Seriti Mike Teke On Leadership With Integrity, Respect And Work Ethic

Mike Teke On Leadership With Integrity, Respect And Work Ethic

​Mike Teke, CEO of Seriti Resources and former President of the Chamber of Mines on integrity, respect, leadership and work ethic.

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Exxaro, Seriti are said to mull bids for South32 coal assets

Exxaro Resources and Seriti Resources are among companies considering bidding for South32’s South African thermal coal operations, which have been valued at almost $800 million, according to people familiar with the matter.

South32’s South Africa Energy Coal unit, the country’s third-biggest exporter of the fuel, was split into a standalone business earlier this year in preparation for a sale. South32 is soliciting expressions of interest for the assets and MTN. Chairman Phuthuma Nhleko’s Phembani Group is also considering an offer, said the people, who asked not to be identified because the information is not public.

Potential bids may range from about R8 billion to R12 billion ($790 million), the people said. The investment arm of non-profit group Mining Forum of South Africa said it plans to make an offer for a 30% stake.

Exxaro declined to comment. Phembani and Seriti didn’t immediately respond to requests for comment. South32 said it has “commenced a process” to broaden the ownership of its South African coal unit, “consistent with our commitment to further transform our South African operations.’

Exxaro, Seriti and Phembani are all South Africa-based, black-owned companies, reflecting a changing landscape of mining ownership in the country as some of the world’s biggest international miners reduce their holdings.

Apartheid redress
State power utility Eskom is the country’s biggest buyer of the fuel and the government is pushing companies to boost black involvement in the economy to make up for discrimination during apartheid. Global mining companies are also under growing pressure from investors to divest from the dirtiest fuels.

South32’s energy-coal business in South Africa has three operating mines, which produced almost 29 million metric tons of the fuel last year.

Phembani already controls 8% of the mines and may look to increase those stakes, according to the people. Exxaro may be interested in a bid as part of a consortium, the people said. Seriti bought coal mines and a large deposit from Anglo American earlier this year.

The deal would give potential buyers access to 18 million tons a year of export capacity, or more than a fifth of the total allocation at the Richard Bay Coal Terminal, according to a prospectus that lists Macquarie Group Ltd. and Morgan Stanley as advisers to the sale.

Only shareholders have an automatic right to export through the terminal, which accounts for almost all of the country’s coal-shipping capacity and is the largest on the continent.

South Africa Energy Coal reported R1.4 billion of revenue for the 2018 fiscal year. It is also the third-largest supplier to Eskom.

© 2018 Bloomberg L.P

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Mike Teke plans to take Seriti Resources public within 24 months

Mike Teke credits Norman Mbazima, deputy chairman of Anglo American South Africa, for keeping the Seriti Resources deal on track. This was the R2.3bn purchase of Anglo’s Eskom-dedicated coal mines to a consortium consisting of black entrepreneurs that Mbazima was influential in forming.

There had been about 63 bids for the Anglo mines – New Denmark, New Vaal and Kriel – which supply Eskom with about 25 million tonnes (Mt) of the 120Mt it burns annually. Mbazima recommended that Teke’s Masimong Holdings, which was one of the bidders, join forces with other interested parties: Thebe Investment Corporation, Zungu Investments Company, led by Sandile Zungu, and Community Investment Holdings Projects, operated by industrialist, Anna Mokgokong.

But it was a combination that was tested. Teke tells how during a lunch at Bellini’s restaurant in Rosebank the call came that Eskom had replaced its CEO, Johnny Dladla, with the relatively unknown Sean Maritz. It was another change in top-level management that would surely spell trouble for the transaction. Anglo wasn’t just selling mines, it was transferring Eskom contracts – a step that would require the blessing of the utility’s top team. Delays kill transactions.

Teke had just taken a lease out on office space which was required for the Anglo coal team that would be taken over by Seriti Resources. “Had this transaction not happened, I would have been on the hook for R2m of office space I didn’t know what to do with,” says Teke.

“I thought this deal was off, but Norman Mbazima had faith. He said: ‘Mike, we are going to fight to the bitter end’”.

