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

UNCLAS SECTION 01 OF 06 PRETORIA 002240 SIPDIS SENSITIVE STATE PLEASE PASS USAID STATE PLEASE PASS USGS DEPT FOR AF/S, EEB/ESC AND CBA DOE FOR SPERL AND PERSON DOC FOR ITA/DIEMOND 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 9, October 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 Eskom welcomes private investors in power expansion U.S. support for Pebble Bed Modular Reactor Strengthening gold, weakening dollar ENERGY Eskom eyes solar, thermal, gas from coal PetroSA to seek Cabinet permission to take 37,5% equity stake in $10bn Coega refinery Nersa to include small-scale producers soon Sasol studying conversion of CO2 into fuel India may increase coal imports MINING Mining production down 11.5% in August Gold Fields spending $1,15bn to complete mechanized South Deep 'tonnage factory' Xstrata deadline for Anglo American bid AngloGold forms marine mining JV with De Beers Simmers reduced Buffelsfontein job cuts by 1,100 - union -------------- HOT NEWS -------------- -------------- -------------- Eskom welcomes private investors in power expansion -------------- -------------- ¶3. (SBU) South Africa's power utility Eskom is keen to have private players participate in its expansion projects, but tariffs would still need to rise substantially to encourage that investment, an official said. The utility is battling to raise parts of the R385 billion ($ 53 billion) it needs to pay for new plants and said it would rely on an increase in tariffs, borrowings and government loans for support. Eskom has been criticized for fuelling inflation by raising electricity prices by as much as 31.3 percent this year and 27 percent last year. The utility has another application pending with the regulator, asking for hikes of up to 146 percent. "I can't see why someone would come into a business that is selling its product at currently between half and two-thirds of the cost," Eskom Chairman Bobby Godsell told a recent industry gathering. Due to a government policy of under-pricing power to attract industry into the country, South Africa has been cushioned by one of the world's cheapest electricity rates, with a kilowatt hour produced by the utility costing on average 4.47 U.S. cents. Godsell said independent power producer (IPPs) have so far proposed to generate electricity at a cost of between 10 - 16 cents, without taking the cost of distribution and transmission into account. "We have the Qcost of distribution and transmission into account. "We have the cheapest electricity in the world, but we just happen today to be out of stock," he said. Eskom has been rationing power since early 2008 when the country's grid nearly collapsed, forcing mines and smelters to shut for days, and costing South African economy billions of dollars. -------------- PRETORIA 00002240 002 OF 006 U.S. support for Pebble Bed Modular Reactor -------------- ¶4. (SBU) The announcement by the U.S. government that it will support South African efforts to research the pebble-bed modular reactor (PBMR) nuclear technology signals more direct U.S. interest in South Africa's conventional nuclear endeavors. This interest relates to the role of Westinghouse (the U.S. nuclear vendor) within what could be a multibillion-dollar, multisite, multi-decade South African nuclear build program. ¶5. (SBU) A respected journalist with Engineering News has suggested that, until relatively recently, French nuclear vendor Areva appeared to have an edge over Westinghouse due to its ties to French utility EDF. EDF is the world's largest operator of nuclear facilities and is willing to invest in South Africa's nuclear program. The virtue of the Westinghouse approach lies in the longer-term benefits that could flow from the indigenization of nuclear design, engineering and manufacturing. Technology transfer, Westinghouse argues, is integral to its business model, despite the fact that it ultimately leads to the creation of potential competitors, able to design, manufacture and operate third-generation PWRs. For their part, Eskom and government want both worlds: they are caught between the need to spread the funding risk and the desire to develop a sustainable nuclear industry. The decision is likely to become politicized. Meanwhile Eskom quietly continues with preparation processes at three possible nuclear sites - Duynefontein (alongside the existing Koeberg nuclear plant, in the Western Cape),Bantamsklip (near Pearly Beach, in the Western Cape) and Thyspunt (near Oyster Bay, in the Eastern Cape). ¶6. (SBU) Officially, any US support for the PBMR following on from the agreement will fall under the so-called next-generation nuclear plant (NGNP) project, which is seeking to "commercialize a new generation of advanced, passively safe, modular nuclear