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

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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 11, September 16-30, 2008

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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.
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HOT NEWS
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ASME Nuclear Codes and Standards
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2. (SBU) Some 400 delegates from South Africa's potential nuclear
supplier and service industries attended the ASME (American Society
of Mechanical Engineers) Nuclear Codes and Standards workshop held
in Johannesburg from October 7-9. The program included a technical
tour to Columbus Stainless, Africa's only stainless steel plant (see
below). ASME is a U.S.-based, independent organization that sets
globally-recognized performance, testing, safety and numerous other
standards and codes for engineering structures and components,
including nuclear. The purpose of the workshop was to explain and
promote ASME standards as a means for potential South African
nuclear industry suppliers to join the global supply chain, thereby
indirectly supporting Westinghouse's bid for new nuclear build in
South Africa. The workshop covered most aspects of the requirements
for certification of South Africa's developing Pebble Bed Modular
Reactor power plant, and for components used in nuclear plants that
may also be exported. The workshop was the joint initiative of ASME
and the U.S. Commercial Service based in Johannesburg.

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End of Commodity Super Cycle - Or Is It?
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3. (SBU) South Africa is a major producer of both precious and
industrial-use metals and minerals, which
in raw and processed form account for some 17-18% of GDP and more
than 50% of exports. The current global credit market turmoil and
the collapse of demand and prices for commodities have had a major
impact on producers, particularly those in emerging countries. The
global commodity price index for 19 raw materials has fallen by 43%
(equivalent to a loss of value of $281 billion at current production
levels) since it peaked in July 2008. This is more than the total
worth of the raw materials two years ago, according to the
Reuters/Jefferies CRB commodity price index. South Africa's major
commodity prices have fallen since July 2008 by: PGMs 67%, gold 26%,
ferro-alloys 12%, copper 52%, nickel 80%, lead 67%, stainless steel
36%, uranium 78%, vanadium 28%, iron ore 10%, and aluminum 36%.
Q36%, uranium 78%, vanadium 28%, iron ore 10%, and aluminum 36%.
Coal, diamonds, zircon, manganese ore, and titanium have generally
retained or increased their value. To add to South Africa's woes,
the rand/dollar exchange rate and the Johannesburg Security Exchange
(JSE) have both weakened by 40% since July/August, which raises the
specter of further inflation and interest rate increases, above the
respective current 13.0% and 15.5%. The good news is that crude oil
has fallen in price by nearly 60% and the refined products by some
13% at the pumps.

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PetroSA's 400,000 Barrels/Day Refinery
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4. (SBU) South Africa's National oil company PetroSA announced on
October 2 that it had received a manufacturing license for its
planned $5 billion, 400,000-bbl/d crude oil refinery. The Mthombo
refinery will be constructed in the Coega industrial development
zone (IDZ),located east of Port Elizabeth in the Eastern Cape
Province, and will probably include a new fuel products pipeline to

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Johannesburg. PetroSA CEO and President Sipho Mkhize said the
refinery would ease the country's current and projected fuel
shortage and was of strategic importance to economic development.
PetroSA previously announced its intention to dedicate the new
refinery for Venezuelan heavy oil (hoping for equity participation
from Venezuelan state oil company, PDVSA). Construction is expected
to start in 2010 and the refinery is scheduled to come on stream in

2014. The refinery would be the biggest in Africa and would create
about 25,000 direct and indirect jobs. Comment: This refinery would
take the place of the Alcan-Rio Tinto aluminum refinery which would
have been the anchor project for the IDZ and was placed on hold as a
result of the January power crisis. The PetroSA refinery also
provides additional energy resources to the energy-starved country,
rather than consuming it. End Comment.


5. (SBU) Neither the SAG nor the SA Petroleum Industry Association
(SAPIA) envisaged the need for more refining capacity prior to the
start of South Africa's economic growth spurt in 2003. Economic
growth has since outpaced fuel demand, refined fuel products have
now to be imported, and pipeline and road infrastructure is under
strain to move ever-greater volumes of refined products.
State-owned Transnet Pipelines is building a new pipeline from
Durban to Johannesburg and the private sector is planning one from
Maputo in Mozambique to Secunda in Mpumalanga to relieve the
transport problem. All of South Africa's refineries are old, are
surrounded by residential suburbs, and increasingly have to
implement costly retrofits to comply with new fuel quality and
environmental standards. Some have become uncompetitive, and the
private sector appears reluctant to build a new, state-of-the-art
refinery. (Comment. Critics opine that output from this new
refinery would far exceed South Africa's projected requirements and
could make existing refineries obsolete. The SAG's response is that
excess fuel will be exported to neighboring states. Other critics
note that state control of refined product prices has led to the
private sector's unwillingness to invest in additional refinery
capacity and the current domestic refined product shortage in the
same way that state control of electricity prices has led to the
private sector's unwillingness to participate in public private
partnerships to produce electric power and the current power
shortage. End Comment.)

