SISHEN IRON REFUSES A PAUSE - EXPANSION ON TRACK

UNCLAS SECTION 01 OF 03 PRETORIA 002732 SIPDIS SENSITIVE STATE PLEASE PASS USAID STATE PLEASE PASS USGS DEPT FOR AF/S, EEB/ESC AND CBA DOE FOR SPERL AND PERSON DOC FOR ITA/DIEMOND E.O. 12958: N/A TAGS: EMIN EPET ENRG EINV ETRD ELTN SENV SF SUBJECT: SISHEN IRON REFUSES A PAUSE - EXPANSION ON TRACK REF: A) Pretoria 2586 B) Pretoria 2250 C) Pretoria 386 ¶1. (SBU) SUMMARY: South Africa's Kumba Iron Ore Mine at Sishen in the Northern Cape Province is gigantic by any scale, boasting a 12.5 kilometer-long open pit. Sishen produces 30 million tons per year, transported by dedicated rail to the Atlantic port at Saldanha (Reftel C). Most of the tonnage is exported to China and Europe, with most of the expansion of 13 million tons per year targeted solely for China. Dwindling Chinese demand is a worry, but Sishen majority-owner Anglo American believes that its niche, high-grade product can retain its market. Sishen's expansion investment in new processing equipment has already been made, so capacity will gradually ramp up to 53 million tons per year by 2013, including development of the separate Sishen South Mine. Kumba is small compared to the three iron-producing "big boys": Vale in Brazil and Rio Tinto and BHP Billiton in Australia. These three have announced significant cuts because of the steel industry slow-down, but Kumba counters that it can differentiate itself based on product grade, hardness, quality, and specificity. South Africa's Northern Cape Province remarkably also possesses 80 percent of the world's reserves of manganese, also an input to steel-making, and also vulnerable to global commodity gloom (septel). End Summary. ¶2. (U) Minerals/Energy Officer and Specialist visited Kumba Iron Ore Mine at Sishen in South Africa's mineral-rich Northern Cape Province at the southern part of the Kalahari region on December 2. General Manager Andrew Loots and his team articulated the mine's commitment to excellence, transformation, safety, and expansion. ¶3. (SBU) Anglo American is the 63.4 percent majority-owner of Kumba Iron Ore, with partners South African Industrial Development Corporation (13.1 percent) and Black Economic Empowerment (BEE) share-holders (23.5 percent). The latter hold the required 26 percent ownership in the operating subsidiary Sishen Iron Ore Company. The BEE partners consist of Exxaro Resources and community and employee shares. Apart from the Sishen Mine, Kumba owns a much smaller iron ore mine, Thabazimbi, in the Waterberg in Limpopo province. -------------- No Delay in Expansion -------------- ¶4. (SBU) Loots asserted that Sishen's expansion program is on track, despite announced cuts from the three giants in the global iron industry: Vale in Brazil and Rio Tinto and BHP Billiton in Australia. Chief Executive Chris Griffith recently told the press: "We'll be the last producers to cut back," adding that Sishen mines a niche type of iron ore that is "vital" for efficient operation of steel furnaces. "We haven't been asked by any of our customers to cut back," he said. Loots told Embassy Officers Sishen's ore is particularly notable for its high grade and hardness. There are two separate components of Sishen's expansion program. The Qseparate components of Sishen's expansion program. The 13-million-ton-per-year Sishen Expansion Program (SEP) investment in a more efficient beneficiation of the existing run of the mine is already ramping up. Current production of 30 million tons per year will increase to almost 40 million tons by 2010. In addition, Kumba is persevering with its separate expansion of Sishen South Mine by 10 million tons per year to bring total production to 53 million tons per year by 2013. Finally, Sishen has potential to expand all the way to 70 million tons. Loots admitted that the market would be depressed for 6-18 months while Chinese stockpiles draw down and/or the steel industry picks back up. (Note: Anglo American subsequently announced a decline in its capital expenditure program for 2009. Kumba Iron Ore said it would cut its 2009 capital expenditure by 20 percent. Management said production would continue to increase, but analysts believe this could delay PRETORIA 00002732 002 OF 003 production expansion at Sishen. End Note.) -------------- Majority for Export to China -------------- ¶5. (SBU) All of Sishen's production is shipped by a 861-kilometer-dedicated-rail-line to the Atlantic port at Saldanha, operated by state transport company Transnet. Loots said that Kumba worked very closely with Transnet to assure efficient operation and maintenance. Transnet is on track for provision of extra wagons to supply the expansion underway. Transnet operates a special port at Saldanha for the export of iron ore, visited by Minerals/Energy Officer and Specialist in February 2008 (Reftel C). Of Sishen's current production of 30 million tons per year, 24 million tons are exported and 6 million tons are dedicated to ArcelorMittal Steel at Saldanha. Loots said Sishen's product is priced on a spot basis, after the majors establish pricing on an annual basis. ArcelorMittal enjoys a concessionary cost-plus-3-percent pricing agreement. Loots was loathe to reveal Sishen's export pricing, but he asserted that Kumba could