In a wide-ranging interview, Teke spends considerable time acknowledging a host of people or organisations who either taught him valuable lessons or hung in there for him: the late Miklos Salomon, the former Billiton executive, for instance. Chief among them is his grandmother.

“I had a painful upbringing in that I never had a father. My mother died when I was seven. And my grandmother then raised me. So what I’m proud of is that I was raised by a disciplinarian. My grandmother was tough and difficult. When she died I was going to high school, but I had already been inculcated.”

Luckily, the Seriti consortium prevailed and the Eskom contracts were transferred in time for signing of the deal in March 2018 – roughly 11 months after the deal was first unveiled. The R250m sale of Anglo’s New Largo, a project that is essential if Eskom’s Kusile power station is to be comfortably supplied – followed soon after, effectively making Seriti one of South Africa’ hottest unlisted coal plays.

Teke has big plans. He wants to list two businesses: one is his investment vehicle, Masimong Investment Holdings, which has recently appointed a CEO; the other is Seriti itself, although the prospect of a listing is not motivated by raising capital for New Largo, which will be brought into being in stages rather than as a single capital project. The latter will, in fact, be funded through the likes of the Industrial Development Corporation.

“Seriti, for me, is a business that I’m going to list, I believe, within an 18- to- 24 month horizon. But I want to list a business that will be compelling to the market.

“I know for a fact that global markets are not excited about coal simply because of the environmental issue, and the risks related to coal. But I will list this business if I can get a bolt-on, beautiful asset that has an export option with it.”

Naturally, one thinks of the 6.5Mt a year in export entitlement that comes with the group of companies comprising Optimum Coal Mine, the former Tegeta Exploration and Resources operation, which had the Gupta family as the ultimate owner. Currently, the mine is under business rescue with a view to it attracting a long-term buyer.

Teke thinks there’s plenty of potential, even after having recently visited the mine – a experience he said “broke my heart”. Teke was the CEO of Optimum Coal Holdings before it was taken out by Glencore. It was when Glencore put the Optimum companies into business rescue that the Guptas were able to swoop in, assisted by backdoor funding, the provenance of which is now widely known.

Seriti, for me, is a business that I’m going to list, I believe, within an 18- to- 24 month horizon. But I want to list a business that will be compelling to the market.

“That mine can still go until 2033,” says Teke of Optimum. “You’ve got huge value: the 6.5Mt of entitlement through Richards Bay Coal Terminal, and then you’ve got Hendrina power station next door, with a [coal supply] contract coming to an end on December 31. There’s an opportunity to reconfigure the contract and come up with a new way of doing things,” he says.

Teke also thinks the Seriti story needn’t stop at coal. “There are two commodities that I’m not going to rule out: manganese and chrome. If I came across an asset in those two areas, we would look at it,” he says. Then there’s the Eskom-focused coal mines that Perth-headquartered company, South32 wants to sell.

“Am I interested in South32 [coal mines]? Any asset that comes on to the market, if it’s long life, if I am able to spend capital, and I’m able to convince my board about returns, and there’s value creation in terms of benefits for the country and for the shareholder … I will go for it,” he says.

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Seriti’s Teke awarded Brigadier Stokes Memorial Award

The Southern African Institute of Miningand Metallurgy has awarded coal producer Seriti Resources CEO Mike Teke with a Brigadier Stokes Memorial Award for his contribution to the mining industry and his leadership role in society.

The platinum medal presented to Teke last week by Seriti’s outgoing president Professor Sehliselo Ndlovu is considered the highest honour to be bestowed by the mining and metallurgical sector.

The accolade was instituted in 1980 to commemorate Brigadier Ralph Stokes’ influence in the South African mining industry.

The first award went to Harry Oppenheimer and it has since been awarded to mining veterans and businessinfluencers including African Rainbow Minerals founder and chairperson Patrice Motsepe, former AngloGold AshantiCEO Bobby Godsell, former Exxaro Resources CEO SiphoNkosi and Minerals Council South Africa CEO RogerBaxter.

