Optimum is contracted under an agreement signed in 1993 to supply 5.5 Mtpa to Eskom, which has resulted in Optimum supplying coal to Eskom at a cost significantly less than the cost of production for a number of years.
Over the years, Optimum has engaged in extensive discussions with Eskom to renegotiate the agreement to a level that is sustainable for both parties, including securing the supply of coal to Eskom until the end of the estimated life of the Hendrina power station in 2023.
Since September 2014, Optimum shareholders have advanced approximately R900M of funding to Optimum to enable it to continue operating and supplying Eskom. This is in addition to R2.5B of bank funding that Optimum drew down prior to September 2014. The funding enabled Optimum to continue operating while negotiations with Eskom with regard to ensuring the sustainable supply of coal to the company continued.
However, in June 2015, Eskom informed Optimum that it is not willing to renegotiate the agreement and terminated the framework agreement. The framework provided the platform on which the renegotiation discussions were being conducted and interim supply of coal to Eskom was being made.
Despite the termination, Optimum secured additional funding from Glencore in early July 2015 to enable it to continue supplying Eskom.
Whilst fully aware of the unsustainable nature of the agreement and Optimum’s precarious financial situation, Eskom served a notice on Optimum in July 2015 in which it asserted its rights to claim significant historical penalties from Optimum and to impose future penalties.
Glencore said Eskom is enforcing specifications in the supply agreement that Optimum is unable to meet on a sustainable basis and which were the subject of the recent renegotiation discussions.
According to Glencore, the penalties sought would result in Optimum supplying coal to Eskom for an effective price of R1 per ton.
“While Optimum is disputing the Eskom claims, the continued financial hardship of Optimum means it cannot continue operating the mine and supplying Eskom on this unsustainable basis,” said Glencore.
“The directors have therefore resolved to commence business rescue proceedings which allows for independent parties to assess Optimum’s financial position and contractual obligations and determine how best to rescue Optimum.
“The directors are of the view that, if the Eskom supply agreement can be renegotiated, there is a reasonable prospect of rescuing Optimum.”
Glencore added that it is willing to extend certain post commencement funding to Optimum to afford the business rescue practitioners an opportunity to assess the company and time to prepare a business rescue plan for Optimum.
Glencore also said it provide all necessary assistance to the business rescue practitioner during the business rescue process, to develop a business rescue plan that will enable Optimum to emerge as a sustainable business and a long-term supplier of coal to Eskom.