Billiton, Eskom agree to Mozal deal

Johannesburg - Eskom and BHP Billiton announced on Sunday that they reached agreement to amend a long-term power supply contract for the Mozal aluminium smelter in Mozambique.

But negotations over the contracts for the supply of electricity to the Hillside and Bayside smelters are still ongoing, although the groups want the talks to be concluded before the end of Eskom's financial year.

The agreement, which still needs to be approved by the National Energy Regulator of South Africa, removes the impact of embedded derivatives on Eskom's balance sheet, as well as all onerous conditions. 

The derivative contracts were based on aluminium prices and currency movements.

Plunging aluminium prices contributed greatly to Eskom's book value loss of R9.5bn last year.

Eskom's contract with BHP Billiton to supply electricity to the mining giant's Mozal and Hillside aluminium smelters accounted for 95% of the utility's embedded derivative liabilities.

Getting rid of those would immediately return almost R7bn to Eskom's bottom line, management previously said.

Under the new arrangement, BHP Billiton will take on "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," according to a statement.

"BHP Billiton remains acutely conscious of the electricity supply challenges facing South Africa and the region and has been exploring innovative and sustainable solutions to these challenges," said Xolani Mkhwanazi, BHP Billiton chairperson in SA, in a statement.

"The smelters continue to make an important contribution to the South African economy and at present continue to fulfil a commitment to a 10% power reduction."

The group said that negotations over the contracts for the supply of electricity to the Hillside and Bayside smelters should be concluded before the end of Eskom's financial year.

Eskom is also in negotiations with Anglo American over a deal, but the talks have reportedly hit stumbling blocks.

Eskom's contracts with BHP Billiton and Anglo account for some 10% of South Africa's electricity consumption.

BHP Billiton has come under fire from critics for using a big chunk of the country's electricity, at much lower prices than those paid by other users, while only contributing an estimated 0.1% of gross domestic product. This is because the imported alumina smelted at the Mozal, Hillside and Bayside smelters is exported directly after it has been processed. Government has confirmed that BHP Billiton only pays an average of 12.3c a kilowatt hour for Eskom power, while households pay more than 30c.

Whilst discussions relating to the South African smelters are continuing over the coming months, the BHP Billiton smelter contracts at Hillside and Bayside in Richards Bay will remain firm and binding. Eskom will maintain its interruptibility at the smelters in line with the provisions of the contract, the groups said in a statement.