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Anglo completes sale of New Largo to Seriti

Anglo American subsidiary Anglo American Inyosi Coal has completed the sale of the New Largo thermal coal project and the closed Old New Largo colliery, in South Africa, to New Largo Coal, which is co-owned by Seriti Resources, Coalzar and the Industrial Development Corporation.

The cash consideration payable for New Largo is R850-million, or about $65-million.

“I am delighted to announce the completion of the sale of New Largo to a majority black-owned and -managed company,” Anglo American South Africa deputy chairperson Norman Mbazima commented on Wednesday.

This sale marks the completion of Anglo’s long-standing strategy to exit its Eskom-tied coal assets.

Anglo also described it as another milestone in the sustainable transformation of the South African miningindustry.

Seriti, which is led by well-known mining personality Mike Teke, is 79% black-owned and is set to become power utility Eskom’s largest black controlled coal supplier, delivering about 24-million tonnes of coal a year to its power stations.

Seriti was, in April 2017, also selected as the preferred bidder to buy Anglo’s Eskom-tied New Vaal, New Denmark and Kriel collieries, as well as four closed collieries, for R2.3-billion.

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Mike Teke’s Seriti still has eye on Gupta coal assets as step towards big league

Mike Teke’s Seriti still has eye on Gupta coal assets as step towards big league

Just like when you grow up there are things that you desire in a toy store, there are assets I desire to own

Seriti Resources CEO Mike Teke has reiterated that Seriti wants to become a coal exporter — and that it would be interested in buying the assets and quotas of the Gupta family’s Optimum Coal.

BusinessLIVE reported in March that Teke had an eye on the mine.

Bidding for Optimum Coal would pit Seriti, which has ambitions to become a black-owned mining champion, against bigger miner Exxaro, which has expressed interest in buying Optimum’s coal export quotas.

Optimum, which is in business rescue, has not clarified whether its assets are up for sale but Teke, who is also a shareholder in Seriti, used to own a stake in the company until Glencore bid for it in 2011.

“Yes I am interested,” Teke told Reuters on the sidelines of a mining conference in Johannesburg on Wednesday.

“I still believe I can run the mine, I still believe I can add value, I still believe I can change the bad things that have happened at that mine.”

Seriti already owns three coal mines, acquired a year ago from Anglo American in a $166m deal that marked the first step in creating what Teke, a teacher turned mining boss, aims to become a publicly traded South African black-owned mining company.

Seriti is co-owned by four black anchor shareholders — Teke’s investment company, Masimong Group; Thebe Investments; Zungu Investments (Zico); and Community Investment Holdings (CIH).

Seriti currently produces thermal coal for Eskom power stations that collectively generate about 23% of SA’s electricity, but Teke said it wants to move into exporting coal.

“My vision is I want Seriti to move into that tier where it’s a mining house that people will think of,” said Teke, a former chairman of industry group the Chamber of Mines (now the Minerals Council SA).

Running Optimum again would be a major step forward.

“Just like when you grow up there are things that you desire in a toy store, there are assets I desire to own,” he said, referring to Optimum Coal.

Bloomberg reports have suggested Glencore is also weighing buying back Optimum, which it sold to Oakbay Investments, owned by the Gupta family, for R2.1bn in 2016.

Glencore declined to comment on the matter on Wednesday.

Reuters

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Seriti has an eye on Optimum

Eskom’s new black-owned supplier, Seriti Resources, has finalised a R2.3bn cash purchase of three collieries from Anglo American and is keen to get its hands on the Guptas’ embattled Optimum mine.

Mike Teke, Seriti’s CEO, was the head of JSE-listed Optimum before it was bought by Glencore. Knowing the colliery well, he said Seriti would be very interested if it came up for sale.

“I never wanted Optimum to be sold. I know it very well. I’ve not spoken to the board yet about Optimum but it’s something we can explore. If I presented it to them a plan will have to come up,” he said.

Having access to Optimum, a mine owned by the Guptas’ Tegeta Resources, which has placed the mine in business rescue, would give Seriti export thermal coal. This would be desirable if Seriti wanted to list, adding to the steady revenue stream from cost-plus supply contracts with Eskom.

