SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE

UNCLAS SECTION 01 OF 04 PRETORIA 005319

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SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE
ASSAY" - ISSUE 11

REF: A) PRETORIA 3049, B) PRETORIA 2998

*THIS CORRECTS PRETORIA 5282, UPDATING ISSUE NUMBER

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1. (U) Introduction: In January 2004, the Economic Section
of Embassy/Pretoria produced the first issue of a new monthly
newsletter called "The Assay". The purpose of this monthly
newsletter is to highlight minerals and energy developments
in South Africa. This includes trade and investment as well
as supply. South Africa hosts world-class deposits of gold,
diamonds, platinum group metals, chromium, zinc, titanium,
vanadium, iron, manganese, antimony, vermiculite, zircon,
alumino-silicates, fluorspar and phosphate rock, and is a
major exporter of steam coal. South Africa is also a leading
producer and exporter of ferroalloys of chromium, vanadium,
and manganese. The information contained in the newsletters
is based on public sources and does not reflect the views of
the United States Government. End introduction.

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Key
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2. (U) Key to some of the terminology and abbreviations used
is given to facilitate understanding.

BEE (Black Economic Empowerment) - the scheme whereby the
South African Government promotes black participation in
business.

- t = tons,
- t/d = tons per day,
- c/l = cents per liter,
- t/m = tons per month,
- t/y = tons per year,
- oz = troy ounces (31.1 grams),
- cmg = centimeter grams,
- mcf = million cubic feet,
- tcf = trillion cubic feet,
- R = SA currency (rand),
- MW = megawatts,
- kt = thousand tons,
- bbl/d = barrels per day,
- MW = megawatts,
- PGM = platinum group metals.

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HOT ISSUES
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ISPAT ISCOR Looks for a Power Alternative
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3. (U) According to Bateman Africa, ISPAT ISCOR is planning
to build its own power station in order to secure a future
power supply and reduce pollution at its Vereeniging Steel
Works in Pretoria. Management is concerned that South Africa
could run into a national base-load power shortage by 2010,
which could have a detrimental effect on the company. If the
ISPAT ISCOR project becomes a reality, it would be South
Africas first industrial independent power producer and the
first power station to be built in South Africa by Bateman,
one of the top five engineering and construction companies in
South Africa. The National Energy Regulator (NER) has
already granted a license for the construction of the power
station. Waste heat from the Vereeniging Steel Works would
drive the planned 140 MW plant. BHP-Billion is investigating
similar options for its Richards Bay and Maputo aluminum
smelters, and its Samancor ferro-alloy plants. These
operations are heavy users of electricity and generate huge
amounts of process heat that could be recycled to generate
additional electricity.

Rolling Over Slow Moving Spoornet
--------------

4. (U) The inability of South Africas rail parastatal,
Spoornet, to grow with the economy and provide efficient
service has caused a number of mining and manufacturing
companies to resort to road transportation, and others to
consider purchasing their own rolling stock. James Lennox,
Chief Executive of the South African Chamber of Business, has
publicly encouraged chamber members to get involved in the
rail business because he thinks it would be good for them and
the economy. He argues that the economic benefits would
include reducing transportation costs for customers and the
more efficient use of rail assets.


5. (U) Because of the lack of rail capacity, iron and
manganese ore producers have not been able to ride the
current global commodity boom driven by China demand. Rail
inefficiencies have also frustrated automobile manufacturers.
As a result, two iron ore mining companies, Kumba Resources
and Assmang, are now negotiating with the government for
permission to buy their own rolling stock so that they are no
longer dependent upon Spoornets limited ability to respond
to growing demand. Kumba and Assmang are situated next to
each other in the Northwest Province, and want to increase
their exports to China through ports at Saldanha Bay and Port
Elizabeth. Also on the table for these iron ore exporters is
the construction of a new rail spur to Coega, where a new
deep-water port is under construction some 20 km east of Port
Elizabeth. Meanwhile, the automotive industry, largely based
in Port Elizabeth, has indicated interest in investing in new
rail capacity between the Port of Durban and Johannesburg.


6. (U) Bulk commodities such as coal, iron ore, manganese
ore, steel, and ferro-alloys account for more than 70% of
Spoornets business. Add motor vehicles to this and the
total exceeds 80%.

