Glencore story highlights the dirty game of coal

NICOLA MILTZ

This has emerged in testimony at the Judicial Commission of Inquiry into Allegations of State Capture. There, the story unfolded of how global commodities giant Glencore was allegedly forced by the state into selling one of its coal mines to the Guptas – the family at the centre of state-capture allegations.

This is a story about a coal mine, Optimum Coal Mine (OCM), formerly owned by Glencore, and how the executives at Eskom, South Africa’s electricity supply parastatal, together with high-ranking government officials, were allegedly hell-bent on forcing Glencore to sell the mine to the Gupta-owned Tegeta Exploration and Resources – literally for a steal.

It’s a murky mystery of corporate intrigue about how big business came off second best after colliding head-on with state capture during the Jacob Zuma years of state plunder.

It all started when OCM was formed specifically to supply coal to Eskom’s Hendrina Power Station back in the 70s. A coal supply agreement was in place for this purpose, which tied OCM into a long-term contract with Eskom to ensure security of supply.

The characters in this plot are ex-South African billionaire Ivan Glasenberg, the Chief Executive of Glencore, who became a Swiss citizen in 2011, and Clinton Ephron, the former Chief Executive of Optimum Coal Holdings, the company Glencore was pressured into selling to the Guptas in 2015. Ephron now lives in Israel.

The two mining executives came head to head with several players now implicated in state-capture allegations, namely former Mining Minister Mosebenzi Zwane, former Eskom Chairperson Dr Ben Ngubane, and Eskom executives Brian Molefe and Matshela Koko.

Ephron last week lifted the lid on Eskom’s shady tactics to squeeze Optimum out of business by forcing it into business rescue. According to his testimony, Glencore found itself “stonewalled” as it tried in vain to hold onto OCM in spite of the incessant interventions of government and Eskom.

Glencore acquired the mine only in 2011. After some time, Optimum found that the inflationary adjustments in the coal price paid by Eskom were no longer working, and that cost of running the mine and producing the coal was exceeding the selling price.

Around July 2013, said Ephron, “We had started feeling the pinch of lower export prices, and the exports could no longer subsidise the supply of coal to Eskom. The mines were starting to lose significant money.”

It was then that Optimum approached Eskom (in 2013) to alleviate some of the financial burden it was experiencing. Optimum invoked a hardship clause provided for in the original contract to try offset the R829 million in losses it had suffered that year. By 2014 (around the time a co-operation agreement came into effect with Eskom), OCM was losing cash of about R80 million to R100 million a month.

This led to arbitration followed by lengthy negotiations, which led to what Ephron referred to as the fourth addendum to the original Eskom/Optimum coal contract.

The fourth addendum would have provided for an extension of the original agreement until 2023 (the existing expiry being 31 December 2018), a revised price for coal, a mechanism whereby Eskom would be able to source coal elsewhere if it could do so at a lower price, and a settlement of claims between OCM and Eskom.

“Glencore considered this proposal to be beneficial to all parties – a win-win,” said Ephron.

The “binding” addendum – which had been approved by an Eskom executive committee – suddenly went up in smoke, said Ephron, only a few weeks after Molefe’s appointment to Eskom.

At a “brief” meeting at Megawatt Park in May 2015, Molefe told Ephron that Eskom would not be amending the terms of the original coal supply agreement with Optimum, and that no amendments would be considered until after the end of the contract in December 2018.

Ephron told the commission he was “devastated” by this. “We had been down a long period of negotiation with Eskom. We had got to the point where we felt that we had reached some sort of conclusion on the Optimum saga. Only to be stonewalled at that point in time.”

Molefe told Ephron that Eskom would enforce its rights under the original contract. This included harsh penalties levied against the company over sub-standard coal.

OCM continued to negotiate with Eskom, which reportedly refused to budge.

Around July 2015, Ephron said he received an unsolicited R2 billion non-binding offer for Optimum via KPMG that was revealed later to have come from Oakbay, which is owned by the Guptas.

Ephron later said the company received a letter of demand insisting on payment of more than R2 billion in penalties due to Eskom for coal that had been rejected. The following month, Ephron said Eskom withheld payment for coal delivered.

The company was forced into business rescue in August 2015, which ultimately paved the way for the Guptas to purchase the beleaguered mine.

In September 2015, Oakbay made a second non-binding offer for Optimum, this time for half the original offer.

Negotiations took place in October 2015 for the possible sale of OCM to Oakbay. By November, the company was still in business rescue, and it was threatened with liquidation.

Then, government mining inspectors were sent out for weekend safety checks at the company’s mines, and slapped Glencore with Section 54 notices which effectively threw salt onto its financial wounds.

Glencore, finding Oakbay’s offers to purchase unacceptable, decided to continue to fund Optimum and help take it out of business rescue.

Zwane then requested a meeting with Glasenberg in Zurich at which Gupta head honcho, Salim Essa, was present.

According to Ephron, at this meeting, Glencore said it would help take Optimum out of business rescue, but would be open to a sale at the right price.

The following day, a meeting was called with Glasenberg, Ephron, Essa, Zwane, and Tony Gupta. The minister allegedly said the best outcome would be for Glencore to reach a deal with the Guptas for the sale of Optimum.

Glencore finally agreed to sell Optimum Coal Holdings to the Guptas for R2.15 billion. Today, no coal is being supplied by Optimum. The mine remains in business rescue.

This week, the commission heard more startling revelations of how Eskom took only three hours to pay a R659 million advance payment to the Gupta-linked Tegeta Exploration and Resources to fully acquire Glencore’s OCM without any goods or services having been delivered to the utility.

A few days before the Guptas were due to make payment, Ephron said Essa said there was a shortfall of about R600 million. He asked if Glencore could fund the shortfall, and the Guptas would get Eskom to make a pre-payment. Ephron said they declined this offer.

The commission heard this week how Eskom speedily stepped in to approve the R600 million pre-payment for coal that the Guptas would now be supplying from OCM.

Energy expert Chris Yelland told the SA Jewish Report that this was a vital crime story showing “ruthless and opportunistic people operating under the cloak of black economic empowerment”.

Said Yelland, “While I’m hugely in favour of black economic empowerment, I’m not in favour of opportunistic criminal elements using this to further their own personal interests at the expense of the poor who have suffered the most. There are no angels in the coal mining industry, and cowboys don’t cry. All I can say is mining is messy.”