Teke said he and another partner in Seriti were exploring vast coal deposits in the Waterberg and were in talks with the company about possibly vending them into the company.

The transaction announced in April 2017 marked the decision by Anglo to cut its exposure to the state-owned power utility, which was insisting on 51% black ownership of its coal suppliers, something the Anglo board would not countenance because it would become a minority partner.

Anglo was also frustrated at the eight years of haggling with Eskom over the construction of the New Largo colliery to supply coal, with the debate raging fruitlessly over who would fund the cost-plus Eskom-tied mine and the ownership of the mine.

Anglo has also agreed to sell its undeveloped New Largo colliery to a consortium that includes Seriti, leapfrogging the new resources company into the top tier of coal suppliers to the state power utility.

Global portfolio

Anglo CEO Mark Cutifani and Anglo American SA deputy chairman Norman Mbazima have said its sales process in SA had come to an end with the sale of the Eskom-linked mines and that it remained exposed to export thermal coal, iron ore, platinum group metals, diamonds and manganese from this country.

“This transaction continues the reshaping of our global asset portfolio based on value and the optimal deployment of capital, while realising value for our shareholders and ensuring reliable supply of coal to Eskom,” Cutifani said on Thursday.

The owners of Seriti, namely Masimong, Thebe Investment Corporation, Zungu Investments Company and Community Investment Holdings, which own 90% of the entity, provided funding towards the deal and secured debt from Standard Bank to fund the deal.

Community and employee trusts own the remaining 10% of the company.

“Seriti is committed to building a new South African mining champion and to providing Eskom with cost-effective, long-term coal supply solutions,” Teke said.

The sale also ticked a box for Anglo in creating a black-owned mining company with a solid set of assets, said Mbazima.

seccombea@bdfm.co.za

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The young Turks of SA’s emerging coal sector

ASKED to clarify the pronunciation of his name, Vuslat Bayoglu responded: “Call me Vusi”, normally a short version of a common South African name. This was the amusing riposte to conference host Bernard Swanepoel’s tongue-in-cheek complaint about the Turk, now in his fifteenth year in South Africa’s coal mining industry.

Bayoglu’s first foray ended messily in court following a bust-up with an empowerment partner. His comeback is Canyon Coal, an eminently more successful effort that he puts down to the absence of new investment dollars from companies like Glencore.

“Back in the day, it was very hard to get new business as Glencore was the dominant player in South African coal,” said Bayoglu on the sidelines of the Junior Indaba, a conference set up by Swanepoel’s company in May. “The group [Glencore] is less involved now. It’s provided a lot of room to pick up assets that are available,” said Bayoglu.

The country’s coal sector is in an interesting space, partly because the majors are thinking carefully about their future strategies. It’s not exactly a case of ‘getting the hell out of Dodge [City]’, but it’s cautious of fresh investment. In the case of Anglo American, it is divesting from the coal sector. South32 is pressing ahead with resource extension projects, one of which is related to Eskom coal supply and, therefore, contractual whilst Exxaro Resources has announced plans to sell certain assets.

That has created opportunities. Scinta South Africa, a company in which Seriti Resources’ Sandile Zungu is invested through Zungu Investment Corporation or Zico, recently bought South32’s Davel coal prospect and Ermelo Mines for R187m.

“There’s about four million to five million tonnes of Eskom quality coal in the discards which we can deliver to Camden power station, which is linked by rail and is about 20km away,” said Charl Ferreira, an executive director of Zico Investments. “We have been discussing the purchase of the South32 assets for about seven years.”

The plan is to build a R2.5bn thermal coal mine at Davel. First, though, Scinta hopes to generate short-term cash flow by processing two discard dumps at Ermelo Mines, which also has a plant and infrastructure that will be eventually repurposed for Davel. It’s a nifty piece of entrepreneurism that is becoming typical of business activity in the sector.

For Bayoglu, the plan is to take Canyon’s production to as much as 10 million tonnes a year (Mtpy) from a current base of about 3.5Mtpa through the development of organic or brownfield projects of recently acquired assets and projects.