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MINERALS
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Uranium Byproduct Worth its Weight in Gold
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7. (U) Afrikander Lease (Aflease) is a junior gold mining
company that operated a now mothballed gold mine in the North
West Province where uranium was an important byproduct. The
mine occurs in the Dominion Reef geological formation, which
is older than the gold-rich Witwatersrand formation and has
relatively high uranium values. The mine contains so much
uranium, in fact, that commodity prices determined whether
one called it a gold, uranium, or dual-metal mine. Over the
past decade, Afrikander Lease operated the mine as a marginal
gold producer. Last year, the company closed the mine due to
high costs of operation associated with the strength of the
rand. Since 2003, however, the price of uranium has risen by
more than 37%, and this may give the mine a new economic
lease on life as a uranium mine this time with gold as the
by-product.


8. (U) Afleases infrastructure, inherited from AngloGold, is
still in place, but requires repair. Chief Executive Neal
Froneman said that by 2005 the mine could resume gold
production and move toward exploiting South Africas largest
deposit of "near available" uranium by 2006. The project
could provide 4 million pounds of uranium oxide a year to a
growing nuclear energy market. Froneman said that the United
States, Canada, Britain, France, Switzerland, and Japan had
already shown interest in the mines 330 million pound
uranium resource, and current and future market and price
fundamentals looked good. At full production, the mine would
also produce 100,000 oz a year of gold as byproduct. The
projected capital cost tostart up the open-pit mine is $27
million, resulting in a breakeven cost of $14 a pound of
of
uranium oxide (i.e., yellow cake). The price of yellow cake
is currently about $20 a pound.

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DIAMONDS
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De Beers and the Draft Precious Metals and Diamonds General
Amendments Bill
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9. (U) De Beers has long struggled with the problem of how to
align its diamond production and "supplier of choice"
marketing strategy with the new Mineral and Petroleum
Resources Development Act and BEE Mining Charter. One way
would be to become more involved in creating a local cutting
and polishing industry and supplying BEE companies with rough
diamonds mined in South Africa. Government has put
considerable pressure on De Beers on this score, which some
believe may be behind the 8% royalty on diamond revenues
proposed in the draft Royalty Bill and the 5% excise tax on
all rough diamond exports proposed in the draft Precious
Metals and Diamonds General Amendments Bill (the Diamond
Bill). De Beers and the diamond industry oppose both these
bills, but see the BEE writing on the wall.


10. (U) At the end of a two-day workshop to solicit the
diamond industrys input into the draft Diamond Bill,
Minister of Minerals and Energy Phumzile Mlambo-Ngcuka
announced that De Beers had agreed to incorporate BEE
requirements into its "supplier of choice" program. The
"supplier of choice" program replaced De Beers old Central
Selling Organization sight holder method that characterized
its monopoly in rough diamonds until the late 1990s. Under
the "supplier of choice" program, De Beers selects its
customers for their ability to promote and market diamond
jewelry. It will now select its South African suppliers
based also on their ability to meet BEE requirements as
prescribed by the mining industry charter. The De Beers
Diamond Trading Company (DTC),the successor to the Central
Selling Organization, currently distributes to 14 "suppliers
of choice" in South Africa, but has committed to add BEE
EE
suppliers and to facilitate the development of BEE diamond
cutting and polishing businesses. Israel-based diamond
consultant Chaim Even-Zohar, who coordinated the workshop,
explained that De Beers would require its "suppliers of
choice" to supply diamonds to BEE cutters and polishers. In
a parallel move, De Beers invited the South African
Government to take a 50% stake in its Diamdel rough diamond
trading subsidiary that sells diamonds to small clients.


11. (U) The diamond industry in South Africa employs about
28,000 people, of which 13,000 are in mining, 300 in sorting
and valuing, 2,100 in cutting and polishing, 3,000 in jewelry
manufacturing, and 9,000 in retailing. Locally mined
production is valued at about $l billion, with $550 million
worth of rough diamonds supplied to the South African market
and a similar value of polished diamonds exported. De Beers
operates as a worldwide wholesaler of rough diamonds,
producing about 40 million carats worth $5.5 billion last
year (about 62% by value of total world demand). Most of the
rough diamonds come from Botswana, South Africa, and Namibia,
but De Beers also purchased $800 million worth of diamonds
from Russia last year.

Synthetic Diamonds Worry De Beers
--------------

12. (U) BHP-Billiton, the world's largest mining company, and
De Beers, the worlds largest producer and distributor of
rough diamonds, are concerned that synthetic diamonds might
adversely impact their $57 billion retail diamond market for
natural stones. In an attempt to protect the high mark- up
on its product, De Beers wants jewelers to buy analytical
machines that can distinguish the synthetic stones from
natural diamonds; the difference is not otherwise
discernable. Two U.S. companies, Apollo Diamonds (Boston)
and Gemesis (Florida),produce synthetic diamonds with
equipment that replicates the high pressures and temperatures
found in the earth. These synthetic diamonds make up about
4% of annual diamond production, but only 0.3% by value since
they are sold at much lower prices. Until recently,
synthetic diamonds were mainly used for industrial purposes,
such as in drill bits for oilrigs. However, new technology
has enabled the production of larger and more impressive
stones. Blackie Marole, the Managing Director of Debswana,
the Botswana Government's joint venture with De Beers,
recently said that the marketing challenge posed by synthetic
stones was as great as that recently posed by conflict
diamonds. Sales of rough diamonds grew 8% in the first half
of 2004 after totaling $8.9 billion last year.

