Glencore Plc’s Optimum Coal unit will seek South Africa’s equivalent of bankruptcy protection as the producer tries to renegotiate an unprofitable two-decade-old deal to supply the nation’s power utility with the fuel.
Optimum supplies Eskom Holdings SOC Ltd.’s Hendrina power plant with 5.5 million metric tons of coal annually at prices that have been “significantly less than the cost of production for a number of years,” Glencore said in an e-mailed statement Tuesday.
The utility said in June it isn’t willing to renegotiate the pact. In July, Eskom said it plans to claim “significant historical penalties” from Optimum and to impose future fines that would see the company supplying the power utility for 1 rand (8 U.S. cents) a ton, Glencore said.
“We’ve been left with no choice because of the penalties,” Glencore Coal South Africa Chief Executive Officer Clinton Ephron said by phone. The price Optimum receives from Eskom is “less than half the cost” of output, he said.
Optimum said in July it will cut about 630 jobs as part of plans to close some operations after coal prices slumped 32 percent since the start of 2014. Eskom, which supplies about 95 percent of South Africa’s power, relies on coal for 80 percent of generation and has resorted to almost-daily scheduled blackouts this year as it battles to meet demand.
Glencore has since September 2014 given Optimum 900 million rand in assistance, it said. The local unit has also drawn down 2.5 billion rand in bank funding.
“The directors are of the view that if the Eskom supply agreement can be renegotiated, there is a reasonable prospect of rescuing Optimum,” Glencore said.
If the quality of coal from Optimum “is no longer representative” of the specification in the contract, the agreement states that the parties should meet to renegotiate, Ephron said. Eskom has refused, Glencore said.
The penalties would go back three years and continue because the quality of coal, while still fit for power generation, has diminished at the outer reaches of the resource, Ephron said. The Hendrina supply agreement ends in 2018, he said.
Optimum hasn’t yet notified Eskom about its intentions to enter business rescue proceedings, the power utility said in an e-mailed response to questions.
“Eskom has an existing coal-supply and offtake agreement with Optimum and we expect the terms to be honoured,” it said.