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.

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No Delay in Expansion
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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

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production expansion at Sishen. End Note.)

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Majority for Export to China
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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.

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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.

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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

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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