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State-owned Mining Company Contradiction
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6. (SBU) Minerals and Energy Ministry spokesperson Sputnik Ratau
said at South Africa's Mining Summit on September 29 that there was
no plan "at the moment" to create a state-owned mining company.
Such a state mining company was proposed by the National Union of
Mineworkers (NUM). Ratau emphasized it was not government policy to
establish and control mines. Nevertheless, Department of Minerals
and Energy DDG Jacinto Rocha said at the Gordon Institute of
QBusiness Science (GIBS) mining panel discussion on October 8 that
the state intended to become involved in mining. He said a decision
had been taken to re-activate a pre-existing state-owned mining
company, but stressed there would be no wholesale nationalization of
mines. Rocha said the alternatives for the state were direct
involvement as a miner or indirect involvement as a shareholder,
particularly in platinum sector opportunities. Besides platinum,
the state would also consider opportunities in gold, uranium and
other strategic minerals.


7. (SBU) Rocha pointed out that the state had long been involved in
mineral ventures, including Alexkor diamonds and Foskor phosphate
mining, and it had established the national oil company PetroSA out
of other state-owned companies Soekor (petroleum and gas
exploration) and Mossgas (gas-to-liquid conversion). The state had
also established enterprises such as Iscor Steel (now MittalAcelor),
Columbus Stainless, and Sasol (coal-to-liquids),all of which had
since been privatized. He said the issue was not whether mining
companies were state-owned or privately owned, but whether they had
quality mining expertise and management. Rocha also referred to
neighboring Botswana and Namibia, where 50/50 joint ventures had
been established between the respective governments and De Beers in
the form of Debswana and Namdeb.


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ENERGY
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Proposed Energy Conservation Scheme
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8. (SBU) Eskom spokesperson Corrie Visagie announced that the
state-owned power utility hoped to implement its energy conservation
scheme (ECS) during the first quarter of 2009. The plan would set
out how much power users could consume over a 12-month period and
would levy considerably higher tariffs for consumption above this
amount. Although not fully finalized, Eskom has indicated that the
conservation rates would apply to customers using more than 100 MWh
per year or a maximum demand greater than 25 MW. Each customer
would be given an energy allocation based on the consumption during
the period October 2006 to September 2007, or before load-shedding
came into effect. The required savings for each customer class,
envisaged to reduce overall demand by 3,000 MW, is 8% for
agriculture; 10% for industry; 20% for the commercial sector; 20%
for the residential sector; and 25% for government and State-owned
enterprises.


9. (SBU) Visagie said Eskom would set rules to provide for changes
that may have taken place after the base period. Major mining
companies, which were already subject to a 5-10% cut, would be
exempt from further cuts. Visagie said the benefit of the
allocation was that the end-user would have the flexibility to use
energy as he/she sees fit. He said normal tariffs would apply for
the allotted energy used, but increased and punitive tariffs would
apply in cases where the end-user exceeded the allotted amount.
Visagie also warned that Eskom would be forced to revert to
load-shedding if the energy conservation scheme is not implemented.

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China's CTL Project with SASOL Progressing
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10. (SBU) China's Shenua Ningxia Coal Industry Group and South
African partner Sasol announced they had signed a contract on
October 22 with Foster Wheeler International Corporation and Wuhuan
Engineering Company to carry out a feasibility study for an 80,000
barrel per day coal to liquids (CTL) plant. The plant is to be
located at the Ningdong Chemicals Base in the Ningxia Hui Autonomous
Region of China. The Ningdong industrial region already has an
extensive infrastructural and industrial base, including power and
water supply, roads, rail, housing, and maintenance facilities. The
plant site is adjacent to huge coal reserves. The decision to
proceed with the feasibility study followed an announcement by the
National Reform and Development Commission of China that the
Ningxia/Sasol CTL project would continue, despite recent cut-backs
on other proposed CTL plans. China is seeking ways to meet its
increasing demand for environmentally friendly fuels and the CTL
route is seen as a promising option.

