Eskom tells Anglo to play ball

Anglo American will have to work with Eskom the planned sale of its coal operations in SA because Eskom owns part of the assets.

Johannesburg - Anglo American will have to work with South Africa’s state-owned power producer on the planned sale of its coal operations in the country because Eskom Holdings owns part of the assets, an executive at the utility said.

Anglo’s coal assets in the country were developed on a “cost-plus” model, which saw the utility pay for the cost of mining operations plus an agreed profit margin, Eskom group generation executive Matshela Koko wrote in an opinion piece in Johannesburg-based newspaper Business Report.

“Eskom technically owns part of, if not the majority of, operating assets and the mining infrastructure, while Anglo owns the mining rights and some of the surface rights,” and the companies will “need to engage in order to effect radical transformation through the potential new owners,” he wrote.

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Eskom is the biggest South African buyer of coal, using it for 83 percent of generation of electricity for the continent’s most-industrialised economy. The utility will be forced to improve savings and reduce the amount it spends on coal after the energy regulator capped an electricity-price increase for the year that started April 1 to an average 9.4 percent, Fitch Ratings analysts said in a March 3 note. The agency assumed Eskom would be allowed an increase of about 12 percent.

Industry transformation

Anglo, which has posted four straight annual losses, said in February it intends to hasten sales of coal and iron-ore assets. The company and other miners have been hobbled by China’s slowdown, which has driven raw-material prices to multi-year lows.

The utility “will now more vigorously shape and transform the industry,” Koko said. “This is important and Eskom is mandated to ensure optimal usage of national assets, especially where it has financed and developed the requisite infrastructure for this industry.” This will have an impact on the coal business’s structure “as the status quo cannot be justified and is not sustainable,” he said.

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Examples of change include selling assets to an existing state-owned mining company, with Anglo ceding mining rights to this body and Eskom providing the physical assets and infrastructure, Koko said.

Eskom used 119 million tons of coal valued at R45 billion ($3.2 billion) in the year through March, he wrote. Its primary energy costs, 52 percent of which were for coal, increased 7.7 percent to R41 billion in the six months to September. Local prices for the fuel have declined 41 percent since the start of 2014 to $48.70 a ton.

Electricity prices in South Africa have almost quadrupled since 2007, when the country started suffering power shortages. Scheduled supply cuts, known as load-shedding, took place almost once every two days on average in the first half of 2015.

“These changes are aimed to benefit the consumer with lower tariff increases,” he said.

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