SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" --

UNCLAS SECTION 01 OF 05 JOHANNESBURG 000416 SIPDIS SIPDIS PASS USAID, USGS, AND DOE E.O. 12958: N/A TAGS: EMIN ENRG EINV EPET ECON SF CH SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" -- ISSUE 10, OCTOBER 2006 JOHANNESBU 00000416 001.2 OF 005 This cable is not for Internet distribution. ¶1. (U) Introduction: The purpose of this monthly newsletter, initiated in January 2004, 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. --- Key --- ¶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. -------------- HOT NEWS -------------- Chinese Gain a Foothold in South African Mining -------------- -- ¶3. (U) The Chinese State-owned company that operates the country's biggest gold mine, Hong Kong-listed Zijin Mining, has bought 20% of AIM-listed platinum explorer Ridge Mining. Its $20 million investment was made at a 35% premium to Ridge's current share price. The Chinese interest is Ridge's substantial nickel prospect on the eastern limb of South Africa's Bushveld complex called Sheba's Ridge. A bankable feasibility study currently underway is expected to give the green light to the R5 billion ($690 million) Sheba's Ridge mine. The prospect has resources (if proven) capable of producing an annual 24,000 tons of nickel, 12,000 tons of copper, 94,000 ounces of platinum, and 274,000 ounces of palladium for at least 18 years. The Chinese investment closes out a $146 million fund-raising exercise for the Blue Ridge platinum mine which is 10 km from the nickel project and about 190 km west of Johannesburg. Anglo Platinum, the world's largest platinum producer, owns 36% of Sheba's Ridge, the Industrial Development Corporation 26%, and Ridge the rest. Mining Royalty Rates Amended -------------- ¶4. (U) On October 11, National Treasury released the long awaited second draft of the Mining Royalty Bill for comment. The industry will be able to comment on the draft until the end of January 2007. It is expected that the bill will be enacted in 2007, after which it will be become effective in May 2009. The proposed royalty will be tax deductible and is aimed at encouraging local beneficiation. Chamber of Mines economist Roger Baxter said that the latest draft was a significant improvement but questioned whether the incentives offered were sufficient to encourage further beneficiation within South Africa. He said that the introduction of relief measures for marginal mines, small miners and royalty liability adjustments were also welcome. While general pleased with the new draft bill, the industry still intends to push for a profit-based instead of the proposed revenue-based royalty system. ¶5. (U) The diamond industry will benefit most from the redrafted bill. The initially proposed 15% export levy on uncut diamonds will be reduced to 5% and the royalty on diamond revenues from 8% to 5%. The royalty on unrefined PGMs will be 6% while the JOHANNESBU 00000416 002.2 OF 005 refined metals will attract a 3% royalty, compared with 4% under the first draft. Unrefined gold will draw a 3% royalty while refined gold (99.5% pure, which is produced by most mines) will attract a 1.5% royalty, compared with 3% proposed in the first draft. Under the first draft, low-ash coal had a 2% royalty but under the latest draft the royalty on high-ash coal will be 1% and 3% on low-ash coal (less than 15% ash). One discordant note for iron ore exporters, especially at a time when demand for and prices of this commodity are running at record highs, is the imposition of a 4% royalty on the raw ore, versus the initially proposed 2%, which will apply only to an upgraded product. US-SA Power Conference - October 16-19 -------------- ¶6. (U) An estimated 35 American companies and an equal number of SA firms participated in a conference to outline opportunities for American suppliers of power equipment arising from the state-owned utility, Eskom's $16 billion energy investment program. The emphasis was on electricity generation, transmission and distribution opportunities. The $16 billion represents a portion of the $60 billion earmarked for infrastructure development by the SAG. The conference had the backing of EXIMBank and USTDA, which offers grant financing for projects in which US firms participate or have the potential to participate. Some 35 Eskom projects were showcased, including substantial base-load and peaking generation initiatives amounting to billions of dollars over the next five years. The conference featured presentations from Eskom, the SAG and US companies that were invited to present their latest technologies. US companies were also guided through South Africa's black economic empowerment legislative requirements, which are an imperative for doing business in the country. -------------- NUCLEAR -------------- PBMR Team Awarded U.S. Nuclear Engineering Contract -------------- -------------- ¶7. (U) At the beginning of October, the US Department of Energy awarded a new generation nuclear plant contract to an international team that includes South Africa's Pebble Bed Modular Reactor Company (PBMR). Jaco Kriek, PBMR's