Eskom Inquiry: Exxaro
14 February 2018
Chairperson: Ms D Rantho (ANC)
The Committee heard evidence from the Exxaro CEO about its relationship with Eskom; cost plus mines versus commercial mines; and prejudice to Exxaro cost plus mines by Eskom.
The Exxaro CEO categorically denied Eskom making prepayments to any mines, and certainly not cost plus mines as had been stated by Mr Anoj Singh to the inquiry. As part of the contractual obligations Eskom provided the land, equipment and capital for operations of cost plus mines whilst the mining company – in this case being Exxaro – provided the mining right to mine on the land owned by Eskom.
Exxaro had requested of Eskom a R1.8 billion capital investment in 2016 for the sinking of a new shaft for Matla 1 as it was becoming unsafe to mine at the existing shaft. Eskom had approved the capital investment but the Minister of Public Enterprise, Ms Lynne Brown, had rejected the capital investment citing issues with socio-economic development. As a result of the refusal, the mine has been mined out of sync and resulted in sub-optimised extraction, a sub-optimal quality mix of coal and less volumes produced. If the status quo continues, Matla will have to permanently close Mine One. Matla had once been a flagship operation. And if this needs to be opened again, the cost of re-establishment would be exorbitant.
The Exxaro CEO agreed that what happened when Tegeta took over at Arnot was a breach of the Eskom Board’s fiduciary responsibility in protecting the interests of the shareholder which is government, and the taxpayer. 1 500 miners lost their jobs despite pleas to the Minister. Huge costs were incurred by Eskom by bringing in external coal.
Members raised questions around Exxaro’s BEE status; the termination of Exxaro contracts by Eskom under Mr Brian Molefe; and the unwillingness by DMR to assist and facilitate negotiations between Exxaro, Eskom, and the National Union of Mineworkers (NUM) yet it was willing to assist Tegeta in the purchase of Optimum Coal Mine (OCM) and make recommendations for Tegeta to receive a prepayment. Tegeta was the net benefactor of all the contracts that Eskom discontinued with Exxaro and other mining houses.
Witness: Mr Mxolisi Mgojo
The Chairperson administered the oath and Mr Mgojo took the oath to tell the truth.
Evidence Leader, Adv Nthutuzelo Vanara: Please state your full particulars for the record and introduce your delegation, also present your statement before the Committee because it is very detailed.
Mr Mgojo: My name is Mxolisi Donald Mbuyisa Mgojo.
Mr Mgojo introduced his delegation and read the statement he submitted to the Committee on behalf of Exxaro Resources (see document).
Adv Vanara: In your presentation you refer to the prejudice that your company suffered at the expense of other third parties benefitting, who are you referring to or who are these third parties that seem to have benefitted at the expense of your company?
Mr Mgojo: From the deliberations that have taken place during the investigation by this Portfolio Committee it has become clearer in terms of the statement presented here that in this particular instance it is seemingly Tegeta that has benefitted. This is given the fact that both Mafube Mine and Arnot Mine which supplied Arnot power station suddenly lost their contracts to the benefit of Optimum. And therefore on that basis I can only conclude that Tegeta was the net benefiter. And also Leeuwpan Mine because Leeuwpan itself was supplying Majuba power station, and Brakfontein. Subsequently if you look at the timelines presented here, the timing with which Brakfontein was awarded that contract was precisely at the same time when we had entered into negotiations and we were awaiting the signing of our contract. We were running on a month on month, and it was at that time that they were busy ramping up.
Adv Vanara: Tegeta owned a mine that was supplying coal to Hendrina at R150, is it Optimum?
Mr Mgojo: That was the case, but it appears that coal that was going to Hendrina was subsequently diverted to go to Arnot power station at a much more favourable price than what was the contract to Hendrina.
Adv Vanara: Matla 1. I just need to get clarity around that. Is this the same mine that Mr Singh in his submission says received a R1.8 billion prepayment as a capital payment?
Mr Mgojo: It is exactly the same mine that Mr Singh was talking about. In actual fact in our submission we have gone to show how in terms of the Coal Supply Agreement (CSA), how capital is procured and the processes that one goes through during that process through various governance structures until such time that capital is finally released. But it is a CSA contractual obligation for that capital to be made available in order for the mine to be able to meet its own contractual obligation in terms of the volume of coal that need to be supplied.
Adv Vanara: And you dispute that there was ever a capital prepayment of R1.8 billion to Matla?
Mr Mgojo: The first time I have heard of the term prepayment was during these hearings. We have never heard of a prepayment for either capital or for coal. We certainly have never experienced this for any of our requests. In actual fact I am not even sure that such exists with regard to cost plus mines.
Adv Vanara: So you say there was a contractual obligation on Eskom on capital investment but eventually the Minster did not give her final approval. Did I understand you correctly in respect of Matla, which is why you eventually did not receive this R1.8 billion?
Mr Mgojo: In our submission we indicated that Eskom informed us that they had approved the capital for R1.8 billion and that they then had to submit that approval to Minister Lynne Brown to approve the capital. We were never informed formally by Eskom of the refusal of Minister Brown to that request. That was never communicated to us. The only time we came to know about it was at the time when we took Eskom on an arbitration process where they were forced because of the request that was made for them to make that available to us, otherwise we were not aware of that refusal.
Adv Vanara: But this Matla was a cost plus CSA, is this correct?
Mr Mgojo: Yes it was a cost plus CSA.
Adv Vanara: You earlier talked to the benefits for Eskom in cost plus CSAs – that was from page seven of your submission – and it would appear that there were more benefits to be acquired by Eskom if it had complied with its contractual obligations at Matla. Do I get you correctly?
Mr Mgojo: Yes, you are right. What one needs to understand and really appreciate is that at the end of the day these assets are actually owned by Eskom. They procure the capital, they spend the money on operation expenses, they make all the necessary provisions for rehabilitation and costs, and therefore you would want to believe that it is to their benefit that these mines are run very efficiently given the fact that they are providing the capital. To the extent of running these operations efficiently, not only do you get the volumes or qualities required, you would also minimise the cost of mining and the cost that Eskom would have to pay for every ton.
Adv Vanara: But you would then agree with me, and this is borne out of your concerns you have raised with Arnot and Matla in particular where there were certain contractual obligations Eskom had to meet, and those obligations were not met.
Mr Mgojo: That is very true. For us it was indeed most surprising and actually very sad that sudden decisions were taken - as if designed not to make that operation a successful operation. This was an operation that had the capacity and capability, and resources on the ground with people capable of extracting those based on historical performance where they have managed those assets in the most effective manner ensuring that the volumes were there, ensuring that the qualities were there, ensuring that they were being run in a cost effective manner. Despite all of that, sudden decisions were taken. So it is very sad that the end result of that whole exercise was one where people had to lose their jobs. To me more than anything else, that is the biggest pain that one has to deal with. As the CEO I would have to stand before 1 500 people and explain to them the fact that there is coal in the ground, we are capable of doing it, we have come up with plans on how we can rescue the mine, and yet despite and in spite of that, the mine itself is put into a situation where it is to close. It is painful when the miners themselves start approaching Department of Mineral Resources (DMR) to intervene in a manner that could save jobs with the other stakeholder being Eskom, and that in itself is not considered as an option. So to me that became the most painful aspect in this whole journey.
Adv Vanara: I am in possession here of a letter that Mr Koko wrote to the Director-General (DG) of DMR. You would not have known about the letter, I want to hand it to you. I want you to focus on the second last paragraph.
Adv Vanara handed the letter over dated 6 December 2015, to Mr Thibedi Ramontja (see p64 of statement).
Adv Vanara: Can you just read from the third last paragraph of the letter.
Mr Mgojo proceeded to read the letter.
Adv Vanara: To that letter, Dr Ramontja responds. It is an undated response, and I would like you to read the response.
Adv Vanara handed over the response to Mr Mgojo.
Mr Mgojo proceeded to read the response.
Adv Vanara: Just to bring you up to speed, this is Tegeta in the process of purchasing Optimum Coal Mine (OCM) together with other subsidiaries from Glencore. This clearly is Eskom talking to DMR that there be a facilitation for the respective licences by DMR so that the transaction could be quickly resolved. Over and above that, there is a commitment from DMR to assist, and that a prepayment of R1.7 billion be made to Tegeta. As an industry player, are you aware how long it takes to get these compliance certificates?
Mr Mgojo: In our experience we have had numerous occasions where we would have to apply for various licences, whether it be a water use licence, a mining right, or a section 11 transfer, and we have not yet experienced a situation where we have received any of these licences under three years. So it becomes almost a norm, hence why I indicated earlier on that insofar as giving pre-advanced notification when you are going to have to do things like closures, that you know there are certain things to put in place. Because when you have to do a closure plan, you are going to have to go to DMR and ask for approval for that closure plan to be accepted because now you are going to have to define that, and that sets the method with which you are going to do it, and how that is going to be measured by DMR as to whether you have adhered to that. So this is probably a record, not to say the fact that DMR in itself is very active in ensuring with Eskom that these things get expedited. But with this knowledge at hand that you are presenting to me for the first time, it also seems to allege that there was a coal crisis that was actually happening at that time which necessitated the expedition of getting these licences and all the authorisations to happen very quickly. And it becomes very clear to me now that on the one side when we were requesting certain things to happen for our Arnot mine and Mafube. To bring these operations to a closure then created that crisis. The cancellation of two contracts supplying Arnot power station in itself creates the crisis.
Adv Vanara: That is precisely where I want us to get to. Should there have been a crisis?
Mr Mgojo: Arnot was supplying at that time despite the fact that it had not had all the land. It was supplying about 1.8 million tons. Mafube was supplying about one million tons. That’s a lot of tons. So when so many tons all of a sudden are taken out of the system for Arnot power station, a crisis emerges. But it is a self-induced crisis because there were contracts that were there that could have easily been extended and would have been the most cost effective contracts because those contracts were supplying from both mines to Arnot power station using the belt system. On a delivery basis, that was the best option for Arnot power station.
Adv Vanara: You have drawn what you call a similar modus operandi for Arnot and Matla. Let’s start with Arnot, that contract in your view was supposed to run until December 2015, and Eskom’s view was that that contract had to run until 2023. And back in 2013 because you were of the view that the contract was ending in 2015, and in terms of the provisions of the contract you must give a two year notice for terminating that contract. Can we just go back there, you gave Eskom that notice, and what was Eskom’s position?
Mr Mgojo: Eskom was of the view that the contract ended in 2023. At that point in time after going back and forth between the two organisations we were even threatening each other about taking the matter to court and having the courts settle this matter. I think at some point sanity prevailed amongst the parties that at the end of the day there is no winner. We decided then let us get together and agree on how we can actually continue the supply of coal given the fact that we were going to renegotiate the terms. But that would have then secured the supply of coal into Arnot, hence why there was a need for us to enter into a Memorandum of Understanding (MOU). At that point Exxaro had highlighted that it would explore various scenarios which we would present to Eskom. There were actually seven scenarios. We sat down with Eskom as a team, it was a very senior team, and out of those seven scenarios there was a joint agreement by both parties that the option decided on would be in the best interest of all the parties involved. With that being said, Eskom indicated that for them to be able to take this option for approval it would have to be backed up by an expert opinion on the technical viability of this option. They then requested us to provide them with three names of technical companies that could help assist them in doing this technical due diligence if we may call it. We did give them the names and that was the last we heard from them on this whole process.
