The Australian-headquartered mining company, South32 yesterday flagged a loss of up to $175 million (R2.47 billion) from the sale of its South Africa Energy Coal (SAEC) to Seriti Resources as Eskom gave its consent for the transaction.
South32 chief executive Graham Kerr said yesterday that on completion of the divestment the group expected to book a loss on sale of between $125m (R1.7bn) and $175m, while the group’s net cash balance was expected to reduce by about $180m to reflect the recognition of the vendor support package being provided to Seriti.
“For South32, completion of the divestment is an important milestone that will see us significantly simplify our business, reduce our capital intensity and improve our underlying operating margins,” said Kerr.
South32 previously announced it had agreed to provide a facility of up to $50m to fund the restructuring of SAEC’s loss-making mine areas. It also agreed to provide $200m (over 10 years) to fund SAEC’s historic environmental and closure liabilities.
Seriti said it had officially become the majority owner of Saec after Eskom greenlighted amendments to the Duvha coal supply agreement (CSA).
Power utility Eskom said yesterday that due to the strategic importance of securing coal supply for Duvha the parties had agreed on a modification of the CSA until the end of December 2024.
The consent from Eskom paved the way for the completion of the sale after all preconditions were met including the approval of competition authorities and the Department of Mineral Resources and Energy.
As part of the consent, Eskom agreed to adjust the coal price of the loss-making Duvha CSA to R550 per ton with effect from June 1, with an annual escalation from January 1, 2022, in line with Producer Price Index.
The modification of the coal supply agreement also secured the continued use of SAEC’s infrastructure at the mine so that alternative supplies could be delivered over conveyors into the power station.
The Duvha SCA met most of the 2 875 megawatts (MW) of the power station’s coal agreement, said Eskom.
It said that the modification to the CSA gave it sufficient time to seek alternative coal supplies, if required, and to resolve the coal delivery infrastructure constraints at the power station.
The group also said the coal supply agreement modification would also prevent massive job losses at the mine, while securing coal supply for Eskom at an affordable price.
Eskom chief executive Andre de Ruyter said: “Of critical importance to Eskom is to secure the continued delivery of coal for the Duvha Power Station, and this agreement provides that security of supply at a price that is affordable to Eskom.”
The Duvah supply agreement had been bleeding cash for years with Seriti previously flagging that in the past two years those losses had become so great that the viability of the whole SAEC was in danger. In June 2019, SAEC invoked the hardship clause in the CSA, citing significant financial losses as a consequence of selling coal to Eskom below its cost of mining.
“Eskom’s hardship review and due diligence confirmed that the mine was loss-making, with increased risk of failure,” said Eskom.
The sale is scheduled for completion on June 1, and will see Seriti holding a 90 percent stake in the business, with the SAEC Community and Employee Trusts each holding 5 percent.
Seriti chief executive Mike Teke said the closure of the transaction was a significant milestone for Seriti and its employee and community trusts.
“It will secure a sustainable, reliable and cost-effective coal supply solution to Eskom and at the same time bring opportunities for further synergies and optimisation within Seriti. This is a further demonstration of our commitment to South Africa and to the industry,” Teke said.
The CSA modification was approved by the National Treasury at the beginning of the month.
South32 shares closed 2.37 percent higher at R32.77 on the JSE yesterday.