Picture: THINKSTOCK
Picture: THINKSTOCK

A WAR of words has broken out between Eskom and its supplier Exxaro over the fate of the Arnot coal mine, as the two parties head for arbitration over interpretations of their contract.

The mine, which employs 1,853 people, closed in December when Eskom did not renew the long-term contract because the cost of coal was too high.

The cost was R769/tonne, while Eskom pays about R300/ tonne on average for coal on fixed contracts.

This is the second coal mine to be sent to the wall due to Eskom CEO Brian Molefe’s determination to keep coal costs down. Glencore’s Optimum Colliery went into business rescue last year as its costs exceeded the Eskom contract price.

Glencore has since agreed to sell Optimum to a company, Tegeta Exploration and Resources, in which the Gupta family and President Jacob Zuma’s son Duduzane hold interests.

Optimum was appointed as one of seven mines supplying Arnot power station on an interim contract since January.

Asked whether Exxaro would be interested in the coal mines that Anglo American, another major supplier to Eskom, is putting up for sale, finance director Wim de Klerk said on Thursday the group’s strategy was to diversify its markets, and it did "not want to increase its Eskom footprint".

Last year, 90% of Exxaro’s domestic thermal coal was sold to Eskom power stations.

Arnot was a tied mine, which means Exxaro held the mining right and was reimbursed for all costs of running the mine, plus a fixed profit, while Eskom owned all the assets and liabilities including the responsibility for capital spending.

Exxaro and Eskom disagree on the date that the contract was due to end and which party is responsible for retrenchment and environmental rehabilitation costs.

Exxaro said since 2004, it had proposed various options to extend the mine’s life and bring down costs, which would require capital investment on Eskom’s part in acquiring more reserves at Mooifontein. After Exxaro’s latest detailed proposals, Eskom insisted it wanted an independent technical assessment, but had not commissioned one.

Mr de Klerk said the situation was a standoff. Exxaro could not operate Arnot because all the assets were owned by Eskom, but Eskom could not operate it because Exxaro held the mining right.

Eskom said it was regrettable Exxaro had decided to close the mine without exploring economically viable options. It said it had discussed Arnot’s high costs for two years and it was untrue that Eskom had initiated closure of the mine.

"Exxaro has the option to continue with the mine without an Eskom contract, which would save jobs," Eskom group executive for generation, Matshela Koko explained.

"Exxaro’s revised coal-supply agreement contract that was submitted to Eskom in February 2016 promises to halve the costs per tonne for Eskom, but lacks substance and commitment on their part. Eskom has responded to this proposal and awaits a more substantive proposal from Exxaro.

"It is therefore not in Eskom’s interest to make a multibillion-rand decision based on a graph in a letter that excludes detail on capex costs and a proper life of mine plan."

Exxaro reported yesterday a turnaround to a net operating profit of R3.2bn for the year to December, from a loss of R3.3bn in 2014, as its coal business grew output and margins.

It paid an annual dividend of 150c, against 470c in 2014, on headline earnings of 457c a share, down from 1372c.

On Monday, Kumba said its Sishen mine, in which Exxaro holds 19.9%, faced a tax bill of R5.5bn including interest and penalties after a South African Revenue Services audit of its 2006-10 years.

Mr de Klerk said Exxaro’s share would be R1.1bn. Exxaro has also received notification from SARS of an intention to tax some international Exxaro companies, but no assessment has yet been raised.

Investec’s mining team said there was nothing in Exxaro’s results to change its cautious view on the shares. Its key concern was the capital investments Exxaro would need to make for longer-term growth in the Waterberg.