Adv Vanara: There is a reason you must give not two months’ notice but two years’ notice, what are the reasons?
Mr Mgojo: In terms of the CSA agreement for cost plus mines, it specifically stipulates that you now have to put together a closure plan. Now putting together a closure plan is a process that is also going to require your people putting it together, you have to have other third parties who are going to verify that because this plan has to be approved by DMR. History has shown us throughout all our experience that when you close a mine you need at least two years for this. You have to ensure that the rehabilitation fund is sufficiently funded as part of that because the DMR will never accept a plan where there has been a shortage in the rehabilitation fund. So it gives time for all of those things to be put in place so at the end date when you have to close you already have a team with an approved plan to start executing the plan from that day.
Adv Vanara: Is it correct that given this was a cost plus CSA, that there would have been certain contractual obligations that Eskom would have had to perform in that termination period of two years?
Mr Mgojo: It is precisely in those two years that the parties would have to sit together and work out this plan together and agree on this plan together and ensure that Eskom from their contractual obligations understands the costs associated with this plan, and ensure that the rehabilitation fund is adequately provided for this plan to be supported. So yes there is a contractual obligation from Eskom’s point of view insofar as what they need to do during that two year period.
Adv Vanara: Were those discussions between yourselves and Eskom taking place in preparation for the closure with the December 2015 date being the end of the contract?
Mr Mgojo: What we have tried to show with regard to the timelines is that right up to September 2015 we had been negotiating in good faith with Eskom with the view of implementing the memorandum that we had both agreed to. The discussions between that date which was a two year trigger date right up till September were about extending the mine. Therefore the notion of terminating or of giving notice of termination in September 2015 with the notice of closing the mine three months later was something that was totally against the contract. In actual fact they were in default of the contract in that respect because you have not given the two year period to do that.
Adv Vanara: It would appear from your testimony that the two year period was not preparing for the closure of the contract but rather the continuation of the contract. Do I understand you correctly?
Mr Mgojo: You are quite right. That was exactly what was happening.
Adv Vanara: Let’s follow the timeline. We know in 2015 there was a revolving door at Eskom at both board and senior executive level. When were you having these constructive discussions of finding a win-win situation, and when did things turn for the worse? Who were you dealing with when things seemed to be going for a win-win solution, and when did this abrupt bomb get to be dropped?
Mr Mgojo: If you just allow me to get the time – because a lot of things happened during that time, and I just want to get my facts correct in terms of when Mr Molefe came in… Right up until March 2015 from 2013 we were dealing with Kiren Maharaj and Johann Bester, and that’s when we were having the constructive conversations. You will recall that at some point some of the people we were dealing with, especially Kiren, were suddenly suspended and during that period after March 2015 until September 2015 I think that was the time Mr Molefe came in. He came in as Acting CEO on 14 April 2015, and was formally appointed on 25 September 2015. From April 2015, if I may say, that is when everything changed.
Adv Vanara: But from April does Eskom explain to you that they have changed their position of holding the view that the contract runs until 2023, and that they are in agreement that the contract would end 31 December 2015?
Mr Mgojo: The first time we were informed about a change in Eskom’s view, given that we were still negotiating and thinking that we were negotiating in good faith with Eskom - in actual fact we kept enquiring with Eskom as to when we are going to get a response from them on the three names we had suggested. But we were not getting very clear indications or responses from them. And it was only when we received that letter in September 2015 informing us that Eskom wants to terminate the contract in December 2015, that was the first time we had any form of communication from Eskom.
Adv Vanara: So the crisis referred to in the letter you have just read, is it a self-induced crisis or what?
Mr Mgojo: What I can say, Chair, and you can also draw your own conclusion to this, there were parties who were willing, there was coal that was available, there were people capable of producing the coal and already engagements that were to go beyond December 2015 were being pursued, that was with Arnot. With Mafube, in spite of the fact that Mafube had in their own position thought that the contract was going to end in December 2015, and Eskom was saying that the contract was going to end in 2023, the two parties being Anglo and Exxaro then decided to continue to supply coal and expressed their desire to continue to supply coal right up to 2018. So you have two mines which were previously supplying the coal, both willing to continue supplying coal, and both are being told to terminate on the same date.
Adv Vanara: I just want a comparison here. Given the background you sketched earlier about the benefits of the cost plus CSA, in respect of Arnot where Eskom had to purchase land for you to continue mining where those issues weren’t resolved, and given the speedy resolution and Eskom’s enthusiasm to assist Tegeta to get all the licences and the prepayment. Given that at Matla to date you have not received the capital payment of R1.8 billion, what do you make of the fiduciary duties of Directors at Eskom? Where does it seem their allegiance was, were they serving the interests of Eskom or other interests?
Mr Mgojo: Given all the information that has transpired over this investigation, some of the information that one was has not had sight of, like this letter, I can only draw conclusions based on this, rightly or wrongly. It just does not make sense to me that a mine that had been producing coal for many years. If I can just give you a background to Matla; it was once the flagship of underground mining in South Africa. The Australians used to come to Matla to learn about underground mining. At one time Matla was producing as much as 15 million tons out of those three mines, so this mine is a mine that had been a very well-oiled machine capable of going beyond the 10.06 contractual agreement where Eskom asked of it to go far beyond that and we were able to do that. The same people are still there, and now the capital is been starved from that operation to the extent that the mine is now rendered partly ineffective to actually comply with its contractual obligations. And on the other side, huge costs are incurred by Eskom by bringing in external coal – far beyond and many times more than the capital cost that was required by that shaft. One thing I can tell you is that in my organisation as CEO and as a board director, if I had to go and tell my shareholders of the actions we are doing that were destructive, I would not be the CEO today. That board would not be in existence because that would not have been seen as demonstrating our fiduciary responsibility in ensuring we are protecting the interests of the shareholder. In this instance the interests of the shareholder of Eskom is the government, it is the taxpayers.
Adv Vanara: No further questions Chair.
Questions by Members
Mr M Gungubele (ANC): I must express my gratitude to Mr Mgojo, the team, and Adv Vanara. I want to make these remarks up front that, having listened to this exercise, I think there is a need to call back certain bosses of Eskom to explain themselves because this comes across as the worst developmental genocide if there is such a word, if the facts are as articulated. Historically in South Africa, Eskom has been known to supply highly affordable electricity, and over time that has changed. You guys have been in that space. I am trying to think about this conveyor belt and strategic location of power stations and coal mines, and third parties. My first question is your comment on that, and second question is if you say “Suddenly third parties came into the space”, were they reducing the cost or increasing the cost, either way what is the reason?
Mr Mgojo: The design of these cost plus mines were highly strategic by nature. Strategic in the sense that before you can locate a power station, you need to have good geological information as to where the source for long term supply can be located. And I will give you an example of the importance of what I am saying. Majuba power station was initially designed as a baseload power station. Resources were defined where that power station was going to be built with the view that there were sufficient coal resources for the life of that mine. The biggest geological mistake probably made in this country was that the geological assessment that was done – the geoscience work that was done for Majuba actually got it so bad. When they opened the mine it was to be so costly because they did not get the geology right in their assessment. Today Majuba power station has to insource all of their coal – hence that statement when I say “To be able to find the right geology”. It is a very strategic decision because at the end of the day what you are looking for is a mine that will give you a long term guaranteed coal supply for the life of the power station. That is number one, so the volumes have to be right, the coal quality for the type of boilers that you are going to make because again the boilers talk to geology so the match between the boilers and the geology has to be right. But over and above that you have to ensure the cost to mine and deliver the coal for the life of the power station, hence the whole notion of having conveyor belts to the power station is very critical. It starts at a strategic level. When during the life of that power station you start changing the original strategic intent that it was designed around, you are bound to disturb that balance. By introducing another form of supply that does not talk to a conveyor belt, that does not ensure the economies or ideal costs, this starts creating a big problem for the power station. There is absolutely no way you can compete as a third party, compared to a mine that can produce coal and put it on the belt. If I can make an example…
Mr Gungubele: Sorry, I am trying to optimise my time with you. There is nothing wrong in making examples. If you can quickly give a sense if there is any nexus between this proper geological assessment, proximity, conveyor belt, power stations that mine, and the historic affordability of electricity as supplied by Eskom. You don’t have to give me all the details.
Mr Mgojo: What I can say to you just from our own operations, at the time when Matla was doing plus 10 million tonnes it was competing between number one and number two with Delmas. There was always this competition between number one and number two to see who was going to be the cheapest supplier of coal, and which power station was the cheapest on the grid, and that was as a reflection of the coal supply. So Matla as I indicated once upon a time was the flagship, so there is a correlation between the coal, and cost of that power into the grid.
Mr Gungubele: Coming to the third parties you spoke about.From the cost perspective what was rational in as far as the operation of the third parties are concerned compared to Mafube and Arnot as they are being left out toward the end of their contracts in 2015?
Mr Mgojo: I think we need to accept that the Arnot situation was an induced situation. It was not enabled to provide the tonnes that it should have, which would have then put its true cost at the right level, not at the 7, 8, 900 plus. If you were to say a steady 4 million tonnes per annum, Arnot would be producing and delivering that coal at about R400-500 per tonne. The plan that we provided in terms of the scenario we developed with Eskom actually brought that cost to just below R500 a tonne.
Mr Gungubele: Who were the third parties that came in?
Mr Mgojo: Now that was coal delivered. A third party would have then not only have to produce the coal, but they would have to transport the coal, and land that coal at the same price as it was able to be produced by Arnot or Mafube. We know that Mafube was landing coal there at R132 to R135 a tonne. So there is no mine that could ever be able to produce, transport and land the coal there at R132. Not even R200.
Mr Gungubele: Who are the third parties, names?
Mr Mgojo: Well, the other third parties in this instance was our neighbour which was Optimum that was getting the benefit of the coal supply. And there were others. Remember Arnot, even before Optimum was there, Arnot because over the years had been reducing the volumes, there were other third parties. So Eskom was not precluded from bringing in other third party coal while Arnot and Mafube was supplying coal there. They were doing that, and that’s what made the power station much more expensive because during that period it was also getting third party coal.
Mr Gungubele: Are you suggesting that when Optimum came in they did it in a more expensive way, and what could have been the factors?
Mr Mgojo: The factors for that would be that they don’t have a belt that goes into that power station. They have to truck the coal by road.
Mr Gungubele: What were the distances?
Mr Mgojo: It’s about 25km. They would have to truck that coal. For those volumes that is a lot of coal!
Mr Gungubele: Let’s come to the 2015/2023 discrepancy. You anticipated the contract to end in 2015, and they anticipated it to end in 2023. If there is a two year notice, now I suspect you might have started communicating with them during 2012-2013 so that you are on time with regard to the notice exercise. And they said “No, 2023” and you debated until you found whatever workable arrangement. My question is that you said 2015, they said 2023. Where did each of you base your reasons?
Mr Mgojo: I think what had happened is that over the ensuing years from the time that this contract was established many years ago in the 1970s there had been some amendments and practices that had come to being. And some of these practices were not very well recorded by the parties which we inherited, and I think in those practices there may have been some view that as a result of that there is the extension of the contract. One of the things that Eskom did do for Arnot power station was that they actually put capital into Arnot power station to extend the life of the mine.
