I would like to welcome this opportunity to meet with the emerging miners’ sector this morning.
Today’s gathering marks another important turning point in the history of the mining industry and ESKOM, whose role in the economy is to interface with every citizen, a school going child, young mother in hospital, petrol stations and ensure the overall functioning of our economy.
Professor Bernard Magubane says:
“From the discovery of diamonds in Kimberley in 1868 to the creation of the Union of South Africa in 1910 is a period of some forty years. This phase of imperial advance in South Africa is without parallel anywhere in the world. A full comprehension of the methods used to subjugate and incorporate the sub-region within the sphere of British imperialism, the personalities, and their arguments to explain and justify their actions will require many more studies.” (Bernard Magubane (1996): “The Making of a Racist State: British Imperialism and the
Union of South Africa, 1875 – 1910”. MacMillan Press Limited, p. 40)
The discovery of diamond in Kimberley and subsequently gold in the Witswatersrand was to play a decisive role in the course of political and economic development in South Africa and precipitated a scramble for the control of the South African territory, set the stage for the Anglo-Boer War which preceded the most extensive plunder of our country’s natural resources and black people’s labour power.
The control of these mineral deposits, the control of the political agenda of this country as well as of black labour precipitated the British avaricious appetite to impose their dominion over the rest of South Africa and it sealed the fate of Africans in South Africa.
The entire edifice of the Union and apartheid thereafter was predicated on this notion that Africans were cheap and expendable labour, they had neither a role in this country’s political affairs nor a stake in its economic fortunes except as cheap labour at the service of the white economy.
It was precisely for this reason that it had been conceived that freedom for the black majority would be meaningless unless it also meant fundamentally transforming the economy in order to reverse both their super-exploitation as well as their socio-economic marginalisation.
For centuries, the South African economy has been built on the back of the minerals-energy complex and, accordingly, the mining industry has also influenced the spatial economic and settlement patterns, as well as the configuration of transport and other infrastructure networks in South Africa over the years.
The amount of public investments in education and development of skills base, the structure of the South African exports and our engagements with the international community as well as the labour relations regime of the South African economy were all shaped by this sector, including the nature of land distribution and tenure system and broadly the evolution of the South African political system.
In a way, the very formation of the African National Congress, the premier movement for national liberation in Africa, was precipitated by the mining sector by forcefully expropriating the mass of African peasants from the land and forcing them into the capitalist economy, by forcefully uniting the four South African colonies into a single Union, by bringing together the Africans from different and disparate ethnic groups to the mines and forcing them into the bowels of the earth to dig up minerals and by discriminating all Africans in common and imposing a glass ceiling on their economic development.
This industry has long been integral to the development and advancement of South Africa’s economy and has contributed largely to making its economy the strongest on the continent.
According to the South African Reserve Bank data, in 2010 the mining industry contributed 18.7% to the country's GDP; the coal industry contributes 9.2% directly, which might be more considering the mining supplier industries and the downstream industries that utilise the outputs.
In 2011, according to the Chamber of Mines data, the total income of the South African mining industry (after depreciation and impairments) was R447 billion while the total expenditure of the industry (after depreciation and impairments) was R437 billion.
It is estimated that 89% of this R437 billion expenditure was spent in South Africa.
And so the question we should ask is, who does this goes to?
Who are the primary beneficiaries of all the mining spend!
We must ask these difficult and uncomfortable questions in order to find amicable solutions to the economic challenges we face, because it is critical to eradicating social inequalities.
The mining industry is the country’s largest employer, with around 460,000 employees and a further 400,000 employed by the suppliers of goods and services to the industry.
South Africa is the sixth largest holder of coal in the world with 31 billion tonnes of recoverable coal reserves, equivalent to 11 % of the world’s total coal reserves.
Although most of the coal is consumed by the South African energy sector, with 77 % of the country’s primary energy needs provided by coal, due to the relative lack of suitable alternatives, this situation is unlikely to change over the next 10 years.
Coal amounting to almost 69 million tons of per annum is exported via the Richard’s Bay Coal Terminal (RBCT) which was further upgraded in 2010 with a resultant increase of the export capacity of 91Mtpa.
Historically the majority of this was exported to Europe, but Asia (India and China) has in recent years become the preferred market.
Coal production in South Africa is concentrated in large mines, with 8 mines accounting for 61% of the output.
Coal’s role as a fossil fuel is likely to become increasingly important in a world in which concerns over energy security are rising and the demand for energy is growing strongly.
According to the World Coal Institute, proven coal reserves are sufficient to sustain production at current levels for 147 years.
Similar to the gold industry, the South African coal sector has undergone a number or mergers and acquisitions and name changes over the last few years, resulting in the emergence of three major coal producers: BHP Billiton Energy Coal South Africa; Anglo American Coal and Xstrata.
The fourth largest is Exxaro Resources Limited, South Africa’s largest black-controlled diversified mining company.
The recent merger of Glencore with Shanduka will lead to the concentration of the market and further entrench the barriers of entry.
