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

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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 14, December, 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.

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HOT NEWS
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SAG Passes Contentious Mine Safety Law
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2. (SBU) South Africa's parliament has passed a new mine safety law,
which enforces stricter penalties and holds mine chief executives
criminally liable for deaths in their mines. The Chamber of Mines
(COM) has criticized the law as "too punitive" because it makes a
provision for increasing fines from $20,000 to $100,000 and includes
a criminal liability clause, whereby chief executives and managers
can be prosecuted should they be found guilty of causing serious
injury or deaths. The law is premised on the principle that the
responsibility for health and safety lies with the employers (owners
of mines). South Africa has the world's deepest mines and its
underground safety record does not match those of its peers in
Australia and North America. The National Union of Mineworkers
(NUM) statistics show that mine deaths in South Africa, the world's
largest precious metals producer, fell by 23% in 2008 (from 20070 to
the lowest since records began in 1904. NUM said that the decline
to 170 deaths was significant, but was still not a cause for
celebration. The government has still to issue the official death
toll.


3. (SBU) Inspectors started suspending operations at mines that
recorded a fatal accident after the death toll rose to 221 in 2007,
the first increase since 2002. A nationwide safety audit was
ordered by President Mbeki in October 2007 after more than 3,000
workers were temporarily trapped underground at Harmony Gold's
Elandsrand mine. Workers also started holding a day of mourning
after mine deaths. Mine unions welcomed the new legislation, but
argued for higher penalties. The new law, which must still be
signed into legislation, makes a provision for mine accident
investigations to be held within 10 days and a report to be
completed within 30 days after the accident. Mine safety inspectors
are also empowered to enter any mine at any time, question persons
and examine documents, and shut down mines if there is
non-compliance with safety instructions.

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Q --------------
ENERGY
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A Coal Roadmap for South Africa
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4. (SBU) South Africa has a coal-based energy economy where coal
provides some 89% of the country's electricity and more than 70% of
its total energy needs. Coal also provides some 22% of the
country's liquid fuel consumption. Export coal was South Africa's
third-largest mineral export in 2007, and contributed some $3
billion to foreign exchange earnings. The country has the largest
identified coal reserves on the African continent, estimated at
about 28 billion tons with a life of some 60 years at current and

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projected production rates. Coal resources in the ground (in situ)
have been estimated at well over 100 billion tons, but reserves are
dynamic and depend on technology, revenue-cost margins, and
socio-environmental issues. The problem facing both industry and
the government is the accuracy and reliability of the estimates of
quantity and quality of coal contained in some 19 distinct coal
basins spread from north to south across the eastern half of the
country. Numerous exercises have been conducted over the past 60
years, but none have proven to have long-term validity. The
proposed roadmap is an initiative of the Fossil Fuel Foundation of
SA and has received support from Anglo American, Eskom, Sasol, the
Chamber of Mines and the Department of Minerals and Energy. Its
purpose is to map the way forward for the production, use, and
policy determination for South Africa's coal.


5. (SBU) The first Coal Roadmap meeting to solicit industry support
and funding was held a year ago and a second report-back meeting was
held in December, chaired by Anglo American's head of energy Roger
Wicks. Wicks said that January 2008's energy crisis could have been
avoided had the coal roadmap been started five years ago. The
roadmap will research various components of the industry, local and
international factors that will affect coal in the future, and will
identify best options to follow for future development. It is
intended to bring together large and smaller producers and users of
coal, equipment suppliers, associations, and relevant government
departments.

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Independent Power Plant Negotiations
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6. (SBU) The delayed Department of Minerals and Energy
(DME)-spearheaded independent power producer (IPP) project is still
steaming ahead, and a new commercial operation date has been set for
mid-2011, according to DME Chief Director of Electricity Ompi
Aphane. Negotiations with a consortium led by Suez Energy of France
for the construction of two open cycle gas-turbine plants are
proceeding and should be completed by the end of March 2009, with
construction to start soon after. Aphane said the economic landscape
had changed since the start of the project, but he believed that the
peaking power plants still presented an investment opportunity for
IPPs. The project would add 1,000 MW to South Africa's electricity
grid, which came under severe pressure early in 2008. However, with
various project delays and industrial cutbacks, electricity demand
is likely to be lower than originally projected for 2009 due to the
current economic climate. The project entails a 750 MW power
station near Durban and a 330 MW plant at the Coega industrial
development site near Port Elizabeth. DME began negotiating with
Suez Energy after AES of the U.S. walked away from an earlier
agreement.