Mr Gungubele: Let me explain why I am asking this question, it’s a contractual duration discrepancy. I find it arbitrary and irrational if you just say “Mine is 2015 and yours 2023” and then the debate ensues purely on that. There must be an objective fact to support each of your subjective views.
Mr Mgojo: Their reference was that the Arnot power station was going to come to the end of its life much earlier than 2023, and they had put in capital to extend the life of the contract. Now that was never recorded in the CSA so that the CSA talks beyond 2015 to 2023…
Mr Gungubele: Were they able to demonstrate that fact that they had put in capital for the purpose you have just articulated?
Mr Mgojo: Yes, they did. We know because we are always in communication with each other. The CSA never reflected that they spent their capital to extend the mine because what then would have happened is we would have said to each other “As per the original agreement, this thing ends in 2015 so let’s amend the CSA to reflect the capital that you are spending to extend the mine”. So my reference point was the CSA that was there in black and white; and their reference point was the fact that “We have just spent capital on the power station to extend the life of the power station and that talks to 2023”. So those are the two reference points.
Mr Gungubele: Will you agree with me or do you think I am unfair if I am saying your contractual relations were a bit loose?
Mr Mgojo: I would say that in that respect a lot of things that were done during that period should have been tighter. I think that mandate happened when the relationship was so good that people just went by the relationship and did things without actually translating them into contractual arrangements.
Mr Gungubele: Now, I guess you say there is a point where you agreed that your protracted dispute was of no value, there was a basis for a win-win situation. Naturally one expects that once you reach that point then you organise yourself in line with the new basis. Surely I would expect in that situation, Exxaro to have started incurring costs or planning in line with the 2023 scenario which did not materialise. What were the implications for the lack of that materialisation?
Mr Mgojo: Well in terms of the cost plus contract, Eskom is supposed to pay all costs associated with any work on behalf of Eskom. But the work that we did in defining these various scenarios, the technical work that we did, and the other opinions that we got is a cost that we never passed on to Eskom. We just absorbed that cost as Exxaro because for us what was really important was to try and get to the win-win situation without really being pedantic about a few thousands of rands that we were incurring just to do our own analysis. So we did it in good faith as we call it and we never charged Eskom for that.
Mr Gungubele: Without labouring the point, now that the third party – your neighbour came – in 2015 you are out, Mafube is out. Do you remember any implications it had for those who were employed in that common space both for Mafube and for Arnot?
Mr Mgojo: As we highlighted in our statement, the consequence of Arnot contracts being terminated in 2015 resulted in 1 500 people being retrenched. Mafube fortunately is a commercial mine although it had a belt supplying Eskom, it is a commercial mine. So because the capital and opex are not paid by Eskom, Mafube was free to actually do what it wished with its coal, and therefore it sold its coal to the export markets because there was no other market in South Africa that could take that type of coal quality because it was power station coal so the only other market was the export market.
Mr Gungubele: If I hear you correctly, a cost plus mine is highly at the mercy of the client as compared to a commercial mine?
Mr Mgojo: The cost plus mine is at the mercy of Eskom because Eskom dictates the capital and all the other things relating to when and how, and how much, and how they manage and enable that capital to be released, whereas a commercial mine decides that on its own.
Mr Gungubele: My last question is around this notion of prepurchase and prepayment, or whatever you call it. If I am following your engagement with Adv Vanara, it presupposes that this is not a norm between Eskom and various providers. Do you want to make a comment on that?
Mr Mgojo: Let me just say it is not something we have ever experienced. It is not defined in the CSA agreements. It is not something we have ever done before, and mind you both Arnot and Matla came from different ownership in the past. One came from Ingwe and one from Anglo, and both contracts although the original contracting parties were two different mining houses, the terms and conditions of cost plus contracts are pretty much the same.
Mr Gungubele: You were a set of mines, not only yours, but a number of others supplying coal to Eskom power stations in their respective locations. Was there a forum amongst those mines where you discussed your common experience in dealing with Eskom that affect your business, transversal factors that cut across all of you, that needed you to be able to work together in the area?
Mr Mgojo: There are fora where mining houses come together to deal with issues like safety, but it’s not only just relating to Eskom operations, it is an industry thing. There is also within the Chamber a coal grouping that talks about coal industry issues. Even amongst the juniors there were opportunities where juniors would get together, specifically those dealing with Eskom, and share understanding, practices, and collectively work together in approaching Eskom insofar as Eskom’s strategy of enabling juniors into the sector.
Mr Gungubele: When did you as Exxaro first hear of a prepurchase of coal?
Mr Mgojo: Well, I think the first time I heard it was when Mr Koko was on Carte Blanche where he talked about this prepayment which initially he disputed knowing anything about. The second time is during the course of this Parliamentary Committee inquiry.
Mr Gungubele: Thank you Chair.
Mr S Swart (ACDP): I appreciate your input here today. It is very clear the strategy that was used and you can connect the dots, as Mr Gordhan would say, very clearly about how things changed when Mr Molefe arrived. Things changed dramatically. We saw Optimum – Glencore was busy renegotiating a hardship contract and were making progress with that with supplies to Hendrina. Suddenly that was put to an end. We saw you were busy negotiating closure with possibly an extension of the Arnot contract. Again suddenly it was put to an end when Mr Molefe came on the scene. I could not understand how the Guptas could have bought the Optimum mine at a loss of R100 million to provide Hendrina at R150 per tonne. How were they going to turn that around? And the obvious answer was a self-induced crisis had to happen at Arnot so that the Optimum mine coal went to Arnot. But to do that you had to reduce Hendrina. The electricity had to be reduced. So it was complicit that Eskom board members and Eskom CEO, everyone was complicit in this, and that is why I support my colleague’s suggestion of recalling witnesses that came and told us a different version. You would have noticed Mr Koko last week was very evasive when I asked him about the Mafube contract. He in fact appealed to the Chairman and said “Chair I am not prepared on that” because he was not speaking the truth. Mafube was supplying coal as you pointed out at R132 per tonne. Nobody could beat that, and that was cancelled. That is why I am outraged and angry because not only did it impact all those workers, not only did it impact the Arnot mine, but it affects every consumer in this nation that has to pay more for electricity because of this cost escalation as you have set out in your submission that could have been avoided quite easily had your contracts been extended and had the original CSA had been extended. Would you agree with that?
Mr Mgojo: The evidence is very clear. It is before us. A lot has been said as part of the submissions here. I think there were a lot of dots that were there. I think what is beginning to happen is that some of the last dots are coming out and you are able to put the line between the dots as Honourable Gordhan would say. On your point, it becomes very clear when I read the letter given to me which I am seeing for the first time that another piece of the puzzle starts to emerge for me to get a better understanding on what was happening behind the scenes when things were so quiet in our negotiations. That dot now becomes clear and then suddenly for me the picture becomes whole. The picture is not a pretty picture. The picture has had a serious impact on people’s lives, the picture has had a serious impact on the people of this country due to the cost associated with power. For me, it becomes almost ludicrous when in one breath you can go to NERSA and ask for a 19% increase in the price of electricity and yet you are seeing people orchestrating things in ways that undermine the essence and fabric of what should be good ethical conduct and its consequential impact on the economy and the people. So I share your anger which goes beyond my being a CEO of Exxaro. It talks about ethical conduct by leaders because as leaders we should be examples.
Mr Swart: You are quite correct, and the court, when highlighting the pension pay out of Mr Molefe, was scathing about the leadership that took those decisions and it indicates a total lack of fiduciary duties as you said earlier, and that is why I said those directors should be declared delinquent directors but also they should be investigated for criminal contravention of the PFMA, of the Companies Act, and these are issues we will be considering. But I hope that similarly, what you have offered in evidence today, that when the Commission of Inquiry into State Capture is held that you will volunteer similar evidence because this is at the heart of state capture in our nation. We know our Budget is going to be presented next week, and the impact of the guarantees for Eskom places our whole nation at risk. So you’ve got workers that have lost their jobs, you’ve got every consumer that puts on their lights affected by these reckless decisions, and you’ve got a whole National Treasury at risk for the reckless decisions to benefit one family – the Gupta family – thankfully one of them is arrested today. Thankfully. But we are looking forward to many more arrests, and we are looking forward to money coming back. I am very concerned about Matla mine that was a flagship of South Africa sitting now with one of the most black empowered companies, Exxaro, that is now almost having to close. I would urge, Chair, that when we engage further with Eskom and the new board that these issues, they are relooking at all these contracts, but that these issue that you are raising with us now because this is more information. I want to ask you about Komati, did you supply coal to Komati because I saw that also ended.
Mr Mgojo: We supplied coal from our mine called North Block Complex (NBC). That one fortunately is one that had been continuing up until now.
Mr Swart: But I understand that Koornfontein which is the Optimum group which is a Gupta related company has last year received a lengthy extension of a new contract for another eight years, and that Komati is about to be closed down. What happens when the power station is closed down, you are paid out for the balance of the contract, or is there a negotiation? Because my understanding is that Mr Koko last year extended that contract for eight years and two months later the board decided to close that power station down or reduce the electricity output at Komati?
Mr Mgojo: Honourable Swart, I am not very sighted on the details of this contract so I think I am walking on dangerous ground. Let me just confer, my colleagues seem to have better insight… The assumption Honourable Swart is that if you are dealing with a captive mine then Eskom would have to be liable in terms of the cost associated with whatever responsibilities they may have within the contract. What is not clear for me is, and this is the same situation I guess one could actually say “Does Exxaro have a claim on any revenue loss out of Arnot given the fact that the capital that has not been made available, and the volumes decline has actually impacted Exxaro negatively in its ability to have earned that extra income?”. So to the extent that one can still have claims to put on Eskom that contractually you were supposed to give me capital for X tonnes and you did not give me the capital, you have deprived me the opportunity between the balance of what I am currently producing and what I was supposed to produce. So in that instance, but I am not sure what happens when the power station itself closes, what obligations and rights are there.
Mr Swart: The point I wanted to make was, and we visited Eskom and I was asking about the mines that have been reduced. The whole issue started with a Hendrina, and that power station is now being reduced. Last year Komati, a contract was given to a Gupta related company for another eight years, and two months later the board decides to reduce the power station. That to me is outrageous, and that the NT is investigating as well – the contract that is extended. The point is at the end of the day the Public Protector (PP) said Eskom bent over backwards, its board bent over backwards to accommodate Tegeta. And I am sure you will agree with me in that regard, hearing the evidence that is in the public domain.
Mr Mgojo: Honourable Swart, what is very clear is that we didn’t get that same privilege.
