South Africa: Minerals and Energy Newsletter

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SUBJECT: South Africa: Minerals and Energy Newsletter
"THE ASSAY" - Issue 11A, November 1-15, 2007


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This cable is not for Internet distribution.


1. (U) Introduction: The purpose of this 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.

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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 NEWS
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Zimbabwe's Indigenization Plans
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3. (SBU) The GOZ has posted in the Government Gazette the
Mines and Minerals Amendment Bill designed to pass
majority ownership of mines to indigenous (black)
Zimbabweans. Under the proposed Bill, the State must
have a 25% non-contributory stake in any mining company
engaged in the extraction of energy minerals, precious
metals and precious stones, and a 26% paid-for interest
in any company involved in the exploitation of these
minerals. The 26% will be paid for from dividends earned
from the state's 25%. The Bill would also require that
51% of any mining company engaged in the extraction of
these or any other mineral be made available for
acquisition by the State or indigenous Zimbabweans. It
also specifies the timeframe within which existing and
future mining companies must achieve the ownership
thresholds, with existing companies allowed more time
than new companies. The Bill justifies its "seizure" by
"virtue of its original ownership of all useful minerals
in its subsoil". The Bill still has to be debated in
Parliament.


4. (SBU) The Mines Amendment Bill follows hot on the
heels of the Indigenization and Economic Empowerment Bill
that requires 51% black Zimbabwean share ownership of

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foreign-owned companies but does not include the "25%
free carry" for government. This bill, which also
provides for an empowerment fund to help with share
acquisition, has still to be signed into law. South
Africa's Impala Platinum and Anglo Platinum have existing
agreements with the GOZ, and a major issue is whether
their agreements will be honored by the government under
the new bills. If the Mines Amendment Bill becomes law,
Zimbabwe could continue to miss out on the on-going
international commodities boom as foreign investors are
likely to stay away.

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MINE ACCIDENTS
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Government's Hard Line on Mine Accidents Worries Miners
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5. (SBU) The high level of fatalities in South African
gold and platinum mines has received intense press
coverage in recent months. As of the end of November
there have been 198 deaths compared to 199 for the whole
of 2006. If deaths this year exceed those in 2006, it
will break an 11-year declining trend. This has brought
sharp reaction from Labor and from the SAG. The National
Union of Mineworkers has received permission for some
240,000 miners to strike on December 4 over safety
issues.


6. (SBU) The Department of Minerals and Energy (DME),
under pressure from government, has reacted by closing
shafts and mines after fatal accidents to investigate
causes and conditions. President Mbeki has ordered the
Minister of Minerals and Energy to conduct safety audits
on all the country's mines in the new year, and the DME
has mooted the possibility of charging managers with
criminal liability where insufficient safety practices
can be shown to exist. In the past, the DME would
conduct investigations without closing mines, which
unions felt was just a slap on the wrist. The DME
Director General has stated that profits must be
subsidiary to the loss of life and that he did not think
mine management was doing enough to ensure the safety of
workers. For this reason, DME is taking a hard-line
approach and closing mines.


7. (SBU) Mine closures have lasted for more than a week
in some mines, which is putting financial strain on
marginal operations, particularly gold mines where
margins are thin despite the high gold price. Mining
companies have expressed concern about the accidents and
fatalities and in some instances have unilaterally closed
down operations after a fatal accident whilst carrying
out investigations and reparations - Anglo Platinum and
AngloGold have both closed mines under these
circumstances. However, mining companies say that it is
not necessary to close the whole mine and that on-going
maintenance is needed to ensure safe working conditions.
The closures also result in loss of revenue and increased
operating costs. Nevertheless, government is determined
to put an end to safety violations where they exist and
to increase safety training and awareness among a
workforce where as many as 50% have no mining experience.
Qworkforce where as many as 50% have no mining experience.

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URANIUM
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Local Uranium Beneficiation 'Sacrosanct'
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8. (SBU) South Africa is intent on using its

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beneficiation policy to add as much value to its mineral
production as is commercially feasible. The Minister of
Minerals and Energy recently signed memorandums of
understanding (MOUs) on energy efficiency and nuclear
cooperation with Japan's Minister of the Economy, Trade
and Industry. After the signing ceremony, the SA
Minister said it was also possible for the two countries
to partner in developing South Africa's planned nuclear-
fuel production capabilities. The Minister said that
Toshiba Power Systems had the technology required for
nuclear fuel production and spent fuel reprocessing,
which the South African government sees as part of its
beneficiation strategy for adding value to the country's
uranium. (Toshiba owns 51% of U.S. Westinghouse, one of
two companies bidding to build South Africa's next
generation of new nuclear power plants). The Minister
spoke passionately of South Africa's nuclear fuel
production ambitions and said that the beneficiation of
uranium in South Africa was "sacrosanct." The MOU's also
cover cooperation on energy efficiency, investment in
platinum, and joint geological research on rare metals
and rare earth metals.


9. (SBU) South Africa is planning to build at least five
conventional nuclear power stations, plus a number of
smaller Pebble Bed nuclear plants (PBMR) by 2025, to
produce 20,000 MW of additional power. The government
wants to ensure that the country has enough feedstock to
fuel these plants. South Africa was one of the biggest
uranium producers in the world in the 1960's, has very
large uranium resources, and is looking to again start to
enrich uranium to power plant grade. (The previous SAG
produced weapons-grade product in the 1970-80's but
abandoned the project prior to the installation of the
new ANC-lead government in 1994.)

