There's A Big Problem Brewing!

What does an economy need to function? Energy! It is essential for the functioning of modern every day life for citizens of a country, and for the country's businesses. And no one will argue that power is not a critical ingredient for the huge South African mining industry.

As I have reported earlier, and discuss in my eBook, the South African power company, known as ESKOM, is seriously troubled. Miningmx.com, an excellent daily publication reporting on issues within South Africa and the mining industry, just published an article today, entitled, "Eskom running viability exercise on Medupi, Kusile as SA faces more power cuts." 

I want to quote from this thorough assessment of ESKOM's current status. "Engineers are visiting the power stations themselves to give us an independent view of what is going wrong," noted Pravin Gordham, public enterprises minister. "The situation is growing dire for the country's economy," reported Miningmx.com. In another quote, Miningmx noted, "Phakamani Hadebe, ESKOM CEO, said one of the company's many problems was it had regressively spent less on maintenance over the last five years even though its power stations were aging." And, "ESKOM provided for maintenance spend on its fleet of R19bn (19 billion Rand) for the 2018 financial year, owing to cash constraints, but had since increased that amount by R5.5bn when the new management recognized the extent of the problem - a realization it had come to "within a matter of months."

With respect to new power projects, per Miningmx, ESKOM said "it was conducting an exercise to see the effect of abandoning the completion of its Medupi and Kusile power station builds, given the financial strain under which the utility is operating, according to chairman, Jabu Mabuza."

A real indicator of the financial well being of a company is its debt service record, and Miningmx reports that "ESKOM has some R419bn in debt, some of which it is unable to service."

As I noted in an earlier blog, NERSA, the National Energy Regulator of South Africa, recently approved a rate increase... an increase that over 3 years totals nearly 30% that is so large as to threaten, or at least seriously challenge the mining industry's margins, unless there is a significant change in price of underlying metals, or a significant weakening of the Rand.

My expectation is that the country will continue to function, and there will be power, and mining of Gold and the PGMs will continue, but at increasingly higher rates for power, with more maintenance required, and with increasingly less funding available for the upkeep of the ESKOM system.

To me, it is an important issue in thinking about the reliability and consistency of supply of the PGMs from South Africa, another arrow in the quiver of risk that suggests all is not stable in the PGM space.

As an aside, the Gold companies of course, face the same issue, suggesting the incremental value of owning mining assets in countries that have ample power (along with a centrist political system.)

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