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

UNCLAS SECTION 01 OF 08 PRETORIA 000972 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 5, April 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 -------------- -------------- Bad Week for Gold Fields -------------- ¶2. (SBU) The past week has seen 13 miners fatally injured at Gold Fields gold mines. The latest accident occurred on the morning of May 1 at the South Deep mine. Nine workers fell to their deaths when the steel rope on the service vehicle lowering them from level 105 to level 110 broke and they fell 60 meters. Eight were construction company employees subcontracted to the mine; one was a mine employee. The Minister of Minerals and Energy ordered the mine closed pending inquiry into the accident. The Minister expressed her sorrow for the victims and their families, and her anger and outrage at mine management for an "accident that should never have happened" had proper safety precautions and maintenance been undertaken. Gold Fields management maintained that the rope in question was inspected the previous day. They have suspended operations to inspect all similar rope systems. The operation should take five or six days. ¶3. (SBU) Two days earlier, four miners were killed in two separate mine accidents on Gold Fields mines. Three died in a seismic-related rock fall at the Driefontein mine. A fourth was killed by a fall of rock while drilling blast-holes at the South Deep mine. (Comment. Every effort is made by miners to secure working places, but it is not always possible to predict or prevent seismic events and rockfalls. However, proper inspection, maintenance, and attention to safety practices should prevent rope breaks and other machinery-related accidents. End Comment.) -------------- Eskom Suspends Load-Shedding -------------- ¶4. (SBU) Eskom has suspended load-shedding indefinitely after electricity experts warned that the practice was detrimental to its aging infrastructure. They warned that switching power on and off threatened the life of electrical equipment and increased its risk of failure. At least two sub-stations exploded during the past week plunging local communities into extended periods without power, allegedly because of load-shedding. Until now, the SAG and Eskom have insisted that load-shedding was the best strategy to conserve power. Cape Town also called on Eskom to implement different Qpower. Cape Town also called on Eskom to implement different energy-saving methods, arguing that load-shedding was not yielding the desired results. Cape Town technicians asserted that, instead of saving the required 10 percent on electricity usage, load-shedding was having the opposite effect. They said businesses and residents increased their electricity usage during times of electricity availability. This added to the pressure on the power grid and infrastructure. There are also indications that frequent turning on and off of household geysers is causing early failure of thermostats. -------------- Embassies to Visit DRC/Zambian Copperbelt -------------- PRETORIA 00000972 002 OF 008 ¶5. (SBU) A delegation of Economic and Energy/Minerals Officers and Specialist from Embassies in Kinshasa, Lusaka and Pretoria will visit copper-cobalt mines in the DRC and Zambia in mid-May. The purpose is to increase mission cooperation in reporting on energy and mineral developments in the region and to assist the USGS in the compilation of their annual commodity and country reports. The May issue of The ASSAY will include details of the visit. -------------- PRECIOUS METALS -------------- -------------- -------------- Fall in Precious Metal Prices - Global Confidence Returning? -------------- -------------- ¶6. (SBU) Platinum tracked gold lower to record a 6 percent fall to $1,933 per ounce in the third week of April. Strikes, power cuts and mine safety closures have disrupted South African production, leading to fears of a bigger platinum deficit in 2008 than 2007. Despite this prices have continued downward. Recent positive first-quarter earnings reports by U.S. companies and positive labor market data have fueled forecasts that the Federal Reserve will not cut interest rates further. This has caused the dollar to strengthen and platinum and gold prices to weaken. Global risk aversion generally has investors fleeing to the safety of precious metals. However, platinum and palladium (and gold) prices are also determined by supply and demand, and operating difficulties in South Africa, which accounts for 75 percent of global production, have caused both production and price volatility this year. ¶7. (SBU) A commodity research group GFMS reported that South Africa's platinum production in 2007 was 5.07 million ounces, a drop of 370,000 ounces on 2006 output. A similar decline is forecast for ¶2008. Companies reporting 2008 first quarter production compared to the previous quarter include: -- Anglo Platinum (Angloplats) refined quarterly output down by 24 percent to 428,600 ounces and an estimated fall of 120,000 to 150,000 ounces for 2008. -- Impala Platinum (Implats) estimated production down by 20,000 ounces for 2008. -- Lonmin (Lonplats) quarterly production down by 17 percent and a forecast cut of 10 percent in 2008 production to 775,000 ounces. -- Aquarius Platinum quarterly production down 19 percent and estimated full year output similar to 2007 at 