Mr Swart: And the letter that you sent which again I find outrageous to the Department, to the Minister pleading for help, pleading that 1 500 workers would not be fired is ignored but at the same time a letter is sent to benefit Tegeta and to request a prepayment to buy a mine, not even for capital expenses but to buy a mine. Then we see the whole scenario at the time you wrote your letter in December where is the Minister sitting? He is in Switzerland negotiating the sale of a mine instead of looking to your interest and the interests of Eskom in the long term. You see a penalty of R2 billion is granted. Have you ever been granted a guarantee? You’ve asked for a capital investment, you should have asked for a guarantee, it seems they are easier to obtain because I have never as a lawyer seen a State Owned Company (SOC) giving a guarantee to another company and then deceiving its board who said they never knew it was to buy a company. But where have you ever heard this nonsense, and that is why when you see this evidence, the one after the next, the different departments cooperating: Minerals suddenly having section 54 stoppages at Glencore mines, the pressure building up on them; business rescue; the pressure you are under; and I am sure if we hear other mines it will be the same thing, to benefit one company – Tegeta-Oakbay – at the expense of yourselves as a company, your shareholders, your workers, and the consumers in South Africa.
I think it is absolutely outrageous and that is why I welcome the input from you because we are putting the dots together, and your questions here are rhetorical because you know the answer already on page 35. Mr Molefe comes onto the scene, he won’t answer your calls, and he won’t meet with you as a CEO of a black empowered company but takes 58 calls to the Guptas at Saxonwold. Thankfully, today there was a raid there, but he won’t meet with you of longstanding coal mining experience and negotiate, he won’t even talk to you. I think this is outrageous and you can see as we link all the dots together how state capture took place but it is unravelling. And these members with me here have stood firm. Their lives have been threatened, our witnesses have been threatened but we have stood firm to get to the bottom of this rot.
You also ask why Mafube was terminated despite the mine delivering the cheapest supply of coal, because it had to suit the Guptas, it had to suit Tegeta, it had to suit the contracts that were required. And where you asked for a R1.8 billion capital injection it was refused. Minister Brown refuses it because your company which has got one of the best BEE qualifications had questions around social-economic development. Again there is no reason for that refusal, but others are given guarantees, and R659 million to purchase a mine, not a capital injection, but to purchase a mine. So we see as we put all the dots together it is so obvious and that is why we appreciate you coming and explaining to us how Arnot fitted into it, how Medupi fits into it, how Komati fits into it, and the fact of the costs that have been linked solely to the transport of coal by truck which is unnecessary. So from my side I want to thank you.
I want to clarify one issue and that is the cost of coal to Arnot. According to the PricewaterhouseCoopers (PwC) report Eskom said they were paying R1132 per tonne, but according to the Denton’s report it was only R686 per tonne. So if I understand it correctly they were telling their own board members incorrect information to justify the cancellation of your contract. So it is almost double the deceit when they said you were been paid more than R1000 per tonne when it was only R686 per tonne, and had that continued you would have kept the contract and that mine would have been operating, and all those workers would have been employed. If you would just confirm that?
Mr Mgojo: Thank you very much, Honourable Swart. We have always known that the figure being stated was not the right figure. Hence why we even came up with the graph which is one of the annexures here which shows historical costs relative to the volumes. So if you had to take that price of the third party coal, it is not even talking to it being delivered. If you actually now were to add the cost of transport, R1.50 per kilometre per tonne, you will find that the delivered cost of that third party coal despite the fact that we have reduced our volumes to such an extent which really increases the costs, that coal would have been delivered no cheaper than what Arnot was costing the mine to produce at that particular time. So mining that mine would have continued going at that cost while we were now implementing the plan to bring it below R500 and to R450 delivered. Thank you.
Mr M Dlamini (ANC): I think it would be wrong of us as a Committee not to welcome the work being done by the Hawks by arresting the Guptas because part of the things we are trying to do here is to cleanse the country. So we must welcome the action taken by the Hawks. Chairperson, I want you from your side to start working on a process because according to our programme the Guptas are coming, so start working on a process of how we follow them to jail, to deal with this situation, or bringing them here with chains. Start working on that process because South Africans deserve to know what actually happened. Now the Exxaro team, one of the issues we are battling with because we have been fed a lot of stories here, lies according to your report and different reports. I think we are sitting here and we don’t know which one is true. Let’s start with do you have a contract with Eskom, how long is that contract, when did it start, and when is it finishing?
Mr Mgojo: For which mine?
Mr Dlamini: All the mines. The work that you do with Eskom, do you have contracts with Eskom? I am asking this because Koko came here and said “There are no contracts in Eskom, we just meet people and make arrangements and then they are given an order”. Do you have legal contracts with Eskom, when did they start, when do they finish? Remember we are being told that you are running 40 year contracts that started during apartheid and all those issues. That is why I am asking.
Mr Mgojo: I am going to start with the captive ones, even though the Arnot contract was cancelled, the contract in itself is still running because there are contractual obligations that still need to be fulfilled despite the fact that the coal is not coming out of the ground. So we do have a contract with that one. We don’t have a contract with Mafube because that came to a termination. That is a commercial mine and therefore they are able to do whatever they need to do with their coal there. Matla and every other, we just cannot operate. Let me put it this way, there is no way we could even begin to operate and deliver coal and spend capital whether it is Eskom’s capital or our capital, without a contract. So for every other active engagement with Eskom we have a contract.
Mr Dlamini: Let’s talk to the issue of BEE. Again we have got the executive like our own Minister of Public Enterprise, Lynne Brown, she comes here and complains when she is pressed to say what is happening with transformation. She comes and complains and releases a statement that these Eskom contracts are run by apartheid linked companies and all those issues. Now with Exxaro you moved your BEE ownership from 50 to 30%, I don’t know what the current status is. If you can just break it down in simple terms, why are the BEE partners more interested in taking the money, what is the real reason of why people when they are owning a big company like Exxaro, they decide that they want to sell all. What was the main reason? And also if you can give me any other two companies that are under the same cost plus mines, except Exxaro, that are operating on the same level as you guys?
Mr Mgojo: I will start with the last one, it will be much easier. Anglo had cost plus contracts obviously Anglo has just packaged all their cost plus contracts and sold that to Seriti Resources, BHP Billiton had cost plus contracts, South32 had cost plus contracts, so basically if you look at all the big mining houses in South Africa, if you look at these historically, those were contracts that had to be of great standing in terms of being able to honour their obligations under long term 40 year contracts to be able to supply coal. So all the big majors and of course Exxaro in itself is a creation of the offshoots of some of those assets, hence why we also have these long term contracts with Eskom. The challenge you would possibly have in South Africa today for the type of reserves still available today is that there are not many reserves still available especially in the Mpumalanga area that could sustain a 40 year contract because the reserves are coming to an end. They are getting much more expensive, patchy, and all over the place. So the only place that is still remaining in terms of where there are big coal reserves is in Lephalale in the Waterberg area. 60% of South Africa’s last coal reserves are sitting up there. So hence because of the historical link between Iscor and Eskom they developed those reserves to supply Matimba power station and now Medupi power station. So I hope that I have answered that first question. Now let me get to the BEE one because I was waiting for you.
Indulge me, allow me to take my time on this one because it talks to the whole philosophy of empowerment because empowerment I always say was an exercise that was supposed to achieve a particular objective and outcome. Therefore in looking at this we have to look backwards and say if what we were trying to design, was it successful or not? So that as we move forward we can learn from the things that worked well and those that did not work well, so we can design something that can be sustainable in the future. When Exxaro was created back in 2006, it was created out of a merger between Eyesizwe Coal’s assets coming in merging with Kumba’s non iron ore assets to create Exxaro. The equity cheque that was written by the BEE shareholders (because over and above Eyesizwe there were other BEE shareholders that came in), the equity cheque that was written by the empowerment grouping because the value of the transaction to get to 52% was that the BEE has to bring in R11.5 billion. So Eyesizwe brought in their assets that were R2 billion equity. The balance of R9 billion had to be debt funded.
Now you are dealing with an industry that is a very cyclical industry. You start a transaction and you lock the BEE shareholders, and the reason you lock them is because the legislation says that for a period of 10 years in terms of the mining charter for you to secure your mining rights. You cannot go below a certain percentage, and therefore the mining right holders who want BEE say “We are going to lock you for a period”. So for 10 years there was a lock up in terms of BEE shareholders with a R9 billion debt. At the time of listing Exxaro, it listed at close to R50. Over the life of that 10 year period Exxaro’s share price moved from that number to as high as R214. At R214 the BEE shareholders value in Exxaro was R30 billion. The debt is R9 billion. But because of the lock up you could not redeem some of that to pay this debt, and in as much as it went up, it came down. It came down so drastically in 2015 that that share price went from R214 and over a period of 18 months or so to R40. R22 billion of value was wiped out just by that movement – black shareholder value – we could have at the height of that transaction sold about 7% and at the end of the 10 year period, Exxaro today would be unencumbered. It could have been owned by black shareholders with 45% ownership of this company.
I raise this point because it talks to what is the programme of empowerment. Is it about optics of shareholding when in actual fact at the end of the day for as long as you have that debt, the banks own those shares? Or is it about value creation where the structures become flexible enough and the legislation becomes flexible enough to ensure that at the maximum point where you can actually maximise black shareholder value that the programme enables that to happen? At R40 we had already breached our covenants. Exxaro had to come in to rescue the structure, and Industrial Development Corporation (IDC) had to come in to rescue the structure. At that point that shareholding was only worth R7 billion down from R30 billion. Fortunately just at the time that the whole structure unwound in 2016, the mining industry had sort of recovered to an extent that they could retain some of that value up to R110 a share. But just look from where it came – R214. So at the end of the unwind, we then asked ourselves “What are we trying to do here, are we about creating optics and we call that BEE when in actual fact in substance it is just a hollow shell but from the outside it looks good, or are we talking about genuine shareholder value that we are trying to create?”.
In this instance, in the second round of the transaction, the original black shareholder said “You know what, we have been locked in for 10 years, but because we believe in this company so much we are prepared to put some of our own equity back into this structure but we are not prepared to incur a huge debt”. So out of what came out as a payout in the unwind, the black shareholders were able to put R3.2 billion of their own cash back. They reinvested 66% back into the new transaction but they opted for a transaction that was only 30% because now the debt that was there to make up the 30% was R2.5 billion. That is the debt of this new structure. If we had to try and do a 50% the total debt would be about R11.5 billion. R2.5 billion:R11.5 billion. You have put R3.5 billion of your own cash in a cyclical industry, who wants to take that type of risk? Hence what was more important this time around is that a R2.5 billion debt is much more manageable to deal with so that by the end of the period hopefully through the dividends that are paid on a six monthly basis you would be able to be debt free and therefore you genuinely own the equity at the end of that. Value has been created in the hands of the black shareholders. That was primarily the reason we reduced it. What also happened Exxaro is warehousing some shares within that black structure which they are providing the equity into the structure. Out of that we are going to create empowerment for our employees and also for some form of community; but we have a history, we have done two sets of ESOPs (Employee Stock Ownership Plans) as I have indicated before.
Mr Dlamini: Thanks for that explanation. It is one of the issues that as a country we are trying to find a proper ground as to how we move forward. The most unfortunate part is that while we are busy with that there are criminals who come and abuse because all these things that are happening. It is on the same basis that we have those challenges in getting actual value in terms of this BEE – something that is tangible – that is when there is a vacuum because while you’re trying to deal with that, the criminals see a space. That is abuse of that space and that is why you saw the Guptas coming in. But tell me, from what you have just explained, you are talking of the BEE style and the country must not make the mistake, we know who the criminals are and we are dealing with them. That’s why we are saying, the criminals aside, we still have to deal with the bigger picture of how we transform. How do we make sure that there is tangible outcome and result? To be given a nice office and a listed company and for 10 years you never see a dividend, it’s actually an insult to black people. My interest is who are the white shareholders of Exxaro?
