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

UNCLAS SECTION 01 OF 06 PRETORIA 002128 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 10, September 1-15, 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 -------------- -------------- SA Mining Output Falls -------------- ¶2. (SBU) Statistics South Africa (StatsSA) reported that total mining production dropped by 12.6% in July as the production of gold and non-gold minerals fell by 16.4% and 12%, respectively, compared with July 2007. The platinum group metals recorded the largest decrease of 32.8% compared with July 2007. This decline was mainly due to smelter problems and deferred maintenance, which would normally have occurred in the first half of the year. -------------- PetroSA's Coega Refinery May Treat Venezuelan Heavy Crude -------------- ¶3. (SBU) PetroSA Vice President of New Ventures Jorn Falbe said last week that PetroSA's proposed $11 billion Coega oil refinery project was the last opportunity for SA to build a refinery that would concentrate on handling heavy crude supplies from the Atlantic region to maximize economic returns. Such a refinery would source its crude from Venezuela, Brazil and Angola, reducing SA's traditional reliance on light sweet crude from the Middle East. This statement follows Venezuelan President Chavez recent visit to SA on September 2-3, which sparked renewed interest in the project. Chavez is believed to have an interest in the project as a means of both increasing the market for Venezuelan heavy crude and reducing Venezuela's dependence on the U.S. market for the same crude. Falbe said that, contrary to perceptions, the refinery would not be reliant on oil supplies promised by Chavez during his visit, since it could also count on potential supplies from Brazil and Angola, which have similar heavy crude deposits. A mission from SA will visit Venezuela during the week of September 22 to look into the possibilities of crude oil exploration (most probably in the Orinoco Belt) while a Venezuelan team will visit SA during the same period to look into the details of the proposed refinery and the use of bulk state-owned storage facilities at Saldanha Bay on the west coast. ¶4. (SBU) Falbe said the next six months would be critical for the refinery project as it moves into the front-end engineering and design (FEED) phase. HSBC has been appointed as a financial advisor for the project and the pre-feasibility study has been completed by Qfor the project and the pre-feasibility study has been completed by the KBR global engineering, construction and services company. The next step will be to select and engineering partner to complete the FEED study. PetroSA began with 30 potential partners and has reduced this number to four unidentified "global players". A final decision on the project will be made after the completion of the FEED study. Falbe said PetroSA found itself in the same position that state power company Eskom did a few years ago when the SAG declined to commit to major investments in the electric power sector. The implication is that if the SAG does not finance the project, SA will suffer refined product shortages or have to import these products. Falbe said that the refinery would be strategically placed to serve the rapidly growing Chinese and Indian markets and that the opportunity to build the refinery was "now or never". Minister for Public Enterprises Alec Erwin was reportedly committed PRETORIA 00002128 002 OF 006 to drive this refinery project forward, but he submitted his resignation on September 23, following the unexpected resignation of President Mbeki on September 20. -------------- ENERGY -------------- -------------- Major Miners Resist Self-Generation -------------- ¶5. (SBU) Major South African deep-level miners want to stick to mining and avoid generating their own electricity, except for emergency power. The Australian company Braemore has accused South African miners of being "spoilt" and pointed to Australia where many miners generate their own electricity. Chamber of Mines official Dick Kruger said self generation was not economically feasible in South Africa. Harmony Gold CEO Graham Briggs held a similar view, adding that the cheapest option for Harmony was to continue using Eskom's electricity, while assuring back-up for safety during power outages. Outgoing Gold Fields COO Terence Goodlace agreed and said that Gold Fields was accelerating energy saving rather than power co-generation. ¶6. (SBU) On the other side of the issue, emerging junior miners such as Wesizwe Platinum and Braemore Resources, with platinum properties on South Africa's Bushveld Complex, are taking self-generation in stride. Wesizwe is planning