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

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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 6, June, 2009

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.


2. (SBU) CONTENTS:

HOT NEWS
Mining Production Down in May

ENERGY
Sasol-Uzbekistan Gas-to-Liquids Venture
GTL Plant Looking for New Gas
Anglo Platinum Fuel Cell Power
Eskom Gets 31.3% Tariff Increase
Eskom Coal Gasification Plant
Eskom Build Plan

MINING
Tata Eyes Coal Production in Mozambique
Mine Hostages Freed
Mine Labor Negotiations and Wage Gaps
Free Market or Nationalized Mining
Travails of Anglo American

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HOT NEWS
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Mining Production Down in May
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3. (SBU) South African mining output fell by 14.5% in May
year-on-year as major companies, including Anglo Platinum and
Xstrata, cut production after slowing global economic growth reduced
the demand for commodities. Mineral output other than gold fell by
15.1%, while gold production declined by 10.5% and local diamond
production by 62.4%, according to Statistics South Africa. Anglo
Platinum and Lonmin, the world's first and third biggest platinum
producers, shut mines in South Africa on slumping demand for the
metal, which is used mainly in jewelry and anti-pollution devices
for cars. Xstrata and Samancor, the world's biggest ferrochrome
producers, also closed furnaces. April's mineral sales dropped by
19.4%, to about $2.5 billion, and non-gold minerals dropped by
23.8%. Diamond production in May fell 1% compared to April and rose
by 1.9% for the three months ending 31 May, compared to the previous
quarter.

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ENERGY
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Sasol-Uzbekistan Gas-to-Liquids Venture
--------------


4. (SBU) Sasol, South Africa's coal-to-liquid fuels and
petrochemical producer, announced on July 15 that it has signed a
Joint Venture Agreement with Uzbekneftegaz (the National Oil and Gas
Company of Uzbekistan) and Petronas of Malaysia for the development
and implementation of a gas-to-liquids (GTL) project in Uzbekistan.

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Sasol's Group General Manager, Petronas' Vice President, and
Uzbekneftegaz's Chairman of the Board of Governors met with the
Deputy Prime-Minister of the Republic of Uzbekistan for the signing
ceremony in the country's capital of Tashkent. The GTL facility
will employ Sasol's proprietary Slurry Phase Distillate (SPD)
process to annually produce some 1.3 million tons of superior
quality products such as diesel, kerosene, naphtha and liquefied
petroleum gas (LPG). According to Sasol, its SPD is sought after
worldwide as the process produces a clean-burning, high-performance
fuel for diesel engines. The project now moves into the feasibility
phase, which will be overseen by a joint venture company to be
formed between the three partners.

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GTL Plant Looking for Gas
--------------


5. (SBU) State-owned oil company PetroSA's Mossel Bay gas-to-liquid
(GTL) plant is expected to run out of natural gas supply by 2011.
The company is currently in talks to import 500,000-700,000 tons of
liquefied natural gas (LNG) a year to help extend the life of its
refinery to beyond 2015, according to PetroSA's vice president for
new upstream ventures, Everton September. The process converts
natural gas into high quality, zero sulfur, diesel, petrol and
kerosene and the products are sold into local markets through major
company retail outlets. PetroSA is currently looking for
close-to-shore sites for an LNG offloading facility to minimize
costs and transmission risks, but is meeting with resistance from
wealthy home-owners who want the facility further away. The
estimated cost of the offloading facility is $250 million and the
company is also planning to spend $650 million to explore for new
gas reserves. September said PetroSA was also in discussions with
U.S. company Forest Oil regarding the development and supply of gas
from their off-shore Ibhubesi gasfield.