Mr Mgojo: The public. If you have your pension with the PIC, if you are in government you are also a shareholder of Exxaro.
Mr Dlamini: Let’s go back to the cost plus mines. The way they are structured, is there any opportunity for a new black wholly owned coal mining company to start up and be able to compete under the same set up?
Mr Mgojo: What I can say is that at Matla you have black BEE junior companies supplying coal. At Arnot you’ve got them supplying coal there. You will recall that Eskom rightfully started a junior mining programme of supporting junior miners which was the right thing to do. Therefore in those instances there was an opportunity for black miners to be able to supply coal in these contracts. But in that happening, it also needed to be accepted that the cost of coal and the cost of power are a result of that because the economies of scale are not there. They have to pay their own capital because their mines are not cost plus mines. They will be requiring a return on their own capital, and therefore the price will have to be higher than my cost plus with Eskom. So that opportunity for black owned companies… I think the worst thing that possibly happened in this process of establishing these new juniors was that along the journey black owned juniors were encouraged to establish themselves, to go and raise and get loans on the backing that Eskom will be able to provide the contracts to support them. Now I think you still need to have a very interesting conversation with the junior miners and understand what happened to them in their relationship with Eskom because the picture becomes even more complete in how a lot of junior miners were decimated. Having been promised something which was never realised, and how many went under because they experienced similar type of incidents that we experienced it. We can absorb that as Exxaro, I’ve got other operations that I can continue with. What about that poor junior miner with one mine and when the time comes to renew that contract for which they went to get a loan, suddenly the renewal does not happen. If you are a junior supplying to those power stations where other new third parties come in, then you’ve got a serious problem.
Mr Dlamini: When the Eskom Head of Generation came here, I asked him about the junior miner policy adopted by Eskom and he just said, “I don’t know about it”. But we knew that the junior miner policy says that for any junior miner there must be 51% plus. But because there was Tegeta who came in and they were not even 51%, that’s why he acted ignorant as if he forgot. Let me understand, these cost plus mines, who owns them? I have written to the Minister several times asking a simple question as to who owns these cost plus mines between Eskom and yourselves.
Mr Mgojo: There are two parts to this. There is the mineral rights owner which in this case is us. We own just the mineral rights. All that says is we have got a right to exploit coal here. But somebody has to own the land, so they purchase the land and infrastructure and every cost associated with that. I bring to the table a mining right. If I was now to sever my relationship with Eskom and somebody else was going to come in on the back of my mineral right, that mineral right would have to be transferred to somebody else. It doesn’t automatically go; you have to ask DMR for a section 11 transfer of ownership of that mineral right.
Mr Dlamini: On that issue of mineral right and Eskom owning the land, there is a contradiction because Eskom, according to what we were told, is the one who dictates the terms because they eventually own the mine. They are the ones saying to you that you are not complying with the 51% because you want to make changes in the ownership structure, for the reasons you have given. Eskom owns the mine so you’re not supposed to do that because you don’t own the mine. That is where there is a contradiction because who has the say on what needs to happen on the mine. Eskom is saying they are paying for everything but you have changed the ownership structure. That means you are the one breaking the agreement with Eskom.
Mr Mgojo: I think we have to look at this thing from an historical context. These contracts have been in place for over 30 years. We have asked to see this 51% Eskom policy on several occasions and it fails to appear. But let’s assume it does exist, this whole notion of 51% is something that was created only in 2011, 2012 around there. However, you are talking about contracts which have been in existence and implemented long before we were even talking about empowerment. So I think it becomes very challenging for an old contract to make that type of request and requirement. Fair enough, if we are talking about a new contract post your policy, then I can agree when I am asking to enter a new contract, and your policy talks to 51%, then I have to adhere to that. Not a contract that has been there for 30 years.
Mr Dlamini: You spoke about the new miners that are getting into the industry and the fact they are coming in as commercial miners so the ground is not level because of their investment, which means their prices are going to be higher than yours. That’s where it creates a problem. From your own experience, how do we move forward because for junior miners to come in and participate, they have to have higher prices on the same delivery of coal into the same coal station? They put in their own money. Eskom puts in its own money on the cost plus mines. How do we then deal with the issue because that’s when they get victimised: “These small miners that are coming into the industry is corruption” because Exxaro can supply at R150 but the new miner that wants to come into the industry can’t match the price. How do we balance the two, and don’t you think this cost plus mine has create sort of a monopoly that blocks new entrants? How are we going to deal with price because the public says “But why is this black guy supplying the same coal mine at double the price?” If we don’t deal with that it will mean we must close shop for new coal miners coming into the industry because we have to deal with the price unfortunately because then it gets abused and we talk to increasing the tariffs. How do we deal with new miners coming in and the price at which you are supplying?
Mr Mgojo: You are raising a very important and pertinent point about the whole system. For this to really work maybe some form of collaboration would have to happen between the big guys and the small guys. If you are my neighbour can I find a way since Eskom is paying for that asset – my mine – to say maybe if you are my neighbour, instead of you trucking your coal 50-100km, why don’t you bring it to my mine and we will put it on the belt so that you minimise that cost. There has never been a model that has says “Out of this cost plus mine, given the fact at some point Eskom is subsidising this – Eskom is actually paying for its own mine on this side. And on the other side it is prepared to pay for a higher cost coal. The question is where are points of collaboration where we can commonly share some of the infrastructure which is in fact commonly owned by Eskom. Those are some thoughts. That would really start saying that a model of sharing Eskom owned resources can actually minimise the cost of coal from the juniors by not having to create other infrastructure that may impede on their ability to be commercially competitive.
Mr Dlamini: Finally, Eskom is saying they buy the land, buy equipment, and hand over. You just come with the mineral rights and do the operation. There is a junior miner on this side who must buy the land, get the rights, get the equipment and do everything. Don’t you think in hindsight Eskom is doing the prepayment to the bigger companies as opposed to the smaller companies?
Mr Mgojo: Unfortunately the CSA does not work like that. As I indicated, in many instances you just don’t get the money upfront. You have to do work, for which you are out of pocket because you are financing that. It is only then after you have done that work, you say “Eskom I have done what you asked me to do please pay me now”. That’s how the capital is being done. It means that you have to have the ability to absorb that cost up front otherwise there is no way you can do that. How Eskom facilitates juniors is that they say “I will give you a contract, and with this contract you can go to the bank and say I have an Eskom contract. On the back of this contract can you lend me money?” But that is still not a prepayment. Let’s not confuse prepayment. You still then have to honour that contract which will come with penalties if you don’t meet the volumes or you don’t meet the specifications. What it does do is to facilitate entry because if it is a one year contract, no bank is going to give you a loan on a one year contract. That type of facilitation only works well when Eskom says “Let’s enter into a five year contract with the option to extend, or let’s get into a 10 year contract. That will facilitate in much more sustainable way for the junior to be able to enter into the space.
Mr P Gordhan (ANC): Thank you Chair, and thank you to the Exxaro team. If I pick up from where Mr Dlamini left off it is quite clear from the answers that if Eskom and its management team and board were serious about developing a new category of small miners and assisting them to truly survive and become sustainable to compete with you, then a very different model is required. A model that is truly supportive of development. It is a statement but I am sure you will agree with that.
Mr Mgojo: I think you have hit it on the spot.
Mr Gordhan: The fact of the matter is that a set of individuals in Eskom and in the political domain didn’t support black entrepreneurs adequately. In fact they let them down to put it lightly in the mining sector.
Mr Mgojo: Many of them suffered in the process, and a lot of them closed down subsequently as a result of not being able to get contract extensions.
Mr Gordhan: So for the purpose of our inquiry, if Minister Zwane spent less time in Dubai and Switzerland, and more time paying attention to this kind of real empowerment, we would have seen significant change by now. Equally if Minister Brown had spent less time ducking and diving as she has before this Committee, and spent more time empowering young black entrepreneurs in the mining sector then by now we would have seen a different set of players on the scene. You might even be complaining to us that they are competing with you.
Mr Mgojo: We welcome the competition. It is an imperative in our industry that transformation does take place. It is not just about transforming existing companies which is critical; it is about this inclusive growth which comes when the environment is conducive and enables new players to come into the mainstream.
Mr Gordhan: I want to make some very self-evident points just for purposes of reinforcement. You have laid out before us a very transparent, very simple, in fact very crude scheme to empower a particular family and a group of individuals sitting on the Eskom board and parts of the Eskom management. I don’t think we should be unfair to the 30 to 40 000 Eskom workers because they in fact suffered as a result of this. They are not directly involved in the capture process themselves. Would it be fair to say that the concept of prepayment as my colleagues have been saying cooked up by Molefe, Singh, and Koko is precisely that, a little figment if not fig leaf, presented to us to cover up what they were really up to?
Mr Mgojo: I like your colourfulness, Honourable Gordhan. I think it is evidently clear from our submission and our understanding of how these contracts work that we have never ever come across any form of contract whether for a cost plus, or for commercial, whether it talks to coal, or it talks to capital, that was in the form of a prepayment.
Mr Gordhan: Last two points Chair, and that is a point that Mr Mgojo made which is really horrendous. The same group of managers went to NERSA and said increase our tariff by 19% whilst leaving this horrendous cost base in place. The citizens of South Africa are now wiser as to why the electricity tariffs increase at the rate that they do. Under the cover of what is called ‘cost reflective tariffs’ you have all this activity that is being exposed today. Similarly 1 500 workers losing jobs, with the Minister in charge of the Department that is accountable to this Committee not lifting a finger to save 1 500 jobs because it is clear that they have commitments to far more important matters which is to feed the accounts in different parts of the world. You don’t have to answer that point but if you do I will welcome that. Thank you.
Mr Mgojo: I think as a citizen of this country, as somebody who has children and grandchildren, the future of this country needs to be secured for the future, and therefore when I come here and give this evidence having been invited and not subpoenaed I come here because of the great injustice that I am seeing happen in our country and I have to ask myself “Do I stand on the side line and be a pedestrian or do I risk whatever it will take for me to play my part in setting things right”. So I come here with that in mind. I am not only representing Exxaro here, I come here as an ordinary South African who says that enough is enough. Our children’s future is in our hands and therefore we have to demonstrate responsibility because in our time history will judge us as to what did we do, how did we allow this thing to happen, and what will be our answer to our children and grandchildren. That’s what motivates me to come here. And so to your point, yes, I don’t like seeing what is happening. I am asking myself that in my own small way coming here as Mxolisi Mgojo, but also as an organisation called Exxaro Resources, what is our purpose as an organisation if we cannot play a critical role in ensuring that as we define the future, it has to be about addressing all the historical bad legacies, and find and contribute to a way of a new emerging South Africa going forward. That is what brings me here.
Mr Gordhan: I am sure we all welcome your democratic activism. Chair I have to leave now, but if you gave a few minutes more I would have asked Mr Mgojo to give a little bit about his family history because he carries all the genes of resistance to wrongfulness in our society. His father was an eminent church person.