The largest of these is De Wittekrans, an 118Mt coal resource near Hendrina in Mpumalanga province. Bayoglu thinks it will have run-of-mine production of some 3.2Mtpy. The project was previously on the books of Continental Coal, a now-defunct company that was once listed in Sydney until it experienced cash flow problems amid a price correction for coal. First, though, Bayoglu has to replace tonnes at existing operations.

Most of Canyon Coal’s current production is split between its Singani (1.6Mtpy) and Phalanndwa (1.4Mtpy) operations. Of these, Singani and its third mine – Hakhano – are reaching the end of their economic lives, which is where assets like De Wittekrans come in.

Production from the mines is sold either domestically or into the export market – Bayoglu’s home country, Turkey, takes tonnes as does Pakistan – but none of the fuel is sold to Eskom of which Bayoglu is critical. “There isn’t anybody who isn’t captured in that organisation,” he says.

ONE of the assets Exxaro Resources was considering selling was Matla, a thermal coal mine contracted to sell some 10Mtpy of coal to Eskom’s Matla power station. As a cost plus mine, it is Eskom’s responsibility to pay for the extension of mineable resources. The fact it hasn’t yet – after promising to do so last year – is thought to be one of the reasons the Matla mine was temporarily put on to Exxaro’s non-core asset list. Others on this list include Arnot, the closed Eskom mine, and North Block Complex.

The fact of the matter is that the increasingly unpredictable business environment regarding Eskom is proving catalytic for the mid-size to junior coal mining space. The other is the redraft of the Mining Charter, which has scattered what little regulatory certainty there was in South African mining to the wind.

A potential buyer for Matla, had it to come on to the market, was Wescoal Holdings – a company that has emerged from the damaging executive row in 2015 with a new strategy focused on its 51% black-owned status. The fallout among executives, principally its founding CEO Andre Bojé, was exactly over the black economic ownership. Bojé wanted to sell the company to an international buyer who liked the potential Bojé had created in the business; Robinson Ramaite, Wescoal’s chairman, preferred entrenching the BEE ownership.

Whether Ramaite’s eventual victory in forcing Bojé out will be to the long-term benefit to Wescoal’s shareholders remains a moot point presently. So far, however, Wescoal has made good progress on a recovery, led by CEO Waheed Sulaiman.

By June, the company was wrapping up its R525m cash and share takeover of Keaton Energy, a transaction that takes Wescoal’s coal production immediately to 6Mtpy with potential to add about 2m more tonnes annually once it develops Moabsvelden, a long-standing project of Keaton’s.

Ultimately, however, Sulaiman hopes to have much larger fish to fry.

“The BEE deal injected new equity into the business and we believe it has really given us a competitive edge over our peers,” said Sulaiman. “From now, we think there can be a significant increase in the asset base and we have plenty of new options around business opportunities. It really positions us well for the next stage of growth.” Wescoal has targeted coal production of 10Mtpy as a medium-term target.

This would be achieved either through small or large transactions, although Sulaiman is cautious regarding taking on too much. “We would look at large transactions but we have to do it in a considered manner,” he said. “Exxaro is one of the things we’re looking at but we have to weigh it up against a deal we know we can do successfully. We need to know we can deliver; make promises we can keep.”

Sulaiman is bound to be pitched against Coal of Africa, led by the savvy and experienced campaigner, David Brown. As with Wescoal, Brown has articulated a growth strategy that is predicated on either small or large acquisitions, recognising in the South African coal industry a fluidity that will throw up opportunities of many stripes.

Whilst Wescoal was inking the Keaton deal, Brown was negotiating the purchase of Uitkomst, a colliery in KwaZulu-Natal province bought from Glencore by Pan African Resources. It was neat business by Cobus Loots, CEO of Pan African, to have bought Uitkomst as it was profit-making, but strategically shareholders didn’t seem overly keen on the asset since Pan African’s mandate was low-cost gold mining.

In selling Uitkomst for R275m, however, Loots pocketed for Pan African shareholders a R157m profit whilst handing CoAL cash flow deemed crucial to its own expansionary plans – the R2.5bn to R3bn Makhado thermal and metallurgical coal project in South Africa’s Limpopo province.