6. (SBU) Limited gas resources off the west and south coasts of
South Africa and Namibia have been known for decades. The south
coast reserves have been exploited since 1992 to supply the world's
biggest commercially operating gas-to-liquids (GTL) plant at Mossel
Bay. The Ibhubesi gasfield off South Africa's west coast is
70%-owned by U.S. company Forest Oil. Ibhubesi's resource has not
been fully defined, but is large enough to move ahead, according to
Forest Exploration International commercial director John Langhus.
The company is awaiting production rights from the Department of
Minerals, and if granted, could start production in 2012. The gas
is likely to be used for electricity generation, with an initial
production of 100 million cubic feet per day, rising to about 225
million cubic feet per day in the future. Langhus said the initial
supply would be sufficient to power a base-load 700 megawatt
combined-cycle gas turbine (CCGT) or a 400 megawatt peaking power
open-cycle gas turbine (OCGT). The Kudu gasfield off the Namibian
Qopen-cycle gas turbine (OCGT). The Kudu gasfield off the Namibian
west coast, when operational, is expected to provide the bulk of its
gas to the Cape. The South African company Gigajoule has announced
a $300 million investment in infrastructure to transport the gas to
industries in the Western Cape. It has applied to the National
Energy Regulator (Nersa) for a license for this purpose and has
signed a MOU with Tullow Oil, 70% owner of Kudu, for the supply of
gas.

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Anglo Platinum Fuel Cell Power
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7. (SBU) Anglo Platinum (Angloplats) has unveiled a fuel cell power
plant at sister company Anglo Coal's coalbed methane exploration
site in the Waterberg coal field in Limpopo Province. The plant has
begun converting methane gas to electricity. The demonstration unit
was purchased from the U.S. company United Technologies UTC Power
and can produce up to 200 kilowatts of electricity, sufficient to
power the operations at Lephalale. An arrangement with Eskom will
feed excess power back into the grid. The fuel cell also has the
capacity to stand alone in the event of grid failure. It is said to

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use about a third of the methane gas that Anglo Coal is producing at
the site; the rest is being flared because carbon dioxide is a less
harmful greenhouse gas than methane. While fuel cells are generally
considered a clean energy technology, they have a small carbon
dioxide footprint. Angloplats says it is considering applying for
carbon credits for the project as the carbon dioxide produced by the
fuel cell is about half that of a thermal power plant. About 270 of
UTC's fuel cells have been installed around the world, but this will
a first for Africa.


8. (SBU) Angloplats' interest in fuel cells lies in its use of
platinum as a catalyst to generate the hydrogen that powers the
cells. Angloplats has a 17.5% stake in Johnson Matthey Fuel Cells
in the belief that fuel cells will drive long-term demand for
platinum. Angloplats' head of market development and research,
Anthea Bath, sees the Lephalale fuel cell as an important
demonstration project that offers South Africa a "unique solution"
for clean energy. Angloplats is partnering with the Department of
Science and Technology to examine the application of fuel cells in
Africa. Bath said the total installed cost of the Lephalale fuel
cell was about $1.25 million, but she expected costs would
eventually come down. The UTC fuel cell also produces heat that
could be used in commercial building applications, such as space and
water heating.

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Eskom Gets 31.3% Tariff Increase
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9. (SBU) The National Energy Regulator of South Africa (Nersa) has
granted state-owned electricity utility Eskom a 31.3% power tariff
increase, which includes an environmental levy. Eskom had asked for
a 34% hike. The increase granted will run from July 1, 2009 to
March 31, 2010, and will raise the average standard electricity
tariff from the current SA 25.24 cents to SA 33.14 cents per
kilowatt hour (about US 3.1 and US 4.1 cents per kilowatt hour,
respectively). The increase will result in tariff revenues of
between R62 billion and R64.7 billion ($7.75 billion and $8.09
billion, respectively). Nersa Chairperson Collin Matjila said the
sustainability of Eskom, the security of electricity supply, and the
affordability of electricity were the key considerations in Nersa's
decision. He said low-income customers would receive an interim
price hike of 15% until the implementation of special tariffs for
the protection of the poor. Nersa said there would be further
above-inflation tariff increases in the future, but could not give
an exact projection -- increases of 25% per year for the next few
years have been mooted by Eskom.