Ms N Mazzone (DA): I want to remind you that you are under oath here so you are protected in what you say. I will ask some questions which will require you to give an unbiased expert opinion. I want to start off by saying I am a politician, and I think after lawyers we are the most hated profession. That means I am not a mining expert in any way, shape, or form but I do understand certain issues around mining which affect entities for which my Committee members and I exercise oversight, and we do so with a constitutional mandate. I have learned things that I thought I would never learn. And one of the things I learned is about coal quality, and why certain mines mine coal of different qualities, and why certain power stations are built that require different qualities of coal. Could you tell me for example at the Medupi power station where you provide coal, what is the coal quality required to burn at the Medupi power station, what grade of coal do we need to burn at Medupi power station?
Mr Mgojo: The design of the power station was designed on the understanding of what is on the ground and not the other way around. You will design a boiler to meet the suitability of the coal that is there, and therefore what you will find is if you look at the boiler of Matimba power station and the boiler at the Mpumalanga power stations may not be the same because the qualities and geologies of those areas are very different and therefore you will find that in the Matimba power station you will burn a coal that has a high ash and there will be a tolerance on what the sulphurs can be, and what the CV can be. And what you have to remember is that the geology in itself is not homogenous, it is just not uniform. You are going to be mining that for over 50 years and each area may be different. What you find is that in some instances depending on where you are mining at that time, the geology at that particular point may be slightly different than the geology where you mined 10 years ago. So when you do the initial surveying you are almost taking an average of that. It only becomes much more confirmed as you do more in field drilling as you are preparing your work.
Ms Mazzone: Just so we understand the picture, when you sign a contract with a company like Eskom, they undertake to build a power station with certain parameters in which they will operate. So the boilers will have parameters in which they can operate, and whoever they sign a coal deal with is also of the understanding that they work within a certain parameter and they are given assurance of continued coal supply. In other words, you have to give Eskom assurance that should you reach a point where like you said geologically the coal is no longer in the spec that falls in the Eskom parameter, you are able to source the coal from elsewhere at your own cost that will be of the quality required to fall within Eskom’s parameter. In other words you play fairly against one another. You say “You are taking a risk on us, and we will adhere to fall within the parameters required by your power station”.
Mr Mgojo: I think what is also important is that when you build these power stations there is a tolerance level. So it is not an absolute. They are designed to say it is a minimum of this and a maximum of that. That is why in the contract it will talk about a minimum and a maximum because they understand that there is always variability within that specification because they know it is not homogenous. In instances where in our contracts where we may be hitting a very challenging area from a coal quality point of view, that is why the penalties are there because it is an understanding that it will not always be 100% and therefore the penalties whatever they may be, will then kick in to say whether it is your CV, your ash, or whatever, but you cannot do that permanently because it becomes uneconomical. You would probably have to import some coal from elsewhere to blend it so that you can come back to spec. So you will play with those types of things and in some instances if you have mines in close proximity of each other you can actually start blending some of these coals to augment that.
Ms Mazzone: Do you know of any mines that were given preferential treatment when it came to paying penalties because all mines at some point have to pay a penalty for some reason? And this is one of the questions where you have to answer from what you know.
Mr Mgojo: Well I don’t know personally of those mines. I only know what is being alleged from what I read because in actual fact, that is private confidential information. We don’t publish what our coal qualities are. But what I have heard is that there has been a situation where a big penalty of R2 billion suddenly became a small penalty. It must be something quite bad to have a penalty of R2 billion. Your coal has to be really, really out of spec for huge volumes to get a penalty like that. So the question then is how that penalty of R2 billion with the same mine, the same operation, but in somebody else’s hands it just becomes a much smaller penalty. I don’t have an answer for that but I am aware that that seemed to have happened.
Ms Mazzone: I can tell you that clearly we read the same publications because I also read that a R2 billion fine was reduced dramatically and the only answer I can think of is either there was an instruction to lower the penalty or someone forgot to put the comma in the right place, and that would make them an unfit Chief Financial Officer or certainly a delinquent member of the board if a mistake like that was allowed to happen. But thank you for your answer. When it comes to the prepayment, I asked the question to Minister Lynne Brown whether a prepayment was made, and I received an answer that was misleading to Parliament so I feel very personally offended that this prepayment was made and then denied and so it continues. I am an MP and I take a solemn oath that everything that I say in Parliament shall be the truth, the whole truth and nothing but the truth, and I expect everyone to offer the same courtesy to me. And when Minister Brown was here and we had this interaction about her mistruth, it is interesting how politicians don’t like to say the word “lying”. But the error in the answer that was given to me is that she blamed her source and told me that her source of information was Anoj Singh who was the CFO, and the CFO then blamed Mr Matshela Koko who at the time was the CEO. And as you correctly mentioned, we have seen footage in this Committee of the Carte Blanche interview where the prepayment was first denied, and then proof was shown, and a little bit of a return of memory came that perhaps this payment was done. I would just like a plain straight answer from you because I want to make sure I heard your answer to Adv Vanara clearly that “It is not common practice for mines to be prepaid”. So it is not something Eskom does?
Mr Mgojo: It is not something that we have either ever experienced, and it is not something that I know of any other companies that have such contracts if it is the same CSA that we have with Eskom. Apart from coal qualities and a few other things, they are normally standard contracts in terms of how they conduct their business with the mining houses.
Ms Mazzone: The company that you work for, I think it is fair to say you are not a multi-million company, you are a multi-billion company. So in your opinion, is R659 million a substantial amount of money?
Mr Mgojo: That is a lot of money.
Ms Mazzone: So it is not just us exaggerating that. I think even in a company like yours, R659 million is a lot of money. Do you think you it would be possible as a Minister, as a CEO, as a CFO that you wouldn’t notice an amount of R659 million been moved around? Is it at all a possibility and I mean speaking strictly from your position as quite high up in a multibillion rand company, do you think you would miss R659 million?
Mr Mgojo: I would be fired.
Ms Mazzone: I would be fired too, believe you me.
Mr Mgojo: Our governance processes are such that those types of monies have somebody who has to be accountable at the end of the day. There is always accountability even in your delegations of authority there is always accountability. At the end of the day the buck stops with me as the CEO. That’s why they say you have to fall on your sword even if you didn’t do it. But you have had to say “How could this have happened during your watch?” and therefore part of what your responsibility is to ensure that the governance structures in place in the organisation are such that it can enable you to ensure that things like that don’t happen. Besides the delegation of authority you have your internal audit. You have got to say to your internal audit “Go out there as you are doing your audit, find things for me that are making you uncomfortable. Don’t wait until you have to give me a formal audit report. I want you to come to me immediately and say in this particular area there are certain things I am not happy about that enables me to actually follow up on that” because in my position I can’t be everywhere. I don’t know everything that is happening. I am relying on certain measures that internal audit are putting in place to ensure that you can safeguard and minimise the risk insofar as things like that happening
Ms Mazzone: So it is fair to say you would rely on your CFO to make sure that R659 million wasn’t been transferred without anyone knowing?
Mr Mgojo: Well the truth of the matter is that somebody has to sign it off, and depending on your delegation of authority, a number of that magnitude definitely my CFO has to know about, and I definitely have to know about it.
Ms Mazzone: And if you had a stakeholder, I would assume you would tell the stakeholder too?
Mr Mgojo: Of course.
Ms Mazzone: Let’s move on. It’s now well-known, the infamous Switzerland trip with Minister Zwane where deals were negotiated and things were happening. And I read a very interesting article this week by a person whom I consider to be a very good investigative journalist. In it he claims that people within the mining big five have said that Minister Zwane gave everyone an ultimatum. That Minister Zwane said “I will audit you, I will check every contract, I will check your water licences, I will check your BEE ratings, I will check your gender adherence, I will check every staff contract you have had, and I will make your life unbearable until such time as you agree to go the path I have chosen”. So now I am asking a very direct question and I can see your eyes getting big because this isn’t an easy question to answer, but this is the time to tell us. Has anyone in your company ever been threatened either by a Minister, a member of the public that owns a company, or by any relative to a senior politician?
Mr Mgojo: Honourable member, the answer is we have never experienced that. I think the only thing we have experienced as an industry, even through the Chamber were the unprecedented section 54s that would close operations even when it was not as warranted as it should be. We experienced that type of pressure and we made it known to the DMR that that action and activity was unwarranted and it led to some of the mining houses even taking DMR to court on the basis of lost earnings as a result of these closures. We have systematically asked our members to report to the Chamber any incidents of that nature that we experience collectively or individually so that as the Chamber we will deal with those directly with the Ministry, and that is exactly what we have been doing.
Ms Mazzone: You see, I think you are being incredibly diplomatic. A section 54, as you said “unprecedented and unwarranted” sudden actioning of section 54 when they are not warranted, they are unprecedented. Would you not see that as a veiled threat?
Mr Mgojo: I have got to differentiate between the right of DMR to issue a section 54. By the mere fact it is law means it has a purpose. It is the use and abuse of that that is not acceptable, and therefore the instrument in itself is right, otherwise how you manage safety incidents going totally unchecked. That is one of the instruments you use. But when you have got an incident where an LDV as we call it – one of those small vans – has got one of the blinkers not working and suddenly you stop a whole mine and say every one of these have to stop and you have got to check everything, we have to do training for everyone all over again, and the mine is stopped for two or three days because of that, that is an abuse of an instrument which was correctly designed.
Ms Mazzone: So the law is designed for the correct purpose but its implementation was abused?
Mr Mgojo: That’s right.
Ms Mazzone: That’s what I needed to hear. Mr Koko was not only the CEO of Eskom, he was also the Head of Generation for a long time. And let’s be honest, load shedding brought our country and economy to its knees. Given the information that we as a Committee have received recently, load shedding could have been avoided, and in actual fact load shedding was a created crisis. And I can’t remember, perhaps it was Winston Churchill who said “You never waste a good crisis”. Given the information we have at hand here, and again this is your opinion, do you think we could have avoided load shedding?
Mr Mgojo: I think what one needs to ask oneself is, in the life of any power station what are the critical things you have got to do to ensure that the operation operates efficiently and effectively throughout its life. And part of that has to do with making sure you do effective maintenance at the time that it is required so that you at least minimise your downtime of those operations. Now without really knowing exactly what was happening, it was very clear by what came out that there was a huge maintenance backlog on a lot of these power stations. This resulted in some of them having to be worked almost non-stop and as a result not sufficient maintenance was done. I can neither say that was designed by design or what the reason was that effective maintenance was not done. But if you manage your business well enough you will know how to start managing the scheduling, and project manage your maintenance of key critical equipment to ensure you never have a situation where you have a severe downtime. So can it have been avoided? I think better planning for sure could have done that.
Ms Mazzone: Have we as South Africa ever been in a stage where we have been so critically low on coal supply that we gone into load shedding because we haven’t had coal supply for our power stations?
Mr Mgojo: The stock levels are things that are managed very critically by mining houses, especially those who have got contracts with Eskom. I would say that we would have had to underperform so badly as a collective mining industry to have actually created a situation or resulted in a situation whereby we could actually eventually end up with low stock levels. The agreements and quantities defined in those agreements are to make sure that there is always sufficient stock piles because you will have strategic stock piles, you will have large stock piles. It would mean for you to get to a point where your levels are so low would mean that those suppliers are really not coming to the party. That’s the only time you can have those stock piles at that level.
Ms Mazzone: Or maybe just a complete over supply of diesel that needed to be purchased?