to co-generate its own power on a large scale at its new 230,000 tons-of-ore-per-month platinum mine in the North West Province. CEO Mike Solomon said this was an imperative because Eskom could not guarantee sufficient power for its new mine and they needed contingencies to prevent project and production delays. Wesizwe intends to install heavy fuel generators for back-up power supply. -------------- DIAMONDS -------------- -------------- SAG Intervention Loses Jobs in Jewelry -------------- ¶7. (SBU) "The introduction of the State Diamond Trader (SDT) has destroyed the local small diamond-cutting and polishing industry and has resulted in the loss of about 1,500 jobs (out of 2,500) due to its inability to supply gem-stones to the industry." So said United Diamond Association (Udasa) Chairman Ernest Malakoane at an association meeting in mid-September. Udasa's Deputy Chairman Derek Thema said the SDT Chief Executive Abbey Chikane had been dismissed. In addition, Udasa had decided to sue the Minister of Minerals and Energy and the SDT for losses suffered by its 200 members because of its failure to supply adequate diamonds. Before the introduction of the SDT, small cutters bought diamonds from De Beers' Diamdel (small diamond marketing) unit. Diamdel's role (and staff) has since been transferred to the SDT, a move that Malakoane called "a disaster". Malakoane blamed the state-owned Industrial Development Corporation (IDC) and Treasury for not providing SDT with sufficient funding to buy the gems required and noted that the downstream diamond industry was in chaos due to the new Diamond Amendment Act. The SDT began trading in January and can by law acquire up to 10% of locally diamond production from the mining industry's annual run-of-mine Qdiamond production from the mining industry's annual run-of-mine (ROM) output. ¶8. (SBU) (Comment. SDT's fumbling appears to be an unintended consequence of the skills shortage and inexperienced government officials getting involved in technically sophisticated commercial activities. For years the local diamond cutting industry pressed for legislation to force De Beers to sell locally, as opposed to getting an allocation of their composite global production. Cutters complained that De Beers' rough diamond pricing and marketing system discriminated against them and that they were capable of cutting any and all locally produced stones economically. De Beers' response has been that because of SA's relatively high wage structure, only stones above a certain quality and size can be cut locally. Cutters PRETORIA 00002128 003 OF 006 are currently receiving only 40% to 60% of required stones from the SDT and have been forced to shed staff. Problems facing the cutters and the SDT include: -- the SDT is purchasing less than the legislated 10% and only from De Beers, pending the determination of "fair market value" (FMV) for stones from other producers; -- stones from other producers are mainly alluvial and have a higher FMV; -- funding from Treasury, which regards the SDT as a pilot project, is inadequate; -- less than 50% of ROM stones can be economically cut in SA. End Comment.) ¶9. (SBU) The Jewellery Council of SA has confirmed that the South African Diamond and Precious Metals Regulator requires all white-owned micro-jewelers to submit plans to achieve 15% black ownership in five years as part of the country's Black Economic Empowerment (BEE) regulations. A goldsmith who works from home said she had been told that this applied to her one-person business, which she said was "totally impractical". A member of the Jewellery Council added that the regulation would also affect dentists and artists who work with gold and precious metals. Small jewelers claim they will lose their businesses if the BEE regulations are strictly applied. Spokesperson for the Department of Minerals and Energy Bheki Khumalo said the department was sympathetic and had communicated as much to the regulator. The regulator has an independent board that will have to rule on the matter. -------------- Petra Takes Over the Cullinan Diamond Mine -------------- ¶10. (SBU) The Petra Diamonds Cullinan Consortium (PDCC),led by a relatively minor BEE diamond miner Petra Diamonds, finalized the purchase of the famous 100-year old De Beers Cullinan diamond mine for $140 million in cash in July. The Cullinan kimberlite pipe hosts the world's second largest diamond resource by value and will transform Petra into a major diamond-producer. Cullinan's total underground resources consist of the B-Cut with an estimated 58 million carats, and the C-Cut with 133 million carats. Surface dump resources accumulated over more than 100 years of mining are an undetermined