520,000-530,000 ounces. -- Northam Platinum full year production estimated to be down by 16.5 percent to 301,500 ounces. All the above are predicated on there being no further deterioration of South Africa's power and safety problems. -------------- ENVIRONMENT -------------- -------------- SA Climate Change Strategy -------------- ¶8. (SBU) Fossil fuel-based industries are under pressure from the public, NGOs and governments to mitigate the emission of carbon dioxide (CO2). The major CO2 emitters in South Africa are the coal-fired power plants followed by Sasol's coal-to-liquid plant. Sasol is the highest single-point emitter of CO2 in the world. The QSasol is the highest single-point emitter of CO2 in the world. The SAG has yet to come to grips with CO2 emissions and the Department of Minerals and Energy (DME),the South African National Energy Institute (SANERI) and Industry have gotten together to develop a strategy to tackle the problem. South Africa hosted the Carbon Sequestration Leadership Forum (CSLF) meeting (chaired by the U.S. Department of Energy Secretariat) held in Cape Town, and the Fossil Fuel Foundation (FFF) conference held in Johannesburg, both in PRETORIA 00000972 003 OF 008 April. The purpose was to explore ways to efficiently capture and safely store CO2 in suitable underground geological storage formations for hundreds of years. A similar situation faces the nuclear industry for the storage of spent nuclear fuels and waste products. ¶9. (SBU) Fossil fuels, like coal, oil and gas account for about 80 percent of global energy usage. This is likely to remain the situation for decades until other bulk and versatile energy alternatives become available. Some authorities opine that oil and gas are nearing peak production, but coal is abundant and widely distributed geographically. Coal is likely to remain the energy source of choice and affordability for most countries, and particularly so for South Africa, which has large reserves of coal and very limited resources of oil and gas. South Africa also has large resources of uranium, and nuclear energy is planned to account for 50 percent of the new-build power generation over the next 20 years. Nevertheless, coal will dominate the South African energy scene for the next 30-40 years, and the ability to capture and store CO2 emissions is an important issue. Carbon capture requires technology, but storage requires suitable geology. South Africa has initiated the Project Atlas that aims to identify over the next one to two years suitable geological formations for CO2 storage. The goal of the global coal industry is to have at least 12 large demonstration storage sites in operation by 2020. -------------- ENERGY -------------- -------------- --- Eskom Defends Price Hikes - Capital Budget Soars -------------- --- ¶10. (SBU) Eskom has justified its request for a 53 percent real increase in its electricity tariffs by saying that the current rate is too low and consumers should carry the costs of increased fuel and coal prices. There remains considerable opinion that the increase will also be used to cover capital costs for new generation equipment. Eskom's budget for capital expenditure for the next five years has escalated from an initial $15 billion two years ago to the current $44 billion. Critics question why the company has done such a poor job of estimating capital costs since money for the new-build projects was in the pipeline as early as 2000. Eskom's response is that fast-tracking projects and the global demand for plant and equipment have substantially increased original estimates. At the same time, the National Electricity Regulator (NERSA) has given Eskom permission to have "commercially sensitive" information on its tariff increase withheld from publication. NERSA recently estimated that Eskom would earn an after-tax profit of over $1.5 billion if it achieved a 53 percent increase. Business Unity South Africa (BUSA) wrote to NERSA calling for its accelerated review of Eskom's tariff request to be abandoned to give stakeholders sufficient time to compile comprehensive responses. BUSA also called for greater transparency from Eskom and government, which has come out in Qtransparency from Eskom and government, which has come out in support of the price increase. -------------- - ANC and SAG Disagree on Energy Price Increases -------------- - ¶11. (SBU) South Africa's cabinet has said that state power company Eskom's request for a significant increase in electricity tariffs was understandable but premature. Cabinet qualified the request as a proposal subject to consideration by the regulator and stakeholders. The National Regulator (NERSA) announced that it would take three months to respond to Eskom's request. The government has supported the increase, saying it was needed to cover sharp increases in fuel costs and to implement Eskom's accelerated demand side management program. It also said that capital for the new-build program would be funded by other sources. However, the ruling African National Congress Party spoke out against the increase, saying that the price hike would have an adverse effect on the daily lives of the poor people as well as on inflation. PRETORIA 00000972 004 OF 008 -------------- The Negative Side of Boom Times -------------- ¶12. (SBU) South Africa is enjoying a prolonged commodity and economic boom. The upside represents more jobs and