A 10-year contract for transporting coal on rail has been signed between Transnet and the South African coal unit of mining company BHP Billiton.

This agreement makes the Australia-based miner the first major customer to commit to a long-term take-or-pay contract with the South African state-owned freight transport company.

It is also a massive boost for certainty around Transnet’s capacity expansion programmes on the export coal line. Transnet is adding close to 10 million tonnes in capacity on the line from the current 73 million to 81 million tonnes over the next seven years.

The agreement with BHP equates to a contract value of approximately R2.4 billion per annum and R24 billion over the 10 year period.

Take or pay contracts are crucial to Transnet’s capital investment programme as they provide revenue certainty – a key consideration for raising funds in the capital markets. Take or pay contracts mean that Transnet commits to providing trains and a customer is obliged to pay whether they have product or not.

Crucially, the long-term contracts provide a massive boost to South Africa’s credentials as an investment destination as they confirm the mining sector’s confidence in the country. For Transnet, this is an indication of strengthening relations with customers, particularly with regards to partnering on future plans.

BHP is one of Transnet’s and South Africa’s largest coal exporters. Transnet is confident that agreements with the remaining 28 customers will be formalised by the end of November this year. Transnet has been in negotiations with the industry over the last 20 months and most customers have agreed to the terms.

All exporters through the Richards Bay Coal Terminal (RBCT) will sign individual contracts with duration of 10 contract years commencing on 1 April 2014 and terminating on 31 March 2024. Transnet Freight Rail has committed to moving 810 million tonnes of coal over the period, including a performance guarantee.