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

UNCLAS SECTION 01 OF 05 PRETORIA 000381 SIPDIS 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 2, 1-15 February, 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 -------------- -------------- Mining Indaba: Africa is Oen for Business -------------- ¶2. (SBU) Record attendance of nearly 5,000 of mining's "who's-who" at Cape Town's annual Mining Indaba showed why it is the premier mining networking convention on the continent and on a par with the Canadian Prospectors and Developers Conference (PDAC) and the Australian Diggers and Dealers Conference (DDC). All aim to attract investment into their respective mineral sectors by providing the opportunity for prospectors, small exploration and mining outfits, and governments to display their mineral wares to international investors and the larger multinational mining companies, who are eager to acquire good mineral prospects and projects at the right price and profitability profile. ¶3. (SBU) Africa is emerging as a major global supplier of raw and processed mineral products in the face of a scramble for resources lead by the economic revivals of China and India and the growing industrial strength of other Far Eastern nations and Russia. Appropriately, the conference theme was "Africa is Open for Business". Despite the overall upbeat tempo at this Indaba, four issues caused it to be slightly less euphoric than last year's. These were: the energy situation confronting South Africa and its neighbors, the prospect of a recession in the United States that could dampen global mineral demand, the possibility of a slow-down in China's demand for raw materials, and the rising level of resource nationalism in a number of mineral and oil-producing countries. ¶4. (SBU) Nearly 5000 delegates from five continents heard sixteen African ministers extol reasons for investing in mineral projects in their respective countries. Five keynote addresses addressed topics ranging from infrastructure to global climate change, the possibility of a U.S. recession, reasons for continued bullishness of gold, and whether the synchronized commodities boom could become a synchronized bust. The potential global ramifications of these issues were discussed and mitigation possibilities put forward. ¶5. (SBU) Some seventy papers on thirteen strategic commodities and on individual mines and projects (including energy) were presented Qon individual mines and projects (including energy) were presented and provision made for scheduled group and one-on-one meetings with company and country representatives. The presence of numerous African Ministers and senior executives from the global mining and investment communities is indicative of the importance attached to the Indaba. These included the South African Minister of Minerals and Energy Buyelwa Sonjica, Anglo American's CEO Cynthia Carroll, De Beers' Managing Director Gareth Penny, and senior executives from major investment organizations and producers of gold, diamonds, platinum group metals, chrome ore and Ferro-chrome, and from biggest diversified multinational miners. -------------- Electricity in the air at the Indaba -------------- ¶6. (SBU) The topic of the potential impact of lower power supplies on South Africa's mine output and resource prices was low-key during PRETORIA 00000381 002 OF 005 formal presentations at the Mining Indaba. Nevertheless, it was a hot topic at many social gatherings as investors and producers mulled over the reasons and potential options for the country's flagging power supply. Uncertainty surrounds the state of power supplies since power utility Eskom asked miners to reduce their power usage by 10percent after a series of power cuts stopped mine production for five days in January. ¶7. (SBU) South African Minerals and Energy Minister Buyelwa Sonjica used her address to reassure delegates that solutions to the electricity shortage were being sought. She took pains to refute newspaper reports of her own department's energy inefficient conduct, which gained little sympathy from a critical audience, and she encouraged all mining companies to cut their power usage. The Minister later applauded Anglo American's Chief Executive Cynthia Carroll when she spoke of her company's energy-efficiency initiatives. ¶8. (SBU) The Minister said that a short-term solution to the power shortage lay in the current program of de-mothballing and recommissioning three power plants and constructing four 500 megawatt open cycle gas turbine generators - two have already been commissioned. This would help ease shortages over the next two years. South Africa also needed to embrace alternative power sources to deal with the electricity issues. Eskom plans to spend US$ 41 billion to boost power generation by 2013, but warned that it plans to start power rationing starting in March. Thus, power cuts (hopefully planned and communicated to users) are expected to continue intermittently until at least 2013. ¶9. (SBU) South African President Thabo Mbeki has apologized for the SAG's negligence that contributed to the power situation and described the power outages as a "national emergency". He said the government would give Eskom funds to