JOHANNESBURG (miningweekly.com) – Business rescue proceedings are to begin at both Optimum Coal Holdings and Optimum Coal Mine after attempts to renegotiate a 22-year-old lossmaking supply agreement with Eskom ended in the State electricity utility asserting its rights to past and future penalty claims.

The penalties sought would result in Optimum supplying coal to Eskom for an effective price of R1/t.

London-, Hong Kong- and Johannesburg-listed Glencore outlined in a media release on Tuesday that the directors of the two Optimum companies saw a reasonable prospect of rescuing the coal mining operation if the coal supply agreement with State electricity utility Eskom could be renegotiated.

This followed Eskom informing Optimum that it was not willing to renegotiate the agreement and serving a notice in which it asserted its rights to “significant historical penalties from Optimum and to impose future penalties”.

Glencore said that Eskom was enforcing specifications in the supply agreement, which Optimum was unable to meet on a sustainable basis and which were the subject of the recent renegotiation discussions.

Contracted to supply 5.5-million tons of coal a year to Eskom as part of an agreement signed in 1993, Glencore said that Optimum had been doing so for a number of years at a cost “significantly below” the cost of production.

Optimum’s failed renegotiation discussions with Eskom had included the securing of the supply of coal to Eskom’s Hendrina power station until 2023, the end of the estimated life of the station.

Glencore said that, since September 2014, Optimum shareholders had advanced R900-million to Optimum to enable it to continue supplying Eskom, which was in addition to R2.5-billion of bank funding drawn down prior to September 2014.

The funding had enabled Optimum to continue operating while negotiating with Eskom to ensure ongoing sustainable coal supply.

However, the platform on which the renegotiation discussions and interim supply were being conducted were removed when Eskom terminated the framework agreement in June.

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

Glencore said that Eskom had served its penalty notice while fully aware of Optimum’s precarious financial situation as well as the unsustainable nature of the coal-supply agreement.

While Optimum was disputing the claims, continued financial hardship meant that it could not continue operating the mine and supplying Eskom.

Glencore expressed its willingness to extend 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 would also provide all necessary assistance to the business rescue practitioner during the business rescue process to develop a business rescue plan, which would enable Optimum to emerge as a sustainable business and a long-term supplier of coal to Eskom.

In response to the Department of Minerals Resources, Glencore also outlined on Tuesday that Optimum had complied with all legal retrenchment process requirements as well as the conditions of its mining right.

It said that Optimum had extended the 60-day legislated consultation process with unions and affected employees to more than 150 days.

It had also agreed to provide funding to enable Optimum to pay the full retrenchment cost and offered assistance to the affected employees through retraining programmes to enable them to plan for the future.

This included training in areas such as portable skills and financial management.

The retrenchment packages offered were above those regulated in the Labour Relations Act and the impact of the retrenchments had been “significantly mitigated” through various engagements and initiatives.

Out of an expected 1 067 employees to be retrenched, a far fewer number of 359 employees had actually been retrenched, with 267 opting for voluntary severance packages and 86 being redeployed to other Glencore operations.