Makhado is a monster of an investment, especially given CoAL’s R1.3bn market valuation: a project that is scoped to produce 2.3Mtpy of coking coal and a further 2.3Mtpy of thermal product over a 16-year life of mine. So far, Brown has used equity in the project and company to raise support and most recently secured a R240m loan from the Industrial Development Corporation to assist with the early stage development of the project.

In terms of project scale, however, few measure up to Resource Generation’s (Resgen’s) Boikarabelo – a prospect also in the Limpopo province, but different to CoAL’s Makhado in that it’s part of the Waterberg coalfields, an area considered the next hub of South African coal production, especially as the riches of the Mpumalanga province are eventually exhausted. So far, only Exxaro Resources has invested substantially in the Waterberg, through its fantastically large Grootegeluk mine and expansion project. But Boikarabelo may well be the very next.

Raising capital for Boikarabelo has been a torturous process. First there was a management coup in which Resgen’s predominantly Australian executive were replaced by South Africans – a move made to align project management with the asset. Resgen had already been toiling with Boikarabelo, raising (and spending) just over R2bn on the project basics, overcoming some (but not all) of the regulatory hurdles, for about five years.

Under the leadership of Rob Lowe, a private equity specialist whose only previous with the coal industry had been on the level of investment manager, Resgen set about the task of pinning down the balance of the capital – a meaty R4bn worth of funds.

A club of lenders including Rand Merchant Bank, HSBC as well as the IDC and Public Investment Corporation, are ready to stump up the capital, but before the credit approval process could begin, there had to be 100% comfort with the setting down of contracts, as well as the business model. Thanks to an improvement in the thermal coal market – where prices appear to be settling between $70 to $75/t – Boikarabelo looks like it may become the next major investment in South Africa’s coal sector.

Lowe says saleable production will be about 6.5Mtpy but with potential to scale up significantly in a phase two development, possibly beyond 20Mtpy. As for coal destination… that would depend. Initially production from Boikarabelo was heading for Eskom, but there’s less certainty now given the ructions at the state-owned power utility.

Commenting in a shareholder update on May 4, Resgen chairman, Denis Gately, said discussions had been held with Eskom that had given Resgen confidence there were “solid grounds” to conclude a coal supply agreement (CSA), but he added: “Further discussions are currently on hold pending the outcome of internal inquiries taking place within Eskom unconnected with the negotiation of this supply agreement.” It wasn’t clear what was meant by “internal inquiries”.

“Eskom’s internal procedures are being held up while people are sent on leave and new people are being appointed,” says Lowe. “But we are not anticipating any issues with the National Treasury because the CSA is vanilla.”

“We are far advanced in relation to the Eskom CSA with the quantities, qualities, the power stations to which Eskom would like the coal delivered,” says Lowe. “We have also had a general discussion on pricing pending these inquiries. But the impact on us is that decisions are not being made which is frustrating as we just want to get the mine built.”

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Eskom leadership crisis may damage security of coal supply

THE management crisis at Eskom, whilst deeply troubling if not entertaining, raises the question as to who’s around to make the executive decisions, especially important ones that are related to primary energy procurement.

The feedback from the South African coal industry is essentially to put a brave face on the matter. There’s no mistaking the difficulties, however.

“When we started talking to Eskom, the CEO changed twice,” said Norman Mbazima, deputy chairman of Anglo American South Africa, a company in the throes of selling some 25 million tonnes/year (Mtpy) of domestic coal to a new black-owned consortium, Seriti Resources, a company in which former Chamber of Mines chairman, Mike Teke is involved.

“Then the chairman also changed,” said Mbazima referring to the almost dizzying turnover in personalities at Eskom’s top table in which Brian Molefe made way for interim CEO, Matshela Koko who, in turn, made way for the current acting boss, Johnny Dladla following a series of allegations relating to corruption and maladministration. There was also the change in chairman from Ben Ngubane to Zethembe Khoza.

Said Mbazima: “But there has been proper engagement taking place even before the CFO was appointed [Anoj Singh]”. This was the fact of the matter at the time of Miningmx’s interview with Mbazima. It’s an indication of just how unstable Eskom has become that Singh was put on leave amid pressure from lenders including the Development Bank of Southern Africa which threatened to withdraw a R15bn loan to the power utility.

