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South African coal mines agree supply deal with Vitol

10 Apr 2018 16:50 (+01:00 GMT)
South African coal mines agree supply deal with Vitol

Johannesburg, 10 April (Argus) — South Africa's Optimum and Koornfontein coal mines will supply a minimum of 200,000 t/month to commodities trading firm Vitol under a 12-month offtake agreement that will help save the collieries from liquidation.

To facilitate the coal supply agreement, business rescuers Louis Klopper and Kurt Knoop entered a 12-month management agreement with investment firm Burgh Group and its operations division Ezimbiwayo Consulting.

The deal marks a victory for Vitol and Burgh, which last year abandoned their attempts to obtain Optimum's 8mn t/yr export allocation at the Richards Bay Coal Terminal (RBCT).

Optimum Holdings, which owns the Optimum and Koornfontein mines along with the RBCT export allocation, is controlled by Tegeta Exploration and Resources. Both Optimum and Tegeta are among eight firms owned by India's Gupta family that entered business rescue in February after the Guptas fled the country to avoid prosecution over their alleged involvement in widespread government corruption.

The deal will ensure a regular cash flow of at least 200mn rand/month for the cash-strapped mines, based on a pre-agreed price of R1,000/t, Klopper said. Vitol will prepay 80pc of the amount due for each delivery.

The agreement with Vitol is far more profitable than the two mines' existing supply agreements with state-owned utility Eskom. Neverthelsess, the collieries will continue to meet their contractual supply obligations to Eskom, Klopper said.

Optimum has to supply 4.4mn-4.8mn t/yr to the Hendrina power plant at R201/t, which does not even cover the R350/t cost of underground mining. The Koornfontein mines supply coal to the Komati power plant at R450/t, which is marginally better but still falls well below the price agreed with Vitol.

The deal secures a transactional bank account for the mines, after efforts to obtain banking facilities from commercial institutions proved unsuccessful because of concerns over the associated reputational risk, Klopper said.

The Bank of Baroda, which previously serviced the Gupta familiy's business empire, ceased operating in South Africa on 31 March. Without the agreement, the only other option would have been to liquidate the mines, putting at risk the livelihoods of 400,000 workers, as well as contractors and their employees, Klopper said.

As soon as the first 200,000t is delivered to the terminal, an initial payment of R230mn will be released, he said.

Ezimbiwayo has experience in open cast and underground mining coal beneficiation and rail and port management. It is tasked with stabilising the operations of the Optimum and Koornfontein mines.

A lack of liquidity since the second half of 2017 brought a deterioration of the mining plants and equipment. As a result, stockpiles of run-of-mine material had not been removed, blasting was not undertaken, equipment was not maintained and a shortage of protective clothing developed.

An assessment by Ezimbiwayo further found that the transport of coal to RBCT had been halted as a result of money owed by Optimum and Koornfontein to the railway and port authorities.

Coal stockpiles could not be removed or traded because of R43mn owed to the Transnet Freight Rail authority since January. Optimum and Koornfontein have also been unable to access their export concession because of R17mn owed to RBCT. In addition, the rail siding at Optimum mine was not operational as a result of R700,000 owed to the Rail Safety Authority.

Stockpiles have begun to smoulder owing to extended exposure to the elements, presenting a fire and environmental hazard. To remedy the situation, Ezimbiwayo will provide an immediate R70mn cash injection to get Optimum's rail siding operational again and free up the rail-to-port transport service and terminal concessions.

It will then sell the stockpiles urgently, which will immediately unlock an estimated R135mn in revenue, Klopper said. The first R35mn shipment is already being readied, he said.

This will guarantee the payment of salaries and wages, get contractors back on site, address the needs of critical suppliers and provide finance to replenish essential materials, such as coal decontaminant magnetite, which is fully depleted at both Optimum and Koornfontein.

As a result of the materials shortage, no "serious mining" has been taking place at any of the mines, Klopper said.

All revenues will be reinvested back into operations and it is envisaged that both mines will be rehabilitated within 12 months, Klopper said. Only then will the business rescuers turn their attention to selling the mines, he said.

Former owner commodities trading firm Glencore, as well as local mining firms Exxaro Resources and Seriti Resources, are all said to have expressed an interest in acquiring the mine.