greater prosperity for many. However, the downside includes rapidly increasing costs and inflation, strained power and skill resources, and a substantial delay in delivery of new plant and equipment. For South Africa, this has meant that the inflation target range of 3 percent to 6 percent has been breached for the past 12 months and is likely to remain above 9 percent for the rest of this year. Basic food prices have escalated by nearly 100 percent, gasoline by 55 percent, and interest rates by some 47 percent over the past two years. It also means that the cost of power plants and equipment has doubled and that delivery times have lengthened. State power company Eskom initially estimated that the country's power crunch would last for four to five years or until new power capacity was installed. Recent statements by spokesman Andrew Etzinger seem to indicate that "crunch-time" has increased to seven years due to delayed decisions by Eskom/SAG and slower delivery expectations. ¶13. (SBU) Eskom's power solution for South Africa is to include 50 percent nuclear (20,000MW) in its new-build program mix. However, the rush to nuclear power, with Asian countries leading the charge, means South Africa's order of five or six reactors may be delayed by equipment supply constraints. Reports note that Japan Steel Works is the only factory in the world able to manufacture the central part of a reactor's containment vessel in a single piece - no joins that could be potential pressure weak-points. The company currently makes four such units per year and even if capacity were doubled this would still not be enough to meet demand. -------------- COAL -------------- -------------- New Coal Fields for Old -------------- ¶14. (SBU) South Africa's coal industry is increasingly looking to the Waterberg coalfield in northern-western Limpopo Province for future production. The Waterberg is estimated to contain some 50 percent of the country's coal resources, but this could be much larger considering that the field extends westwards into Botswana and may represent the eastward extension of a much bigger field. Estimates of Botswana's coal resources range from less than 100 billion tons to over 200 billion tons. The Waterberg already hosts the 17-million ton per year Grootegeluk coal mine that feeds the 4,000 MW Matimba power station. It will also feed the new 4,800 MW Madupi plant that is under construction. Matimba is currently the world's biggest dry-cooled plant, but Madupi will take the title when completed in about 2015. Further west, the Canadian company CIC Energy is negotiating with the Botswana government and Eskom to build the large Mmamabula mine and 4,900 MW power station (in two phases of 2,450MW each). The plant will be located on the SA-Botswana border and supply power to South Africa. Industry QSA-Botswana border and supply power to South Africa. Industry research association Coaltech's manager Johann Beukes estimates there is the potential for eight power plants on the Waterberg by ¶2026. ¶15. (SBU) South Africa still has substantial resources of coal in the ground in its main producing fields. It is the responsibility of the Department of Minerals and Energy to establish the country's reserve base, but they do not have the capacity to do the job. The bigger mining companies have a better knowledge of where the reserves are, but for competitive reasons do not divulge this information unless forced to do so. Reserves in the main coal-producing region of Mpumulanga are contained in a few large blocks, each of sufficient size to host 40 to 50-year life power plants or coal-to-liquid (CTL) complexes. The remaining reserves are in smaller blocks amenable to smaller-scale operations, which favor black economic empowerment (BEE) companies. Coaltech's chairman Dick Kruger estimates that production in Mpumulanga will PRETORIA 00000972 005 OF 008 peak at about 280 million tons in the next decade and then decline. Other analysts believe that production will not decline for decades, but that new mining could be constrained by water and environmental issues and by conflicts over land use. South Africa has some nineteen identified coalfields of varying size and coal quality. -------------- IRON and STEEL -------------- -------------- SA Seeks to Diversify Steel Production -------------- ¶16. (SBU) The SAG has been in dispute with (virtual) monopoly steel producer ArcelorMittal South Africa for a number of years over the companies import parity pricing model for domestic steel, which inflates local prices. The SAG wants Arcelor to adopt a developmental model that would allow local steel fabricators, manufacturers and users to be more competitive in the international market. A further aggravation for government is Arcelor's "sweetheart" deal with Kumba Iron Ore that allows it to purchase 6.5 million tons of iron ore per year on a cost plus 3 percent basis. As a consequence of high local demand for steel, the pricing policy, and the low price paid for iron ore, Arcelor is making very healthy profits on local sales. At the same time the high steel price is negatively affecting heavy steel users. A number of companies recently took Arcelor to the Competition Tribunal and the company was fined $100 million last September for "excessive pricing". Not withstanding, Arcelor raised prices on four consecutive occasions during 2008. ¶17. (SBU) The SAG plans