Business News 6.9.2017 08:00 am

Twelve days in December – part 2

Brakfontein and the corruption of geoscience.

Missed part 1? Read it here

Twelve days in December is Moneyweb’s attempt at putting together a coherent description of events – the so-called “connecting of the dots” – of what lead to one of the most turbulent political and economic periods in the country’s history since the advent of democracy. 

Between December 3 2015, when one of the world’s richest men was coerced into selling Optimum Coal Holdings at the Dolder Grand Hotel in Zürich, to December 15, when the government secretly agreed to sell the country’s entire strategic fuel reserve, the nation experienced a spectacular decline in wealth.

It was also the unmasking of President Jacob Zuma who, in playing his hand with the firing of Nhlanhla Nene and the appointment of Des van Rooyen as finance minister, clearly and unambiguously revealed that his loyalty to his friends, the Guptas, trumped everything else, including his Constitutional duty to the country. 

But in hindsight, it appears to have been a strategic misstep, one that detonated a nuclear bomb in financial markets and which drew condemnation from all quarters, that ultimately led to Pravin Gordhan being reappointed as finance minister. We think the period can be characterised as a coming together of a whole range of apparently disparate events in a highly suspicious orgy of greed. 

Brakfontein

“The Gupta family’s strategy was clear when they got into mining – they wanted to get hold of coal assets contiguous to power stations,” said Moneyweb’s source within Glencore. This was disclosed after we reached out to discuss what had happened in respect of Optimum. “They had identified Optimum before Brian [Molefe] was placed there [at Eskom] and that was his mandate – to deliver them mines which they could feed with lucrative coal contracts.”

But Optimum was not the Guptas first foray into coal mining. Their strategy had most likely been informed by their experience at the Brakfontein Colliery, where they had acquired a mine, which unlike Optimum, was not adjacent or near Eskom power stations. Instead, the company’s first contract was to supply coal to the Majuba power station some 160 kilometres away.

Locations of select mines and power stations

.

.

Source: Goole Earth, annotations by author

The Guptas (through their company Tegeta) acquired Brakfontein via a company called Goldridge (Pty) Ltd as far back as 2010 and later appointed a mining contractor to operate the mine for them. But in the midst of a disagreement over payment in 2014, and as part of resolving the dispute, the contractor called in a geologist with 39 years of experience in the coal industry to review the technical aspects of the case, and what Gerhard Esterhuizen found was shocking to say the least.

A Competent Person’s Report (CPR) is a technical report prepared by a geologist or geoscientist with the requisite experience in the commodity being evaluated to deem the author an expert. The competent person is paid by the owner of the deposit to determine the resources according to established scientific standards.

The integrity of these reports is vital because in most cases, a CPR is relied on by investors and financiers to assess the economic viability of mining a deposit.

In Eskom’s case, and because coal is not homogenous, the CPR provides critical information on whether the deposit can supply its power stations with coal of the correct combination of quality and volume.

However at Tegeta’s request, a CPR relating to Brakfontein had been published on August 19, 2011 and according to Esterhuizen, this “was probably the same report that was submitted to Eskom as one of the requirements to apply for a coal supply contract”.

The Eskom coal supply contract with Brakfontein commenced on April 1 2015 and required the mine to deliver 1.35 million tonnes of coal per annum to Majuba (160 kilometres away) until September 30 2025, which equates to 13.5–14 million tonnes over the period. The contract was specific – it related to Portions RE 17 and 27 – comprising four seams of coal.

Using the figures in Tegeta’s CPR, Esterhuizen concluded: “The very first problem that we face is that there is only 3.17 million tonnes of the Number 4 Lower coal seam available, which is an over estimate because there are areas where no coal products are present, but ignored by Tegeta. Where is the additional 10 million plus tonnes of coal to come from based on figures from the Competent Person’s Report prepared for Tegeta?”

.

.

Further to that, Esterhuizen also found that the person who put together the report, “does not comply with the most basic elementary requirements and very clearly exhibits a lack of coal geological knowledge and the identification of geological factors pertaining to mining and utilisation potential”. In fact, the analysis in the CPR was so poor that Esterhuizen concluded that the person simply could not be considered a “competent person” and representing as much amounted to professional misconduct.

The individual is now the subject of a separate investigation into professional negligence and could be found guilty if the report was indeed provided to Eskom to conduct their own technical investigation. “But I doubt it was ever presented to them,” says Esterhuizen, “because I know the technical team would have outright rejected the report based on their years of experience and expertise.”

Moneyweb cannot disclose the identity of the author of the CPR until a disciplinary process has been concluded.

Because the Guptas likely wanted to maximise production in order to secure another contract, they decided to open up another mine, Brakfontein Extension, and commissioned a CPR that was published in June 2013. There were major problems with this too, according to Esterhuizen. “There is no geological continuity between adjacent areas and no competency shown in the modelling of the coal deposit. The CPR does not differentiate between low and higher volatile matter coal and not between coal that is suitable for Eskom and coal that does not conform to Eskom requirements, a fatal flaw.”

The CPR is well-written and presented in a professional manner, but the section that deals specifically with the modelling of the deposit and the estimation of the Coal Resource Base, is not of an acceptable standard with numerous inaccuracies.

So it appears Tegeta commissioned these reports as part of completing a checklist – providing the basis on which they demanded coal contracts with a façade of authenticity.

As we learnt from the PwC report into Eskom’s coal contracts, the process that led to Tegeta being awarded a coal contract for Brakfontein in 2015 was treated as “an unsolicited offer outside of any procurement process”. One can deduce that the Tegeta technical data was not made available to their own technical team to evaluate coal on offer.

Eskom’s own reports and conclusions confirmed what Esterhuizen could clearly see from the flawed CPR report in front of him. Eskom’s coal sampling report that was published two days after the coal supply agreement was signed, indicated that the “blended” 4 Upper and Lower seams was not recommended for Majuba; and the 4 Lower seam – the only one with borderline coal qualities matching Eskom’s requirements “was insufficient to sustain the quantity required for the Majuba power station over the life of the contract”.

Extract from PwC report into Eskom coal contracts

.

.

Note “AC” refers to Brakfontein and “Z” to Majuba. “S4L” refers to Seam 4 Lower.

As Esterhuizen concludes: “Both Brakfontein Mining Operations are mining in the blind and there cannot be any form of coal quality control and anything can be present in a run-of-mine product, a crushed and screened stockpile.”

So, instead of the quantity and nature of the coal reserves dictating what type of coal supply agreement it could offer Eskom, it appears that with the Guptas it became the opposite – what contract can be obtained from Eskom and what are the reserves required to get it?

Eskom clients and the South African taxpayer are now confronted with the fact that for ten years from 2015, just 23% of the coal being supplied by Brakfontein may be of any use to the utility.

Issues around coal quality, while a minor nuisance in respect of this contract for the Guptas, could be used to their advantage in obtaining mines adjacent to Eskom’s power stations, as we shall learn in the next instalment.  

Brought to you by Moneyweb 

To comment you need to be signed in to Facebook. Please do not comment by saying anything prejudiced.
We reserve the right to remove offensive comments.

poll

today in print