South Africa: Minerals and Energy Newsletter

UNCLAS SECTION 01 OF 05 PRETORIA 004103 SIPDIS SIPDIS SENSITIVE STATE PLEASE PASS USAID STATE PLEASE PASS USGS DEPT FOR AF/S, EEB/ESC AND CBA DOE FOR SPERL AND PERSON E.O. 12958: N/A TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - Issue 11A, November 1-15, 2007 PRETORIA 00004103 001.2 OF 005 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. --- 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 -------------- -------------- Zimbabwe's Indigenization Plans -------------- ¶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 PRETORIA 00004103 002.3 OF 005 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. -------------- MINE ACCIDENTS -------------- -------------- -------------- Government's Hard Line on Mine Accidents Worries Miners -------------- -------------- ¶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. -------------- URANIUM -------------- -------------- Local Uranium Beneficiation 'Sacrosanct' -------------- ¶8. (SBU) South Africa is intent on using its PRETORIA 00004103 003.3 OF 005 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.) -------------- DIAMONDS -------------- -------------- Lesotho Diamond Mine Does it Again -------------- ¶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. -------------- -------------- Diamond Beneficiation in Africa - Not an Easy Task -------------- -------------- PRETORIA 00004103 004.2 OF 005 ¶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. -------------- STEEL -------------- -------------- New Steel Plant for Durban to Supply Toyota -------------- ¶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. -------------- MINING -------------- -------------- Benefits of the Mining Sector -------------- ¶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 PRETORIA 00004103 005.2 OF 005 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