South Africa: Minerals and Energy Newsletter "THE ASSAY" -

UNCLAS SECTION 01 OF 05 PRETORIA 002005 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 9, August 2008 This cable is not for Internet distribution. ¶1. (SBU) 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. -------------- HOT NEWS -------------- -------------- Venezuela - SA Cooperation (for Real?) -------------- ¶2. (SBU) President Chavez was in South Africa on September 2 and 3 for a first-ever state visit by a Venezuelan president. During the visit he signed a number of agreements and memoranda of understanding for energy cooperation in areas of: mining, trade and upstream oil and gas, exploration and exploitation of offshore oilfields and the production of heavy oil in Venezuela. As part of the agreement, South Africa would also gain access to Venezuela's oil reserves. Venezuela has large oil reserves and developing commercial relations in this sector could provide alternative sources of supply for South Africa. South Africa's State-owned oil company PetroSA reportedly said that it had acquired an oil-producing asset in Venezuela and has qualified as an operator for offshore gas exploration in Venezuela. PetroSA has invited its Venezuelan counterpart Petrsleos de Venezuela S.A. (PDVSA) to participate as an investor in South Africa's proposed crude oil refinery at Coega. ¶3. (SBU) Speaking at a joint press briefing with President Thabo Mbeki in Pretoria, President Chavez urged PetroSA to immediately go to Venezuela to start working to exploit the resources in the Orinoco Heavy Oil Belt that he said has the largest oil reserves in the world. He said it "will be a wonderful day when the first Venezuelan tanker delivers oil to South Africa". Cost and price structures have not yet been developed, but Mbeki said the purpose of the agreement was to cut out intermediaries and have a direct state-to-state relationship. South African Minerals and Energy Minister and Venezuelan Energy and Petroleum Minister signed the agreements. South Africa's Minister visited Venezuela in July and this paved the way for closer cooperation between the two countries. Venezuela is also keen to explore South Africa's gas-to-liquids technology. Editorials question whether potential reliance on Venezuela's high-sulfur heavy oil would improve South Africa's energy security. -------------- ENERGY -------------- -------------- Pebble Bed Moves Closer to Construction -------------- ¶4. (SBU) South Africa's Pebble-Bed Modular (nuclear) Reactor (PBMR) Q4. (SBU) South Africa's Pebble-Bed Modular (nuclear) Reactor (PBMR) project has moved a step closer to construction of a commercial-scale power station at Koeberg near Cape Town. The PBMR company has signed a contract for engineering, procurement, project and construction management (EPCM) services with the South African-Canadian joint venture company Murray & Roberts SNC-Lavalin Nuclear (Pty) Ltd. (MRSLN). The project entails the construction of the demonstration reactor at Koeberg and a fuel plant at Pelindaba near Pretoria. Construction is due to begin in 2010 and the plant is scheduled for completion by 2014. This is some 10 years later than originally planned due to technical, environmental and funding hold-ups. Licensing and the environmental impact assessment still need to be successfully completed. The demonstration plant will PRETORIA 00002005 002 OF 005 supply about 165 megawatts to South Africa's national grid once in service. High-temperature, gas-cooled reactors, like the PBMR, are also a source of process heat that can be used to generate bulk hydrogen for numerous applications. -------------- Eskom Plans to Reprocess Nuclear Fuel -------------- ¶5. (SBU) South Africa plans to expand its nuclear industry and diversify its energy mix as it battles crippling power shortages. The Department of Minerals and Energy's Nuclear Chief Director Tseliso Maqubela has said that state-owned electricity producer Eskom is seeking commercial contracts with foreign companies for the reprocessing of spent nuclear fuel. In the medium to long-term the country would look to establishing a reprocessing facility in South Africa if it were economically viable, he said. But in the short-term it made sense to contract out to experienced reprocessors such as France's Areva and U.S.