/ 13 September 2019

Coal divestment hits South Africa

Coal divestment hits South Africa
(John McCann/ M&G)


If you’re a global mining giant, you want out of coal quick sticks for the simple reason that the major investment funds will no longer put their money into fossil fuels, especially coal. Global funds have announced that their collective $11-trillion under management will no longer fund investments that contribute to the climate catastrophe that is global warming.

Two of the biggest names in mining, Anglo American and South32, have sold or are selling their South African coal mines, rather than face divestment pressure from investors that would affect their overall holdings.

READ MORE: Change for climate a risky business

This has created opportunities for local investors, specifically black-owned companies, to pick up these mines at bargain-basement prices. In South32’s case, chief executive Graham Kerr reportedly said that the sale of its South African coal interests could be concluded for a token $1, the caveat being that the buyer would be responsible for putting up the required rehabilitation funds in the event of closure of $756-million, or about R11-billion.

Business Day opined that South32 had put money in to facilitate a deal: “It doesn’t look like South32 expects to make a killing from the sale.
If anything, the multinational miner is paying in to offload the business. In anticipation of selling [its South African coal interests], South32 invested $377-million from the business’s own cash flows to make it sustainable.

READ MORE: Big deal over ‘strange’ coal mine meeting

BHP Billiton this year signalled its intention to exit the thermal coal business, Rio Tinto last year divested from large coal assets and Glencore has agreed to cap its current coal production, Business Day said.

The Financial Times reported on August 22 that South32 said it was in “exclusive talks” to sell its South African coal mines to local mining house Seriti Resources. The offer includes a “modest” upfront cash payment with a deferred payment mechanism to allow both companies to share in any coal price increase, South32 said.

Closely held Seriti has entered into exclusive negotiations to buy South32’s thermal coal assets after starting production in 2017 and 2018 with tied mines (those linked to specific power stations) it bought from Anglo American for R3-billion. Should the South32 deal go ahead, Seriti will supply one-third of Eskom’s coal.

Seriti chief executive Mike Teke is cautious about the process, MiningMx reported. Seriti has been chosen as the preferred bidder; it is not yet the de facto owner, Teke said. So, in the next 12 months, his company has to conclude and finance the menpurchase of the asset, which involves not only paying an upfront fee — still to be agreed with South32 — but also winning the support of Eskom, according to MiningMx.

Eskom’s agreement is needed because it is the counterparty of coal sales agreements on domestic coal produced by South32’s mines. It will also have to be agreed by the competition authorities and the department of minerals and energy.

Meanwhile, Exxaro Resources, Eskom’s largest supplier of coal, said it is working on a new strategy for its business founded on coal mining amid investor and public concerns about the effect of climate change, Bloomberg reported on August 28.

The mining house said that it is planning “structural changes”, including clean-power initiatives, to make the business sustainable. Exxaro will extract “as much value as quickly as possible” from the assets it holds, particularly thermal coal, chief executive Mxolisi Mgojo said.

Shareholder activist Tracey Davies of Just Share, which has led campaigns for climate equity at Standard Bank and Sasol, said the big mining houses are divesting their coal assets while dressing this up to look like really good empowerment deals.

She said the mining majors are selling what could become stranded assets, meaning that sometime in the near future they will not be commercially viable. Davies says the sales are happening at a time when there is much uncertainty about the energy future of the country, with a new integrated resource plan awaited and a lack of clarity on what the Eskom restructuring will look like. In the meantime, the risks associated with mining coal mean a higher cost of capital, while renewable costs continue to fall.

This, said Davies, does not help the country in its transition to a low-carbon future. “One of the worrying things is that they may be less able [than the major resourced companies now exiting] to deal with the clean-up,” she said.

Seriti, which is poised to become South Africa’s second-largest coal producer, is exploring alternative methods of funding, including from equipment suppliers, and will hold off on a listing, as coal is being shunned by financiers because of its environmental impact.

“We see the project financing ability of new coal projects … frankly becoming harder and harder,” Seriti’s chief financial officer, Doug Gain, told Bloomberg in August. Seriti will wait until next year to decide whether to list or to seek alternative funding options, he said.

The company may seek less traditional funding options because pollution concerns have led South Africa’s biggest banks to limit lending to coal projects and the country’s political and economic instability could deter investors from buying shares, Bloomberg reported.

Seriti has been approached by heavy earth-moving equipment suppliers interested in providing funding in exchange for securing contracts on the project, Gain said, declining to identify the companies. Some of the biggest equipment suppliers to coal mines include Caterpillar, Atlas Copco and Sandvik.

“We think that the large equipment manufacturers see an opportunity in the — call it the shrinking ability of coal companies to raise capital — to provide capital themselves behind their fleets,” he said.

In March a report by the Climate Policy Initiative (CPI), a London-based think tank, identified South African empowerment companies as potentially at risk as the global transition to a low-carbon economy takes place. The CPI identified “transition risk” as that when the value of assets and income are less than expected because of climate policy and market transformations, and said the risk for smaller South-Africa-focused and sometimes black economic empowerment companies could be more than $1-billion.

“These companies typically have little diversification and small balance sheets, meaning that any transition risk falling on these entities would likely be implicitly transferred to the state, including state-owned funders, such as the Industrial Development Corporation.”

Should the South32 acquisition go ahead, it will mean that Seriti and Exxarro will jointly supply 72% of Eskom’s coal needs. This is being justified by some industry sources as good for empowerment. They said the pair are sufficiently financially resilient to be up to the job. South32 executives said concentrating Eskom’s coal supply could bring down its coal costs and reduce the use of trucks, which is expensive.

MiningMx wrote that “including supply of coal to Eskom by another company, Exxaro Resources, roughly 72% of Eskom’s total 120-million tonnes a year coal burn will be in the hands of two companies. This may seem like the complete opposite of what’s intended by broad-based economic empowerment, but in these economically straitened times, it’s exactly what Eskom (and the country) needs.”

But notwithstanding the real challenges of transitioning from a hopelessly coal-dependent economy to a cleaner future, it is hard to see how anyone could think that Eskom having just two mining houses supply 72% of its coal needs is a good thing.

One of the real benefits renewables offer — over and above that they do not destroy the planet — is that they allow for regionalised, localised and diversified energy inputs. This allows flexibility and adaptability to help to keep the system as a whole efficient and honest.

Having just two major coal suppliers feels too much like Eskom putting all its eggs in two energy baskets, as it did with Medupi and Kusile. We still live with the consequences of this grand folly and it is not at all clear how we will escape it. To repeat the exercise voluntarily by allowing just two mining houses to dominate coal supply makes no sense at all.