South32 wants Eskom to change Duvha contract

JOHANNESBURG – South32, the global diversified mining company, said it was working to address its loss-making Duvha coal supply contract.

The Duvha contract has been loss-making for some time as the realised price for coal under the contract did not move in line with mining costs.

South 32 chief executive Graham Kerr said on a conference call yesterday :“We’re not looking for a massive move in the rate in terms of some contracts you see out there; we’re looking for a rate that allows that business to actually break even, hence allow Seriti to grow and prosper and continue to provide Eskom with more tons at a time when they’re actually short of tons to their various power stations.” 

South32 sold its South Africa Energy Coal business to Seriti Resources, led by former Optimum Coal chief executive Mike Teke last year.

“If worst comes to worst and we simply cannot get a solution that gets us to a break-even position, it’s quite simple for us: the business is just not a business anymore, because you’re bleeding cash every single day and we don’t run businesses that are cash-flow negative,” Kerr said.

“If you look at the average cost of production that people talk about in terms of Eskom, you’re looking at roughly R450 per tonne, then on top of that you’ve got up to R150 per tonne in terms of transportation. The advantage I guess of the product coming out of the Wolverkrans Middelburg Complex (WMC) that goes to Duvha is it’s straight off the conveyer into the power station, and the cost at the moment is in the low R200s a tonne.”

South32  said that the issue was raised with Eskom  around June and it had been working through a process for a period of time.

Earlier yesterday, South32 reported an 84 percent hit in earnings to $99 million (R1.4 billion) for the half-year ended December 2019 compared with $635m in 2018 after geopolitical tensions heightened during the period under review.

The group reported an 80 percent fall in underlying earnings to $131m.

Volatile markets led to a 21 percent decline in the average realised prices for key commodities. Alumina, manganese ore, metallurgical coal, aluminium and thermal coal took a hit in the period.

Underlying earnings before interest, taxes, depreciation and amortisation were $678m, and free cash flow from operations was $284m.

Despite the plunge in earnings, South32 resolved to pay an interim dividend of US1.1 cents a share for the half-year ended December 31, 2019.

The group said it would focus on cutting costs.

“We remain focused on identifying and embedding further opportunities to improve our operating and cost performance in a sustainable way, to maximise margins,” said the company.

South32 shares closed 0.85percent higher at R26.25 on Thursday.


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