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DIAMONDS
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Lesotho Diamond Mine Does it Again
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10. (SBU) The Letseng Diamond Mine in Lesotho has done it
again! Following the discovery of the 601-carat fancy-
colored Lesotho Brown in 1967, and the 603-carat Lesotho
Promise, in August 2006, respectively ranked 15th and 16th
largest diamonds in the world, the mine has now produced
the 493-carat Letseng Legacy, ranked as the 19th largest
diamond ever found. It recently sold for $10.4 million
and will ultimately be cut into a number of smaller
stones with an aggregate value of nearly twice that
price. The 603-carat Lesotho Promise was originally sold
for about $12 million and will be cut into some 20
flawless diamonds ranging from 75 carats to one carat
with a total estimated value of around $25 million.


11. (SBU) The joint owners of the Letseng mine are Gem
Diamonds and the Lesotho Government. The prices received
for Letseng diamonds are a reflection of the rarity of
its stones and they have the highest dollar value per
carat in the world. The mine is noted for the high
percentage of large stones in the 10-plus carat range.
Letseng at around 3,100 meters is the highest diamond
QLetseng at around 3,100 meters is the highest diamond
mine in the world. Expensive to operate with a low yield
of around two carats per hundred tons, the quality and
size of its stones makes it a viable venture,
particularly as the market for extraordinary diamonds
(10-carats and above) continues to grow. The mine plans
to double production in 2008.


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Diamond Beneficiation in Africa - Not an Easy Task
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12. (SBU) A diamond beneficiation workshop at the
Corporate Council of Africa's US-Africa Business Summit
outlined the challenges to establishing profitable
diamond cutting and polishing centers in Southern Africa.
Governments in the region, particularly South Africa,
Botswana and Namibia are seeking to gain more value from
their diamonds by adding value to them locally. However,
they face major competition from established centers in
Antwerp, Israel, China and India, which have better
skills or lower cost than Sub-Sahara Africa.


13. (SBU) De Beer's Executive Director said that given
proper skills training, it would be possible to make
diamonds the most beneficiated mineral in the region
within five years. To achieve this, industry needed a
targeted effort to train cutters, both locally and within
the region. Director Somen Das of Rose Blue, a
vertically integrated diamond manufacturer, pointed out
that South Africa's cutting costs averaged $50 to $60 per
carat whereas Indian and Chinese costs (where 90% of
stones are cut) were about $8 per carat. Antwerp and
Israeli cutting costs are $70 to $100 per carat but they
have greater skill and experience in cutting bigger
stones. He suggested that cutters in Southern Africa
should focus on stones of a carat and more to be
competitive.


14. (SBU) Das said that his company (Blue Rose) had a
positive experience in South Africa. Infrastructure, the
regulatory system and labor relations were all good but
that they had more difficulty than expected in training
and developing local workers. The company had planned to
hand over its factory to local managers but found that
they did not develop technical skills as fast as
expected. The company was still using expatriate
managers were still being used. The Department of
Minerals and Energy acknowledged that the challenge of
skills development in South Africa was a major hurdle to
be overcome.

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STEEL
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New Steel Plant for Durban to Supply Toyota
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15. (SBU) Growth of the South African vehicle
manufacturing industry has been strong - total sales for
2007 are expected to be about $8.6 billion. Toyota South
Africa is the leading seller of cars into the domestic
market and the company has decided to set up a dedicated
plant to supply sheet steel for its Durban plant. The
company opened a $40 million steel plant on the Toyota
site in Durban at the beginning of November. The plant
is a joint venture between Toyota (Japan) and local steel
company ArcelorMittal and will be operated by Toyota SA.
The decision to go ahead with the steel plant was based
on Toyota SA being identified as a vehicle sourcing node
in the Company's global supply chain. Durban plant
production is planned for 220,000 units per year by the
end of 2008, of which 60% to 70% is intended for export.

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MINING
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Benefits of the Mining Sector
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16. (SBU) A 2007 Chamber of Mines report has gone to
Q16. (SBU) A 2007 Chamber of Mines report has gone to
lengths to quantify the contribution of minerals to the
growth and economy of South Africa. It goes beyond the

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battery limits of a mine and looks at the downstream
benefits of manufacture products such as, jewelry, motor
vehicles and parts, ferro-alloys, steel and stainless
steel, electricity, fuels and chemicals from coal, auto-
catalysts from platinum, palladium and rhodium, and many
other products produced from the country's abundant raw
minerals. Mining's direct contribution to the economy
(GDP) in 2006 was $18 billion or 7% and the industry
employed 460,000 people. Backward linkages contributed
some $5.8 billion or 2.2% and 100,000 jobs. Forward
linkages contributed $4.5 billion or 1.7% and 55,000
jobs. Other spin-off effects contributed $17 billion or
6.4% and 400,000 jobs. In total, minerals contributed
(conservatively) $46 billion or 17.2% of the GDP and over
1-million jobs, or 14% of total employment. The social
structure in South Africa is such that each worker
supports six to eight others, meaning that seven to nine
million people (15% to 19% of the country's total
population) owe there welfare to the minerals industry.

BOST