quantity, but are currently estimated at 17 million carats. Petra has estimated a mine production of 700,000 to 850,000 carats in 2008/09 and full production of 1 million carats per year from 2009-10, with annual revenues of around $100 million. Petra's acquisition of mines from De Beers continues with the latest transaction being the purchase of a 75% stake in the Williamson Diamond Mine in Tanzania for $10 million cash in August 2008. The mine made a $29 million loss in 2007. Petra also purchased De Beers' Koffiefontein diamond mine in July 2007 and has agreed to buy its Kimberley underground mines. De Beers' strategy is to sell its marginal South African diamond assets. Its last big transaction is likely to be the sale of its Namaqualand alluvial diamond mine on the west coast to mid-tier company Trans Hex. ¶11. (SBU) The Cullinan mine is renowned for producing some of the Q11. (SBU) The Cullinan mine is renowned for producing some of the world's most spectacular diamonds, including the famous Cullinan Diamond, which is the largest rough gem-quality diamond ever found, and more than 300 stones of over 100 carats each. The Cullinan diamond was found shortly after the end of the Anglo-Boer War in 1905 and weighed 3106-carats (621 grams or 1.37 pounds). It was cut into 105 stones including the 530-carat Cullinan 1 (the Great Star of Africa),and the 317-carat Cullinan 2 (the Lesser Star of Africa). Both the Great Star of Africa and the Lesser Star of Africa are in the British crown jewels. The share holders of PDCC comprise Petra and Al Rajhi Holdings, each with a 37% initial interest, and PDCC's Black Economic Empowerment (BEE) partners (26%),which meets the requirements of South Africa's Mining Charter. (Pictures of the original rough Cullinan and the cut Cullinan 1 were included in the e-mailed version of the Assay.) -------------- MINING -------------- -------------- PRETORIA 00002128 004 OF 006 Union Calls for a State-Owned Mining Company -------------- ¶12. (SBU) The new ANC-administration is likely to push for more government involvement in and control of (stopping short of outright nationalization) the country's strategic mining industry. As a first step, National Union of Mineworkers (NUM) President Senzeni Zokwana has called for the creation of a state-owned mining company. Speaking to delegates at the September Mining Summit in Johannesburg, he said that this would "create a new-culture mining company that cares - not only for shareholders, but also for workers". He said human resource development needed a lot of work and adult basic education and training should be encouraged, so as to fast track the development and promotion of those already in the industry. ¶13. (SBU) This idea was first mooted earlier this year by ANC Secretary-General Gwede Mantashe, who spoke about the creation of more State-owned enterprises, especially in the mining sector, and asserted that plans would move ahead when the new (post-Mbeki) government came to power. The NUM had also called for nationalization of coal mines following the power crisis in January, when insufficient coal stocks at power stations were said to play a role in the crisis. Zokwana softened this view by saying that establishing a state-owned mining company did not mean nationalizing existing operations, but that such a company would exploit the many greenfield projects that were still available, particularly in platinum, in partnership with private companies. He cited Norway, Botswana, Namibia, and Ghana, where the State holds interests in mining operations, and questioned why this could not be done in South Africa. -------------- - Zambian Windfall Tax Deferred (Contribution by Vedruna Santana, U.S. Embassy in Lusaka) -------------- - ¶14. (SBU) The Zambian Government (GRZ) introduced a new minerals tax regime in April 2008, which entailed a higher minerals royalty and corporate tax rate as well as a windfall tax ranging from 25% to 75%. Several international mining companies threatened to take legal action against the GRZ for introducing tax rates that violate the terms of their development agreements. According to recent reports, some of these companies have been reassessing whether they will continue operating in Zambia. These companies have expressed no difficulties with the mineral royalty and corporate tax adjustments, but describe the windfall tax as particularly onerous. The Zambia Chamber of Mines has re-opened a dialogue with the government to discuss the mining regime. ¶15. (SBU) The Zambia Daily Mail reported on September 10 that Secretary to the Treasury Evans Chibiliti, who appeared before a parliamentary committee on estimates, said that the GRZ had deferred its collection