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New Coal Terminal at Richards Bay Unlikely
QNew Coal Terminal at Richards Bay Unlikely
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7. (SBU) A consortium is said to be planning a new 10
million-ton-per-year export terminal to be built adjacent to South
Africa's privately owned Richards Bay Coal Terminal (RBCT) in
Kwa-Zulu Natal. The new terminal would also be privately owned and
is intended to provide access to junior miners who were not granted
export allocations under the Phase 5 RBCT expansion. The expansion
is expected to be completed in July and will raise export capacity
from the current 76 million tons to 91 million tons per year. A row
has been brewing since the middle of 2008 when it became apparent
that Transnet Freight Rail (TFR) would not be able to deliver coal
at anywhere near the expanded capacity and that smaller producers
could lose their export allocations. RBCT is owned by BHP-Billiton,
Anglo Coal, Xstrata, Exxaro, and Total Coal.


8. (SBU) Coal industry sources are skeptical about these reports and
view the construction of a new terminal as unlikely. An
authoritative source believes the move is an attempt to put pressure

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on the RBCT owners to allocate more export quotas to BEE junior coal
miners. This has been a contentious issue for years and the SAG
only approved the Phase 5 expansion when terminal owners agreed to a
BEE quota, starting at one million tons per year and increasing
annually to the current four million tons. Subscriptions for the
Phase 5 expansion are heavily weighted in favor of BEE companies.
(Comment. The issue of additional terminal capacity to 91 million
tons is a moot one because neither the mines nor, in particular, TFR
appear capable of supplying coal at a rate sufficient to meet even
RBCT's present capacity of 76 million tons per year. There is also
some doubt as to whether the country's dwindling coal reserves could
support this quantity of exports, given that state power utility
Eskom will need some 50-60 million extra tons of coal for its new
and rehabilitated coal-fired stations. South Africa exported only
62 million tons of coal in 2008, down from 66 million tons in 2007.
End Comment.)

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MINING
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Gold Fields - "If we can't mine safely, we won't mine"
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9. (SBU) The South African mining sector has been severely
criticized over recent years for its safety record. The country's
mines are the deepest in the world, which brings with it issues of
seismicity (induced earthquakes),rock (pressure) bursts, falling
ground, heat, and technical challenges. Nevertheless, the industry
is constantly compared to its peers in Australia and North America,
where mining conditions are less onerous, and found wanting. The
pressure to improve overall mine safety has been driven by
government, labor unions, and society, but also by an enlightened
mine management intent on educating workers and enforcing safety
regulations. This concerted drive for mine safety is particularly
noticeable in the gold mines, but also in platinum mines.


10. (SBU) The top three gold miners, AngloGold Ashanti, Gold Fields,
and Harmony Gold, are under new leadership as are top platinum
miners Anglo American, Anglo Platinum, Impala Platinum, and Lonmin,
and some have made great strides in implementing safety procedures.
AngloGold's CEO Mark Cutifani recorded a fatality-free quarter in
June for the first time. Gold Fields' CEO Nick Holland has achieved
a 50% improvement in its fatality rate -- Holland coined the phrase:
"If we can't mine safely, we won't mine". Anglo American's new CEO
Cynthia Carroll has made mine safety a top priority, arguing that
safety and profitability go hand-in-hand. The new CEOs are having a
positive impact, giving credence to the concept that safety starts
at the top. Mine fatalities have fallen 50% over the past decade
and the sector has made giant strides from the 855 deaths recorded
in 1986. The question is, can the gains made this year be sustained
Qand improved upon?

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Global Crisis Hits African Mines
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11. (SBU) The global financial crisis and falling commodity prices
have dealt a major blow to mining-based African economies. The
commodity boom has turned to bust and some prices and company stocks
have declined by as much as 80% since July -- from over $2,000 to
$816 per ounce for platinum, from $8,000 to about $3,100 per ton for
copper, and from $55,000 to less than $10,000 per ton for nickel.
This has made it increasingly difficult to raise capital for new
projects and mining companies are scaling back operations and
expansions. The result has been retrenchments and the
implementation of emergency measures (extended periods of leave) to
prevent further loss of jobs. Zambia and the Democratic Republic of
Congo are some of the hardest hit in the region, while Tanzania and
Mali, which focus mainly on gold mining, have been less affected.
There has also been a slowdown in mineral exports from the region,

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which is placing strain on government revenues and the ability of
many African governments to meet poverty-alleviation targets.


12. (SBU) Africa holds an estimated 30% of the world's mineral
resources including 40% of gold, 60% of cobalt, 90% of platinum, 72%
of chromium, 80% of manganese, and approximately 65% of diamonds.
Diamond prices have fallen by 30% since October causing mining giant
De Beers to implement an extended leave period for workers. This is
likely to affect the world's biggest diamond producer Botswana,
where diamonds account for more than one third of GDP and 70-80% of
export earnings. In South Africa, the financial crisis has added to
the woes of the electricity crisis and sources say some 24,000
workers are facing redundancy. The reduction in growth in China has
significantly affected demand for both base metals and the platinum
group metals. The two positives are that gold has retained its
value and coal continues to be in demand.