10. (SBU) The electricity tariff increase will assist Eskom to cover
its operating costs and has been positively received by the
government. The government agreed that Eskom tariff revenues should
reflect the full costs of supplying electricity, including a
reasonable risk-adjusted margin or return to ensure the industry
Qreasonable risk-adjusted margin or return to ensure the industry
remains economically viable, stable, and fundable in the short,
medium and long term. Labor, consumers, and business, on the other
hand, are not as happy and say that, while the increase was in line
with what had been expected, it would have negative effects in the
medium term. They believe that the increase will affect input costs
for business and generate a 'ripple' effect that will increase the
price of most goods and services to consumers. This, in turn, would
have a negatively impact on inflation, and cause a further slowdown
in economic activity. Some accuse Eskom and government of poor
management, poor planning, and underinvestment, which caused the
energy crisis in the first place. Some trade unions opine that the
increase is merely an attempt by government to shift the burden of
Eskom's capital costs to consumers.

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Eskom Coal Gasification Plant
--------------


11. (SBU) State-owned power utility Eskom's Majuba thermal power

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station in Mpumalanga Province has been plagued by an inadequate
supply of coal from its feeder mine. Coal has had to be transported
by road from distant mines, and plans are to build an 80-kilometer
rail link from the mines to the power plant for this purpose. The
coal mine at Majuba hosts a 3.5 meter thick coal seam, 300 meters
below ground. However, the nature of the geology prevents efficient
bulk mining. Eskom embarked on a project to test the viability of
utilizing the energy contained in the coal some three years ago.
They employed a technique known as in-situ underground coal
gasification (UCG),which has been successfully demonstrated in the
U.S., Russia, and Australia.


12. (SBU) Under the UCG technique, boreholes are drilled into the
coal seam, which is then ignited using oxygen injection to control
the heat and the expansion of the "fire". The heat drives off the
coalbed methane and gases generated by the partial combustion of
coal, which are then run through gas turbines to generate
electricity. Eskom's corporate consultant, Dr. Mark van der Riet,
says that an efficient and cost-effective way to generate
electricity using UCG is through integrated gasification combined
cycle (IGCC) technology. The Council for Scientific and Industrial
Research (CSIR) is currently developing a 6-megawatt demonstration
plant and computer model to generate data for use in a feasibility
study for the commercialization of a 2,100 megawatt plant.

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Eskom Build Plan
--------------


13. (SBU) South Africa's overall electricity demand is running at an
annualized 2.7% lower than the same time in 2008 due to the global
economic crisis, according to Eskom Enterprises division MD Braam
Conradie. This presented opportunities to significantly reduce the
capital costs of projects underway he said. To date, 13 gigawatts
of power are under construction, some 4,440 megawatts of capacity
have been installed, 2,062 kilometers of transmission lines laid,
and 10 by 100 megavolt-amp transformers completed. Eskom has put
some projects on hold, namely the Tubatse pump-storage scheme and
the Majuba rail line, but other projects will go ahead in
preparation for the economic upturn. The "big two" thermal
stations, Medupi and Kusile, and the pump-storage station Ingula,
have a combined capacity of about 12 gigawatts (see above). Reports
indicate the plants should be commercially ready between 2012 and
2017, will have greater input from the government, and are
progressing on schedule. Although Eskom has decided not to proceed
with the Nuclear-1 investment for the time being, it claims to
support nuclear power as the way forward and would continue
developing its nuclear program, but with a partner and with greater
involvement from the government.

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MINING
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Tata Eyes Coal Production in Mozambique
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Q --------------


14. (SBU) Tata Steel, the sixth biggest steel producer in the world,
and its joint venture partner, Australia-based Riversdale, plan to
start full production at the Benga coking coal project in Mozambique
by 2014. Production should begin in 2011 and Benga is likely to
yield over 20 million tons of coal per year. Tata Steel has a 35%
stake in the JV and a secured right for 40% of the coal to feed its
Corus facilities in the UK and Europe. Riversdale said it has
completed the feasibility study, which envisages three stages of
development of which it has obtained 65% ($169 million) of the
funding for stage 1. The Mozambique government awarded a mining
contract for Benga to the Tata Steel JV in May 2009.

