By Devon Maylie and Alex MacDonald
CAPE TOWN--Big electricity increases will put more projects and
jobs at risk in South Africa, mining executives said Thursday.
South Africa's state-owned electricity provider Eskom Holdings
Ltd. applied for a 16% increase in electricity prices per year for
the next five years to help fund its new building program and shore
up its credit rating.
Eskom, which supplies about 95% of the country's electricity
primarily through coal-fired power plants, asked the National
Energy Regulator of South Africa in October for an average price
increase of 13% to cover its own needs, plus an additional 3% to
support new independent power producers.
Industry, such as mining, say this will render projects
unaffordable and lead to more closures or job losses in an industry
already struggling with weak demand, lower prices and labor wage
increases that beat inflation.
Eskom already raised prices by around 24% a year over the past
three years. Mining executives last week argued to the energy
regulator that the price increase can't be that high.
If Eskom's proposal goes forward, "we will see projects being
stopped and jobs being lost," said AngloGold Ashanti Ltd.' s
(ANG.JO) outgoing Chief Executive Mark Cutifani.
The cost increases has already led to some projects to shut.
Last year Xstrata PLC(XTA.LN) idled some of its chrome furnaces for
several months. International Ferro Metals said last month it will
halt a furnace until March.
The power producer is struggling to meet demand as it builds two
new power plants, which are expected to be completed by 2019.
Eskom is spending 337 billion rand ($38.9 billion) over the next
five years on the new power stations and to upgrade existing
plants. The utility needs to avoid a repeat of 2008 when coal
shortages and other issues led to rolling black outs across the
country and halted major mining and manufacturing.
Eskom also said it's struggling with the rise in the cost of
coal, which it expects to reach 10% a year over the next five years
but Nick Holland CEO of Gold Fields Ltd (GFI) said the proposed
power rate increases go above and beyond what is needed.
"Eskom needs to be pulled back. It's not necessary to have such
high tariffs," he said, saying Eskom is seeking to recover the cost
of its investment in power plants over a shorter period of time
rather than the life of the plant.
He said there will be no incremental growth in mining investment
as a result of the move. You're "going to see rationalization of
business.... Projects will go to other countries in Sub Saharan
Africa... if you don't have affordable power," he noted.
India-focused Vedanta Resources PLC (VED.LN) which acquired
Anglo American's portfolio of zinc assets in Africa in 2011 said
the economics of its North Gamsberg project would be called into
question if the proposed power tariff increase was implemented.
"We clearly see that South Africa is on the brink of [a power]
deficit," said Kishore Kumar, the CEO of Zinc International, Africa
& Ireland. "Beneficiation can't happen in this country at that
[power] price," he said. Beneficiation refers to the process of
refining zinc concentrate into refined products.
Vedanta is planning develop the world's largest undeveloped zinc
deposit called the Gamsberg deposit in two phases. The first phase
of the project, Gamsberg North, includes an open pit mine, zinc
refinery, and smelter that would be able to produce 400,000 tons of
refined zinc a year.
Vedanta doesn't have a cost estimate for the project since it is
still working on a feasibility study that it plans to submit to
Vedanta's board for approval at the end of the year but Anglo
American, the project's previous owner, had estimated the cost of
developing the Gamsberg project at $2 billion, Mr. Kumar said.
-Write to Devon Maylie at devon.maylie@dowjones.com and Alex
MacDonald at
alex.macdonald@dowjones.com
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