of windfall tax until discussions between the two parties are completed. He said the mining companies had appealed the windfall taxes to the late President Mwanawasa, who had asked Qthe windfall taxes to the late President Mwanawasa, who had asked the Minister of Finance to review it. He said government would defer the tax until it had concluded a proper assessment with the Zambia Revenue Authority. The parliamentary committee was informed that only two companies had paid the windfall tax so far. It is hoped that a compromise will be struck between the mining companies and GRZ for the benefit of the Zambian economy. Zambia's copper output for the six months rose to 286,750 tons, an increase of 20% over the same period last year, and is on course to reach 600,000 tons for 2008 versus 535,000 tons in 2007. Cobalt production rose 2,230 tons, an increase of 2% over the 2,188 produced in the first half of last year. -------------- Slow Mining Right Conversions Worry SAG -------------- ¶16. (SBU) South African Minister of Minerals and Energy Buyelwa Sonjica expressed her concern about the slow pace of mining rights conversions at a Mining Summit in Johannesburg on September 9. The Summit was convened to discuss transformation issues in preparation PRETORIA 00002128 005 OF 006 for review of the Mining Charter in 2009. She said less than 30% of old-order mining rights applications had been submitted for conversion and submissions close to the deadline of April 30, 2009 would create unnecessary bottlenecks in processing. On the issue of black economic empowerment (BEE),Sonjica stated that although there had been a number of large transactions in the sector, the issue of historically disadvantaged individuals fronting as legitimate BEE partners remained a challenge. She said that few of the empowerment transactions embraced the true spirit of broad-based BEE, which is to introduce effective participation of the historically disadvantaged into the SA mining industry. ¶17. (SBU) The Minister also urged mining houses to find more meaningful ways of working with local communities, and expressed worries about tensions between these communities and the mining companies. In this context, unions are planning to protest the mining sector's failure to provide power and infrastructure to rural communities from which they source labor. Sonjica said that communities would not oppose mining if they were meaningful beneficiaries and were consulted on mine development plans. She criticized comments by local analysts about disinvestment in South Africa and said the DME had constituted a task team to investigate such reports. She cited the South African Reserve Bank figures indicating progressive growth of fixed-capital formation in the mining sector from approximately $3 billion in 2004 to $5 billion in ¶2007. (Comment. The Minister made no mention of the much larger capital inflows into mining countries such as Australia and Canada during the same period, or the dearth of investment between 2000 and 2004, when mining companies were waiting for the new Act to be announced. End Comment.). Analysts cite the following as impediments to investment: lack of infrastructure and skills; power disruptions and shortages; distance to new markets, typically the Far East; the new mining and BEE legislation that have created investor uncertainty; and currency fluctuations. The minister claimed, without being specific, that the government had taken many steps to address these challenges. -------------- Mine Fatalities Down But Not Out -------------- ¶18. (SBU) The National Union of Mineworkers (NUM) has launched a series of one-day protests against on-going fatalities in mining (and other industries),despite an annualized 18% reduction in fatal accidents in 2008 compared to 2007 (132 deaths to September 23, 2008 compared to 221 for the whole of 2007). The NUM has proposed heavy fines and jail sentences for mine managers who fail to observe the tenets of the South African Mine Health and Safety Act (1996). NUM also blames government for a lack of qualified and experienced inspectors able to carry out routine mine inspections. Minister Sonjica said mine safety audits ordered by President Mbeki earlier this year had been completed and would be released after being presented to the President. A mining industry expert said the audit Qpresented to the President. A mining industry expert said the audit was not credible, due to skills shortages at the ministry. Official figures for deaths in other industries are not available, but a number of fatal accidents on construction sites and in factories have been reported. The mining industry has placed blame at the door of the SAG's black economic