Industry insider says parastatal’s deal with family’s company is ‘sleight of hand’ as coal is diverted from one power station and bought for a higher price at another
Eskom has quietly awarded a contract worth more than R564 million to a coal mining company owned by the Gupta family and President Jacob Zuma’s son Duduzane.
Two months after being awarded the lucrative contract, Tegeta Exploration and Resources appears to have performed a financial miracle.
In March, the business rescue practitioners of Optimum Coal – which was sold to Tegeta in April for R2.15 billion – reported that the mine was projected to lose R100 million a month.
But now, they say that the Guptas’ new mine will be taken out of business rescue in August, or even sooner.
At the heart of the company’s spectacular turnaround is the R564 million contract Eskom quietly awarded to Tegeta in April to supply Arnot power station with 1.2 million tons of coal over six months. With transport costs added, Eskom is paying just under R700 million – excellent, by Eskom standards.
Until recently, Optimum Coal, situated just south of Middelburg, Mpumalanga, was owned by mining giant Glencore. It was announced in December that Tegeta would buy it. It was later alleged that mining minister Mosebenzi Zwane travelled to Switzerland with the Guptas to help them seal the deal.
Tegeta’s major shareholders include the Gupta family’s Oakbay Investments (29%); Duduzane Zuma’s Mabengela Investments (28.5%); Gupta associate Salim Essa’s company, Elgasolve (21.5%); and two unknown investors in Dubai.
When Tegeta took over Optimum in January, it was losing more than R3 million a day because of a lossmaking contract to supply coal for the Hendrina power station. At the time, there was widespread speculation that Tegeta would use its political influence to secure more lucrative terms from Eskom.
Eskom, though, has repeatedly denied this, insisting there would be no special treatment for the Gupta company. “There’s an impression that we are doing special favours for them. This is not true,” Eskom spokesperson Khulu Phasiwe said on Thursday.
But a City Press investigation has identified a number of ways Eskom is helping to bail out Tegeta’s new mine.
At R470 a ton, Tegeta’s Arnot contract is one of Eskom’s most expensive.
In May last year, Public Enterprises Minister Lynne Brown told Parliament that Eskom paid an average price of R230.90 a ton for coal, and that the average price of Eskom’s five most expensive contracts was a “delivered price” of R428.84 a ton.
However, the price paid to Tegeta excludes transport costs. Eskom refused to reveal the transport costs, saying these are “commercially sensitive”. However, City Press has established that, with transport, Tegeta is paid roughly R580 a ton, pushing the total value of the six-month contract up to just under R700 million.
Officially, the business rescue practitioners say the turnaround at Optimum is thanks to Tegeta boosting production and cutting costs, but spokesperson Louise Brugman confirmed the new Arnot contract played a significant role.
Waiting for the Guptas
Tegeta only received this lucrative contract thanks to a nine-month delay in Eskom awarding a permanent supply contract to replace a 40-year-old Exxaro contract that expired at the end of 2015.
Eskom was supposed to award the contract in November, but this was initially delayed until March, and then delayed again until September this year.
When Tegeta started supplying Arnot in January, they were one of seven short-term suppliers.
In a rare public statement, the Guptas’ Oakbay Investments insisted they had only a small piece of the pie: “We had a one-month contract in January, supplying less than 15%.”
But by the end of March, the contract for Arnot had still not been awarded.
“Initially, the contract was supposed to be fulfilled in March, but we couldn’t do that because out of the five [short-listed bidders] none of them was able to give us the full 5 million tons a year,” said Phasiwe.
But the original request for the proposal document issued in August last year does not require a single supplier for the full 5 million tons.
Eskom says it approached the four remaining ad hoc suppliers at Arnot and offered them the opportunity to increase their supply.
“We had to get extra tonnages from the four that are remaining. If we did not get any extra tonnages, we would have had a shortfall of 2.1 million tons,” Phasiwe said.
Two companies were then given additional contracts: Umsimbithi for 540 000 tons, and Tegeta for 1.2 million tons.
Phasiwe said the delays in awarding the Arnot contract did not only benefit the Guptas.
“If we have other companies benefiting, then I don’t think it’s fair to single them out.”
Umsimbithi spokesperson Shamiela Letsoalo would not confirm the price they were paid, but it is less than the amount paid to the Guptas.
“The terms of the contract are confidential. We can, however, confirm that the delivered contractual price is below the R450 a ton, as reported by Eskom previously,” she said.
Sleight of hand
Under the existing Eskom contract that Tegeta inherited from Glencore, Tegeta must deliver 458 000 tons of coal a month to the Hendrina power station.
But City Press has established that Optimum does not produce enough coal to honour both contracts.
In what one mining industry financier describes as a “sleight of hand”, it appears that Eskom is allowing Tegeta to divert a significant portion of Optimum’s coal from Hendrina power station, where Eskom pays them R174 a ton, to Arnot power station 50km away, where Eskom buys the same coal at R580 a ton.
Eskom confirmed that for the past three months, Tegeta delivered, on average, 315 000 tons of coal a month to Hendrina.
Four different coal industry analysts and miners City Press spoke to questioned why Eskom did not take possession of the full 458 000 tons of coal at R174 a ton, but allowed Tegeta to use them to increase its supply to Arnot.
Yesterday, Eskom said it had reduced the coal requirements at Hendrina in the past few months.
“As far as we are concerned, no coal meant for Hendrina is being diverted to Arnot.
“Deliveries early in the year were reduced by Eskom due to a lower burn requirement at Hendrina power station,” Phasiwe said.
“The commitment from Optimum, going forward, is to meet the Hendrina burn requirements.”
Tegeta declined to respond to a detailed list of questions, saying: “We are committed to the future sustainability and profitability of Optimum. Our strategy for the Optimum mine will be announced in due course.