coal smokestack
Eskom claims that Glencore has been supplying the utility with poor quality coal

On Friday, business rescue practitioners at the Mpumalanga-based Optimum coal mine, announced that the existing coal-supply agreement with state power utility Eskom’s Hendrina power station will be put on hold for the duration of the business rescue proceedings.

The coal mine is owned by Anglo–Swiss multinational commodity trading and mining company, Glencore.

Coal mine to stop supply

Business rescue practitioners, Piers Marsden and Peter van den Steen said in a statement that they were compelled to reduce the immediate cash losses in order to allow enough time for the development of a rescue strategy for the mine, Mining Weekly reported.

Glencore said that its Optimum Coal Mine was under financial strain because it was selling coal to Eskom for less than the cost of production, fin24 reported.

Eskom currently pays ZAR150 per tonne of coal under the existing contract, which is legally valid for another three-years.

The coal mine supplies the South African power utility with 5.5 million tonnes of coal per annum, which contributes 2,000MW to the national electricity grid.

Legal recourse

With the supply contract valid until 2018, Eskom has confirmed the suspension notification but is investigating what legal recourse it has.

Marsden and van den Steen explained: “Suspending onerous contracts is a mechanism that legally entitles business rescue practitioners to release the company under business rescue from lossmaking contracts and in this case is a necessary recourse if we are to have any prospect of rescuing Optimum Coal.”

Seeking feasible solution

Eskom spokesperson Khulu Phasiwe explained: “We have about 40 days of coal stockpiles at Hendrina, and therefore the operations of the power station will not be affected in the short-term.”

Phasiwe told Fin24 that the utility had not yet implemented a “Plan B”.

According to Mining weekly, Marsden and Van den Steen said that as an interim measure, Optimum propose to supply Hendrina at the mine’s cash cost of production between ZAR400-ZAR450 per tonne of coal.

Marsden and van den Steen added: “We hope this interim agreement is a viable solution which will enable the parties to negotiate a long-term contract that will facilitate the sustainable supply of coal to Hendrina into the future.”

Marsden expressed that a new agreement would be the optimal solution: “If Optimum mine is forced into liquidation it will result in interrupted coal supply to Eskom, job losses and other negative consequences and ultimately could result in substantially higher costs for Eskom”.