Eskom wants supplier Anglo Inyosi Coal to restructure

Source Business Day Live

by Brendan Ryan | Dec 06, 2013

ESKOM is forcing Anglo American to restructure Anglo American Inyosi Coal into a black-controlled company in order to be allowed to supply coal from its New Largo colliery to the Kusile power station.

This was confirmed on Thursday by Eskom CEO Brian Dames during questions at the presentation of its interim results. Eskom had previously declined to give Business Day a straight answer regarding the black economic empowerment requirements for the Kusile coal supply contract.

As reported on October 24, Anglo American Inyosi Coal holds the contract to supply Kusile from its New Largo colliery. It is 73% owned by Anglo American and 27% by the Inyosi consortium, headed up by Pamodzi Holdings and Lithemba Investments.

While a 27% BEE shareholding meets the empowerment requirements of the Mining and Petroleum Resources Development Act, in December last year Eskom implemented a mandate from the Department of Public Enterprises to source up to 64% of its future coal supplies from "emerging miners".

These are defined as having an empowerment ownership of 50% plus 1 share.

The first generating set at Kusile is due to be commissioned in the second half of 2015 but Eskom has not yet signed the supply contract. New Largo must be developed into a colliery capable of producing 16-million tonnes of coal annually.

Asked whether the new empowerment procurement policy had been an issue delaying the conclusion of the sales contract, Mr Dames said: "It’s not an issue, it’s a requirement. We are working on that and between us and Anglo I am sure we are at a point where we both agree.

"We would want to see more than a 51% BEE (black economic empowerment) shareholding and between us and Anglo we will find a solution."

An Anglo American spokesman said: "We are continuing to engage constructively with Eskom but cannot comment further at this stage".

Anglo American Inyosi Coal was set up in 2007. It owns the operating Kriel and Zibulo (formerly Zondagsfontein) collieries as well as three "greenfields" projects — New Largo, Elders and Heidelberg.

Kriel supplies coal to Eskom while Zibulo is a multiproduct operation with exposure to the export market through the Richards Bay Coal Terminal.

The value of Anglo American Inyosi Coal was given in 2007 as R7bn. Anglo American put up R68m in equity and Inyosi R25m. The R6.9bn balance of the funds was provided by Anglo American as vendor finance.

According to a coal industry source — who spoke on condition of anonymity — one way in which Anglo American could meet Eskom’s requirements for a higher empowerment stake would be to restructure the company through taking out certain assets so dropping the overall value.

He said: "If they remove Zibulo Colliery with its exposure to the export market they will easily get to the point where Nyosi will have outright control."

The problem is that this will make a mockery of the original business strategy behind the creation of the company.

Anglo American — like other South African coal majors such as the former Trans Natal (now part of BHP Billiton) — built up their business on the twin foundations of Eskom and export business.

Eskom provided a secure, high-volume but low-profit margin sales base from which the coal groups could operate in the more lucrative but higher-risk export market. Turning Anglo American Inyosi Coal into an operation that only supplies Eskom will remove the upside potential of export trade from the business.