SOUTH AFRICA: BIG GOLD AT SOUTH DEEP

UNCLAS SECTION 01 OF 03 PRETORIA 000745 SIPDIS SENSITIVE BUT UNCLASSIFIED DEPT PLEASE PASS TO USGS E.O. 12958: N/A TAGS: EMIN EINV CA SF SUBJECT: SOUTH AFRICA: BIG GOLD AT SOUTH DEEP REF: A. 04 PRETORIA 4813 ¶B. 04 PRETORIA 4117 ¶C. 04 PRETORIA 1695 Sections of this cable are Sensitive But Unclassified, please handle accordingly. ¶1. (SBU) Summary. Placer Dome (Canada) and Western Areas (South Africa) officially commissioned their new ultra deep Twin Shaft Complex at South Deep on February 4. Deputy President Jacob Zuma attended the event on behalf of the government, and used the occasion to deliver a hard-hitting speech on the importance of the government's black economic empowerment (BEE) policy. The Deputy President's message was not lost on Placer Dome, which is having difficulty meeting BEE equity requirements. With proven and probable reserves of 55.6 million ounces, South Deep promises to be one of the most lucrative gold mines in the world. The new Twin Shaft Complex consists of a single drop ventilation shaft to 2759 meters below the surface and a single drop main shaft to 2993 meters below the surface. The primary advantages of a single drop shaft are that it obviates double handling of ore underground, and it affords direct and immediate access of men and materials to 25 million ounces of gold. Management plans to increase South Deep's annual gold production from 490,000 ounces in 2005 to 560,000 ounces in 2006, and to 800,000 ounces by 2010. Western Areas held the original mining rights to South Deep, and for this it receives 50.875% of the gold revenue. Placer Dome, however, appoints the joint venture chairman who can cast the tie-breaking vote. End Summary. Speeches -------------- ¶2. (SBU) Western Areas majority shareholder Brett Kebble introduced Deputy President Jacob Zuma, who attended the official commissioning ceremony of the Twin Shafts Complex at South Deep on February 4 on behalf of the government and Minister of Minerals and Energy Phumzile Mlambo-Ngcuka. (Note: Mlambo-Ngcuka's husband investigated and initiated prosecution of a close associate of Zuma's on corruption charges that involved Zuma's support for a French arms deal. The trial of his close associate is ongoing.) Zuma spoke to over 200 guests for about 20 minutes on the history and the precepts of the government's broad-based black economic empowerment (BEE) policy as it pertained to the mining sector. This included meeting percentage targets on black ownership, black management, basic education and skills transfer to black workers, and a commitment to improve the living conditions of black mine workers. He also stressed the development of downstream industries, such as jewelry manufacturing. Zuma's message on the importance of BEE to the government was not lost on Placer Dome executives, who find it difficult to meet BEE ownership targets without diluting controlling interest or future profits. ¶3. (SBU) Placer Dome President and CEO Peter Tomsett spoke for about ten minutes. He noted that Placer Dome's investment was the first and largest foreign mining investment in the new South Africa. Despite criticism from shareholders and stakeholders for delays (i.e., 20 months) in completing the Twin Shaft Complex, he believed that the project was now on track. However, more investment would be required to meet his vision of a profitable mine producing at over 700,000 ounces a year. Tomsett said that achieving productivity results, worker training, and meeting equity requirements demanded cooperation from all parties involved. He was confident that Placer Dome's investment fulfilled the objectives of the mining bill. The Mine and the Ore Body -------------- ¶4. (U) South Deep is located in the district of Westonaria in Gauteng Province, about 30 miles from Johannesburg on the edge of the Witwatersrand basin. Housing one of the largest known but unexploited gold ore bodies in the world, the property has proven and probable reserves of 55.6 million ounces (as reported by Placer Dome on December 31, 2004). Such an ore body will support more than 60 years of mining. Currently, investment in the mine totals more than R6.5 billion ($1 billion in today's rand). ¶5. (U) South Deep comprises the old South Shaft Complex and now the new Twin Shaft Complex. The South Shaft Complex consists of a main shaft and three sub-vertical shafts that reach to 2693 meters