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Mine Hostages Freed

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15. (SBU) Eastern Platinum's Crocodile River Mine (CRM) in South
Africa has terminated the mining services contract for companies
whose employees participated in an illegal industrial action of
hostage taking. The mine spokesman said they would in the future
use only permanent company employees to carry out core mining
activities. Further, he said that charges had been brought against
those who were engaged in the illegal actions.


16. (SBU) About 500 contract workers staged a sit-in on July 9,
holding some nine supervisors underground to back their demands for
permanent employment by the mine instead of by their respective
contractors. The workers voluntarily returned to the surface on the
morning of Saturday July 11, following successful mediation between
the parties, and were repatriated home. Eastern Platinum CEO Ian
Rozier said the sit-in had ended and the supervisors released
unharmed. CRM management has indicated that it remains committed to
ongoing discussion on this issue, but only through the appropriate
channels provided under the terms of South Africa's labor relations
legislation.

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Mine Labor Negotiations and Wage Gaps
--------------


17. (SBU) Winter is generally the time of discontent in the South
African mining industry. It is the time when annual wage
negotiations get underway and everyone in the industry enters a
stressful period until negotiations are concluded, generally by the
end of July, if no strike action is taken. The South African
industry and unions have generally resisted multi-year contracts for
various reasons and this ensures industry disruptions on an annual
basis. Wage negotiations for 2009 have been clouded by a year of
high inflation and interest rates, a volatile currency, record high
commodity prices followed by the financial crisis and record falls
in commodity prices. Many commodity prices declined by more than
50%. Gold has been the one exception and it has generally retained
its value. This situation has made it difficult for both labor and
industry to put forward or respond to realistic wage demands, with
labor generally looking backwards to the helicon days of 2007-2008
and industry looking forward to a possible bleak future for
direction. Labor has demanded a 15% across-the-board increase in
basic wages, a 21% increase of the entry level wage, and a number of
other benefits, which the Chamber of Mines (COM) negotiator
estimates would increase mine labor costs by 30% to 42%. The COM
has offered a 9.5% inclusive package increase and believes that the
two sides are close to an agreement. This package has, with a
higher rate for lower-paid workers, has been accepted.


18. (SBU) The wage gap between workers and top executives in the
mining industry has increased during the past three years, despite
the above-inflation wage increase awarded in 2008. According to a
Qthe above-inflation wage increase awarded in 2008. According to a
report by union-backed think-tank Labor Research Services (LRS),the
ratio between workers' wages and chief executives' salaries
increased from 401 in 2005 to 453 in 2008. LRS Director Saliem
Patel acknowledged that these estimates did not include executive
remuneration in the form of share options and the actual gap was
likely to be wider. Research has shown that the wage of a general
worker in July 2004 was R547 a week and R768 a week in 2009 ($89 and
$90 at the respective dollar/rand exchange rates),an increase of
40% in rand terms, but zero in dollar terms. However, over the same
period inflation was 29%, thus the real increase in wages was
considerably less. The report indicates that industry profits have
increased on average by 71% in 2005, 114% in 2006, and 19% in 2007
and 2008.
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Free Market or Nationalized Mining
--------------


19. (SBU) The move in most African mining jurisdictions is towards a
market economy and away from nationalization, according to the

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International Bar Association mining law chairperson Peter Leon. He
said countries such as Ghana, Tanzania, Namibia, and Botswana had
introduced reforms to the mineral laws to encourage foreign
investment. This contrasts with calls for the nationalization of
South Africa's mining industry by the African National Congress and
the South African Communist youth leagues and the Congress of South
African Trade Unions. Leon welcomed statements by President Zuma
and Mineral Resources Minister Susan Shabangu that nationalization
of the mining industry was not on the government's agenda, but that
a debate on the issue is needed. Leon said his concerns are that:
-- the call was in the midst of a global financial crisis and was
probably aimed at testing stakeholder reaction;
-- the call coincided with the government's decision to revive the
State-owned mining company; and
-- the debate could have negative implications for mining
investment.
African Exploration Mining & Finance Corporation, the name of the
proposed government mining company, was originally established in
1944 by the then South African government to support the war effort,
but was never operational.


