BHP, Eskom review aluminium smelter power agreements

The world's biggest mining company, BHP Billiton, and South African power utility Eskom will renegotiate controversial electricity supply agreements currently in place for BHP's aluminium smelters in South Africa and Mozambique, and expect to have a new deal in place by the third quarter.

"This is a significant milestone that results in a new pricing path which will not be linked to commodity pricing and foreign currency,” Eskom said in a statement.

The utility said it expects final agreements will be signed by the third quarter of this year.

The details of the negotiations and proposals are confidential, but have been developed after “lengthy” discussions between the two parties, both confirmed.

The new agreement “may involve BHP Billiton assuming responsibility for the commodity pricing and currency exchange risks related to the contracts, which would in turn reduce the volatility of Eskom's earnings and improve its balance sheet”, BHP said on Monday.

Under the terms of its existing contracts with Eskom, BHP Billiton pays less for power when the aluminium price falls and more when it climbs.

Eskom signed the power supply deals for the energy-intensive smelters years ago, when South Africa still enjoyed a surplus of energy.

But the confidential contracts have come under fire within the country, now that it is battling tight supply and rising costs for electricity.

"This is a historic step in the right direction for Eskom and the country,” Eskom interim executive chairperson Mpho Makwana said.

“These agreements were concluded in a period of excess capacity and changes in the current environment have required that we adopt a different approach.”

BHP Billiton warned on Monday that while the proposed amendments to its contract would positively influence the electricity supply position over time, the grid would remain "under pressure for the foreseeable future”.

"BHP Billiton is grateful to Eskom for its willingness to work with us in the development of mutually beneficial outcomes that are favourable to both parties and the public,” the company said.

"We are confident that this will strengthen the foundation for a solid partnership with Eskom and our long term commitment to South Africa.”

Engineering News Online reported earlier this month that Eskom was in negotiations with two companies regarding five legacy power contracts that would be exempt from the recently-announced electricity tariff increases.

BHP was understood to be one of the companies and either Anglo American or Xstrata presumed to be the second.