help end the power problem that has cut the estimate of the nation's GDP growth for this year by some 1.5 percent - from 4.9 percent to about 3.6 percent. In his budget speech to parliament on February 20, Finance Minister Trevor Manual announced almost $10 billion in financial support to Eskom over the next five years. Given present circumstances, it is highly unlikely that the country can achieved the desired goal of a 6 percent growth rate by 2010. -------------- POWER -------------- -------------- Power Crisis Could Damage Long-Term Growth -------------- ¶10. (SBU) South Africa's energy crisis has caused short-term financial losses to large and small businesses and has been a great "inconvenience" to South Africans in general. A semblance of order and electricity management has taken root by way of commitments by consumers to reduce demand by 10 percent and power-rationing is set to kick-in in March - except for certain designated industries and strategic facilities such as oil refineries. Currently, electricity supply is reasonably stable at lower output and companies and government are looking at the longer-term impact of the energy Qgovernment are looking at the longer-term impact of the energy crisis. ¶11. (SBU) Nedbank Group Chief Economist Arthur Dykes warned that the electricity crisis threatened South Africa's productive potential and was more than a "simple constraint on a vital input". He said that the loss to production and sales in the short term by rationing could be simply calculated and would reduce GDP growth by some 1.5 percent in 2008. However, he said that if government's response to the crisis was not adequate, the gap between potential GDP and the "constrained outcome" would amount to "a huge R166 billion ($21 billion) in today's rands". ¶12. (SBU) Dykes estimates that the cumulative loss in GDP over a five-year period could amount to R377 billion ($50 billion) and that government could lose R100 billion ($13 billion) in tax revenue. To avoid this outcome, cutbacks must be carefully targeted at areas PRETORIA 00000381 003 OF 005 that would not reduce the economy's productive capacity. In the case of mining, the industry has been on an energy efficiency program for the past few years. Forced reductions from current levels would have direct, negative and possibly non-linear effects on output. A 30percent cut in electricity would force a total shutdown of production. The current 10 percent reduction would reduce output by more than 10 percent as some 50 percent of energy consumed in deep mining provides only for cooling, ventilation, and pumping. The remaining 50 percent is used for extraction, implying that a 10 percent overall cut in electricity effectively generates a 20 percent cut in production. This could entail a revenue loss of some $60 billion over five years for the gold and platinum mines at 2007 prices, which are now 30 percent to 40 percent higher. -------------- MINING -------------- -------------- Africa Demands More from its Minerals -------------- ¶13. (SBU) Despite an abundance of mineral resources in many African countries, Africans have generally not benefited greatly from mining activities and are now looking for a greater share of wealth from their natural resources. Much of this travesty is due to a lack of transparency in agreements between governments and mining companies, which determine the distribution of revenues, and to poor governance and corruption by the ruling elite in many African countries. It is ironic that Africa, with its vast mineral resources, remains the poorest continent in the world. ¶14. (SBU) A further problem is the general lack of negotiating capacity and experience in African governments that could lead to equitable and mutually beneficial contracts. This often becomes a politically and economically unstable situation when mines become highly profitable and governments come under civil society pressure to renegotiate contracts. This is always an unpopular event for companies and investors and also gives the country concerned a bad (investor) reputation. Renegotiation of the ownership and revenue distribution terms have taken place in many developing countries, from Papua New Guinea to South Africa, Botswana, the DRC, and Namibia as they have become more aware of the potential wealth being forfeited to offshore investors. This has been labeled mineral "nationalism" and is one of the issues being debated globally. -------------- GOLD -------------- -------------- Gold Production -------------- ¶15. (SBU) In the short-term, South Africa's gold production is estimated (by the Chamber of Mines and analysts for existing conditions) at 250-260 tons for 2008 and 245 tons for 2009. However, if gold mines have to operate at 90percent of normal power these figures could be lower by as much as 15percent to 20percent, namely about 220 and 210 tons for the two years, respectively, according to Gold Fields CEO Ian Cockerill. In the short term, the mines are likely to find it difficult to adapt to the reduced power allocation, but in the longer term, they should get back to near Qallocation, but in the longer term, they should get back to near normal production, bearing in mind that some 50 percent of power