Eskom Coal Supply and the Role of Emerging Miners

May 2015

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Eskom historically utilised 2 coal contract types, with an increase in shorter-term contracts in the last 10 years

Fixed-price Long Term Contracts Fixed-price Short-Medium Term ContractsCost Plus Long Term Contracts

Description

Advantages

Disadvantages

• In place for mines that are situated close to Eskom’s power stations with all coal production dedicated to Eskom

• The coal price is based on mining costs plus an agreedprofit consisting of management fees and a return on capitaloriginally invested

• These contracts deliver coal to Eskom at a fixed price that is annually escalated according to an agreed composite escalation index

• Supply to Eskom, export marketand other local markets

• Utilised to fill the remaining coal requirement that cannot be supplied by the cost-plus and fixed price contracts

• The short-medium term mines tend to have inherently higher cost structures which relates to higher coal costs

• Historically lowest R/t cost• Transparency into mine

operations and ability to influence• Easiest long term negotiations,

simplified and expedited financing

• Predictable prices• Less price and quality variation

risk exposure than Cost Plus

• Fast and easy to negotiate• Predictable prices• Flexibility through short contract

durations and road and rail deliveries

• Eskom carries almost all risk• Mine has limited incentive to

optimise operations• Eskom provides initial and

sustaining capital expenditure

• Prices can be high if Eskom has limited alternative options

• Dependent on global market demand, price and export volumes

• Substantial price premium for mining marginal deposits and for the miner’s higher risk exposure

• Considerable contract management resources required

62 59 60 68 71 65 67 63 65 60 60 53 52 50 48

262016117211 46444540373831

31282931303030

124

F2014 F2015

122 124

F2013

126

F2011

126

F2010 F2012

122

31

F2009

133

F2008

120

31

F2007

117

31

F2006

112

31

F2004

113

F2003

105

30

F2002

93

30

F2001

89

29

F2000

92

28

Volume Trend

(2000-2015)

Fixed-price Short/ Medium TermFixed-price Long TermCost Plus

Source: PED Internal analysis

Coal Purchases (Mt)

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Eskom’s life of station coal supply plan contains over two billion tons of un-contracted coal from 2020 onwards

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20

40

60

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120

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180

2011

2012

2013

2014

2015

2016

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2018

2019

2020

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2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

Un-contracted

Contracted

Based on a 50 year operational lifespan Only 5 stations still in operation after 2040:

Contracted

Unidentified

Coal demand, MtpaIncludes only Eskom requirements

Total uncommitted requirement of ~40Mtpa as early as 2018

Key Message• Coal supply to 2018 is contracted to an acceptable degree (with exception of Kusile),

thereafter a significant proportion of coal is not contracted. Also planned operationallifespan increases to between 50 and 60 years will compound the problem.

Source: 2012 McCloskey Coal Conference

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Export Price and Coal Grades

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Coal Export price trend at Richards Bay Coal Terminal in US dollars

Source: Argus Media, Macquarie Research

Shortage of coal supply to

Eskom

6

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124

122

120

74

8

6

4

2

0

Kelvin PS

Calorific value GJ/ton

Eskom

Export

Industrial boilers

Municipalities e.g., hospitals CementBrick and tile

MiningAgriculture

VolumeMt, 2009/2010

Eskom controlled

Competitive

Export

India

Eskom

India

• RB3, the lower quality coal grade (~5,500kcal/kg, ~23MJ/kg) has been legitimised in recent months signifying that RB3 is a tradable commodity. RB3 competes directly with Eskom’s coal requirements

• Coal Brokerage global COAL updated its Standard Coal Trading Agreement (SCoTA) in March 2012 to a new trading contract for Richards Bay (5,500 kcal/kg NAR; total moisture 14%; maximum ash 23% and 1% sulphur on as-received basis)

Sasol

Segmentation of the SA coal market, with Eskom needing higher quality and India prepared to take lower quality

Source: McKinsey Analysis

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Eskom’s Current Coal Requirements

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Eskom Long Term Coal Supply (Projected)Mtpa

Source: Internal analysis

Eskom has to secure 2.17 billion tonnes of coal up to 2051, ~1.05 billion is still to be contracted

▪ ~1.05 billion tonnes (average 11Mtpafrom FY2018 onwards), will be sourcedfrom new coal supply agreements andprovides an opportunity for emergingminers

▪ Potential for Waterberg supply in thefuture in addition to the Mpumalangaregion.