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LIQUID FUELS
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Biodiesel
--------------

13. (U) As the world price of crude oil climbs, the
scientific community and the South African Government have
begun to contemplate producing biodiesel from sunflower seeds
or soya, and ethanol from maize and sugar cane. According to
Andre Otto, Deputy Director for Renewable Energy at the
Department of Minerals and Energy (DME),locally produced
biodiesel could reduce imports of crude oil and act as a
cushion against sharp increases in oil prices. Biodiesel
might also create a viable market for South Africas new
black farmers. The Department of Science and Technology, the
South African Bureau of Standards (SABS),the South African
Revenue Service (SARS),and the South African Petroleum
Association want to propose an implementation plan to
government in March 2005. Otto states that the aim is to
supply 150 million gallons of biodiesel a year within 10
years, equal to about 8% of the countrys annual diesel
consumption or 2.5% of total liquid fuel consumption. SARS
says that there should be tax benefits given to farmers who
grow crops to produce biodiesel. However, local automobile
manufacturers are concerned about biodiesel quality, and have
asked SABS to set acceptable standards.


14. (U) The greater fuel efficiency of new diesel engine
e
technology from Europe has helped diesel car sales reach 10%
of all new vehicle sales in South Africa. Econometrix senior
economist Tony Twine believes that this could even rise to
40% by 2013. South Africans now pay about $3.00 for a gallon
of gasoline.

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Labor
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AIDS Takes its Toll on Gold Miners
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15. (U) Harmony Gold, the third largest gold producer in
South Africa, estimated that AIDS would kill one third of the
41,000 workers it employs in South Africa. In its 2004 annual
report, Harmony stated that the HIV infection rate among the
company's workforce would peak this year at 33.9%. AngloGold
Ashanti, the countrys largest gold producer, had an
infection rate among its South African workers of 30.2%,
according to Petra Kruger, head of the company's HIV/AIDS
unit. Gold Fields, the second largest producer, has an
estimated 28% infection rate among its workforce. The rate
of infection among miners has placed a financial and
healthcare burden on companies as they battle falling
productivity among the sick and rising medical costs for
their workers. Harmony estimated that the impact of HIV/AIDS
on their cash flow would be in the range of $2 to $5 an
ounce.


Russians Talk Minerals and Energy
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16. (U) A large delegation of Russian officials met with
their South African counterparts in Pretoria on November 17-

18. Heading the delegation was the Minister of Natural
Resources, Yury Trutnev. One of the most important agenda
items for South Africa was assuring a long-term supply of
crude oil. In 2002, PetroSA, the state-owned oil company,
bought crude oil from Russia in a once-off deal. PetroSA
officials have since visited Moscow several times to discuss
further purchases, but without success.


17. (U) Trutnevs visit could also signal interest in natural
resource trade and investment by both countries. South
Africa and Russia are leading producers of platinum group
metals, gold, and diamonds. South African company sources
said that this would depend on the resolution of disputes
between South African companies and their Russian
counterparts. The most notable of these is the refusal by
the Russian mining company, Arkhangelskgeoldobycha (AGD) to
honor the investment and licensing partnership agreement
signed with the De Beers-owned company, Archangel Diamond
Corporation (ADC). Other South African companies engaged in
Russia include Mondis (Anglo American group) joint venture
with the Syktyvkar paper and pulp mill, AngloGold Ashanti's
recent $32 million purchase of shares in Trans Siberian Gold
(a London-listed miner with projects in central and eastern
Siberia, and Anglo Platinum's stake in a platinum deposit in
the Urals, funded through Eurasia Mining (another London-
listed miner).


18. (U) In the news, Anglo American recently sold its 20.3%
holding in Gold Fields Limited, South Africas number two
gold producer, to Norilsk, the giant Russian nickel and
d
palladium producer. Although Norilsk management stated that
the purchase was purely for its portfolio, rumors persisted
that they were positioning for a takeover of Gold Fields.
Harmony may have beaten Norilsk to the punch, which is why
Norilsk is now teaming with Harmony in a hostile takeover bid
for Gold Fields.
FRAZER