Mr Mgojo: Maybe.
Ms Mazzone: Maybe?
Mr Mgojo: Maybe.
Ms Mazzone: Fair enough. Now in May 2017 Minister Brown said something profound in her budget speech. She said that 90% Eskom’s of coal supply came from white owned mines. And in it she included Exxaro. You gave an incredibly detailed response about what BEE and share value, and share output, and forgive me, I am a white woman asking you a question on Broad-Based Black Economic Empowerment (BBBEE), but the question is now when one looks at a statement such as 90% even I shake my head in disbelief. I can’t believe that in South Africa we would allow this to be the case. Is 90% of the coal supplied to Eskom supplied through white owned mines?
Mr Mgojo: That is not true. First of all in South Africa, in terms of DMR’s own charter, at least 26% you should have achieved in terms of empowerment.
Ms Mazzone: And as a black man, you have every right to be proudly at the helm of a company that provides coal to Eskom and does so in a diligent manner. Don’t you find a statement like that highly insulting to you and to everyone else who tries to achieve a level of excellence for your country?
Mr Mgojo: I think it is terribly misleading. It undermines the exact efforts at which we are diligently trying to rectify the past by taking certain actions around the whole area of empowerment. So it basically says that it does not recognise the true efforts which can be measured for people to make statements like that.
Ms Mazzone: I came across a statement that was made by Mr Koko, and it says “Koko criticized the move on Twitter saying “So Exxaro decides to show Eskom the finger instead of radically transforming, and has no decency to even engage on the matter”. “Radical economic transformation is dealt a heavy blow by Exxaro”, he further tweeted. Indeed black management control is necessarily progressive. Eskom’s coal procurement process requires all mines that supply coal to its power stations to have a black ownership target of 50% throughout the life of its mine. Eskom will soon ask for a meeting with Exxaro in an effort to understand how they plan to comply with the 50% plus requirement”. Now to me, given what I know, given what I have heard today, I don’t think anyone was showing anyone the finger. It was the other way around. And I also think it was used as an excuse to offer a prepayment to purchase a mine that didn’t need to be purchased above existing mines. It shows to me an escape route of the lowest possible form in terms of job loss and in terms of what this action – the detrimental effect – had on so many millions of South Africans, quite frankly. Not only those that lost jobs, but those that suffer because the price of electricity now sky rockets. When you read something like this, what is your reaction?
Mr Mgojo: Don’t worry. I did not have to worry for him to call me, I called him. We had our conversation and let me just say that we understood each other in the end.
Ms Mazzone: Sounds to me like you brought it on. Chair, my final question, perhaps this is not a fair question given the fact that you have been honest, but your honesty is just unbelievably refreshing. In your opinion has there been a deliberate and provable attempt to capture the South African mining industry for the interests of the Gupta family?
Mr Mgojo: My answer to that is definitely yes. We are the victims of that. We have lived that experience. Our people have lived that experience, and therefore it is without doubt in my mind that if I am going to be saying that that has not happened, I would be lying to myself, I would not be true to myself. I would not be recognising the situation that our country finds itself in, and therefore I am one of those who are saying that this has to come to an end. This country deserves much better.
Ms Mazzone: Chair, on that note I have to agree, this country deserves so much better. No further questions.
Mr R Tseli (ANC): Let me thank you Mr Mgojo for coming here to play your part. As you have indicated I think the testimony was very helpful, very informative. It assists us in the work we are doing because at least for now it confirms what other witnesses have been saying earlier about a whole range of activities where state resources were being looted and damaging this very beautiful brand – Eskom. I think I agree with what the Honourable Gungubele was saying earlier that perhaps we need a follow up session with some of the bosses from Eskom who came here earlier. The cancellation of the coal supply between yourself and Eskom, to what extent did it affect your operations over and above the 1 500 jobs which were lost?
Mr Mgojo: You know the mine exists within a particular ecosystem, and that ecosystem goes beyond the gate of the mine, we are part of the community. The mine serves not only its own interests, but it also attempts to play a very responsible role in contributing to those communities where those mines operate. So to the extent that the mine is now not in a position, because it has been closed, to play its role in ensuring that certain activities that were bringing better lives to people in those areas are not being able to be done actually impacts the whole community – the schools, the various projects that we are trying to do in enterprise development, a whole host of things that we try to do in terms of socio-economic development in those communities comes to the end when the mine stops. The net impact is far beyond just whatever money that Exxaro may have made, far beyond been able to provide jobs for people, but you have actually impacted the whole community because they were depending on the existence of that mine as part of their own sustenance.
Mr Tseli: It appears your relationship with Eskom got strained when you proposed the BEE transaction sometime in December 2016, and I am interested in knowing what the transactions were going to involve. How would they impact the work of Eskom if they were to succeed in the manner in which you designed them?
Mr Mgojo: Our relationship with Eskom was strained long before that. It was strained at the time there was a change of guard in Eskom with the arrival of Mr Brian Molefe. For the first time ever you would have a company which is the largest supplier of coal to its customer that those two CEOs are unable to converse with each other. For a period of two years after repeated attempts to engage with Mr Molefe, he never for one moment gave us an audience. Now I am their largest supplier, and there are serious issues we need to deal with, very strategic issues we need to deal with and you are not afforded that opportunity. So it was very clear to me that the intent was not about building a relationship with us and in fact I should have seen that as a sign of something horribly bad about to happen. I don’t care how much I may not like the other guy, but the courtesy and respect of a CEO to another CEO to engage even if you have differences is part of normal business. And so therefore for me the whole thing about empowerment is just a smoke screen. It has absolutely nothing to do with anything because even today we continue supplying coal to Eskom, and we will continue to supply coal to Eskom for as long as we have the contract that is in place.
Mr Tseli: I want to go back to the prepayment issue. Mr Singh says the prepayment is not new to Eskom. The direct question is, has Exxaro ever received any prepayment?
Mr Mgojo: Honourable Tseli, I have tried to highlight in every way possible that this whole issue of prepayment is something new to us. We have never experienced a prepayment either for capital or for coal. We have never heard of any other company that has received that prepayment in the course of their business. We first heard of it when it had to do with those operations that belonged to Tegeta. That is the first time we even heard of the concept of a prepayment for coal or for capital.
Mr Tseli: So it was just a smoke screen. That’s fine. Page 28 of your presentation, paragraph 96.1, the Brakfontein CSA between Eskom and Tegeta was concluded in March 2015 and seemingly at a much higher price than what Exxaro had agreed with Eskom. I am raising this aspect because you continually say your rates were much lower, so I want you to quantify exactly your rates as compared to the Gupta linked companies.
Mr Mgojo: In this particular instance we are talking about the Leeuwpan coal, and we are very emphatic on the point that our coal was cheaper than Brakfontein’s coal price. And if one has to go even further, we have indicated Mafube coal price was cheaper than any other coal supplied to Eskom in the country. And there are many other instances where we can say that our coal was cheaper than any other coal. The only mine that had seemingly higher cost coal would have been Arnot from the Arnot mine. We have also highlighted much earlier that it was as a result of the fact that land and capital was not made available to Exxaro to enable Exxaro to fulfil the contractual obligations of the supply contract. If it had, we would have been enabled to ensure that the cost of coal supplied to Eskom would have been much lower than what it was.
Mr Tseli: I am asking you to try and quantify it. To me that is vague, it is a general statement to say rates were much lower, and that Gupta rates were much higher. I want you to try and assist us, how much higher were their rates as compared to those of Exxaro?
Mr Mgojo: Just give me one moment to confer… Let me give you a comparison between the Leeuwpan mine and the Brakfontein mine. The cost of our coal at mine gate was R13.25 per gigajoule and that coal was going to go by rail. The cost of Brakfontein at the mine gate was R13.50 per gigajoule and that was going to travel 200km by road. What we also know is that after three months Brakfontein was given a price increase after three months while ours still remained at R13.25.
Mr Tseli: Part of your annexures – Annexure N – is a letter from Minister Brown where she was disapproving the relocation of Matla 1 in terms of section 54(2) of the PFMA. I am interested in the relevance of this letter to the issues at hand.
Mr Mgojo: This matter relates to the R1.8 billion that Exxaro was requesting from Eskom to actually sink a new shaft at Matla one. And as part of that approval process for that capital required Minister Brown’s approval at the end after going through Eskom’s governance structure. So it is in that context that this letter has relevance on the shaft that we were trying to secure capital to be able to implement that shaft.
Mr Tseli: There is another letter where the department was proposing that Eskom make prepayment to OCM, it is not part of your annexures here, I think it is part of those that were distributed earlier by Adv Vanara, and I want to go straight to that one. When you look at this letter will you disagree with the view that says the Department was fully aware of all the payments that have been made in the process between Eskom and any other company that is under investigation?
Mr Mgojo: If I read this letter, it is drafted on a letterhead which belongs to the Ministry of Mineral Resources written by the DG of that Department. And if I read this letter it gives certain advice to Eskom of actions that they should take in order to expedite what was being tried to achieve here. Although I am seeing this letter for the first time today, the only inference I can draw out of this letter is that the letter had the intent of facilitating a particular outcome by the Department.
Mr Tseli: At some stage NUM threatened to go on strike if the Arnot Mine was to be closed, and the Department even promised to facilitate a meeting between yourself, Eskom, and the employees. Why do you think even after that threat the Ministry could not assist in facilitating that meeting as undertaken?
Mr Mgojo: Just to correct, they were not threatening to strike, they were threatening to block the trucks that were coming from the power station from the other mining house.
Mr Tseli: My question is that the Department made an undertaking that they would facilitate a meeting between yourselves, the employees, and Eskom. Why was that facilitation not honoured?
Mr Mgojo: It did happen in December when NUM representatives were there, DMR representatives were there, Eskom representatives were there, and Exxaro representatives were there. The meeting actually happened at our head office. But it required of Eskom to take consideration of extending the contract by at least two years to first enable that the proper rehabilitation programme as per the CSA, the planning for that could be undertaken. Over and above it was also the hope that during that period maybe there would be an opportunity for Eskom to agree to re-engage as per the engagement we had under the MOU to extend the mine and the contract up to about 2023 at that time.
Mr Tseli: Do you think there are certain things that DMR could have done differently to avoid some irregular activities that you have presented today?
Mr Mgojo: I want to believe that had there been a willingness by the Minister himself to be actively involved with the purpose of trying to save the jobs to ensure that from his own office he could have had the engagement also with Eskom to ensure that possibilities could be taken seriously that could enable the engagement around extending this contract and saving the jobs could have been achieved. I firmly believe as I see this letter now, it seems that they are able to facilitate these things to enable certain outcomes so I would have hoped that similar type of engagement of facilitating, of advising could have happened to create a particular outcome where the mine could have continued and the jobs could have been saved.