negotiate a niche premium to general spot pricing. He noted that general spot prices earlier in 2008 peaked at $170 per ton and have declined to as low as $65 per ton, comparable to pricing in 2006-07 at the start of the now-defunct commodity boom. -------------- Giant Pit and Complex Geology -------------- ¶6. (SBU) Loots said Sishen's open pit represented the largest single pit in the world. Sishen's high grade (over 60 percent) hematite iron ore exists in a sizable, complex deposit, subjected to historical lava flows and faulting. These reserves of over 900 million tons (providing a 30-year plus remaining life for the mine) form the bulk of South Africa's iron ore reserves, which rank ninth in the world. The current mine was developed in the 1970s and the open pit has been extended to 12.5 by 1.5 kilometers and 300 meters deep. The scale of the pit and the managerial acumen required to manage the mining and subsequent processing to assure quality control for seven separate products to suit customer requirements are impressive. Sishen employs sophisticated modeling and monitoring processes to track conventional pit mining processes of drilling, blasting, mining, truck and shovel hauling, and processing of the product. Embassy Officers observed substantial employment of Caterpillar equipment on the site. A special "pantograph" electricity-assisted system for pulling the haulers out of the pit is used more sparingly now to conserve power, thereby increasing diesel consumption. -------------- Beneficiation and Expansion -------------- ¶7. (SBU) The beneficiation and processing of the iron ore on site provides for an average increase in grade from 60-63 percent to 65-66 percent. The beneficiated output is then blended into six distinct "lumpy" or fine products. Sishen's beneficiation entails Qdistinct "lumpy" or fine products. Sishen's beneficiation entails primary, secondary, tertiary, and quaternary crushing; wet and dry screening; heavy medium separation, including cyclones and drums using atomized ferro silicon; and blending. ¶8. (SBU) The purpose of the Sishen Expansion Program is to produce up to 13 million additional tons per year from the existing mine by treating ore heretofore not economically beneficiated. This special process flow-line comprises crushing and sizing, "jigging" beneficiation, slimes and coarse tailings disposal sections, and final product stockpiling. The world's jigging expert proudly showed Embassy Officers his "baby", an eight section jig, whose performance was still being adjusted as production was slowly ramping up. The jig consists of vibrating screens subjected to PRETORIA 00002732 003 OF 003 vertical air-driven water pulsation and cross water flow to stratify mineral particles by their density. Valuable product and waste are separated using vibrating feeders and gates calibrated to remove the product at the required grade. Product is then de-watered on additional vibrating screens. Sishen will boast the largest and newest jigging plant in the world. ¶9. (SBU) Sishen has 8,567 employees, of whom 3,602 are contractors. The company houses 34,300 employees and family members in the nearby bedroom city of Kathu, which has many trees, or a few other smaller townships closer to the mine and its historic tailings dumps. The company continues to improve its safety performance and has achieved over 90 percent participation in HIV Voluntary Counseling and Testing (5-8 percent of those tested are HIV positive.) (Comment: The 10 percent that opted out of testing may include those who suspect that they are infected but do not want to find out. Consequently, the overall infection rate may be in excess of 5-8 percent. End Comment.) ¶10. (SBU) Management said it was working closely with a few universities and the Department of Minerals and Energy on the highest standard of land rehabilitation. Like most mines and industry, Sishen is struggling to maintain production in the face of ten percent electricity savings. Sishen has implemented water conservation and purification schemes, but must actively pump sizeable quantities of water out of the pit. This water is treated to use in the plant and to supply Kathu and neighboring rural townships. ¶11. (SBU) Mine management and employees face challenges residing in this relatively remote location, but many expressed the desire not to live anywhere else but in the Kalahari with its clean, big skies and little to no security worries. In this region, the Kalahari is semi-arid, slightly mountainous country with scrub Acacia thorn trees, rather than desert. Embassy Officers had the opportunity to visit Witsand Nature Reserve with bleached white sand dunes, thorn trees, Springbok, Gemsbok, and ample birds. There is a special allure to the Kalahari. ¶12. (SBU) COMMENT: The mineral wealth in this corner of the southern Kalahari is remarkable. Sishen and its smaller neighbors face not insignificant logistical challenges (distance and the limitations of state-owned Transnet) and an uncertain Chinese and global steel market. Sishen management is adamant in its story that it is special and its niche customers will stick to its unique products, but it is difficult to believe their expansion will not be affected by the global downturn. End Comment. BOST