Eskom prepaid Guptas’ Tegeta $38 million for coal supplies

South Africa’s electricity utility paid 578 million rand ($38.2 million) in advance for coal supplied by a Gupta family-controlled company to guarantee supplies for a power plant, the producer and an Eskom Holdings SOC Ltd. executive said.

Tegeta Exploration & Resources Ltd., controlled by the Gupta family that’s associated with President Jacob Zuma, is supplying the utility’s Arnot coal-fired facility in the eastern Mpumalanga-province at an average price of 500 rand ($33) a metric ton for the fuel, Eskom said in a statement. That compared with 1,132 rand a ton Eskom was paying Exxaro Resources Ltd. in a 40-year agreement that wasn’t renewed when it ended last year, the power producer said. Tegeta is sourcing coal from the Optimum mine it bought from Glencore Plc after the Baar-based producer placed the operation under business rescue proceedings.

“We’ve done this before a couple of times,” Matshela Koko, a generation executive at Eskom, said on Johannesburg-based Talk Radio 702 Monday, referring to prepayment. “We wanted to secure the coal supply for June,” he said. June is the middle of South Africa’s winter.

Eskom first asked Optimum to supply the Arnot plant in January, Oakbay Investments (Pty) Ltd., which owns Tegeta with Mabengela Investments, said in answers posted on its website. The mine delivered about 500,000 tons of coal to Arnot between January and April, it said. Optimum is delivering 250,000 tons to meet a current contract that runs through September and it may meet the requirement as early as the end of July, Oakbay said.

Oakbay said it received an advanced payment of 578 million rand for the deal.

“We told them that we were facing significant challenges due to the conditions around business rescue and the bank closures,” Oakbay said, after some South African financial institutions ended business with the company. “We then asked for a prepayment.”

‘Unsubstantiated Penalty’

Glencore put Optimum into bankruptcy protection after Eskom refused to amend an unprofitable coal-supply contract and penalized the producer with a 2-billion rand fine. It levied the penalty because the quality of coal Optimum delivered to the Hendrina plant didn’t meet the specifications of a supply contract.

It was Glencore’s view that “the penalty cannot be substantiated” after contracting experts to look into the matter, Oakbay said. The mine’s business rescue practitioners will challenge the penalty in talks with Eskom, Oakbay said.

On Sunday, City Press newspaper reported Eskom is allowing Tegeta to divert Optimum coal from the Hendrina power plant, where it pays 174 rand a ton, to the Arnot facility, which is 50 kilometers away and where Eskom pays more for coal. The newspaper cited a mining-industry financier.

Eskom isn’t diverting coal from Hendrina to Arnot, it said in a statement yesterday.

Long-Term Contract

The utility is evaluating proposals from companies that bid to be long-term suppliers to Arnot, and will announce its decision by September, Eskom said in an e-mailed response to questions.

“We did not apply when the tender was in the market last year,” Oakbay said. “However, we have since acquired Optimum and we are looking for growth from any and every source based on our strong production increases.” When the company bought Optimum, it was producing 400,000 tons a month and it’s increasing monthly output to 1 million tons by July, Oakbay said.