Ms L Mnganga-Gcabashe (ANC): The empowerment issue is a very important one to us. It is very clear in the submission you are making that you have been following the issues that were raised in this inquiry and you are aware that we raised empowerment with the executive of Eskom. We take note that Eskom can’t operate without contracts. Eskom does issue contracts, it does engage on contractual agreements with companies they have done business with, but our issue with Eskom is the coal supply that has not been on an open tender for 40 years. We can differ on certain companies, maybe certain companies have been there for 20 years, some for 30 years, and some for 40 years. That is our issue. That’s where the problem is. And for us it’s that after 23 years of democracy Eskom has failed dismally to transform the coal supply industry. And when they were trying to do that, they did it wrongly, purposely with the Tegeta Company. That is where the problem is. And we don’t want to shy in telling you as a CEO and other members of your company that we still maintain that the coal supply should have gone to an open tender even long before Tegeta was in place, and it was wrong for Eskom when they had an opportunity to implement that they implemented it in a wrong way which is tantamount to fraud and corruption. What is it that Eskom was trying to do in making a prepayment because it doesn’t fall under capital funding? What could be the reason for this kind of a prepayment advanced to Tegeta?
Mr Mgojo: In trying to remember exactly what you have been saying, I am really trying to understand what the question is. If you can just clarify exactly what the question is so I can answer your question directly.
Ms Mnganga-Gcabashe: What is it that Eskom was trying to do in making a prepayment, it is not a capital funding. It doesn’t fall under the category of facilitation fund, so what is it exactly?
Adv Vanara: I think the question is it would appear there would have been a reason Eskom would invest capital infrastructure. What could possibly be the reason for this kind of prepayment that would have been advanced to Tegeta?
Mr Mgojo: You are correct, Honourable Gcabashe, that the notion of a prepayment is not something that exists within our coal supply agreements. Neither for capital nor for any other form of payment that Eskom would be obliged to pay. It has never been done in the form of prepayment. There are processes and governance processes that define how money eventually flows. The only thing I can say is from what has been presented here in this Committee and in unpacking the timeline of events and now getting insights of things that happened or didn’t happen either to ourselves or to others during this period, it would definitely appear that this prepayment, which is a phenomenon that is new, was to enable a certain outcome or event to materialise. And I think throughout all the documentation and sessions we have seen of people coming here, it becomes clear that this prepayment was actually to facilitate an acquisition of an asset.
Ms Mnganga-Gcabashe: Is it a norm according to your knowledge within the mining industry or coal supply industry to facilitate the acquisition of asset costs?
Mr Mgojo: For cost plus mines it is Eskom’s responsibility to pay capital. It is part of the contractual obligations, not a prepayment. So that part is not a norm. For a commercial mine, the mine owner always takes the responsibility to source whatever capital or fund whatever “capex” or “opex” for the mines that it owns and operates. So for both captive and also for cost plus mines, it is either Eskom who becomes responsible for acquiring the capital through a clear defined process or the mine owner will procure the capital to enable the capital requirement of that mine.
Ms Mnganga-Gcabashe: I want to take you to page 9 and 10, can you explain to us the various committees at Eskom because you have been doing business with Eskom, you know which those committees are?
Mr Mgojo: It will go to various committees at Exxaro and also in Eskom.
Ms Mnganga-Gcabashe: At Eskom such as? You should know because you have a contract with them.
Mr Mgojo: Well they have their internal committee for how they manage their governance. We are not party to that. The one committee we do know of is that it goes to their Executive – their Exco – as part of that committee to approval. It also starts right at the beginning at the project planning phase where we define the need for that capital. So the mine and Eskom will sit together and say “We need this capital”. And then we will do the work to say if it is a mine or a shaft it is this. Then we will do all the technical work and submit to Eskom for their approval, and they can also get their own technical people to verify that. Once it has gone through that process it gets to their Investment Committee and then to their executive and then after that if the capital is big, it will eventually hit their board. That is their process.
Ms Mnganga-Gcabashe: That is exactly what we have been saying about Eskom, that the systems that have been created by the procurement policy and supply chain management process have not been adhered to, and that is why companies like yourselves who have been doing business with Eskom for so many years are not clear which committees your applications go to because the procurement policy systems are either not in place or they are in place but they are not being followed. Because if they were been followed you would know if there is a problem and you re-submit a report it would go to a bid spec, it would go to being reassessed, you know which steps of the system it would follow, and at the end it would be approved at Exco level. The mere fact that you are not sure answers us on what we have been saying that Eskom is not following the systems that have been created by Treasury and Parliament to be followed by all SOEs with regard to coal supply. You don’t have to answer that.
Mr Mgojo: I take your point, Honourable.
Ms Mnganga-Gcabashe: Thank you. The point is some Eskom executives that have misled this Committee and Parliament. I hear that suggestion that maybe they must be called again to come before this Committee Inquiry. I am not sure whether we should do that or if it is up to us to analyse and assess, and evaluate if we are able to do that to know who is telling the truth and who is not. After receiving different reports from executives and from different companies that work with Eskom, we come to a determination. I don’t think we should call anyone back. We have called people and they took an oath. If they decide to lie or mislead us they were under oath and there is no point in our wasting parliamentary resources and funding and time to sit here for hours and have interactions with those witnesses again. Everything was made clear to them that they should tell the truth before this Committee. If they decided not to, they must live with that. We will come to our determination after having listened to all parties.
Chairperson: Thank you, I think what you have just explained needs to be discussed in a Committee meeting when we are doing the assessment of all the work that we have done.
Dr Z Luyenge (ANC): Let me join my colleagues in appreciating the input from you Mr Mgojo. I think it is really a further eye opener, on top of what we have heard since we started this process. In this process there is a problem statement that there is a deliberate looting of state resources, and Eskom has been identified as one of the champions of that. In a bid to respond or justify that problem statement we see that it is in the public domain but we have a responsibility and obligation to get deeper into that and make a determination. You are part of the society and you happen to lead and you have a responsibility to make a contribution, that is why you are here, and that is why we engaged others and officials and board members of Eskom. Unfortunately their approaches used to differ; contradictions actually happened in front of us. You have appropriately put forward your views as to how Eskom conducts her business. I was going to ask a question to say you have been long been there at Exxaro, and what is it that you did in order to quell the situation? And you responded to say; “I tried my level best to no avail", the Eskom CEO never gave you an audience. I feel so sorry for you to experience that. I know that when you are being undermined by someone who feels he is the god and world of that company. It is unfortunate, Mkhuluwa. It is unfortunate because we should be complimenting each other. It is unfortunate it is been done by your own brother. It is not a white man who is undermining you, it is one of us. That is how things go.
Can you indicate whether Exxaro is growing, and if growing, then in which form? Under the circumstances I will not be shocked to hear from you that Exxaro is diminishing like a dwarf. You have many years but your height remains the same and you have wasted a lot, eaten a lot of groceries but you are healthy, but when I ask you how you are, you say “It is better than yesterday”.
On affirmative action at Exxaro, a claim has been made by your opponents that “Exxaro, Anglo American, and Glencore are part of the conglomerates of companies that were there 40 years ago, and the majority of service providers at Eskom are 90% white-owned companies. That actually came from senior officials at Eskom. Some Committee members have indicated that perhaps those people gave us that information not understanding the seriousness of undermining Parliament. Someone comes here, with expenses incurred by taxpayers, and lies under oath. I think Chairperson it is in that spirit that we must call people back and discuss that. I want you to go further into affirmative action and BEE.
Mr Mgojo: We are a company that technically one would say is just over 10 years old. You are correct in saying we bought assets and have contracts that have been in existence for the past 30 to 40 years. I want to say that I don’t think it would have been very strategic for us to think that our survival depends on Eskom based on the volumes Eskom gets from us. It gets to a point where you say: Commercially, are we not exposing ourselves to a risk as all our business is in one basket - in the event that one day Eskom is not able to pay for its coal? Strategically for Eskom, if for whatever reason Exxaro had to go into a big crisis and was unable to supply coal, given the amount we supply coal to Eskom, are they not at risk?”. I think it just makes commercial sense for both parties to say maybe the levels we have reached are the most suitable levels and therefore just from a commercial risk one should start looking at exposure in other markets and other opportunities. And that is exactly what Exxaro has been doing. We have recognised that for us to grow as a business it would be dangerous for us to continue to put all of our eggs into one basket. Over the years we have been progressively opening ourselves to the export market. Some of the contracts were stopped by Eskom and not renewed for whatever reason, as we have explained. All that coal that used to go to Majuba is no longer going to Majuba. It is going to the export market. And that is where it had to find its home for that mine to survive. Otherwise 60% of that mine's coal was going to Eskom. That is part of the risk you want to minimise in case things like this happen. I can say to you if you are a shareholder of Exxaro, hold on to your shares because Exxaro is going to keep on growing.
Dr Luyenge: Do you buy into this school of thought that says Eskom is really into the looting of state resources, yes or no?
Mr Mgojo: What I can say is that there are things that are terribly wrong being done in Eskom which are a big drain on the fiscus and resources of this country.
Dr Luyenge: Do you believe that Eskom is really squeezing out all other service providers in favour of the Gupta related companies?
Mr Mgojo: What I can say is that where we have been squeezed out as Exxaro, the net benefactor was Gupta related companies.
Dr Luyenge: Would you appreciate an opportunity to have the Gupta brothers sitting here responding to the same questions? Don’t you think we need to call them to hear their side of the story before they vanish into thin air?
Mr Mgojo: I think given the mere fact that we are sitting here today - they are part of that common denominator - that it is correct they should come and tell their side of the story to this Committee.
Dr Luyenge: The use of "unscrupulous means" by Eskom officials and the board, how would you term that kind of behaviour, is it promoting ethical practices of professionalism?
Mr Mgojo: This country for it to succeed requires people of integrity to lead it, people with certain values about serving, being of service, and not been served. And therefore I am of the firm belief whether you are talking about politicians, about business leaders, church leaders, or people in civil society, we need ethical and moral leadership otherwise what values are we teaching our children? And so all I can say is that given all the evidence and everything one has experienced at Eskom, I can honestly say that the type of leadership and the people leading Eskom cannot subscribe to the fact that they were honest and ethical. If that was the case we would not be sitting here today.
Inquiry Chairperson: I am not going to hold the Committee here. I just want to emphasize what the Chairperson of the Portfolio Committee raised. The Eskom internal committees which you do not know as a contractor for Eskom, and which committees are actually dealing with the contracts getting into Eskom. If Eskom was a democratic organisation and open as an entity of government I should think you would have known which committees your contracts were going through so that at a later stage you are able to engage those committees and say “You have overstepped your mandate". You did not do what you were supposed to be doing about the committee of this nature at Eskom. I think that should have happened. Mr Swart has already suggested that we engage the new board and maybe the future executive of Eskom about the contracts that are in Eskom and look at the policies that Eskom has now and whether they need to change. When Eskom is running normally it runs according to the Constitution of South Africa and according to policies of the entity itself.
I want to say to you and your team that we appreciate your coming to the Committee. You have given us different information to what we have been given, even before the Committee Inquiry, even before I came to this Committee and this Fifth Parliament. There is a lot of information received today, more than at any time I have spent in this Committee. Also Members are calling for the former executives of Eskom to return. I don’t want to be judgmental but I am not aware of how we are going to find them. Will we find them in the current environment? And I note the request by Mr Dlamini.
The information Mr Mgojo has given us has put us in a position where we have to ask ourselves if we really got the truth out of these people that have given us statements and presented to us. When they were taking the oath, were they really meaning to tell the truth and nothing but the truth. We will give the information to relevant bodies, and that together with what you have given us might be further investigated just to get the truth out of it. We welcome the information and wish you well in your work.