To compliment the previous post, i think this bodes well for...

To compliment the previous post, i think this bodes well for both FSE and RES


Eskom's R284bn coal spend is thin end of wedge
David McKay | Tue, 23 Oct 2012 16:28
[miningmx.com] – ESKOM'S recently published electricity tariff increase application – a 16% per year increase from 2013 to 2018 - is about the most transparent the utility has been on its business to date. Plaudits for that.
For instance, it discloses its contract price for coal over the proposed five-year period. It averages at R349 per tonne and carries a total investment in primary energy costs of R284bn.
In the past, it was virtually impossible to get coal suppliers to disclose Eskom buying prices, or even to which power station they were supplying their coal.
Year-on-year, Eskom's coal procurement data shows it is prepared to pay 10.2% price inflation over the period of the tariff application. That’s not quite the single-digit inflation it said it wanted from its coal suppliers, but it's also nothing like previous coal price inflation which Eskom CEO, Brian Dames, disclosed this week was around 18%.
Bevan Jones, GM for London Commodity Brokers (LCB) makes the rather interesting point that price appreciation of over 10% offered by Eskom may even be better than coal producers are likely to get for similar quality thermal coal in the export market. Certainly, prospects in the thermal coal market have dimmed.
“If I was a junior miner, I would definitely sell to Eskom at 10% inflation. For the same quality coal, junior miners will no doubt be getting the best price from Eskom in a few years time. They may even prefer to not wash their coal for exports anymore and instead sell to a higher-paying Eskom,” he said.
The question is, however, whether Eskom's offered price is enough to attract foreign investment in new mines.
New mines remain crucially important to Eskom. The R284bn it expects to spend on coal supply over the five years, equal to 810Mt of coal represents about 80% of the total it requires.
That means Eskom has to procure another 162Mt of coal (20% of total required) for a total outlay of about R56bn based on the average price. Notably, of the 80% coal is has secured, only a portion, about 8%, is from new mines. The rest is from Eskom-dedicated mines, existing multi-product mines, and medium-term mines.
But can Eskom source the balance of coal required when the risk faced by investors wanting to invest in South Africa is higher than it's ever been?
A senior banker at a well known merchant bank in Johannesburg says coal mining finance in South Africa is hard, if not impossible to raise, especially for Eskom-dedicated mines. They have to be a combination of export and domestic coal mines for them to fly.
Another coal executive, who asked not to be named, says Eskom’s calculated average price of coal is a bit of guesswork. That’s because the price is calculated as a margin above operating cost and there’s no knowing how costs really will change for coal miners.
For instance, there are possible regulatory changes to coal exports which may make multi-product coal mines less profitable, and the crushing irony that they face steep increases in electricity, the cost of which we can be exact: 16% a year, assuming the tariff application to Nersa passes muster.