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Task Team Tries to Save Mining Jobs
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13. (SBU) An agreement by a mining industry task team set up to save
jobs could help to save nearly 15,000 jobs that are at immediate
risk in the sector, according to union representatives. The task
team consists of representatives of the Department of Minerals and
Energy (DME),trade unions, and the Chamber of Mines and has agreed
to a non-binding six measures to minimize job cuts by reducing
mining costs, alleviating funding problems, removing impediments to
production such as power cuts, ensuring compliance with labor laws,
dealing with retrenchments, and looking at alternatives to
retrenchments and steps to mitigate the effects of retrenchments.
Retrenchments could grow to as many as 24,000 as a second wave of
restructuring notices have been issued.


14. (SBU) Solidarity union leader Dirk Hermann said the agreement
would help to reduce retrenchments by 40-60% and its most positive
aspect was the focus on alternatives to job cuts. The alternatives
that were agreed to include internal company transfers and
redeployment, temporary lay-offs, a shorter working week, reducing
bonuses for all including chief executives, and setting up
mine-specific task teams. The trade unions had demanded a
moratorium on retrenchments on December 1. The Chamber of Mines
rejected this demand and the industry task team was formed instead.
DME Director General Sandile Nogxina said the SAG had so far given
no consideration to what interventions might be possible if the
retrenchment situation worsened.

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Zambian Mines Close Production
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15. (SBU) The Zambian government (GRZ) has asked foreign mining
firms to use profits made during the copper boom to keep working
during the downturn. This follows an earlier announcement that
Luanshya Copper Mine (LCM) had suspended operations. LCM suspended
QLuanshya Copper Mine (LCM) had suspended operations. LCM suspended
their $354 million Mulyashi copper project, which had been due to
start producing 60,000 tons of copper in 2010. LCM then shut its
Chambishi Metals unit, the country's largest cobalt producer,
followed by the Baluba copper mine. LCM cited operational
difficulties arising from the global credit crunch as reasons for
the decision. Bank of Zambia Governor Caleb Fundanga expressed
optimism that copper prices would soon rebound but said the
developments at LCM were a threat to the country's copper industry
and economy. He said that although copper demand and prices were on
a downward trend it was too early for companies to leave in a rush.

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Katanga Halts Kolwezi Cobalt Production
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16. (SBU) Bermuda-based Katanga Mining has temporarily suspended
mining operations at the Tilwezembe open pit and processing at the

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Kolwezi concentrator in the Democratic Republic of Congo (DRC) due
to the depressed cobalt price. The company said it would sell down
its cobalt concentrate inventory during the last quarter of 2008,
and focus on its operations at the Kamoto underground mine, the T-17
open pit, and the Kamoto concentrator. Copper concentrate is to be
accumulated at its Luilu metallurgical plant for processing at a
later date.

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Glencore to Take Over Katanga Mining
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17. (SBU) The Swiss-based metal mining and commodities trading
company Glencore looks set to take control of Katanga Mining, which
owns one of the potentially largest copper/cobalt operations in the
Democratic Republic of Congo (DRC). Based on the eventual
structuring of an emergency funding package for Katanga of about
$515 million, Glencore could end up owning between 22.1% if other
investors come to the table and 83.7% if it provides the funds
alone. Glencore already holds an 8.5% stake in Katanga, earned by
providing financial assistance to Nikanor when the company
experienced capital overruns in 2007. In a Christmas Eve statement
Katanga announced that it was in serious financial difficulty and
that in the absence of immediate financing alternatives, it would be
unable to continue to operate as a going concern.


18. (SBU) Katanga holds a 75% stake in two joint ventures with the
state-owned mining company Gecamines. Katanga owned the Kamoto
Copper Company (KCC) and acquired the DRC Copper and Cobalt Project
(DCP) when it took over Nikanor in a $3.3 billion deal in early

2008. The merged operation was supposed to create the DRC's largest
copper/cobalt operation producing 400,000 tons per year of refined
copper and 40,000 tons per year of cobalt by 2011. Katanga has
since revised its production plan to 150,000 tons of copper by 2012.


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CAMEC Halts DRC Cobalt Operations
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19. (SBU) Emerging diversified miner Camec has announced a
temporarily halt to its copper and cobalt mining operations in the
Democratic Republic of the Congo (DRC). The decision is in response
to the sudden and steep decline in the demand for cobalt and copper,
particularly from China. The Company intends to monitor the
situation on a weekly basis and will recommence mining operations
when commodity demand improves. This decision affects the Mukondo /
Kakanda / Luita facilities in the DRC. During this next period
sales will be supplied from stock. The company also announced the
reduction of ongoing exploration across the group.

