 JOHANNNESBURG (miningweekly.com) – Resources group BHP Billiton says that its Mozal aluminium smelter, in Mozambique, will "definitely" remain profitable, despite an amendment to its favourable electricity-supply contract with South African power utility Eskom.
The group confirmed with Mining Weekly Online that the power price received by Mozal would be "higher", but still "internationally competitive". BHP Billiton also confirmed that electricity represented up to one-third of the operating costs of running an aluminium smelter.
The new deal was struck over the weekend, with a further deal, involving the mining giant's South African smelters, promised by March next year - together, the Southern African smelters consume about 5% of South Africa's 40 000-MW capacity. In fact, Mozal's maximum demand of 950 MW, while the maximum demand from the South African smelters is 1 300 MW.
Spokesperson Johnny Dladla told Mining Weekly Online that, under the terms of the new contract, BHP Billiton would assume all currency and commodity risk, and that the new deal is also rand denominated.
Hitherto, the contract had been coupled to both the aluminium price and the rand/dollar exchange rate, with the power price falling when the London Metal Exchange-quoted price fell, or when the rand strengthened against the US dollar.
It emerged recently that the smelters paid only 12,3c/kWh in 2008/9, while the rest of the country was having to absorb double-digit increases on tariffs closer to 30c/kWh (for direct Eskom customers), and while other industrial and residential consumers were experiencing supply disruptions.
Dladla would not comment of the margin impact of the new arrangement, which would be made effective from March 31, 2010, saying only that the group's aluminium market experience, together with its in-depth market insight, would help it to manage the risk associated with the amendment.
"The amended, mutually beneficial agreement has allowed BHP Billiton to secure its power supplies to the Mozal smelter on internationally competitive terms," Dladla commented, adding that the business was managed on the basis that it could achieve prices measured against a floating price benchmark.
BHP Billiton would, he added, still be in a position to sustain profitable smelter operations in Mozambique, a country that had become relatively reliant on the tax revenues and foreign-exchange earnings arising from the smelter.
Across the region, BHP Billiton smelters employ more than 3 200 direct employees and 2 800 contractors, and contributed R1,3-billion in corporate tax to the South African and Mozambique governments in 2008. Mozal is also Mozambique's largest foreign-exchange earner, generating some 53% of its earnings.
The Mozal smelter also remains the largest single investment in Mozambique's history and employs 2 200 people directly (staff and contractors) and reportedly supports a further 10 000 secondary jobs.
Dladla told Mining Weekly Online that the BHP Billiton and Eskom negotiation teams had been acutely sensitive to the importance of Mozal to the Mozambique economy and that this factor has also informed the eventual solution, which was described as "mutually beneficial".
Neither company would be drawn, though, on the mechanics of the deal, which still had to be approved by the National Energy Regulator of South Africa. But Dladla acknowledged that it was more complex than a pure vanilla-type supply arrangement.
"Power supply contracts of this nature and duration remain complex. We are not in a position to provide more detail on the commercial basis of the agreement."
It was also uncertain whether the agreement would be subject to the recently approved tariff path, which would see Eskom's prices rising by, on average, 25% a year between 2010 and 2013. Details were also not disclosed as to the level of the new tariff, nor on the duration of the deal and whether it included a volumetric discount.
But Eskom acting chairperson Mpho Makwana stressed that it removed the disruptive impact of embedded derivatives from its balance sheet, as well as "all onerous conditions".
The volatility associated with these embedded derivatives was at the core of the R9,7-billion loss reported by the utility for its year to March 31, 2009. In fact, the commodity-linked contracts accounted for R9,5-billion of that loss and were flagged as "unsustainable" by Eskom and its shareholder, the South African government.
Since then, confidential negotiations have advanced between BHP Billiton and Anglo American regarding five discounted power contracts, which were not subject to tariff increases. Eskom had also stressed that the balance of its 138 key industrial customers were not protected from tariff increases.
It was also confirmed by Eskom that contracts at Hillside and Bayside, in Richards Bay, would remain firm and binding while the negotiators continued their discussions and that the utility would maintain its "interruptibility" at the smelters in line with the provisions of the contract.
BHP Billiton chairperson Xolani Mkhwanazi said that the group remained confident that mutually beneficial solutions would also be found for the South African smelters. He also said that the group's smelters continued to fulfill a commitment to a 10% power reduction.
Meanwhile, Dladla confirmed with Mining Weekly Online that BHP Billiton was "exploring sustainable options" for future power security, as well as to cater for growth.
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