below the surface. The new South Deep Twin Shaft Complex, in full operation from November 19, 2004, consists of a single drop ventilation shaft to 2759 meters and a single drop main shaft that currently services mining from 2590 to 2890 meters below the surface. The primary advantages of a single drop shaft are that it obviates the double handling of ore underground and affords direct and immediate access for men and materials to 25 million ounces of gold. The Twin Shafts are located as close as possible to the center of the ore body, allowing miners to reach the ore body in less than 10 minutes, as opposed to three hours using the old South Shaft. Together with the South Shaft, the Main Shaft will sustain a hoisting rate of 235,000 tons per month of gold bearing rock and waste from 3000 meters over a 60-year life span. With 17 MW of hoist power, the main shaft can hoist at speeds up to 64 kilometers and hour. This exceeds the newly installed milling capacity of 220,000 tons per month. ¶7. (U) The Twin Shafts each have an inside diameter of 9 meters. Construction required excavating 633,311 tons of earth, pouring 43,000 square meters of concrete, and assembling more steel (7,700 tons) than in the Eiffel Tower. Complicating construction were two faults running through the shaft area: the Fargo at 2409 meters down and the East Arrow Fault at 2841 meters. These faults required steelwork independent from the shaft pillar. The ventilation shaft was the first ultra deep shaft in South Africa completed without a fatality. No fatalities occurred during the 17-month construction and equipping period for Twin shifts. In all, the project took 10 years and seven months to complete. ¶8. (U) The mine has been divided into three areas: the extended sub-vertical shaft area serviced by the old South Shaft, and phase 1 and phase 2 areas serviced by the new Twin Shafts. Extended sub-vertical mining is taking place 1630 meters below the surface. Phase 1 mining is taking place at 2393 meters and 2800 meters below the surface (where a crusher is located). The plan is for future Phase 2 mining to take place at 3360 meters below the surface. More than 60% of current production at South Deep is from fully mechanized mining methods: trackless drift and fill, and benching. Management wants to mechanize as much as 80% of production at the deeper levels. Ore is transported by an underground rail system to a shaft loading system before it is hoisted to the surface. Tramming on the main levels is by means of electric rail locomotives and 14-ton hoppers. At 2890 meters, virgin rock temperatures are 50 degrees centigrade. To maintain comfortable work conditions, cooling is provided by 10 MW of site-specific underground refrigeration. In addition, about 760 kilograms of air per second gets cooled to 6 degrees centigrade in 35 MW worth of bulk air coolers on the surface and force ventilated through subsurface air drifts into the main shaft. ¶9. (U) Reef horizons currently being mined include Ventersdorp Contact Reef on the western edge of the property and the Upper Elsburgs on east and northeast. The beds thicken from 1.5 meters to 120 meters as one moves north and east. Conventional longwall methods are being utilized on Ventersdorp ore, while a variety of methods are being utilized on Elsburgs ore, including conventional longwall, drift and fill, benching, and long-hole stoping. The lucrative Elsburgs section especially lends itself to bulk mining and mechanization. Production -------------- ¶10. (U) South Deep management plans to increase annual gold production from 490,000 ounces in 2005 to 560,000 ounces in 2006, and then to 800,000 ounces by 2010. A significant transition will occur when primary operations move from South Shaft Complex to the new South Deep Twin Shaft Complex in the fourth quarter of 2005. Cost savings should be derived from increasing the economy of scale bringing cash costs down from R74,873 per kilogram gold in 2004 to R66,700 per kilogram in ¶2005. When production reaches full potential, management expects costs to decline to R60,000 per kilogram (about $10,000 in today's dollars). Management expects to achieve positive cash flow in second quarter 2005. Cash flow should be further enhanced with cost savings of almost R5 million per month when the company halts production at the old Harmony 4 shaft. By accelerating development on three levels, management wants to increase