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Vitol deal risks Optimum's future: CEO

04 May 2018 20:25 (+01:00 GMT)
Vitol deal risks Optimum's future: CEO

Cape Town, 4 May (Argus) — The Optimum coal mine in Mpumalanga, South Africa, faces liquidation because of the unfavourable terms of a supply deal with commodities trading firm Vitol, the mine's chief executive George van der Merwe has warned.

Van der Merwe has applied to the High Court in Gauteng to have the business rescue practitioners overseeing the colliery removed. It went into business rescue in February along with seven other entities owned by the Gupta family who fled the country following corruption charges.

In his court application seen by Argus, the chief executive contends that the Optimum coal mine is "suffering irreparable harm" because of agreements that the rescuers reached with Vitol and investment firm Burgh Group last month. But Optimum's business rescuer, Louis Klopper, who will file his answering affidavit next week, refutes all of Van der Merwe's claims.

The Vitol supply deal contains a heavily discounted price for Optimum's coal, post-delivery payment and inflated transport costs, according to Van der Merwe. Along with the Burgh Group's "excessive" management fees, these inflict a loss of around R22.9mn/month ($1.8mn/month), he alleges.

Under the supply deal, Vitol pays a $19/t discount to API 4 for NAR 4,800 kcal/kg coal and a $7/t discount for NAR 6,000 kcal/kg coal, the court paper says. By comparison, Optimum recently sold its NAR 4,800 kcal/kg coal to Glencore at a $15/t discount and its NAR 6,000 kcal/kg to African Iron Ore at a $5/t discount. This amounts to losses for Optimum — and a hidden profit to Vitol — of $4/t for NAR 4,800 kcal/kg and $2/t for NAR 6,000 kcal/kg coal, the chief executive says.

Vitol will also pay Optimum on a post-delivery basis, whereby the mine is not entitled to any payment until the full month's consignment of 200,000t has been delivered. This contrasts with its preferred model of a 95pc pre-payment as evidenced by Glencore contracts of the past, the chief executive says.

But Klopper says the API figures quoted by Van Der Merwe were "completely misleading" because he was choosing a way of calculating the price that suited his argument. The rescuer further says that, as outlined when the deal was first announced, Optimum would be paid on a weekly basis for each 50,000 t tranche of coal delivered.

Optimum's chief executive also claims that the Vitol agreement assumes much steeper transport costs. This is partly because Burgh failed to pay outstanding Transnet and Richard's Bay Coal Terminal (RBCT) fees to reinstate the mine's rail freight and export capability, he says.

But only last week Burgh's chief executive Quinton van der Burgh told Argus that rail shipments had resumed and 8mn t/yr of RBCT export rights were restored after R43mn owed to the Transnet Freight Rail authority and R17mn owed to RBCT had been paid.

Van der Merwe further alleges that the Vitol contract assumes much higher transport costs for a third-party contractor that it used previously. When contracted with Centaur Mining, which used the same third-party contractor Vitol is now using, the cost was just R171/t compared with Vitol's R274/t, Van der Merwe says.

But UAE-registered Centaur Holdings' subsidiary Centaur Mining South Africa was named in the public protector's State of Capture report, which investigated then-president Jacob Zuma's "alleged improper relationship with the Gupta family." Centaur made the second-biggest contribution of R885mn, or 36pc, towards the Gupta family's payment for Optimum, according to the report. One of its directors, Aakash Jahajgarhia, is married to Anil Kumar Gupta's daughter.

African Iron Ore offered an alternative deal with substantially better terms than those eventually agreed to with Vitol and Burgh, according to Van Der Merwe. Not only did it propose a price for 6,000 NAR that was $2/t higher, it also offered significantly lower management fees. Whereas Burgh will earn 1.5pc of Optimum's monthly turnover up to R250mn and an extra 2.5pc above the R250mn threshold, African Iron Ore proposed a flat rate fee of 0.5pc of revenue, he says.

But Klopper says the offer from Mauritius-based African Iron Ore was rejected, not only because it came with stringent conditions but also because the firm is strongly suspected to be part of the "bigger Gupta network."

Van der Merwe further argues that the "impartiality and lack of interest" of Vitol and Burgh are questionable given that both are direct competitors to Optimum. Since March, Burgh has agreed to supply Eskom with 200,000t of coal in addition to the 300,000t it already supplies under the utility's "emergency coal supply" procedure. So Burgh has arguably already profited from short supply caused by Optimum's difficulties and, since it took over its management, no coal has been shipped from the mine to Eskom, he claims.

Vitol is also a major competitor of Optimum and, less than a year ago, Optimum was selling coal to the commodities trading firm at a discount of $3/t to API. Previously, Vitol and Burgh attempted a joint acquisition of Optimum, the chief executive points out.

Van der Merwe further warns that the rescuers' cancellation of Charles King's R2.97bn ($237mn)purchase of the Optimum and Koornfontein mines, exposes Optimum and its holding company to "ruinous litigation."

Charles King has already paid a deposit of R66.72mn ($5.3mn) and in a letter dated 15 March threatened legal action should the rescuers not abandon plans to sell Optimum to a local mining firm, he says.

But the sale of Optimum by Gupta-owned Tegeta Exploration and Resources was widely viewed with suspicion after it was determined that Charles King was a Switzerland-registered clothing distributor.

Klopper says the transaction as "illegal" and points out that it was being investigated because the payment was never approved by the Reserve Bank as required by law.

The court is expected to hear Van der Merwe's application on 15 May.