-based Westinghouse Electric, which is majority owned by Toshiba of Japan. ¶6. (SBU) Contracts would be managed by Eskom and radioactive waste would be shipped overseas for reprocessing and returned for re-use in local reactors. South Africa hosts Africa's largest uranium reserves, and the recently approved nuclear policy permits the SAG to regulate uranium exports to secure supplies for Eskom. Eskom plans to build and commercialize up to 24-30 165 MW PBMR units once the demonstration plant has been successful commissioned and tested between 2014 and 2017. Westinghouse Electric, Eskom, and South Africa's Industrial Development Corporation are investing millions of dollars to prove the PBMR technology. -------------- FERRO-ALLOYS -------------- -------------- ArcelorMittal SA to Build Fe-Mn Complex -------------- ¶7. (SBU) The world's (and South Africa's) biggest steel producer ArcelorMittal has confirmed its intention to participate in building a ferro-manganese complex. The project is to comprise the development of a manganese mine, beneficiation plant and sinter (pressure and heat used to bond metal particles) complex near Hotazel in the Northern Cape Province, and a smelter complex in the Coega Industrial Development Zone (IDZ) in the Eastern Cape Province. This follows ArcelorMittal's decision to take a 50% share of exploration firm Kalagadi Manganese. The $432.5m deal will result in the establishment of the joint venture between Kalahari Resources (40%),South African state-owned Industrial Development Corporation (10%) and ArcelorMittal (50%). Manganese is vital to the production of quality steel ¶8. (SBU) The proposed manganese mine and sinter plant would produce 2.4-million tons of sinter product per year from three million tons of ore. This would feed into a new 320,000 ton per year ferro-manganese alloy smelter to be located at Coega, which is planned to come on-line in 2010. Drilling to date has confirmed the presence of high-grade manganese ore, sufficient to support a life-of-mine of more than 20 years. The project is located on the Qlife-of-mine of more than 20 years. The project is located on the Kalagadi Manganese Basin, which contains about 80% of the world's known manganese resources. This greenfield project will facilitate: ownership in manganese ore and ferro-alloys by previously disadvantaged communities, create employment opportunities in an area of high unemployment, and bolster export earnings for South Africa. ArcelorMittal has indicated its intention to secure its supplies of raw materials for steel production, such as coal, manganese and iron ore. -------------- ENVIRONMENT -------------- -------------- Plans for Carbon Capture and Storage PRETORIA 00002005 003 OF 005 -------------- ¶9. (SBU) Carbon capture and storage (CCS) is one of the recognized mitigation measures to lower green-house gas (GHG) emissions. The potential for CCS in South Africa requires an investigation into locating and characterizing suitable long-term geological storage sites for carbon. Large storage reservoirs are generally associated with sedimentary basins in which oil and gas occur. South Africa lacks these large natural reservoirs, but small sedimentary basins hosting gas and oil accumulations occur off South Africa's south and west coasts and may have some potential for large-scale CO2 storage. The onshore central basin of the Karroo Group also has substantial sedimentary formations that may offer CO2 storage opportunities. ¶10. (SBU) The newly established SA National Energy Research Institute (SANERI) together with a number of industry and government organizations have appointed the Council for Geoscience (CGS) and the Petroleum Agency of SA (PASA) to compile a CO2 Geological Storage Atlas of all potential CO2 storage sites in and around South Africa. The Atlas is due to be completed by December 2009 and will report on the methods and storage potential of all onshore and offshore basins. It will rank basins in terms of risk and geological settings, present storage options, provide maps showing the distribution of basins and geological and seismic profiles to support the findings. It will include an estimated storage capacity for each basin, the location of the main emission sources, and CO2 transportation issues. The Atlas will be carried out in five phases: -- storage site identification; -- investigation of potential sites; -- drilling sites to recover core for testing; -- modeling sites for CO2 injection and retention; -- conducting small-scale testing; and -- developing an integrated strategy for CCS. -------------- PLATINUM -------------- -------------- New Low-cost Platinum Smelter -------------- ¶11. (SBU) Existing platinum group metal (PGM) smelting/refining technology is relatively old and restrictive with regard to the ore it can treat. Each complex requires a minimum throughput of about one million ounces of PGMs per year to be cost-effective and is out of the reach of many junior producers now coming on stream. Mintek, the state-owned research organization, and Australian company Braemore have jointly developed the ConRoast process for the treatment of PGMs that will also give platinum juniors access to affordable smelting capacity. The process removes sulfur by roasting followed by smelting in a direct current (DC) arc furnace. The environmental benefits are considerable in that nearly all the sulfur is removed as a continuous stream of SO2, which can be fed to a sulfuric acid plant or to a CCS process. The technology allows great flexibility of ore types treated. ¶12. (SBU) Australian mining company Braemore is planning to build a 10-megawatt co-generation ConRoast smelter in Rustenburg, with the ability to produce 500,000 ounces of PGMs per year. The company Qability to produce 500,000 ounces of PGMs per year. The