20. (SBU) Chamber of Mines Chief Executive Mzolisi Diliza said the
South African government did not have the funds to nationalize the
mining industry and pay market-related compensation. He said the
industry was worth almost $250 billion on the Johannesburg Stock
Exchange (JSE) and had an income of $51 billion in 2008. At the
same time, expenditure was $51 billion and dividends paid amounted
to only $3 billion. The Department of Mines Director-General
Sandile Nogxina warned the industry that transformation should be
accelerated and he saw no problem with a policy debate on
nationalization. The mooted debate received a warmer reception from
black investors, who expressed the belief that blanket
nationalization will not work, but greater state involvement is
required to achieve meaningful black economic transformation and the
government's developmental goals. An economist who runs a small
mining firm said the mineral rights already belonged to the state
and there was a case to be made for government becoming a major
shareholder in all of the mining operations in the country. He
cited the success of joint ventures between diamond producer De
Beers and the governments in Botswana (Debswana) and Namibia
(Namdeb). Black investors all expressed concerns about government's
ability to actually run mines should the assets be nationalized.

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Travails of Anglo American
--------------


21. (SBU) Anglo American, the world's fifth biggest multinational
mining company by value (including Chinese companies),is under
siege. While it owns some of the best mineral and platinum assets
in the world, Anglo has consistently underperformed its peers such
as Australian-based BHP-Billiton, London-based Rio Tinto, and
Qas Australian-based BHP-Billiton, London-based Rio Tinto, and
Brazil-based Vale in acquiring quality assets, expanding production,
and maintaining share price. Analysts point to poor management,
where the company has consistently missed production, financial, and
budget targets, particularly with regard to platinum. They also
point to poor executive decision-making where peers have out-bid
them for new assets, and iron ore assets and share buy-backs were
bought at the height of the commodity boom. This, together with the
slump in commodity prices, the cutting of thousands of jobs, and the
group's missed profit forecasts, has cost shareholders their final
2008 dividend. As a consequence, questions are being raised about
the leadership abilities of a number of Anglo's top management, in
particular the relatively new CEO Cynthia Carroll.


22. (SBU) Anglo has been under pressure on a number of fronts. The
Department of Minerals wanted Anglo to appoint a black South African
to replace their retiring Chairman Mark Moody-Stuart "in the
interests of black economic empowerment and transformation". Anglo
resisted the pressure and appointed Englishman John Parker as
chairman, but is still under pressure to appoint a black South
African as Deputy Chairman. Anglo has also become a takeover target

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for its peers. Xstrata, 35% owned by the world's biggest minerals
and metals trading company Glencore, has made a bid for Anglo in "a
merger of equals", which Anglo management rejected. Xstrata was
created from Glencore coal assets. Its CEO, South African Mick
Davis, has led Xstrata's growth by acquisition into the world's
seventh biggest diversified metals and mining company by value. The
rationale for the merger with Anglo, according to Xstrata, is that
the combined company would bring about operating synergies (valued
at about $1 billion),an enhanced scale of operations, and provide
financial flexibility to fund future growth. A combined
Xstrata-Anglo would be the world's biggest producer of thermal coal,
platinum, zinc, and ferro-chrome; second largest copper producer;
fourth in nickel; and among the top five in coking coal and iron
ore. Opposition to the merger may come from competition authorities
in a number of countries and from the SAG, which fears the loss of
jobs and its influence over Anglo American. The battle continues.


La Lime