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Tegeta-Optimum: a deal that doesn’t make sense

A litmus test for the relationship between the Guptas and Eskom.
Minister of Mineral Resources, Mosebenzi Zwane

The deal to acquire the Optimum coal assets and associated mines by the Gupta-controlled Tegeta Exploration and Resources from Glencore plc is about to reach its conclusion. All that now remains outstanding is for Tegeta to pay the R2.15 billion acquisition price across to the Business Rescue Practitioners (BRP) and the deal will be completed. Tegeta had already assumed financial liability for the operations since the beginning of January 2016.

According to the BRP’s spokesperson, Louise Brugman, everything was going according to plan on Friday, following the approval from creditors. On Monday, the feedback had assumed “no comment” status, probably due to the small matter of some of the directors of the erstwhile acquirer having resigned immediately and “fled” the country. This included Atul Gupta (Chairman), and Varun Gupta (CEO), who were both directors of Tegeta’s parent company, JSE-listed Oakbay Resources and Energy.

This was followed-up by the remarkable assertion in the City Press on Sunday, that the Guptas had left “for good,” a statement that was not denied by their spokesperson to Moneyweb editor Ryk van Niekerk over the weekend. 

Read Ryk’s article on the Gupta’s here.

But whether the deal proceeds could well be a litmus test for whether the Guptas relationship with the South African government, and by default, Eskom, is fundamentally corrupt. This is because the commercial logic behind the deal on the part of Tegeta has been elusive, to say the least, in my opinion.

So let’s consider the terms:

  1. Tegeta has agreed to pay the acquisition price of R2.15 billion in cash. Glencore throws in R400 million to get to R2.55 billion in total, which removes all bank creditors from the equation.
  2. Tegeta agreed to honour the supply contract with Eskom to deliver coal to the Hendrina power station. This entails delivering 4.5 million tonnes of coal per annum for 2016, 2017 and 2018, at the contracted price of R150/tonne. This works out to a loss of roughly R300/tonne, at the very least, which was also the precise reason Optimum got into trouble in the first place. A R300 loss per tonne for 13.5 million tonnes in total, gets you to a loss of R4 billion over the course of three years, assuming no further escalation in costs. (As an aside, Mineweb understands that mining activity has, over the course of the life of mine, moved further and further away from the power station, such that coal has to travel up to 23kms by conveyor belt to Hendrina, something which raises the cost and introduces problems with coal size due to vibrations the coal experiences on the conveyor belt.)
  3. On top of that, Eskom have made it abundantly clear that they intend to pursue the R2.3 billion penalty imposed on Optimum (and inherited by any new owner) for failing to meet the terms of the contract. Add the purchase price, coal supply liability and penalty together and you get an outlay of R8.5 billion.
  4. But what is truly astounding is that Tegeta agreed to all of this in principle before conducting any due diligence – a commitment of R8.45 billion without even kicking the tyres.

It is therefore no surprise that there were no other bidders. So how did Tegeta justify the price paid and associated inherited liabilities? I can’t see it on the face of things. (Attempts to reach them have been unsuccessful.)

But if you assume their relationship with government is corrupt, its quite possible the fine would be reduced or cancelled, or there was a very profitable contract expected in the future. This is where the tenure and role of the Minister of the Department of Mineral Resources, Mosebenzi Zwane, another alleged Gupta ministerial appointment and obvious kortbroek in mining circles, has been bizarre. How many other mining companies have received the Minister of the DMR to save jobs in the industry in the same way Minister Zwane pandered to Glencore in Switzerland? I don’t recall Minister Zwane dropping into 20 Carlton House Terrace in London begging Mr Cutifani for an appointment in such an urgent manner.

So with the political ground under President Zuma and the Guptas now shifting, the Optimum deal could be a litmus test to demonstrate the nature of the relationship. If as the acquirer, would you really want to sink R8.5 billion into a project over the next three years if the assumptions that have been made in one form or another are changing rapidly?

I don’t think so.


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