TALKS between SA's largest coal producer, Anglo American Thermal Coal, and state-owned utility Eskom are at an advanced stage, with the two parties inching closer to concluding a supply agreement in respect of the New Largo coal mine project in Mpumalanga.

New Largo, which is in the final phase of a prefeasibility study, will supply the Kusile power station, priced at about R118bn, in nearby Emalahleni, with thermal coal once the station starts to produce an initial 800MW of power by 2015.

It is expected the mine would eventually supply all Kusile's 4800MW capacity by 2018.

Anglo American is expecting to present a finalised agreement to directors in London towards the end of the year. "We expect to seek approval from our board in the fourth quarter and commence construction thereafter," a spokesman said on Friday.

The progress in talks comes after Public Enterprises Minister Malusi Gigaba's call for coal to be classified as a strategic resource to protect Eskom from rising prices and deteriorating quality.

The government wanted Eskom to keep tariff increases at relatively low levels after years of implementing sharp price hikes.

Mr Gigaba's comments also reinvigorated the debate about the balance between coal exports and domestic use.

Growing interest in SA's coal has affected the quality and cost of coal supplied to Eskom. There had been a shift in the global market to buying lower-grade coal, traditionally sold to Eskom. Speaking at the presentation of Eskom's annual results in Cape Town last week, Mr Gigaba said SA might consider various ways to classify coal as a strategic resource.

Eskom said coal prices were the main driver of the 29,2% rise in its primary energy costs in the year to March.