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Government Change Clouds Eskom Projects
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11. (SBU) Recent changes at the Department of Public Enterprise
(DPE),which runs state-owned power utility Eskom, may delay
Q(DPE),which runs state-owned power utility Eskom, may delay
projects to expand electricity generation and mitigate the country's
power shortage. New South African President Kgalema Motlanthe named
former Department of Justice Minister Brigitte Mabandla as the new
DPE Minister at the end of September. Analysts said Mabandla will
have to get to grips with plans to build a number of new power
stations and help Eskom raise cash internationally in the midst of a
global credit squeeze. Her term will last six-eight months before
the scheduled general elections, which leaves little time for
meaningful changes and the possibility that she will be displaced
after the April/May 2009 elections. One of Mabandla's key tasks
will be to approve the expansions mooted for power generation,
including the new nuclear power plants being contested by
Westinghouse and Areva of France. The nuclear decision has been
postponed on two occasions this year, but Eskom officials say that

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the decision will still be made before year-end. Analysts do not
expect Mabandla to radically change the current policy.


12. (SBU) Meanwhile, the electricity reserve margin remains
alarmingly low as Eskom starts its summer maintenance program and
Eskom's spokesman has affirmed that electricity supplies remain at
risk. Energy savings were instituted following the January power
crisis and there have been no significant power disruptions during
and since the (southern hemisphere) winter months. Consumers have
assumed a false sense of security because of this and the Department
of Minerals and Energy has warned that South Africa is "not out of
the woods yet," as far as electricity supply is concerned. Eskom
has started its summer maintenance season and has shut down some
units, so far without incident.

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GOLD
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Mars Bacteria Found in Deep Gold Mine
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13. (SBU) A team of scientists has discovered a strange breed of
bacteria living in a deep gold mine in South Africa. The
rod-shaped microbe, dubbed Desulforudis audaxviator (see picture in
e-mail version),can survive in complete darkness, without oxygen,
in temperatures around 600C, as long as it has a trickle of water
flowing through radioactive rocks. The bacteria derives energy from
the radioactive decay of uranium in surrounding rocks and gets
carbon and nitrogen, two of the building blocks of life, either from
dissolved gases or by cannibalizing other bacteria. The bacteria
was found living under such conditions in a 2.8 kilometer-deep gold
mine in South Africa. These mines contain gold, uranium, fossilized
carbon material, and moisture. "I would guess that an organism like
this would be ideally suited for the Martian subsurface," said
Princeton University microbiologist Doctor Onstott, one of the
microbe's discoverers. D. audaxviator takes its species name from
the Jules Verne classic "Journey to the Center of the Earth". The
research is significant as it shows the resilience of life on
earth's most extreme frontiers, but also because of the implications
for finding life elsewhere in the universe, said NASA's Astrobiology
Institute Director Carl Pilcher.

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STAINLESS STEEL
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Stainless Steel and Nuclear Power in SA
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14. (SBU) Stainless steel has unique properties that make it an
important material in the construction of nuclear plants and
structures in corrosive environments. Columbus Stainless Ltd is
South Africa's and Africa's only stainless steel producer and is a
fully integrated, high-tech facility. The facility is 76% owned by
the Spanish stainless steel giant Acerinox S.A., which produces some
11% of the world's stainless steel output. Columbus hopes to
provide its steel for a fleet of conventional pressurized water
reactors (PWR) and up to 25 locally-developed Pebble Bed Modular
Reactors (PBMR) mooted for South Africa over the next 25 years.
QReactors (PBMR) mooted for South Africa over the next 25 years.
Columbus also plans to export nuclear plant components, but will
need ASME accreditation if selling to the U.S. market. Columbus has
the capacity to produce 1 million tons per year of stainless steel,
including 600,000 tons of value-added cold-rolled steel. At the
time of the ASME-group visit, it was operating at 30-40% of capacity
due to the drop-off in export orders, particularly from China and
Asia, resulting from the current global financial turmoil. Columbus
exports nearly 80% of its production and is looking to increase
sales in the local and African markets.

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MINING
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Mining Industry Needs Skills
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15. (SBU) South Africa is not alone in facing the skills shortage
afflicting the global mining industry, which has been in growth mode
since about 2002. The current global financial turmoil may slow or
postpone some projects, but industry fundamentals still look good
for the medium-term as China, India and Asia may be able to sustain
their industrial growth. Growth requires mines and metals, but the
lack of qualified, experienced engineers and miners is likely to be
a major constraint to supply. The shortage of skills in the mining
industry is so acute, according to a report by Ernst & Young (E&Y),
that it is likely to persist even if 5%-10% of new projects are
halted.