Medium Term Supply

▪ Long Term supply includes the lifeextensions of all our existing long termcontracts and the New Largo agreementfor Kusile

▪ The estimated saleable coal from thesesources is ~1.12 billion tonnes

Long Term Supply

▪ For the next 5-years Eskom is 80% contracted and the remaining FY16 and FY17 shortfall will be securedsoon.

▪ For the foreseeable future Eskom is fully contracted at Lethabo, Matimba, Medupi, Kendal, Duvha, Matlaand Tutuka.

Contracted/Recently Secured

Source: Internal analysis

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Eskom Coal Requirements: Qualities

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• Indicative Coal Quality requirement ranges (MJ/kg, Air Dried)

Note: Based on 240 specifications

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Market Factors

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Export capacity of existing coal mines

§ Lack of investment will result in a decline from 2018 onwards

§ Export coal prices were around US$95 per tonne 24 months ago, but dropped below US$75 per tonne by July

2013 and to US$62 per tonne in recent weeks, recovering only to US$65 on the second week of May 2015.

Export capacity of existing South African mines(Million tonnes)

§ No new export mines have been announced

since 2012 and the only ‘sustaining’ project was

at Glencore’s Tweefontein Colliery

§ The global coal industry is reducing its focus on

thermal coal, driven by thermal coal assets have

delivered anemic returns in recent years and a

material recovery in prices over forthcoming

periods is not anticipated.

§ In the medium term companies will continue to

constrain capital expenditure

§ Eskom believes that the lack of investment in

new mining capacity over the last few of years

and the time it takes to establish a new coal mine

will force Eskom to start purchasing a proportion

of its coal requirement at prices that competes

with export opportunities, i.e. at export parity

prices.

Comments

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2015 20352020 2025 2030

Source: Wood Mackenzie

Seaborne Thermal Growth (2015-2035)(Million tonnes)

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Imports into India will increasing rapidly

Thank you

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Eskom coal quality requirements

Source: PED

Parameter Typical Eskom Ranges Impact of out of spec coal Actions to improve/ manage qualities

Calorific Value (CV)

16 – 23.5 MJ/kg - Low CV coal means that more coal must be burned to produce the same electricity

- In extreme cases, the power station will not be able to burn low CV coal

- Coal can be ‘washed’ to float off lower CV coal, the miner can try to mine only the higher CV coal seams, or low CV coal can be blended with high CV coal

- The power station furnace can be designed to use low CV coal; however, once built, the required CV cannot be changed

Volatiles 20 – 26% - Coal will not ignite in the furnace if the volatiles are too low

- Excessive volatile are a safety hazard

- Limited actions possible – must source the correct coal

Ash 22 – 41% - High ash coal has less energy, increases the ash disposal requirements and can ‘clog up’ and erode key power station equipment

- Ash can be removed by washing of the coal- Equipping the station to handle higher ash coal is

possible, but generally expensive

Abrasive Index (AI)

219 – 609 mg/Fe - High AI coal will cause wear and erosion of power station equipment

- AI can be reduced by selective mining and/or washing

- To handle high AI coal, the power station must increase its frequency of maintenance, which reduces the time available for producing electricity

Sulphur <1% - Sulphur results in air pollution, which can exceed permissible levels

- Washing can reduce sulphur levels- The power station can install expensive filtering

equipment to remove the sulphur dioxide

Moisture 5.9 -11% - Higher coal moisture affects efficiency of the boiler

- Compact stockpiles to remove water and allow drying time