company also plans a 35-megawatt smelter for the high nickel-containing platreef concentrates from the Bushveld's northern limb. The ConRoast strengths include: the ability to handle the high-chromium UG2 reef and other chrome-rich reefs containing platinum, it is a smaller lower-cost plant with fewer process steps, and it does not impose limits on the quantities of base metals or sulfur contained in the concentrate. Braemore has proved the process at differing scales at Mintek and has achieved a 99% recovery of PGMs from UG2 ore. The technology appears capable of reducing capital and operation costs by 25% and 40%, respectively. Braemore plans to commission the UG2 smelter during the first quarter of 2010 and the Platreef smelter in the last quarter of the same year. -------------- ALUMINUM PRETORIA 00002005 004 OF 005 -------------- -------------- Coega Smelter in 2012 or 2018 (Maybe?) -------------- ¶13. (SBU) Power rationing and supply security considerations would prevent the construction or expansion of aluminum smelters until 2018, said BHP-Billiton's South African CEO Marius Kloppers on August 18. BHP-B operates and owns the Hillside and Bayside smelters in Richards Bay and 47% of the Mozal smelter in Maputo, Mozambique, plants which have been forced to cut production and expansions because of power restrictions. Kloppers' statement is relevant because BHP-B is currently bidding to take over mining company Rio Tinto, which is negotiating a new $3.25 billion, 720,000 ton per year, 1,350 megawatt smelter at Coega in the Eastern Cape Province with the SAG and Eskom. The uncertainty arose when state-owned Eskom's CEO stated in July that Eskom could not make any new connections until 2014, when it is expected that some new base-load power units will become operational. He said Eskom's reserve margin would drop to 2% in 2010 and then turn negative between 2011 and 2013 unless power savings of 5% to 10% were made nationally. ¶14. (SBU) Negotiations about the construction of an aluminium plant at the Coega deep-water port and Industrial Development Zone (IDZ) in the Eastern Cape Province between the SAG and French aluminium company Pechiney began in 2001. Pechiney was bought out in 2003 by Canadian aluminium producer ALCAN, which in turn was taken over by Rio Tinto in 2007 to form the world's biggest aluminum producer Rio Tinto Alcan. Later in the year BHP-B made a hostile take-over bid for Rio Tinto, and this is still on-going. Each merger further delayed the go-ahead for the project. The energy crisis in January, when Eskom declared "force majeure" on power supply to mines, caused Rio Tinto to re-think the power-hungry project, and on August 18 it put the project on hold until 2012. In a joint statement by Eskom and Rio Tinto on August 19, they said the aluminum smelter would still go ahead in 2012. (Comment. If construction in fact begins in 2012, the aluminum plant would be completed and ready to go in about 2018. End Comment.) -------------- GOLD -------------- -------------- Gold Firms Battle Costs and Falling Output -------------- ¶15. (SBU) New chief executives of Africa's three top gold producers are seeking ways to cut costs and expand output. AngloGold Ashanti, Gold Fields, and Harmony Gold (respectively, the world's third, fourth, and fifth-biggest producers) have benefited from a strong gold price that has tended to shield them from decreasing output and costs that are escalating at 25% to 35% annually. Gold hit an all-time high of $1,030.80 in March, but the global economic slowdown and strengthening dollar have seen prices tumble to around the $800 level. Given the current upward inflation spiral and faced with challenges of government interference, power shortages, deep hot mines, loss of skills, labor strikes, very hard rock, and Qhot mines, loss of skills, labor strikes, very hard rock, and falling productivity, it seems the only way out for South Africa's gold mining industry is a sustained increase of the gold price (analysts pose a minimum of $1,200 per ounce) and/or a weakening of the Rand currency. ¶16. (SBU) Gold analyst Nick Goodwin says that South African gold company margins are shrinking, shares of the big-three producers have underperformed their peers in North America and Australia, and they have failed to fully participate in the gold price rally due to a stronger rand, high costs, power shortages, and safety shutdowns. AngloGold is favored by investors compared to its African rivals due to a wider production base outside South Africa, which contributes about 40% of its output, as well as the group's relatively lower costs. Gold Fields has some 80% of its total output from South Africa, and virtually all Harmony's production (96%) is South Africa based. To mitigate the South African "effect", all three companies PRETORIA 00002005 005 OF 005 are looking to increase their overseas footprints. AngloGold has acquired mines in Brazil and Argentina, Harmony has the joint-venture Hidden Valley project in Papua New Guinea, and Gold Fields bought a $550 million Peru mine. BOST