to make a decision in September on the feasibility of helping to build a new steel plant that will provide needed competition for Arcelor. The Minister of Trade and Industry has said that the government is considering several initiatives, including a plant in Mozambique, to expand the manufacturing sector by making steel available at prices below those charged by Arcelor. State mining research organization Mintek and the Mozambican government are studying the feasibility of constructing a steel mill in Maputo. Enron Corporation originally proposed the mill in 1997, using magnetite from the Palabora Copper Mine tailings dump, located in South Africa a few kilometers west of the Kruger National Park. The plan lapsed because of the demise of Enron and environmental concerns regarding the proposed transport route, which was to be through the park. -------------- MINING -------------- -------------- Energy Crunch Impacts on Mining Output -------------- ¶18. (SBU) Statistics South Africa (Stats SA) said in its monthly publication that South Africa's total mining output fell by 7.3 percent year-on-year in February. Gold production declined by 28.2 percent and non-gold production by 3.2 percent. The lower February figures followed on January's 10.7 percent decline in mining output. During that month gold production took the biggest knock, falling by 16.5 percent, PGMs fell by 15.9 percent, and coal fell by 12.5 Qby 16.5 percent, PGMs fell by 15.9 percent, and coal fell by 12.5 percent. The mining industry was hard hit by the national electricity crisis in January and February, and total mining production for these two months declined by 5.2 percent, gold declined by 11.1 percent and non-gold minerals by 4.1 percent. Stats SA attributed the drop to lower production of platinum-group metals (PGMs),gold and diamonds. Total gold output for South Africa in 2007 fell by 6.5 percent. However, due to massive commodity price increases Stats SA reported that the value of South Africa's mineral sales increased by 13.5 percent in the three months ended January 2008. This was mainly due to higher prices for PGMs, coal, manganese ore and iron-ore. PRETORIA 00000972 006 OF 008 -------------- Cynthia Carroll Wins Mining Rights for Anglo -------------- ¶19. (SBU) From the moment Cynthia Carroll took over the reigns as CEO of Anglo American in October 2006, a cyclone seemed to rip through the world's third largest mining company. In its wake it took a number of subsidiary company CEO's and senior staff who had failed to meet her safety and efficiency standards. Her biggest coup however, was the relationship she quickly established with Minister of Minerals and Energy Buyelwa Sonjica, which was evident at the 2008 Mining Indaba in Cape Town. Anglo has not been a "favorite son" of the new ANC-dominated regime for a number of reasons. These related to Anglo's dominance and size in the South Africa economy and the perception that it helped sustain the previous government. Anglo has faced a number of government-related hurdles in converting existing mining and exploration licenses, and in obtaining new licenses as prescribed by the Mineral and Petroleum Resources Development Act (2002). Prior to Carroll's arrival, Anglo had numerous pending license applications and had on a few occasions resorted to the courts to force the Department of Minerals and Energy (DME) to process them. The DME-Anglo relationship could only have been described as "frigid". ¶20. (SBU) Then came "Cyclone" Cynthia. Cynthia Carroll has been referred to along some corridors of mining power as 'Cyclone Cynthia' because of the gusto with which she tackles tough issues. With unprecedented success she has been awarded new-order mineral rights for Anglo's South African operations. The only remaining loose ends relate to Anglo Platinum's 50:50 joint ventures (JV) with black economically empowered (BEE) mining companies Royal Bafokeng Resources and African Rainbow Minerals (ARM). These apart, Carroll has been awarded new mining rights for Anglo's coal, ferrous metals, base metals and other platinum projects. Anglo Platinum now has conversion of rights in everything but the above two specific transactions, which are being worked on with the joint venture partners, and, according to Carroll, completions are imminent. -------------- Senior Mining Resignations and Skills Exodus -------------- ¶21. (SBU) Gold Fields CEO Ian Cockerill became the fourth South African mining chief within a year - third in the gold sector - to announce his resignation. His departure follows the resignations of Anglo Platinum CEO Ralph Havenstein, Harmony Gold CEO Bernard Swanepoel, and AngloGold CEO Bobby Godsell. Cockerill has since been appointed CEO of Anglo American's coal subsidiary, Anglo Coal. Gold Fields Chief Financial Officer Nick Holland has held the post of for ten years and has been appointed to succeed Cockerill. ¶22. (SBU) Much of the skills exodus of both senior and middle mining management has been attributed to government interference, growing concerns about the power crisis, political transition, and an Qconcerns about the power crisis, political transition, and an upsurge in crime. Mining academics at the Witwatersrand School of Mining Engineering are being headhunted by Australian and Canadian companies at salaries three times higher than paid locally. South Africa continues to provide a good