Why did Glencore surrender its Optimum mine to Guptas?

Johannesburg – A combination of political interference and corporate bullying were the deciding factors in Glencore’s surrendering its Optimum Coal Mine to a company owned by the Gupta family, the Commission of Inquiry into State Capture heard on Wednesday.

Former Glencore CEO, Clinton Ephron, told the inquiry that Glencore was significantly pressured to sell its coal mine to Tegeta Resources for R2.1 billion, which was contracted on a cost-plus model to Eskom. 

Ephron said that this was after then Eskom chief executive Brian Molefe became "hostile" and declined to renegotiate new terms for a previously agreed coal supply agreement (CSA) after Optimum started experiencing a cash crunch.

Molefe had also slapped Optimum with a hefty penalty for 16.5 million tonnes of poor quality coal that Eskom had rejected over three years, with Eskom withholding R58 million and R34 million in payment to Glencore over two separate months. 

Glencore was citing a loss of R166.40 per ton on coal supplied to Eskom, or approximately R120 million per month. Ephron said that Optimum coal mine lost R829 million in 2013 alone under the Eskom contract. 

"We had been down a long period of negotiation with Eskom and there was a significant amount of history regarding the negotiation. We had got to the point where we felt we had reached some sort of conclusion, only to be stonewalled at that point of time," Ephron said.

"We wanted Eskom to fulfil its obligations under the CSA, and further terms under the fourth addendum. I don’t know why Brian Molefe declined. He told us that the amendments to the new CSA would not be affected. It was a stonewall negotiation. It wasn’t a discussion. It was a position."

While Glencore was negotiating new terms with Eskom, Ephron said Optimum was suddenly hit by a series of section 54 work stoppages in 2015 by the department of mineral resources (DMR), based on "frivolous reasons".

Ephron said the notices were "unduly harsh and disproportionate" as one was issued to halt the entire underground operations of the mine due to an oil leak in one of the trucks while other notices were issued on weekends when the department’s inspectors were not on duty.

The section 54 work stoppage notices perform an important function to maintain health and safety at workplace in mines, but they further crippled Optimum’s viability, which was already under severe strain from Eskom’s refusal to renegotiate.

"At the time we thought it was a clear warning shot from the DMR. To our mind it implied we needed to support the Optimum sale," Ephron said.

Glencore had no choice but to put Optimum under business rescue even though shareholders were willing to refinance the mine. 

But then Glencore was approached by audit firm KPMG on behalf of Gupta-owned firm, Oakbay Investments, with an offer to purchase Optimum Holdings, which included Richards Bay Coal Terminal, Koornfontein and Optimum mines, for R1 billion. 

Glencore rejected this offer, saying that it was willing to sell Optimum assets "at a reasonable price".

Ephron said Oakbay then set in motion the wheels to buy the mine from Glencore, setting up a series of meetings with Glencore’s group CEO Ivan Glasenberg in Zurich in December 2015. 

This meeting was attended by Rajesh "Tony" Gupta, former mineral resources minister Mosebenzi Zwane, Gupta associate Salim Essa, Glasenberg and Ephron himself. 

Zwane has long maintained, even in Parliament, that he never attended the meeting.

At the meeting, a price of R2.15 billion, which was more than double the initial offer, was agreed for Optimum.

Ephron said that Tony Gupta spoke about the rehabilitation trust funds which were invested in long-term equity instruments to avoid price votality, and requested that Optimum convert the rehabilitation funds into cash equivalents.

"We were suspicious of them at the time. The only reason we decided to sell was a number of reasons, including substantial risks associated with it. It was a painful decision," Ephron said. "

"With benefit of hindsight, it was quite easy to join the dots. We were shocked by what came out of the Public Protector’s State of Capture report."

But as the deal was being concluded, Ephron said he then received a call from Essa informing him that Tegeta was short of R600 million for the purchase price.

"Essa requested that Glencore funds this shortfall and would recoup the R600 million money from the first payment from Eskom for the coal from Optimum. Glencore declined this offer," he said. "It was a surprise. What was told to us about the purchasing party was not entirely true."

Ephron said Tegeta also approached a consortium of mines and banks trying to raise the shortfall, but all turned it down. 

In 2016, Eskom came through for Tegeta and extended to it a questionable R600 million prepayment for coal that was yet to be delivered from Optimum coal mine.  

On Thursday, the inquiry will hear testimony from former cabinet minister Trevor Manuel and Siphiwe Nyanda.

African News Agency (ANA)

State Capture  41 - Why did Glencore surrender its Optimum mine to Guptas?

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