Optimum is contracted to supply 5.5 million tons per year to Eskom (South Africa’s electricity provider) based on an agreement signed in 1993. This agreement has resulted in Optimum supplying coal to Eskom at a cost significantly less than the cost of production for a number of years.
Optimum has engaged in extensive discussions over the years with Eskom to renegotiate the agreement to a level that is sustainable for both parties, including securing the supply of coal to Eskom until the end of the estimated life of the Hendrina power station in 2023.
In June, Eskom informed Optimum that it is not willing to renegotiate the agreement and terminated the framework agreement. Despite the termination, Optimum secured additional funding from Glencore in early July to enable it to continue supplying Eskom. Eskom served a notice on Optimum in July in which it asserted its rights to claim significant historical penalties from Optimum and to impose future penalties. Eskom is enforcing specifications in the supply agreement, which if Optimum is unable to meet on a sustainable basis, the penalties would result in Optimum supplying coal to Eskom for an effective price of R1 ($0.08) per ton.