training ground to meet the skills demand of overseas mining companies. -------------- DIAMONDS -------------- -------------- Visit to Historic Kimberley -------------- ¶23. (SBU) The Embassy Minerals/Energy Officer and Resource Specialist were hosted by De Beers to see their historic and current operations in Kimberley in the Northern Cape on April 3. De Beers no longer has active mines around Kimberley, having sold them to Petra Diamonds, but they have a plant to recover diamonds lost to the tailings dumps decades ago when technology was rudimentary. The diamond concentrate recovered from dump re-treatment, together with PRETORIA 00000972 007 OF 008 that from their other South African production is processed, sorted and classified at the Combined Treatment Plant in the Harry Oppenheimer House located in the center of Kimberley City, which is run by De Beers' Diamond Trading Company (DTC). ¶24. (SBU) In the past, all diamonds mined by De Beers were sent to London to be aggregated with its global production, and a quantity equal in value but not the original quantity was returned to South African to be cut and polished by local cutters. This was long a sore-point with cutters and government, as they perceived that the returned diamonds were not sufficient to grow the industry. Under South Africa's new mineral beneficiation policy, which has also been adopted by Botswana and Namibia, the newly established State Diamond Trader may request that up to 10 percent of all production be sold to it for resale to local cutters, and that 40 percent of the remainder be sold into the local diamond industry. The remainder can then be exported in rough without payment of a 5 percent export tax. De Beers pointed out that they have happily abandoned their old monopolist ways and are now just a market leader, having settled their various anti-trust and class-action suits in the U.S. and the E.U. -------------- AFRICAN MINING -------------- -------------- Flooding at Tanzanite Mines -------------- ¶25. (SBU) More than 65 miners drowned in Tanzania after floods swept through a remote tanzanite gemstone mine near Mount Kilimanjaro in late March. Eight pits were inundated, drowning the miners. Torrential seasonal rains have hammered much of East Africa and floods have killed a number of people in neighboring Kenya and Uganda. Mining accidents among informal (artisanal) miners are relatively common in Tanzania, which is the continent's third biggest gold producer after South Africa and Ghana. Mererani lies to the south of Arusha, and is the only place in the world where the violet-blue gemstone tanzanite is mined. Tanzanite was discovered in the late 1960s and is still mined in some pits using crude, unsafe methods and technology by small-scale operators with little capital and training. ¶26. (SBU) Tanzania's government licenses the tanzanite mines and most miners work independently and normally use ropes to lower themselves into shafts dug by hand. More than 100 people died in 1998 when heavy rains flooded the mines, and 39 tanzanite miners suffocated to death in 2002 after inhaling carbon monoxide produced by a dynamite explosion in the mine shaft. The government suspended mining operations in the area after the latest flooding accident. London-listed TanzaniteOne also operates formal tanzanite mines in the area and this has caused major disputes with the artisanal miners. -------------- Potash in the Republic of Congo -------------- ¶27. (SBU) MagMinerals, a subsidiary of Canada's MagIndustries Corporation, is set to put the Republic of Congo (not to be confused with The Democratic Republic of Congo or DRC) back on the map as a Qwith The Democratic Republic of Congo or DRC) back on the map as a potash producer. The GOC has granted the company a 25-year Mining License for its 2,200-square-kilometre Kouilou concession. The planned Kouilou Potash Mine project is located 16 kilometers east of the Atlantic port city of Pointe-Noire, and promises to produce 1.2 million tons per year of potash when ramped up to full production. The government will retain a 10 percent free carried interest in the mine. The final feasibility study showed that the first phase of mine development would require $723-million for a 600,000 ton per year operation to produce granular potash. ¶28. (SBU) MagMinerals plans to build, own, and operate a stand-alone potash facility to be situated next to sister company MagMetals' brine mining field. Five commercial scale exploration wells are PRETORIA 00000972 008 OF 008 currently being developed. The potash facility will be located adjacent to the proposed site of the magnesium plant and smelter being developed by MagMetals, where annual production of 600,000 tons of magnesium cathode is envisaged. The plant is a modular design, which would allow additional 580,000 ton per year units to be added over time to fully utilize the extensive resource base. It will use proven solution mining technologies to exploit the deposits, which resource has been estimated at some 800 billion tons. MagIndustries initially decided to mine magnesium, not potash, but potash prices are currently bullish while those for magnesium have remained relatively flat under pressure from subsidized supplies from China. The company is also refurbishing the small Inga I and Inga II hydroelectric power plants for its own use and to sell power locally and regionally. BOST