is needed just to sustain the deeper mines. Miners are confident that they can weather the current storm but there could be a substantial loss of reserves, employment, exports and delayed investment. ¶16. (SBU) South African gold output has seen an average decline of 4 percent per year over the past 28 years and this is likely to continue unless the price increases at a rate above that of costs. There are a number of major projects currently in the works, namely at least one new mine and a number of others under evaluation, including the re-opening of the central section of the Witwatersrand basin over a length of some 45 kilometers and to a depth of about 1,000 meters. There are also a number of large expansion projects PRETORIA 00000381 004 OF 005 underway that could add some 30 to 40 tons of gold over the next three to five years. ¶17. (SBU) In addition, if and when uranium production increases, this will further increase gold output as a by-product - uranium is associated with gold in the Witwatersrand gold field. However, whether this new gold will compensate for that lost through lower production (and closure) from the old deep-level mines remains to be seen. Exploration within and around the basin is on-going and one or more new discoveries, although highly unlikely, cannot be ruled out. A number of mines have reserves/resources and production plans for the next 25 to 50 years. -------------- SA Gold Production Could Reach a 100-Year Low -------------- ¶18. (SBU) Electricity supply has recently become the vexing question for gold-miners in South Africa. Gold Fields CEO Ian Cockerill said that mines could lose as much as 20 percent of production for as long as they received only 90 percent of their power needs. This reduced output, together with the closure of marginal shafts, could cause the country's gold production to drop to below 200 tons, a level last seen about 100 years ago. A power cut of 10 percent over a year equates to a foreign exchange revenue loss of about $1.5 billion at current prices and exchange rates. For over a century gold has been one of South Africa's major foreign exchange earners and a driving force behind the country's economy. -------------- In Brief -------------- -------------- Africa - Home to World's Most Wanted Minerals -------------- ¶19. (SBU) South Africa and the continent are rapidly being seen as the storehouse of a variety of strategic minerals and energy resources that are essential to industrial growth and economic development. There are virtually no minerals that Africa does not have in abundant and exploitable quantities, ranging from energy deposits of coal, oil, gas and uranium, to gold, platinum group metals, diamonds and gemstones, copper-zinc-lead base metals, cobalt, titanium, tantalum, rare-earths and the ferro-alloy metals of iron, nickel, chromium, manganese, vanadium and others. Africa also has abundant untapped and under-exploited resources for hydro, wind and solar power. Much of the new mineral development is being driven by demand from China, India, Russia and the Far East. -------------- Construction of DRC's Inga 3 Soon to Start -------------- ¶20. (SBU) The Western Power Corridor Company (Westcor) has announced the launch of the Inga 3 Hydropower Project on the Congo River in the DRC. The project is under the leadership of the African Union (AU) and developed by Angola, Botswana, the DRC, Namibia, and South Africa. The pre-feasibility study for the 4,300-megawatt base-load station was completed at the end of 2007, and construction is expected to start in 18 to 24 months. Westcor has called for expressions of interest from advisors and consultants in a number of Qexpressions of interest from advisors and consultants in a number of disciplines including legal, power systems, economic and financial, engineering, environmental, risk and project management, and quantity surveying. -------------- Eskom Needs Private Stopgap Power -------------- ¶21. (SBU) Electricity utility Eskom plans to turn to the private sector to build and operate base-load power stations. The aim is to plug a gap between the commissioning of two new coal-fired plants that are due to come on line in about 2012 and new nuclear capacity that should be commissioned in 2016. Eskom's head of generation, primary energy and the new build program Brian Dames said that PRETORIA 00000381 005 OF 005 additional power needs to be brought on stream between these two years and that Eskom plans to secure private sector participation in a new base load power station to ensure that in 10 years South Africa is not faced with power shortages again. -------------- - Eskom Needs 45 Million Tons of Additional Coal -------------- - ¶22. (SBU) Eskom seeks an extra 45 million tons of coal, worth between R11 billion and R22 billion, to restore its stockpiles to at least 20 days' supply. This is over and above its running requirement of 125 million tons used in 2007 and would be added systematically over the next two years. Under its contracts, Eskom pays on average $11 to $13 per ton for coal, but the 45-million additional tons would have to be bought at near export prices as high as $50 to $75 per ton. So far 34 million tons have been identified. BOST