in an inhumane manner and without due regard for all the legal prescripts governing the retrenchment process, proceeded on Monday to suspend Optimum’s mine right, under Section 93(b) of the Mineral and Petroleum Resources Development Act, on the basis of alleged inadequate adherence to Social Labour Plans (SLPs).

As the Section 93 notice is not permanent, its lifting is expected to allow Optimum to continue to supply coal to Eskom’s Hendrina power station, which it is contracted to do until 2018.

Moreover, the company’s retrenchment process is seen to have been beyond reproach, with Glencore agreeing to provide funding to Optimum to enable it to pay the full retrenchment costs, as tabled at the Commission for Conciliation, Mediation and Arbitration; the company also offered assistance to affected employees through retraining programmes that enabled them to plan for the future.

The retrenchment packages offered were above those regulated in the Labour Relations Act and the impact of the retrenchments had, the company said, been “significantly mitigated” through various engagements and initiatives.

Out of an expected reduction of 1 067 employees, a far fewer 359 employees were eventually retrenched, with 267 opting for voluntary severance packages and 86 being redeployed to other Glencore operations.

“We’ve done everything by the book,” Ephron assured Mining Weekly Online.

But right now the mine is standing idle, following the DMR’s notice to Optimum of alleged failure to discharge obligations fully.

Meanwhile, Glencore has expressed its willingness to extend certain post commencement funding to Optimum to afford the business rescue practitioners an opportunity to assess the company and also provide them time to prepare a business rescue plan for Optimum.

The diversified major has also undertaken to provide all necessary assistance to the business rescue practitioners during the business rescue process of developing a business rescue plan, which would enable Optimum to emerge as a sustainable business and a long-term supplier of coal to Eskom.

Funding will be provided until such time as Optimum can either be taken out of business rescue or, if that fails, placed in liquidation.

Until closing down its coal exports at the end of July and reconfiguring the remaining mine to supply Eskom’s Hendrina power station only, Optimum was producing at a rate of 10-million tons of saleable coal a year, from opencast and underground mines, half of it bought domestically by Eskom and the other half exported.

Optimum’s reiterated plan is to continue to supply Hendrina until the end of its contract in 2018 but Eskom’s assertion of retrospective penalty rights is seen by the directors as being a bridge too far.

The shareholders of Optimum have, since September, advanced R900-million to Optimum to enable it to continue operating and supplying Eskom, which is in addition to R2.5-billion of bank funding that Optimum had drawn down prior to that.

The funding enabled Optimum to continue operating while negotiations on sustainable supply to Eskom continued.

While aware of the unsustainable nature of the agreement and Optimum’s precarious financial situation, Eskom opted in July to serve notice of its specification penalty rights.

Mineral Resources Minister Ngoako Ramatlhodi stated recently that mining companies that trampled on the rights of workers would find him uncompromising.

The Minister has also stated that the DMR would vigorously monitor the implementation of SLPs, which were critical in the granting of mining rights.

One of the world’s largest global diversified natural resource companies and a major producer and marketer of more than 90 commodities, the 181 000-employee Glencore has operations on more than 150 mining and metallurgical sites, oil production assets and agricultural facilities.

With a footprint in both established and emerging regions for natural resources, the London-, Hong Kong- and Johannesburg-listed company’s mining and marketing activities are supported by more than 90 offices in 50-plus countries.

Glencore is a member of the Voluntary Principles on Security and Human Rights, the International Council on Mining and Metals and the Extractive Industries Transparency Initiative.

Edited by Creamer Media Reporter

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