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Zimplats' Platinum Expansion in the Balance
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20. (SBU) Impala Platinum's Zimplats' Ngezi development project in
Zimbabwe has set out to raise funds for the completion the project
that would raise production to 160,000 ounces of platinum.
Qthat would raise production to 160,000 ounces of platinum.
Spokesperson Bob Tait emphasized that it was only the expansion that
was under threat and that Zimplats' current production of 95,000
ounces of platinum per year would continue uninterrupted. He said
that times were tough for capital raisings, but the project was
robust and would transform Zimplats to one of the lowest cost
producers in the platinum industry. The completed expansion would
enable it to operate profitably even at current metal prices and it
was critical that the project be completed. The Ngezi operation is
located on the Hartley Geological Complex on the Zimbabwean Great
Dyke southwest of Harare. The $340 million expansion project is at
an advanced stage with construction of two concentrators set for
completion in the first quarter of 2009 and also includes the
development of two new underground mines.

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Zimbabwe's Bindura Nickel Suspends Mining
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21. (SBU) Bindura Nickel Corporation (BNC) has placed its Trojan and
Shangani mines in Zimbabwe on care and maintenance with immediate
effect. The smelter and refinery operations will also be placed on
care and maintenance once stocks have been depleted. BNC said it
would maintain critical infrastructure and skills so as to allow
production to re-start under more favorable conditions. The company
is also investigating the potential for the resumption of smelting
and refining using third-party feedstock under existing and
additional toll contracts.

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Petra Diamonds Cuts Exploration
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22. (SBU) Petra Diamonds, which is 44% owned by the Saudi
Arabia-based Saad Investment Company, said it would cut its
exploration budget by at least 80%, citing the global economic
downturn as the main reason for the decision. Petra Diamonds, which
bought the famous Cullinan Mine from De Beers, announced that its
exploration spend on early stage prospecting in Angola and Botswana
and advanced exploration in Sierra Leone would be reduced to $5
million per year from a budgeted $25 million per year. Petra's CEO
Johann Dippenaar announced that the group had successfully
transformed to a strong diamond producer with substantial production
and revenue contributions from the Cullinan and Koffiefontein mines
and the Kimberley tailings dumps, properties it purchased from De
Beers. Its smaller Star and Helam fissure mines would be put on
care and maintenance.

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International Ferro Metals Halts Production
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23. (SBU) London-listed International Ferro Metals (IFL) has
temporarily halted ferrochromium production at its South African
operations in response to falling demand. Ferro-chromium sales will
continue to be supplied from the company's inventory, which stood at
38,000 tons at the end of October, but sales to China are to be
suspended until prices and conditions improve. IFL's two furnaces
have a capacity of 267,000 tons of ferro-chromium per annum.

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Not all Doom and Gloom in Mining
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24. (SBU) Harmony Gold raised $100 million by selling 10.5 million
shares on the open market and reaffirmed its capital expenditure
plans. Harmony plans to use the cash to reduce its debt levels to
zero by June 2009. The company also reported that it had repaid a
substantial tranche of a loan from Nedbank. The third-ranked South
African gold company confirmed that it would continue to develop its
pipeline of projects as planned, despite turbulent economic
conditions and outlook. The company has eleven underground mines
and one opencast operation in South Africa and is currently building
Qand one opencast operation in South Africa and is currently building
and expanding mines in South Africa and Papua New Guinea.

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Anglo Coal and Iron Ore Projects Still Flying
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25. (SBU) Anglo American's plans to cut capital expenditure by more
than 50% across the Group for 2009 has largely left its coal and
iron ore (through its 64% holding in Kumba Iron Ore) projects
untouched. The cuts would mainly impact expansion plans for its PGM
and base metals projects. The company said it will ensure that
state power utility Eskom's steam coal requirements were fulfilled,
but that it had curtailed plans to grow its coking and metallurgical

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coal production due to the expected cut in steel and ferro-alloy
output in 2009. About $400m in capital expenditure has been
allocated to steam coal projects in 2009.


26. (SBU) Anglo American Chief Executive Cynthia Carroll said the
company was planning a fourfold increase in iron ore production by

2016. Speaking at the launch of Kumba's Sishen Expansion Project
(SEP) in November, which features the largest jig beneficiation
plant in the world, she said that Anglo would be producing around
150 million tons of ore a year by 2016 and would have a 13% share of
the seaborne trade. Referring to the current global economic
turbulence, Carroll emphasized that Anglo was well-placed to weather
the storm and had both a healthy balance sheet and some of the most
highly rated mining assets in the world, the majority being
large-scale, long-life, low-cost operations. Kumba spokesperson
Tebello Chabana confirmed that Sishen mine would continue its
ramp-up of the new jig plant and that the Sishen South mine
expansion project was still on track to start production in the
first half of 2012. He said Kumba's total iron ore production was
tied up in long-term contracts, but there was now a greater emphasis
on quality/niche products rather than volume of output as was the
case earlier in the year when demand was greater.

LA LIME