Exxaro Resources Limited (“Exxaro”) – Position statement in relation to termination of Arnot Coal Mine’s Coal Supply Agreement by Eskom Holdings (Pty) Ltd (“Eskom”)

The purpose of this statement is to respond to the media statements in relation to the announcement in November 2015 that Eskom would not renew Exxaro’s Arnot Coal Mine (“Arnot Mine”) Coal Supply Agreement (“CSA”) to the Arnot Power Station beyond 31 December 2015.

It is imperative upon us to provide clarity and provide in-depth context to the decision taken by Eskom. In so doing we wish to protect and promote our reputation as an operator of very significant coal mining operations in South Africa which have reliably supplied Eskom, the domestic market and export markets since our creation as Eyesizwe and through to 2006, with the creation of Exxaro Resources Limited. Further, Exxaro is a South African-based company, created from the transformation objectives of the country and continues to promote and exercise the transformation agenda, in social and economic terms.

Exxaro acknowledges and recognises the extensive and long-term relationship we have developed with Eskom during the 40 year tenure of the CSA. We continue to value this relationship, which we anticipate will continue in relation to our remaining coal supplies.

The context of the termination of the CSA involves the following issues, which are of concern to Exxaro: –

  1. Procedural arrangements in relation to contract termination – Exxaro and Eskom have been attempting to reach agreement on the termination date of the CSA:
    Discussions between Exxaro and Eskom have been ongoing prior to 2013, wherein Eskom had indicated that the CSA ended in 2023, in line with the life of the power station, whereas Exxaro indicated a termination date of 31 December 2015 and requested Eskom as per the CSA, to renegotiate a new CSA from Arnot Coal Mine to the power station beyond the expiry of the CSA. The CSA provides for an early (two year) notice for the intention to terminate the supply and offtake contract in order to provide adequately for, inter alia, the closure of the mine. After Eskom changed its stance in September 2015 and advised Exxaro during the discussions between the parties, Exxaro proposed to Eskom that it would continue to produce coal for Eskom as per the CSA until December 2017, while the closure is planned properly as envisaged in the CSA. A response in relation to this proposal has not been received from Eskom.
  2. Eskom’s obligations in terms of the CSA, both during the operating life of the mine and at mine closure and post mine closure:
    Arnot mine was developed as a tied mine, i.e. its production is dedicated to the Arnot Power Station only. Therefore, in terms of the CSA, Eskom is required to provide the capital to fund sustaining and expansion expenditure to the mine. This includes making available sufficient reserves to ensure the supply of coal for the life of the power station. All costs incurred to mine Arnot are invoiced to Eskom, plus a fixed profit and fixed return on capital, these amounts are included in the Rand per tonne and are not additional fees. Further, the CSA holds that upon termination of the agreement Eskom should pay all costs associated with closure of the mine and making good the deficit in the rehabilitation trust fund. Leading up to the date of closure and in the closure plan, consultation between Eskom and Exxaro should have taken place to assess the costs associated with the closure. This has not happened.
  3. Eskom’s motivation for terminating the contract was that Arnot mine supplied coal to the power station at “R900-00 per tonne”:
    As mentioned earlier, Exxaro and Eskom disagreed on the date of termination of the CSA. To resolve this impasse, and to address Exxaro’s willingness to continue to supply Eskom post 2015, it was agreed by both parties to jointly investigate options to achieve a win-win solution for both companies. The parties entered into an MOU which governed the parties jointly for investigating an optimised Arnot mine production scenario. In terms of the MOU, Exxaro presented numerous scenarios to Eskom, and Eskom insisted these would require an independent technical assessment of their viability. To date, Eskom has not obtained the independent technical assessment. It was whilst awaiting a response from Eskom on this issue that we received a notice of the intention not to automatically renew the CSA beyond 31 December 2015.

    Since then, in February 2016, Exxaro submitted a further proposed optimised mine plan and this week Eskom informed us that they were not at a confidence level at which they can commit to the proposed plan.