mining to 330,000 tons of ore bearing rock and waste per month. With an additional investment of R1 billion, Kebble believes that South Deep could double production over the next three years. The Joint Venture -------------- ¶11. (U) Placer Dome Western Areas Joint Venture (PDWAJV) was established in 1999 to invest and build the Twin Shaft Complex and then manage South Deep. Each partner owns 50% and has the right to appoint three joint venture board members. As long as Placer Dome SA maintains a 40% interest in the joint venture, it has the right to appoint the Board Chairman, who casts a tie breaking vote -- except, as Brett Kebble is quick to point out, on matters that have a material impact on the business, in which case a unanimous decision of the board is required. Western Areas receives 50.875% of all gold revenue. Should production exceed one million ounces per year, Western Areas would receive a further 1.75% of Placer Dome's attributable gold production. The new CEO of the joint venture company is John Bredenhann. The new Chairman of Western Areas is Mafika Mkwanzi, who is also Chairman of Letseng Diamond Mine in Lesotho. The Managing Director of Placer Dome SA is Sam Coetzer. Western Areas -------------- ¶12. (U) Western Areas is a company ultimately owned and controlled by the Kebble family, including Roger Kebble and his son Brett. In 2004, Inkwenkwenzi, a broad based black empowerment consortium, acquired 13.7 million shares of Western Areas together with a call option for an additional 5.3 million Western Areas shares. The Kebbles believe that this new empowerment shareholding in Western areas, together with existing empowerment shareholdings from JCI and Randgold, will take Western Areas beyond the Mining Charter's five-year BEE ownership target of 15%. This is what the government will look at when issuing new order mining licenses until 2009. The 10-year target is 26%. On February 7, Western Areas launched a Level-1 American Depositary Receipt sponsored by the Bank of New York in the U.S. over-the-counter market. One ADR equals one ordinary Western Areas share. This gives Western Areas the benefit of a traded U.S. security without having to adapt to U.S. reporting requirements. Western Areas also owns contiguous gold resources that in time can be accessed from existing South Deep mining infrastructure. The company is fully exposed to rand currency fluctuations, but plans to restructure its hedging position. Placer Dome -------------- ¶13. (SBU) Having invested $630 million dollars in South Africa, Placer Dome believes it is now the largest foreign investor in the new South Africa, and the largest foreign investor in the mining sector (not counting South African companies that have relisted in the U.K.). As a matter of shareholder policy, Placer Dome wants to control its investments. To do so in this case, it negotiated a delicate balance of ownership and control in its joint venture with Western Areas. If its investment in the joint venture falls below 40%, for example, Placer Dome loses control. In 2004, the government promulgated the new Minerals and Petroleum Resources Development Act, which replaces South African property rights with new order mining licenses to be granted by government before May 2009. The Act also gives legislative status to an industry charter that sets forth BEE targets and objectives. Placer Dome feels that it scores well on these targets, with the exception of equity. The prospect of diluting its shareholding in South Deep has caused much consternation at Placer Dome's headquarters in Vancouver and among its shareholders, almost half of whom are American. In November of 2004, Placer Dome along with Southern Era (Canada) notified the Department of Mineral Resources and Energy, as it understood it was required to do under law, of its intention to lay claim should it incur future losses due to the implementation of the new mining law. This angered Minister of Minerals and Energy Mlambo-Ngcuka and relations between the two have been frosty ever since. Nevertheless, new President and CEO Tomsett did meet with Mlambo-Ngcuka at the 2005 Mining Indaba (Conference) the following week. Mlambo-Ngcuka reportedly refused to waive the BEE equity requirements for Placer Dome, but left the door open for the company to substitute possible involvement with a BEE company in jewelry manufacturing. "Be creative." she reportedly advised. FRAZER