Structural constraints and the transformation of the coal mining industry will require mining companies to partner with the public sector to achieve sustainable development and growth.
Hence, as the department entrusted with the shareholding of vital State-Owned Companies (SOCS) that can decisively change the game of economic participation through their procurement spend, we believe that Eskom’s future coal requirements can be used to underpin a game changing by pursuing the diversification of the sector with fundamental transformation outcomes.
This is why we changed our department’s vision last and decided to pursue transformation in the SOCS in our portfolio, as well as their customers and suppliers in our drive towards industrialisation, job creation and skills development.
The emerging suppliers will have to demonstrate a resilient attitude and willingness to develop long-term sustainable businesses in the mining value chain.
Today’s engagement is to share with you, as emerging miners, Eskom’s Emerging Miners Strategy in order to leverage Eskom’s future coal requirements whilst fulfilling the need to meet sustainable development imperatives because mining fuels the economy.
As I indicated earlier, the Minerals and Petroleum Resources Development Act (MPRDA) of 2002 regulates the mineral resources sector and one of the critical principles that underpin this important piece of legislation is that the industry is required to undergo transformation and provide opportunities for the previously disadvantaged.
Judging from the ownership patterns, the industry has limited itself to bare minimum standards; hence the question of social and economic justice remains unresolved in the mining industry, particularly coal mining.
The potential for the success of this industry is evident in the historical success stories that have emanated from collaboration between government and the industry.
The following are testimonies of collaboration:
- Kuyasa was founded in 1995 and bought Ikwezi Mine from BECSA.
- It started its coal business with a 480 000 tons per year contract with Eskom, supplying Kendal power station.Kuyasa currently supplies Eskom with approximately 2 million tons per year.
- Liketh was started by black professionals in 2001.
They started with very small contracts with Eskom and in 2008, when Eskom had major coal requirements, Eskom facilitated a resource allocation from Anglo Thermal Coal’s KK Pit 5 resource for beneficiation purposes to supply Eskom up to 2018.
Liketh grew to be the No. 4 coal supplier to Eskom in 2009.
There are a few other similar examples of successful Black Economic Empowerment (BEE) initiatives such as Optimum Coal Holdings Limited (OCH) which supplies 5.5 million tons per year of coal to Eskom; Koornfontein and Eyesizwe.
In regard to Eyesizwe, both Anglo and BHP Billiton facilitated the sale of Matla and Arnot Collieries to Eyesizwe Coal which was later acquired by Exxaro, leading to a much larger empowerment transaction.
This transaction resulted in Exxaro becoming a majority black-owned company and, accordingly, Exxaro is today Eskom’s 3rd largest coal supplier.
It is for these reasons that the Department of Public Enterprises (DPE) and Eskom have embarked on a ground-breaking and game-changing initiative substantially to transform the South African coal mining industry for Eskom’s long-term security of coal supply.
This initiative is envisaged to be a bold milestone in the mining and electricity production sectors in South Africa in the next few years.
To ensure its success, the Board of Eskom has approved a Coal Supply Strategy as a guiding principle of this transformative agenda in the sector.
The Department of Mineral Resources estimates that there are currently 30 BEE coal mines in South Africa.
In this case, BEE is defined by the DMR as 26% Black Ownership.
However, if measured in terms of 50% plus 1 share Black Ownership, this number becomes significantly lower.
Currently, emerging miners account for approximately 17% of the total Eskom coal spend of R28bn.
R28bn constitutes 80% of the total Eskom energy spend of R35bn, wherein the R7bn is attributed to other primary energy elements such as water, diesel for Open-Cycle Gas Turbines and fuel oil amongst others.
Emerging miners include both majority black-owned emerging miners and emerging miners not owned by blacks.
Black emerging miners as defined by Codes of Good Practice accounts for approximately 4.7% of Eskom’s total coal spend.
These statistics are important to elucidate the failure of this industry to transform.
Opportunities for emerging miners exist in the sector and they are largely in the short-to-medium term supplies for ESKOM such as in, for instance, during the procurement processes, beneficiation of low quality reserves (washing, de-stoning and others) to Eskom specifications; reclaiming of dumps (blending of material from discard dumps) and environmental rehabilitation.
Those are low hanging fruit but we are not saying out people are entitled to low-hanging fruit.
Our research and other empirical evidence shows that Black emerging miners are confronted with several constraints such as funding, sizeable reserves, technical expertise and contracts which would involve off-take agreements.
This is why we have, among others, invited the Development Finance Institutions (DFIs) today.
Consequently none of the black emerging mines has demonstrated appetite to remain in the sector for long and they sell their equity to international companies or local companies and exit the industry, which robs our country of the economic transformation so pivotal to our broader social transformation as a nation.
