/ 1 April 2011

Eskom in costly rights bungle

Eskom In Costly Rights Bungle

With South Africa facing a 1000MW shortfall in 2012 and Eskom scrambling to secure the coal it needs, the utility is locked in painful negotiations with a small mining company that was awarded the mining rights to a colliery which Eskom once owned.

Vunene Mining was awarded the rights to the Usutu colliery, which is linked by conveyor belt to Eskom’s previously mothballed power station, Camden. This has made Eskom’s coal supply deeply problematic. Coal is brought in by truck and rail (since January this year) from other mines at a greater cost and with heavy wear and tear on roads.

But while Eskom says it is in talks with the department of mineral resources to resolve the issue, the department says Eskom never applied to have its rights converted from old order rights to new order rights, as required under law. The company shares a director, Mojalefa Mbethe, with Imperial Crown Trading 289, the company embroiled in a bitter battle with Anglo subsidiary Kumba Iron Ore after being awarded prospecting rights to a portion of Kumba’s Sishen mine. This dispute, which has gone to the high court, has caused considerable investor unease.

The department cautioned that a parallel between the two cases could not be drawn, saying that the court case included serious allegations of fraud against Kumba. Moneyweb first brought the Usutu saga to light in February, revealing how Eskom bought the rights to Usutu from BHP Billiton after the mothballing of Camden in the early 1990s. It then applied to have the old order rights converted to new order rights in 2005.

Eskom has on record a letter confirming that the department received the application, but the department maintains Eskom never applied to convert the rights. According to the department, prospecting rights to the colliery were awarded to shelf company City Square Trading. The department told the Mail & Guardian that Vunene Mining only came into being in 2009 after a company called Liketh had bought 40% of the shares of City Square Trading.

Mining rights
The department said the prospecting rights were converted to full mining rights last year. But Vunene said in a statement to the M&G that the fully fledged mining rights were granted in October 2009.

As early as 2004 Eskom began planning to return to service some of its old power stations, including Camden, at a time when the government was delaying decisions on building new generation capacity. That delay contributed in large part to the blackouts of 2008. According to Eskom it was only informed in 2007 that its conversion application was not successful.

Compounding the confusion surrounding the Usutu colliery, Bheki Khumalo, the spokesperson for the department, said that according to the department’s records “we do not have evidence that points out that Eskom applied for conversion on the Usutu property”. But the process of returning Camden to service began in 2005 and by 2009, when Vunene was finally granted full mining rights, the precarious hold Eskom had on its coal supplies and the overall security of power supply was well known.

Despite the issue of security of coal supply, Khumalo said that the department could not favour a state-owned entity when it came to awarding mineral rights. “It can’t be correct to say to a prospective applicant, ‘We will wait for a state company to apply’, ahead of the rest, and give them preference,” he said.

“Eskom indeed continuously raises the issue of the security of supply. We are currently working with them to meet their security of supply requirements including [insuring] that the state mining company [African Exploration Mining and Finance Corporation] is involved in helping Eskom.”

The department is investigating whether Vunene agreed to supply coal to Camden but is instead exporting the coal because of higher international prices. Vunene has denied having made any commitment, saying that it did not export coal. In a response to Mail & Guardian questions, Vunene management sent a press statement saying that it has been in negotiations with Eskom to supply coal to Camden under a five-year contract. This was after a supply agreement reached in February 2008 foundered, as Vunene had failed to secure full mining rights by August 2008.

Vunene said it expected the contract negotiations to be complete by the end of March this year, subject to testing that its coal met the specifications of the refurbished Camden station. “In the absence of a formal supply agreement with Eskom, Vunene has been supplying all of its monthly coal production to local customers,” the company said. “The Usutu mine does not have any coal-washing facilities, nor does it have access to a railway siding or any export allocation, and therefore it has not exported any coal.

“It is however possible that some of Vunene’s local customers may have exported some of the coal supplied to them by Vunene.” Eskom spokesperson Hilary Joffe confirmed that the utility and the company were in talks, adding that Vunene had been supplying a limited amount of coal to Camden — a total of 30 kilotonnes to date — as part of the test phase. “Eskom’s priority is to secure reliable long-term supplies of coal for its power stations, including Camden, at a cost that South Africa can afford and in a way that does not damage South Africa’s roads,” Joffe said.