    In the years until 2010, the CSA was fulfilled from both underground and opencast operations at competitive cost performance. However, in anticipation of the reduction in production volumes with the depletion of the opencast operations, as well as changing geological conditions of the underground operations, Eskom was approached to acquire additional surface rights to enable access to additional coal reserves on Mooifontein which could be exploited by opencast mining methods and hence maintaining cost competitive production levels.

    However, from 2011 to date, as opencast reserves depleted and challenging geological conditions were encountered in the underground sections, volumes decreased significantly and operating costs escalated.

    Since 2004 Exxaro has engaged with Eskom, and from 2010, has sent various letters regarding Eskom’s failure to secure sufficient surface rights for farms which were and are still required for Arnot Mine to access the surface and exploit the coal resources through an opencast mine in order to satisfy its obligations in terms of the CSA. This would enable the maintenance of cost competitive production levels which were achieved in the period up to 2010. The delay in the acquisition of these Mooifontein surface rights (and the inability in certain cases to acquire surface rights) prevented Exxaro from obtaining the environmental licences required to mine and deliver the contractual tonnages, from both underground and opencast operations, at a much lower cost compared to the cost indicated by Eskom in the media. It is estimated that mining of the required Mooifontein reserves would reduce the cost to an average below R500 per tonne.

    Costs for the FYE 31 December 2015 ended at R769 per tonne and not the R900 per tonne claimed in the media. This situation is foreseen for the next two to three years and will improve from 2017/2018 if the required additional Mooifontein reserves are exploited until the end of the life of the power station. In the past when Exxaro did mine a small portion of Mooifontein opencast reserves, together with the underground sections, we achieved mining costs below R200 per tonne.

    In summary, the acquisition of additional Mooifontein surface rights by Eskom would enable far cheaper production costs.
  4. Exxaro’s options and ability to supply coal beyond 2015:
    Exxaro believes there are sufficient current and future reserves which can be mined at cost effective levels to meet Eskom’s requirements (at competitive rates and increased volumes), should the Mooifontein reserves be included. Regarding the Arnot mine’s life of mine and the remaining mineable reserves, there are approximately 70 million tonnes of which 34 million tonnes are underground and 36 million tonnes are opencast. There are also future reserves that exist within the Arnot mining area that could extend the life of the mine in future.
  5. Consequences of Eskom’s actions in terms of sterilisation of coal reserves; termination of employment through a Section 189 of the LRA; and mine closure and post mine closure:
    The closure of Arnot mine will result in the abandonment of about 70 million tonnes of mineable coal and impact negatively on more than 1800 jobs. Exxaro is committed to reaching a solution that could (if accepted by Eskom) preserve a large amount of the jobs at Arnot mine. However, we cannot absorb the Arnot labour force within the other Exxaro mines as we have filled all vacancies from our other mines which recently reached the end of life. The current Social and Labour Plan (SLP) will be fully implemented by 2021, well ahead of the depletion of the Mooifontein reserves, which could continue to be exploited for supply to an extended life of the Arnot Power Station or other nearby power stations. The continued operation of the mine to 2030 could provide for longer benefits to the community.

NEXT STEPS
The first option is to continue to supply Eskom’s Arnot Power Station with coal on the basis of an extended contract where Exxaro will exploit the remaining underground reserves as well as the Mooifontein reserve, resulting in a cheaper and market related cost of supply.

Alternatively, should Eskom not wish to extend this contract and want to continue with the closure of the mine and related social-economic and environmental consequences, Eskom is obligated to pay the outstanding required amounts to fulfil all its mine closure obligations as agreed in the CSA, viz. top up of the environmental liability, assume all costs arising from the S189 and assume all costs due and payable as a result of the mine closure.

We believe that Eskom wants a reliable supply of coal at a fair market price for the remaining life of the power station. We have attempted to demonstrate to Eskom that this is possible if the Mooifontein reserve is secured and exploited under the Arnot mining right.

We remain open to a resolution that is mutually beneficial and will enable us to continue to provide employment opportunities and contribute to the development of the local municipal economy and national fiscus.

  • Please refer to Slide 7 in Exxaro’s presentation of the 2015 annual financial results for graphs providing a detailed explanation of Arnot production and costs. Presentation to be published on www.exxaro.com at 09h30 on 3 March 2016.
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