Chief Executive, said the contract was worth about $3 million (R23 million) and was for the first phase of engineering work for the project at the Idaho National Laboratory. The contract includes pre-conceptual engineering, design comparisons of various alternatives for reactor heat and hydrogen generation, conceptual cost estimates and accompanying schedules and research and development requirements for different options. ¶8. (U) The initial 12-month phase is the first step in a multi-step program to deliver a high temperature, gas-cooled reactor prototype to increase US domestic energy supplies, reduce greenhouse gas emissions and move more quickly towards a national hydrogen economy. The international team is led by Westinghouse Electric Company and includes Potchefstroom-based M-Tech Industrial of South Africa, Shaw Stone & Webster of Boston; Technology Insights of San Diego; Air Products and Chemicals of Allentown, Pennsylvania; Nuclear Fuels Services of Erwin, Tennessee; and Kadak Associates of Providence, Rhode Island. -------------- Platinum Group -------------- Bushveld's Eastern Lobe needs Higher PGM Prices -------------- -- ¶9. (U) South Africa's Bushveld complex hosts the world's largest resource of platinum group metals (PGMs). The complex has the shape of a distorted four-leaf clover with well-developed western and eastern lobes, a partially developed northern lobe and an embryonic southern lobe. Both the western and eastern lobes have two main reef horizons, namely the Merensky Reef and the UG2 Reef. The Merensky is better developed on the western lobe and has a higher metal content and higher proportion of platinum than the UG2, while the UG2 is the dominant reef on the east lobe. The ore from the Merensky is also easier to mine and to treat because of its lower chromium content. ¶10. (U) The prolonged high price of platinum (sweetened by the high price of the relatively minor metal rhodium) has encouraged exploration on the eastern lobe and a number of mining companies are planning or have commissioned projects there. The majority of resources on the western lobe are already in production or are tightly controlled by the platinum majors. Mining on the eastern lobe requires higher palladium and platinum prices than JOHANNESBU 00000416 003.2 OF 005 are required for operations on the western lobe. According to Brad Mills, Chief Executive of Lonmin, the platinum price has to remain in excess of $1,000 per ounce at about R7 to the dollar for companies to successfully invest in the Eastern lobe, while the price required for mining ore bodies in the Western lobe is about two-thirds of that. The current platinum price is $1,080 per ounce and the rand/dollar exchange rate 7.5. Lonmin Platinum gets Mining Rights Converted -------------- ¶11. (U) The start of October saw Lonmin became the first South African platinum producer to convert its old order mining rights for its Marikana operations into new order mining rights. This is a requirement of the new Minerals Act which converted all privately held mineral rights to State custodianship. The conversion gives Lonmin's South African operations, namely Western Platinum and Eastern Platinum, the exclusive right to mine for platinum group and associated metals within its property boundaries for the next 30 years, renewable thereafter for 30-year periods. Simultaneously the company announced a $1 billion investment plan to expand its operations over the next three to five years. This will boost platinum production to at least 1.3 million ounces a year by 2010 and create about 4,000 jobs in various areas of its business. ¶12. (U) Lonmin achieved its mining right conversions with social and labor plans for its mining areas, which included the development of people and housing schemes. This was commended by Minister of Minerals and Energy, Buyelwa Sonjica, who said that social and labor aspects were very important in preventing mining towns from turning into ghost towns once reserves were depleted. Brad Mills, Chief Executive of Lonmin, said the conversion of the company's mining rights removed uncertainty around the future of its operations and gave the company great confidence in its current and future capital investments in South Africa. Currently, Lonmin is looking at a wide range of beneficiation issues with the Department of Minerals and Energy (DME),including the relocation of upstream and downstream activities and facilities to South Africa. Implats Exchanges Royalty Payments for Equity -------------- ¶13. (U) With agreement from both the Royal Bafokeng Nation (RBN) and the South African National Treasury, Impala Platinum (Implats) will convert royalty payments to the RBN to a 13.4% share of the company. This was driven out of concern by Impala (the world's second biggest platinum producer) that under the revised Royalty Bill, royalties paid to the RBN would not be offset against those paid to the state. ¶14. (U) Under the new deal, Implats will issue shares worth about $1.6 billion (R12.1 billion at the current rand/dollar exchange rate of 7.5) to the RBN, its principal black economic empowerment (BEE) partner. This is equivalent to an advance payment of all royalties due to the RBN over the 32-year royalty agreement. The royalties amount to $1.4 billion (R10.6 billion),and the $200 million (R1.5bn) difference, equivalent to a 12% discount, will be recorded on the Implats balance sheet as a "BEE charge." To facilitate the deal, Treasury plans to change a section of the income tax act (by the end of November) to allow Implats to deduct the equivalent of $1.4 billion from its taxable income over 32 years. All new agreements must be ratified by the end of this year. -------------- LEGISLATION -------------- Mining Industry Blames Government for Losses -------------- ¶15. (U) The mining industry has blamed government policies for a 33% decline in investment since 2004 that has resulted in an estimated loss of 20,000 jobs. On the other hand, while Minerals and Energy Minister Buyelwa Sonjica has established a departmental task team to investigate reasons for the decline, she has accused the industry of using this to avoid its Mining Charter obligations. The Charter mandates that industry transfer 15% of its assets to Black organizations and individuals by 2009 and 26% by 2014, plus other social and training obligations. This is seen as a major disincentive to international investment, particularly to junior exploration companies, many of which have relocated to the DRC, Angola, Zambia and other African countries with less onerous mining codes. It has also seen many South African companies diversify operations overseas and into the rest of Africa. ¶16. (U) The Chamber of Mines has provided the Minister with JOHANNESBU 00000416 004.2 OF 005 investment data and cited a number of government policies (including those of the Charter, Minerals Act, and proposed Royalty and Beneficiation bills) which could have contributed to a lack of investor confidence. These included the negative effect of delays in approvals for environmental assessments; the issuing of water rights; the issuing of exploration licenses; and delays and impediments to converting old order rights to new order rights (the conversion of existing operating licenses for exploration and mining that should have been almost a "rubber stamp" exercise). Department (of Minerals and Energy) officials said that they had received 9,000 applications for conversion of old-order mining rights to new-order rights and that 1,421 were rejected for various reasons, including the failure to commit to Charter obligations. Anglo in another Dispute over Licensing -------------- ¶17. (U) In mid-September, Anglo Platinum (Anglo Plats),a subsidiary of Anglo American, filed actions against the Department of Minerals and Energy (DME) for refusing to grant prospecting rights on four properties located on South Africa's Bushveld Complex. Two weeks later, Anglo Coal, also a subsidiary of Anglo American, filed action jointly on the DME and on Abarawaki Investments, a subsidiary of mining exploration company Thabex Exploration, to defend its applications for coal prospecting rights. Abarawaki was cited as a respondent because it had received a notice of acceptance from the department on a prospecting right over an AREA held by Anglo Coal. As a result of the negotiations, Anglo Coal has received some of its prospecting rights. ¶18. (U) (Comment: The new Minerals and Petroleum Resources Development Act requires that exploration and mining companies convert their old licenses (so-called old order rights) to new order rights to comply with the Act and with the Mining Charter. However, according to the law firm Webber Wentzel, in terms of the Act the minister has very limited powers to decline applications for conversions of rights, for which the deadline was April 30. The law also provides for mining companies to obtain a "mandamus", or order to compel the minister to process both conversions and new applications. Unfortunately, the law is complex and open to interpretation and the capacity of the DME to handle this is limited by the number and experience of their staff. End Comment.) -------------- DIAMONDS -------------- Firms Shed Diamond Cutting Jobs -------------- ¶19. (U) Pending legislation aims to see more South African diamonds cut and polished locally in the belief that this would create substantially more jobs. Instead, cutting firms are shedding jobs as they grapple with squeezed margins. Cutters claim that this is due to an imbalance between the high price of rough and revenues for finished gems. At the beginning of September, a trade union official said that some 400 cutting and polishing jobs had been lost in Johannesburg since January, bringing employment in the city down to 1,800 cutters, with another 600 cutting jobs elsewhere in the country. ¶20. (U) MacDonald Temane, Chairman of the South African Master Diamond Cutters Association, said a delay in putting in place the government's new diamond laws was not helping the industry. He said that this had a destabilising effect and caused uncertainty. The mining ministry concurred that there were many elements of the complex diamond law that had to be put