After our situational analysis, even though not exhaustive, and significantly to respond to the above and use our SOCS as vital drivers of economic transformation, we developed a five-pillar Black Emerging Mining Coal Strategy:
1. Creating a Mine Development Fund: Eskom will seek partnerships with the likes of the Industrial Development Corporation (IDC), National Empowerment Fund (NEF), Development Bank of Southern Africa (DBSA) or private sector funding for pre-feasibility studies and consolidation of resources and infrastructure. A fund will be established by initially working on items on a project-by-project basis and then progress to manage larger projects;
2. Use coal trading as an option to secure coal resources and enhance transformation: coal trading, subject to conditions, can be used to develop black-owned companies in coal beneficiation and processing as well as to assist black mining rights holders to acquire the capital initially to establish mines. In this regard, we will ensure quality and environmental compliance;
3. Increase Black-Ownership as a means to transform the industry: Eskom will use its purchasing leverage to empower black-owned suppliers and increase equity stakes to 50% + 1 share. Most importantly, we will have to develop black emerging miners by entering into Memoranda of Understanding (MOUs) with suppliers to assist with acquiring funding;
4. Utilise commercially acceptable levers to increase Black ownership which will require that we enter into discussions to increase Black Ownership participation by utilising various commercially acceptable levers. We intend to enter into partnerships with established miners to participate in skills development of the black emerging miners.
5. Consolidation of smaller Black Owned mining resources for development which will require identifying black-owned mining resources that could be consolidated into larger entities for development, as well as investigating synergies for the establishment of coal processing plants.
In this regard, and as a matter of principle, Eskom:
- will not contract with suppliers operating illegally or mines that are operated by middlemen,
- will only contract with owners of mining resources or value-adding agents,
- will also be entitled to conduct audits to assess compliance with all the legislative requirements and operation and management of the mine.
- Eskom will continue to share its coal supply requirements and purchasing plans with suppliers at appropriate forums.
There is need for innovation to harness available and previously mined resources using viable technologies to fulfill Eskom’s requirements.
The coal strategy is anchored on an optimal portfolio of long, medium and short term strategic supply partnerships and focuses on coal supply which will provide security of supply at the lowest total cost of ownership whilst ensuring consistent quality, and continuous improvement opportunities throughout the life of the coal supply contracts.
Coal supply for domestic energy use will become a national problem that will require a national solution through collective thinking.
Furthermore, Eskom increasingly has to compete with exports and this could worsen as India seeks to import lower quality coals from South Africa.
This situation is likely to worsen post-2018 as the Mpumalanga basin becomes depleted and coal qualities deteriorate.
In the same vein, Eskom would be engaging the major coal producers with the concerted view of ensuring the establishment of a national pact on coal to ensure the security of electricity supply through the purchasing of affordable coal.
The proposed pact will help to keep electricity tariffs at inflation levels.
It is important that we should be relentless in pursuing cost-reflective tariffs so that we do not burden our economy and residences with high-electricity costs.
We really need to work together for mutual benefits in both coal mining and electricity sectors.
Engagement has been held with the established miners, the Chamber of Mines and SAMDA who have supported the direction of the strategy and who will continue to engage with the Department of Public Enterprises, Eskom and the emerging miners to roll this strategy out.
With this level of participation across all players in the industry, partnerships with emerging miners will need to be underpinned by the following principles:
- Strong support and alignment with the role Eskom plays as part of the national strategic assets
- Strong support and alignment with established mining houses and industry forums and legislative compliance
- Ethics and integrity of suppliers in line with Eskom’s values and objectives
- Open and transparent supplier relationships underpinned by a willingness to share information and partner with Eskom
- Business sustainability and supplier stability over long-term relations – including a pricing model that is based on efficient costs plus a fair risk adjusted return, and
- Operational performance - willingness of supplier to commit to continuous improvement with a shared benefit to both parties.
Over the years, we have seen assets consolidated in the industry and the large resources that are suitable for Eskom supply are owned by a few players which makes it difficult for emerging miners to penetrate, let alone even to start participating meaningfully.
Today’s conversation and sharing of ideas seeks to re-write those patterns of ownership and to find ways to remove the undesirable structural barriers of entry if we are to eradicate social inequality in South Africa.
We are committed to change the landscape of the coal mining industry with your commitment as miners, willing to participate for the long-haul, working together and exploring new business models that will lead to the sustainability of the sector.
In this regard, we are prepared to utilise all the levers available to us, including partnerships with other State Owned Companies (SOCS) such as Transnet and the Eskom capacity at the Richards Bay Coal Terminal (RBCT), to drive this aggressive transformation agenda.
In January 2011, President Zuma outlined this transformative vision, underscoring the fundamental importance of raising our transformation agenda to a new level, thus:
“We have to live the promise of the Freedom Charter, which states amongst others, that all our people will share in the wealth of the country. Political emancipation without economic transformation is meaningless. That is why we have to commit ourselves to economic freedom in our lifetime...”
South Africa has come too far and still we have a long road ahead of us.
The dreams of the majority are real and yet remain still unfulfilled!
Those of us charged to become the agents of this vision of fundamental transformation cannot recoil from this path upon which people have been embarked for centuries.
I thank you.