empowerment (BEE) policies because they claim it pushes inexperienced and unqualified people into positions of authority and leadership for which they are not yet ready. -------------- Titanium Mining Go-Ahead for Wild Coast -------------- ¶19. (SBU) A twelve-year-old turf battle between the Department of Minerals and Energy (DME) and the Department of Environmental Affairs and Tourism (DEAT) ended in July when DME approved titanium dune mining on the Transkei Wild Coast, located on the coast of the Eastern Cape Province. The DME granted Australian mining company Mineral Commodities (MRC) rights to extract titanium from the Xolobeni Mineral Sands project. The sand dunes are reported to contain over 346 million tons of titanium, with an estimated value of $1.46 billion, and in an area of high unemployment and rural poverty. A DME spokesperson was adamant that decisions on mining PRETORIA 00002128 006 OF 006 applications should not be driven "only by environmental issues", and must take into consideration the socio-economic circumstances of the communities in the area. ¶20. (SBU) the Department of Environmental Affairs and Tourism (DEAT) and an environmental group called "Sustaining the Wild Coast" maintain that the mining project would cause irreparable harm to the ecosystem, which includes internationally recognized unique biomes. They also claim that the environment, land, and mineral rights of local inhabitants will be violated. The DEAT minister nevertheless plans to streamline the processing of environmental applications so as not to hold up needed development. Environmentalists also object to a proposed coastal extension of the N2 national highway (which would also serve the mine) from Port Edward in KwaZulu/Natal to Port Elizabeth in the Eastern Cape. The existing highway goes inland and has little scenic attraction. A coastal road from Port Edward to Port Elizabeth would extend the touristically attractive Garden Route from Port Elizabeth to Cape Town and open 800 kilometers of Eastern Cape coastline to tourism and employment. -------------- NUCLEAR -------------- -------------- Nuclear Project Decision Process in Progress -------------- ¶21. (SBU) State-owned power utility Eskom said on September 16 that the procurement and investment decision process for the proposed Nuclear-1 pressurized water reactor (PWR) nuclear power stations is underway, noting that no decision had yet been taken. Eskom appealed to the media "and other interested parties" to allow space for the process to unfold and be concluded. One Eskom manager said the decision was imminent, but another spokesman said the decision would be finalized by year-end. Eskom is evaluating bids for the proposed nuclear power stations from two suppliers of PWR technology: the N-Powerment Consortium led by Westinghouse of the U.S, and the EPR Consortium led by Areva of France. The N-Powerment Consortium is offering three 1,140 MW AP1000 units for a total station capacity of 3,420 MW, while the EPR Consortium is offering two 1,650 MW EPR units for a total station capacity of 3,300 MW. The decision could be further delayed by President Mbeki's resignation on September 21 and the appointment of a new cabinet on the 25th. -------------- ENVIRONMENT -------------- -------------- Air Quality Monitors Measure Hot Spots -------------- ¶22. (SBU) The Department of Environmental Affairs (DEAT) and the Mpumalanga Provincial Department of Agriculture and Land Affairs (DALA) installed new air quality monitoring stations over a 31,106 square kilometer area encompassing a number of small towns in Mpumalanga Province. The region is noted for its concentration of coal-fired power stations, heavy industries, residential coal burning, and veld fires, all of which contribute to its severe air pollution problems. The DEAT Deputy Minister has stated that the new air quality monitoring stations will identify pollutants, Qnew air quality monitoring stations will identify pollutants, including benzene, carbon monoxide, lead, and sulfur dioxide, and the specific areas from which they come. The data collected will be made available to the general public and to relevant stake holders such as the Air Quality Officers Forum, which includes representatives from other effected municipalities. The deputy minister noted that DEAT would present identified polluters with proof of their pollution levels and would work with them to remedy the situation over a stipulated time frame. Polluters could be subjected to fines or jail terms if they failed to comply with quality standards and/or time frames. The monitoring stations were installed at a cost of $134,000 each, and were partly sponsored by the Royal Danish Embassy. BOST