International mining house Glencore is placing some of its South African coal operations under rescue proceedings, blaming the move on an “unsustainable” long-standing supply deal with power utility Eskom.
The Anglo-Swiss giant said that it would place subsidiaries Optimum Coal Holdings and Optimum Coal Mine under supervision after Eskom refused to renegotiate a supply deal signed in 1993.
Under the deal, Optimum is contracted to supply 5.5m tons per year to the state-owned utility – a deal which Glencore claims has left the firm facing “financial hardship”.
“The agreement has resulted in Optimum supplying coal to Eskom at a cost significantly less than the cost of production for a number of years,” said a Glencore statement.
Glencore said that it had scaled back operations and production over the last six months, and pointed to previous financial commitments including a R900m funding lifeline from shareholders, additional bank funding and a July 2015 capital injection.
But the firm said that continued efforts to renegotiate with Eskom had been rebuffed – leaving Optimum facing a raft of financial penalties under the original agreement.
“Whilst fully aware of the unsustainable nature of the agreement and Optimum’s precarious financial situation, Eskom served a notice on Optimum in July 2015 in which it asserts its rights to claim significant historical penalties from Optimum and impose future penalties.”
Such penalties would result in Optimum supplying coal to Eskom at just R1 per ton, according to the statement.
Glencore said that there remained a “reasonable” prospect of rescuing Optimum if the Eskom supply agreement can be renegotiated. Under the rescue proceedings, independent parties will assess Optimum’s financial position and form a survival plan for the business.
The news represents yet another blow to the beleaguered South African mining industry, which is struggling under the pressures of low international prices, labour disputes and erratic power supply. Troubled platinum miner Lonmin last week said that it will cut 6,000 jobs in its operations.