Mbazima insists the sale of Anglo’s domestic coal mines to Seriti is pressing ahead, but it does involve the transfer of a coal sales agreement (CSA) with Eskom. Anglo has always made it clear that Eskom is no bystander in this arrangement so it remains to be seen how long the process is going to take.

As described in a previous Miningmx article, published in June, there’s some coal mining executives who decline to sell coal to Eskom at all, given the uncertainty and rolling crisis at the organisation. “There’s no-one who isn’t captured at Eskom,” was the view of Vuslat Bayoglu, CEO of unlisted miner Canyon Coal which produces 3.5Mt of coal annually and has ambitions to take this to 10Mtpa.

Growing attitudes of this ilk will eventually pose a risk over the security of Eskom’s primary energy supply – something of which Molefe was fairly sanguine. He didn’t believe Eskom would suffer much of a coal supply deficit. It’s not a view shared by Exxaro Resources CEO, Mxolisi Mgojo, whose company has taken a concerted effort to reduce its exposure to Eskom-related business.

Said Mgojo in an interview: “This deficit [in coal supply to Eskom] is going to continue to increase if the environment is not conducive for any new further investment by big players who are currently supplying Eskom. They may decide that they just can’t put there money there.

“That deficit will continue to increase which means that there’s going to be a continued shortage of coal. Then, of course, some of these resources are being depleted, and so over time we will have this challenge”.

Mgojo has personal experience of this “challenge” having failed to persuade Eskom to reinvest funds in Exxaro’s cost plus Arnot mine which supplied Eskom’s Arnot power station. The mine was eventually closed and arbitration over closure liabilities are currently underway.

The COO of South32’s Southern Africa business, Mike Fraser, acknowledges Eskom has been in a state of near permanent logjam for months, if not years. He thinks, however, South32, the Perth- and Johannesburg-listed diversified group, has a workaround for its problems.

It’s good that it does: South32 is contemplating an extension to its Khutala colliery in Mpumalanga province, an operation that currently supplies 10.2Mt of coal to Eskom’s Kendal power station. However, production is set to fall to 8.6Mtpy in South32’s 2017 and 2018 financial years, hence the project. Eskom is funding the feasibility study for the extension, but there’s been no decision as yet to extend the current reserves which presently stand at nine years.

Fraser said Eskom had provided capital for an open cut mini-pit operation which would provide additional volumes, and a discussion was underway regarding a short-term underground extension whilst South32 studies a larger life extension.

“That life extension project ‘scope of works’ is being defined; we’re in feasibility now,” said Fraser. “We believe that in to 2018 we’ll be ready for an Eskom investment decision which gives us sufficient time to develop that into, say, 2021, when we’ll actually need those additional volumes before we really start tailing off on the current underground production.”

Fraser said it is becoming harder for Eskom to award new CSAs than it is to amend existing ones. “So our go-forward hypothesis is that we’ll use our current CSA and this will be an addendum because it’s essentially an investment under the existing coal supply agreement,” he said. Whilst there may be some slight changes in the agreement – to account for differing coal qualities contained in the expansion project for instance – it’s thought this would be easier for Eskom to do.

Fraser also believes that even whilst it was under the guidance of Molefe, there was a growing realisation – assisted by the work of McKinsey & Co which was providing consulting services – that it was still cheaper putting in Eskom’s own capital than inducing capital from lenders because “… then people have to create risk on top of it”. That’s why he thinks that in some respects, the so-called cost plus mines that Molefe disliked so much – those Eskom paid for in return for exclusive supply – make sense.

Commenting on Exxaro’s relationship with Eskom, Mgojo is philosophical. “My view is that Eskom-Exxaro will be around long after the current leaders of either organisations are there because there’s a 40-year agreement that will need to both honour.

“It is my hope and my wish that if I’ve not been very good in making it work as Mxolisi that the next guy will do a better job than me. You just have to do it because 40 years is a long time still to be in a very rocky and bad relationship,” he said.

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