Optimum Coal Holdings and Optimum Coal Mine have commenced business rescue proceedings and placed both companies under supervision given continued and unsustainable financial hardship facing the companies.

This follows attempts to renegotiate an old supply agreement, with Eskom, which the power utility declined to review and which has ended in Eskom asserting its rights to claim significant historical and future penalties from Optimum.

These penalties will result in Optimum supplying coal to Eskom for an effective price of R1/ t.

The directors are of the view that if the Eskom supply agreement can be renegotiated, there is a reasonable prospect of rescuing Optimum.

While fully aware of the unsustainable nature of the agreement and Optimum’s precarious financial situation, Glencore said in a statement on Tuesday that Eskom served a notice on Optimum in July 2015 in which it is enforcing specifications in the supply agreement which Optimum is unable to meet on a sustainable basis and which were the subject of the recent renegotiation discussions.

Optimum is contracted to supply 5.5Mtpa to Eskom following an agreement signed in 1993. This agreement has resulted in Optimum supplying coal to Eskom at a cost significantly less than the cost of production for a number of years.

Optimum has engaged in extensive discussions over the years with Eskom to renegotiate the agreement to a level which 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.

Glencore said that since September 2014, Optimum shareholders had advanced approximately R900 million of funding to Optimum to enable it to continue operating and supplying Eskom. This is in addition to R2.5 billion of bank funding which 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, the framework agreement, which provided the platform on which the renegotiation discussions were being conducted were removed in June 2015, when Eskom informed Optimum that it is not willing to renegotiate.

Despite the termination, Optimum secured additional funding from Glencore in early July 2015 to enable it to continue supplying Eskom.

While Optimum is disputing the Eskom claims, the continued financial hardship of Optimum means that Optimum cannot continue operating the mine and supplying Eskom on this unsustainable basis. 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.

Glencore 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.

It will also provide all necessary assistance to the rescue practitioner during the business rescue process to develop a plan which will enable Optimum to emerge as a sustainable business and a long-term supplier of coal to Eskom.

Optimum has over the last six months taken various steps to restructure its operations and reduce its costs, including downscaling its operations and reducing its production. Optimum has, however, continued to suffer financial hardship as a result of its agreement with Eskom.

Top Stories:

AngloGold Ashanti closes $820M sale of US-based CC&V assets

Rwanda opens bidding process for mining concessions to raise money

Producers table final three-year gold sector wage offer