FREE STATE STRUGGLES WITH GOLD GEOLOGY AND ILLEGAL MINERS

UNCLAS SECTION 01 OF 02 PRETORIA 001145

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E.O. 12958: N/A
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SUBJECT: FREE STATE STRUGGLES WITH GOLD GEOLOGY AND ILLEGAL MINERS

REF: A) Pretoria 842
B) 08 Pretoria 565

PRETORIA 00001145 001.5 OF 002


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1. (SBU) Summary: Gold-mining in the Free State Province is
emblematic of broad challenges in profitably mining gold in South
Africa. Controlling costs, managing labor, assuring safety and
power, and exploiting remaining low-grade deposits are difficulties
that have caused South Africa's production and ranking to slip over
time (Reftels). The Free State was once a significant contributor
to South Africa's ample production, but gold-mining there is in
decline as high-grade deposits have been depleted. Harmony Gold is
selectively developing and operating brown- and green-field
production around the Welkom area, but illegal mining is an
incessant problem given abundant abandoned, interconnected shafts,
nagging unemployment, and relatively high gold prices. The bodies
of 81 illegal miners were recently recovered from a derelict Harmony
shaft, apparently afflicted by an underground fire. End Summary.


2. (SBU) Minerals/Energy Officer and Specialist went underground at
two of Harmony Gold's Welkom, Free State mines - Target and Phakisa
- on May 27-28. The Embassy team visited with Harmony Free State
Chief Operations Officer Tom Smith in Welkom and earlier in the
month at the Johannesburg offices of Harmony's BEE partner African
Rainbow Minerals (ARM).

--------------
Harmony Targets Low-Grade Deposits
--------------


3. (SBU) Harmony Gold is one of the largest gold producers in South
Africa, accounting for about one-third of the gold produced in the
country. Harmony specializes in reinvigorating mature gold mines of
marginal profitability by applying low-cost methods of extraction
and refining for low-grade gold deposits in the Free State and
Northwest Provinces. COO Tom Smith told Minerals/Energy Officer
that 43 percent of Harmony's shareholders are in the U.S. The
largest shareholder at 16 percent is the BEE company ARM, thereby
allowing the company to comply with BEE and Mining Charter
requirements for black ownership. The company is also developing
gold mines in Papua New Guinea and Australia.


4. (SBU) Target Gold Mine encompasses a number of legacy mines
north of Welkom around the site of the first discovery of gold in
the then Orange Free State in the 1940s. The deep-level mining
currently occurs around 2,500 meters underground, targeting the El
Dorado reef mineralization. The Harmony Target Mine employs a
unique "massive" mining approach to exploit areas where a number of
economic gold-bearing reefs have been compressed and up-turned. The
company uses remote loaders in 15-25-meter dimensioned underground
chambers to assure safety from rock falls and fragmentation. (Note:
most deep South African mines use hand hydraulic drills to mine
narrow reefs. End Note.) The Target mine mined and processed
622,000 tons of ore to produce 2,644 kilograms of gold in 2008. The
Embassy team also witnessed the pouring of the final gold product
QEmbassy team also witnessed the pouring of the final gold product
into 23-kilogram, 90-percent gold bars, which are sent to the
company's refinery in Johannesburg.


5. (SBU) The Embassy team also visited the newly developed Phakisa
mine where management has devised some innovative projects,
including a "rail-veyor" for shipping the gold ore underground to
the hoisting shaft and a specialized ice plant for cooling of the
mine working areas. Harmony management at both mines described the
company's demonstrable commitment to worker safety and the company's
commitment to manage mine development and operations to control
costs. They were frustrated with the combativeness of the National
Union of Mineworkers (NUM) and the high cost of labor in the mining
sector (about 60 percent of operating costs). Both mines' deposits
exhibit unique challenges in profitably developing and exploiting
the mines. The neighboring mines of the Pamodzi Mining Company are

PRETORIA 00001145 002.3 OF 002


suffering a painful liquidation affecting thousands of workers,
showing that management has little room for error in controlling
costs and financing. Harmony is considering bidding on the
liquidated assets. Both mines' management said that HIV/AIDS was a
dire problem, estimating prevalence at 20 percent. They said that
some locals were "denialist" in their approach to the risks
associated with HIV/AIDS, as well as to the risks associated with
illegal mining.

-------------- --
Illegal Mining Highlighted by Rising Death Toll
-------------- --


6. (SBU) Harmony officials complained about the growing and
difficult problem of illegal or - as they label it - criminal
mining. The Free State is particularly susceptible to this threat,
because of the presence of interconnected, derelict and current
mine-shafts and high-carbonized gold reefs. Harmony claims it is
difficult to keep the illegals out of the shafts because they are
abetted and fed by legal workers. Over the past week, 81 dead
illegal miners have been brought to the surface and 294 illegals
have been criminally charged, in a sensational incident reportedly
related to an underground fire in an abandoned Harmony shaft.
Harmony has already been adopting measures to combat this problem,
such as tightened security, improved access control, and daily
search operations underground. Harmony has made clear that the
safety of its workers is its top consideration and it has refused to
send its workers into risky areas to search for illegals - alive or
dead. New Mining Minister Susan Shabangu visited Welkom and she and
labor unions called for a probe and a multi-stakeholder task force
to address this incident and the long-term problem. Smith told
Minerals/Energy Officer that rising unemployment and high gold
prices have fed illegal mining by both locals and foreigners from
Lesotho and Mozambique. A Lesotho official said one-third of the
dead illegal miners were from Lesotho. Mine employees are tempted
to profit by abetting the activities. He said it was difficult to
quantify, but as much as 100 tons of gold per year is reportedly
exploited by organized criminal syndicates. He complained that the
unions often are more concerned about protecting the rights and
interests of criminal miners than legitimate mining. Most recently,
Harmony announced the suspension of 57 of its permanent staff for
illegally processing gold.


7. (SBU) Comment: The Free State's historic mines show-case two
huge challenges, both with great public relations risks - illegal
mining and legacy tailings with environmental consequences. Harmony
appears to be working hard to manage these issues, but they add to
the existing threats of rising costs, labor complaints, and volatile
gold prices. Huge capital investment and operating costs are
evidenced by Harmony's average yield of 4-6 grams of gold per ton of
processed ore. This is an immense rock-moving (from deep in the
Qprocessed ore. This is an immense rock-moving (from deep in the
earth),milling, and processing business and margins are at risk
from both ends - rising costs and volatile prices. The Free State
faces declining production and employment, but Harmony intends to
keep extending the life of its mines, so there will remain some
gold-mining for the foreseeable future.

La Lime