New Largo sale a symbol of new order in SA coal mining


New Largo sale a symbol of new order in SA coal mining

Hilary Joffe

The sale by Anglo American of its New Largo coal project is a symbolic moment for the industry, one which touches on key aspects of South Africa’s coal mining and Eskom stories and raises questions about the future of both.
New Largo, in Mpumalanga, is the coal resource that was supposed to supply Eskom’s new Kusile power station, and was part of the reason Kusile was located in that particular spot. By now, a new New Largo coal mine should have been almost ready to supply Kusile. But perhaps it’s fortunate that Kusile is so late, because the project, the cost of which is estimated at R20-billion or more, hasn’t even been started yet – a story to which we will return below.
Anglo has sold New Largo, which comprises an old, closed colliery and the new project, to a BEE consortium led by Mike Teke’s Seriti Resources for R850-million. The deal follows Anglo’s R2.3-billion sale to Seriti last year of New Vaal, New Denmark and Kriel, which are so-called “tied collieries” that sit underneath the Eskom power stations they were built to supply.
The deal catapulted Seriti to being Eskom’s second-largest coal supplier – and assuming New Largo is developed one of these decades, Teke and his partners stand to become even more dominant players in SA’s coal industry – in line with the vision he has outlined to become a black-controlled South African mining champion.With these deals, Anglo has neatly combined the pursuit of its own “radical restructuring” with delivery on its commitment to transformation. The London-listed group was getting out of coal anyway, as part of the streamlining it embarked on in 2015 and it described the latest deal as “another Anglo American-led step-change in the sustainable transformation of the SA mining industry, supporting both Eskom and the country’s transformation objectives”.
But the New Largo sale is, in its way, a historic moment for what left-wing academics used to call South Africa’s “minerals energy complex”. South Africa’s coal industry was built on Eskom, which co-invested with Anglo, Gencor and other big players in the new collieries that were built to supply Eskom power stations. South Africa’s export coal industry was developed later, using the profits from the domestic supply contracts to Eskom. And though exporting is much more lucrative than supplying Eskom – export prices are about double domestic prices and coal prices globally have been roaring lately – export coal still accounts for less than 30% of the volume of coal South Africa produces. And the fact that Eskom looms so large has long driven transformation in the coal industry, going back to the formation of black-controlled Exarro in the 1990s by Anglo and BHP Billiton. And in recent years the industry’s big players have been doing deals to create a new generation of leading black coal players.
But their exit has been as much about self-preservation, in the face of regulatory uncertainty and pressure from Eskom, as about a commitment to BEE. And New Largo is symbolic, in a way, because it was a poster child for the regulatory shifting of the goal posts that helped to wreck investment in South Africa’s mining industry long before the latest, controversial mining charter.As Eskom was embarking on building Kusile about a decade ago, Anglo had become increasingly reluctant to embark on the huge investment required to build the new mine because the coal prices Eskom was offering, and therefore the returns on the investment, were so low. After long and difficult negotiations, Anglo and Eskom eventually agreed on something resembling the old “cost plus” arrangements Eskom had with many of the earlier coal mines, where Eskom put in some of the capital to develop the mine. Anglo brought in a 25% empowerment shareholder, Inyosi, in line with mining charter requirements. All seemed OK – until Malusi Gigaba became public enterprises minister in 2010 and began insisting on 51% black ownership for coal suppliers. That, in essence, is why there is no New Largo mine as yet to supply Kusile, whose first unit is now operating, with coal from other miners in the area.So now that new BEE players are to take control, will the new mine at last be built?
A big new coal mine would be quite a thing in an industry which has seen no new projects in recent years, mainly because of regulatory and legislative uncertainty. A Chamber of Mines survey last year found that R122-billion of additional capital expenditure would go into South Africa’s mining industry “in a more certain and conducive environment”.
New Largo is included in that number. But the big question is where the funding will come from to develop it. There is speculation that Teke is looking to a JSE listing which could enable the consortium to go to the market for funding. But investors would still want certainty – not only about the regulatory regime in mining but surely also about Eskom and the future of its new building programme.
It could be a tough call in any event because investors globally are becoming more negative towards coal, as climate change concerns grow and renewable energy technologies become ever more attractive. Add to that the question marks that have been raised at home about whether a cash-strapped Eskom should be pushing ahead to complete Kusile at all, and the future looks even more uncertain. How the new owners of New Largo deal with that will be worth watching. ​

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