in place, including input from the National Treasury on proposed export duties and royalty taxes. It is expected that the laws will be implemented early next year. De Beers Opens its High-Tech Macrodiamond Laboratory -------------- -------------- ¶21. (U) On October 5, the world's leading diamond miner, De Beers, officially opened a $16 million geological exploration macrodiamond laboratory (GEMDL) opposite its headquarters west of Johannesburg. The facility was designed to speed up the process from discovery (of a kimberlite body) to mine development. For the immediate future De Beers plans to process sample material from its world-wide exploration projects at the new laboratory. The company budgeted some $100-million for exploration in 2006 and is likely to sustain or increase that level into the future in an effort to increase rough diamond supply. There have been few new major discoveries during the passed decade. De Beers is pursuing prospects in Botswana, Angola, the Democratic Republic of Congo, and Canada, and has JOHANNESBU 00000416 005.2 OF 005 plans for India and Russia. ¶22. (U) The new laboratory has a 150 ton per year sampling capacity, which will enable it to process about ten advanced exploration projects a year as compared to one currently. This capability is likely to have an immediate positive spin-off for their joint venture AK6 project in Botswana with African Diamonds and Wati Ventures. The plant uses South African-developed technologies and enhanced international innovations to carry out the process in a secure 'hands-free' environment. The laboratory is designed for 100% recover of diamonds and diamond chips down to a few microns in size. Additional value-added services are aimed at determining and evaluating the characteristics and properties of diamonds and the geological environment in which they occur. ¶23. (U) (Comment. DeBeers' strategy for South Africa appears to be to sell off marginal mines to Black Economic Empowerment enterprises, increase recoveries from profitable mines, cut back on head-office staff and dispatch previously centralized services to the operations, and concentrate on high technology development and innovation in diamond exploration, recovery and industrial diamond manufacture. End Comment.) Lesotho's Monster Diamond Find -------------- ¶24. (U) The Lesotho Promise, a 603 carat white diamond of exceptional color, was discovered at the Letseng mine in Lesotho, and sold in Antwerp for $12.4 million. This is the biggest diamond found since the 777 carat Millennium Star, owned by De Beers, was discovered in the Democratic Republic of Congo in 1993. Last year the Letseng mine was also the source of another two exceptional stones, one exceeding 100 carats and another of 83 carats, also soon to be sold in Antwerp. The mine was previously owned and worked by De Beers between 1977 and 1982 but demands by the Lesotho government caused them to cease operations. Letseng is currently owned by the Government of Lesotho (30%) and Gem Diamonds (70%) and operated by Gem since mid-year. Gem recently received shareholder approval to purchase the operation from JCI. The mine is low grade but is known to produce large high quality diamonds. Of the 100,700 carats recovered since restart of operations in April 2004, 90% were of gem-quality and some 1.5% exceeded 100 carats each. -------------- COMPANIES -------------- Two Major Companies Formed -------------- ¶25. (U) On August 16, the Competition Tribunal unconditionally approved the merger of Kumba Resource's coal assets with those of Eyesizwe Coal within a newly created company, Exxaro Resources. This forms part of a black economic empowerment transaction involving the unbundling of Kumba into two separately listed entities, namely Exxaro and Kumba Iron Ore Limited. The Competition Tribunal also unconditionally approved Exxaro's proposed acquisition of Namakwa Sands, Anglo American's mineral sands operations on the west coast. The two companies will be separately listed on the Johannesburg Securities Exchange (JSE) by the end of the year. ¶26. (U) Kumba Resources, 66% held by Anglo American, is Africa's biggest iron ore producer and also has substantial assets in coal, minerals sands, zinc, ferrosilicon and dolomite as well as ferroalloys. November will see Kumba unbundled into Kumba Iron Ore and Exxaro. Exxaro will hold the coal and metal mining assets and retain a 20% stake in the Kumba's Sishen iron ore mine. It also has a 90-day option after listing to buy 100% of Namakwa Sands for $310 million, as well as options to buy 26% of the Black Mountain zinc mine and the Gamsberg zinc project in the Northern Cape. If it exercises the Namakwa Sands option Exxaro would become the world's third-largest producer of titanium mineral sands - used mainly in making pigments for paint. Exxaro will also be South Africa's fourth-largest coal mining company, the biggest supplier of coal to Eskom for power generation and top producer of metallurgical coals. If it keeps to its planned output of 70 million tons of coal by 2012, it will become South Africa's biggest coal producer. COFFMAN##