16. (SBU) The skills shortage is serious in all countries, according
to the E&Y report, with Canada and Australia each estimated to need
an additional 70,000 to 80,000 workers over the next decade. E&Y
says the largest contributing factor to the labor shortage in South
Africa is the HIV/AIDS epidemic, followed by the emigration of
skills to developed countries. Estimates are that a third of South
African engineering graduates have emigrated over the past 40 years.
Shortages have pushed up salaries and forced mining CEOs to adopt
innovative methods of recruiting, training, and retaining skills.
Recruiters have to overcome the perception of mining as a
"stone-age" career with issues of health and safety, working in
remote areas, and mining as a sunset industry, instead of as a
modern, technologically innovative sunrise industry. World leader
in coal-to-liquid (CTL) technology Sasol recently announced that
they would provide an annual contribution of $3 million to South
African academia to develop world-class science and engineering
graduates, retain and attract talented academics to teach at
universities, and grow the engineering profession. This investment
is part of a $30 million ten-year commitment.

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The Fittest to Survive in the Mining Sector
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17. (SBU) The global financial turmoil could see the end for a
number of junior miners, but also presents the majors with
attractive buy-in opportunities to profit from the situation,
according to the Chief Executive Officer of U.S. mining company
Freeport McMoran. Analysts estimate some 50% of junior miners could
be out of buiness in a year's time. The fittest companies will be
well-placed to acquire properties at bargain prices and to profit as
the commodity cycle turns and demand for minerals resurfaces, which
is estimated to occur in mid-2009 (others say 2010/11). Currently,
all mining share and mineral price indices have suffered, with some
shares down by as much as 80%. At the same time, the combination of
rising capital costs for new projects and mining input costs
increasing by more than 20% per year is putting further stain on
under-funded juniors.

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Platinum Mining Takes the Hardest Knock
QPlatinum Mining Takes the Hardest Knock
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18. (SBU) The platinum group metals (PGMs) basket price for
platinum, palladium and rhodium is down by 55-68% (from $2,470 to
$750 per ounce),or by some 40% in rand terms as the currency has
weakened by 40% over the past few weeks. A Cadiz mining analysis
said that new capital expenditure on PGM mines could only be
justified if prices rise by 20% to 40% ($1,100-1,200 per ounce)
above current levels. African Rainbow Minerals platinum division
CEO Steve Mashalane said that 15 out of 27 PGM projects, mainly on
the Eastern and Northern Bushveld Complex, are unlikely to go into
production at current PGM prices.


19. (SBU) The collapse of PGM prices has placed many South African
platinum mines in "survival mode", said a PGM analyst, and cuts to
production and capital expenditure have become necessary. He said
platinum production is largely unresponsive to price until it drops
below a certain level, and thereafter it declines as lower-grade

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sections are closed and expansions are curtailed. The analyst
believes that once the platinum price drops below $1,100 per ounce
(it was $790 per ounce on October 24) there is hardly any growth
potential left above the current base production of 5 million ounces
per year. However, deep, hard-rock mining is not as responsive to
price changes in the short-term because of outstanding capital
commitments and large labor forces that can not easily or desirably
be retrenched every time metal price volatility results in low metal
prices.

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To Save Sterkfontein from Acid Mine Water
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20. (SBU) Watermark Global has selected the CSIR's (Council for
Scientific and Industrial Research) alkaline barium and calcium
(ABC) process as the best technical and commercial solution for
treating gold mine acid mine drainage (AMD) water. A
pre-feasibility study on the viability of treating AMD water from
the West Rand Witwatersrand Basin is currently being finalized. A
five-month pilot-scale operation has shown that the CSIR technology
meets the South African National Accreditation System standards for
industrial quality and potable water. Phase one of the project
would involve the construction of a commercial-size plant to treat
75 mega-liters of AMD water per day for industrial and/or domestic
consumption. The project is aimed at reducing the toxicity of water
flowing from defunct mines on the West Rand that threatens to flow
into the Cradle of Mankind World Heritage Site, including the
Sterkfontein and other caves which host evolutionary human and
humanoid fossils. The caves are composed of dolomite and could be
severely damaged by acid waters.

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DIAMONDS
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State Diamond Trader Seeks New CEO
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21. (SBU) The South African State Diamond Trader (SDT) CEO Abbey
Chikane's contract has not been renewed and no replacement has yet
been named. This follows the Trader's inability to supply
sufficient stones to the local small diamond-cutting industry, which
has seen the industry shed nearly 40% of its jobs over the past 18
months. An SDT spokesperson said the business of procuring rough
diamonds was continuing as usual. The SDT was established to buy
10% of the country's diamond production for sale to local small
cutters and polishers, in an attempt to boost local beneficiation
and create jobs, but has fallen short of meeting these objectives.
SDT management say they are awaiting approval from National Treasury
to increase its borrowing power, from the current $4.5 million to
$12.5 million per cycle, to enable it to purchase more rough stones.
There is currently some uncertainty as to how the organisation will
continue to operate.

LALIME