plants such as the PBMR that use high-temperature gas reactor technology". In fact, Westinghouse, the Shaw Group and the PBMR Company are jointly promoting the PBMR under the NGNP scheme and are seeking a project appropriation of $200 million for the 2010 financial year under the program. PBMR spokesperson Tom Ferreira has confirmed that under the recently signed bilateral nuclear agreement, there is the potential for direct funding from the US Department of Energy under the NGNP. -------------- Strengthening gold, weakening dollar -------------- ¶7. (SBU) The gold price surged to a record $1,045/oz high in New York on Tuesday 6 October 2009. Analysts believe this is a reaction to concern about US inflation and a weakening dollar spurring demand for the metal as an alternative investment. The higher gold price is good news for SA's gold mines, struggling with rand strength, Qis good news for SA's gold mines, struggling with rand strength, rising costs, such as for labor and electricity, and falling ore grades. The JSE index of gold mines shot up 6.7 percent, with AngloGold Ashanti up 6 percent, Gold Fields up 7.4 percent and Harmony rising 7.5 percent. Higher inflation traditionally erodes the value of the dollar against other currencies, causing the prices of commodities to rise as investors use these investments as an alternative store of wealth. The price of Brent crude oil rose as much as 2.3 percent to $69.52 a barrel. Copper, an indicator of industrial activity, rose 2.7 percent in London. A further potential contributor to dollar weakening was a report by Britain's Independent newspaper that Arab states, China, Russia, and France had secretly discussed replacing the dollar as the currency denominating in oil trades. -------------- ENERGY -------------- -------------- PRETORIA 00002240 003 OF 006 Eskom eyes solar, thermal, gas from coal -------------- ¶8. (SBU) Eskom's Managing Director for Corporate Services Steve Lennon said projects would take shape next year. "You will be seeing the timing of big renewables, the timing of nuclear, you will be seeing more certainty on under-ground coal gasification ... first quarter next year you will see a lot of things come together," Lennon said in an interview. He said Eskom was designing a 42 megawatt pilot plant to test a technology to gasify deep coal deposits underground and feed the gas into a combined cycle gas turbine. It then plans to scale up the project to a 2,100 MW plant. "Probably by the end of 2011 that gas pilot will be up and running, which means that a full-scale plant, everything going well, could be running around 2015-16," he said. -------------- --- PetroSA to seek Cabinet permission to take 37,5% equity stake in $10bn Coega refinery -------------- --- ¶9. (SBU) South Africa's national oil company PetroSA will submit a recommendation to the Department of Energy during October requesting that it be allowed to retain a non-controlling 37,5 percent equity position in a proposed new $10 billion, 400,000 bl/d, crude oil refinery. The State-owned group has completed the technical feasibility study for the project, which it is proposing for construction at the Coega industrial development zone, landside of the country's newest deep-water harbor, the port of Ngqura, in the Eastern Cape. The commissioning of the refinery is scheduled for ¶2015. Should Cabinet approve PetroSA's ownership model by December, the group's next move would be to finalize its front-end engineering design for the Coega refinery by March 2010 - setting out the technical design of the plant and the types of material it would process. ¶10. (SBU) The plant would probably be designed to convert so-called "heavy sour" material, found predominantly in parts of the Middle East and South America, into diesel and petrol. However, it was also possible that "sweeter" crude from Angola could be blended into the final mix, with PetroSA hoping to secure supply contracts in tranches of 100,000 barrels or more. Wherever possible, PetroSA would also seek to conclude deals giving it ownership over the crude inputs, and the recent joint-venture-agreement (JV) with Venezuela's PDVSA offered some indication as to the type of deal being pursued. Earlier in October, PetroSA and PDVSA announced the creation of a joint venture to exploit a mature oilfield in the South American country. Some $400 million could be invested over four years to extract oil from the fields in the Venezuelan state of Anzoategui. PetroSA announced plans to invest $10 million within the next 6 months to finalize the technical studies, and should the JV succeed, production of 30,000 bl/d is possible within the next 24 months. Qproduction of 30,000 bl/d is possible within the next 24 months. ¶11. (SBU) PetroSA and the Coega Development Corporation (CDC) signed a co-operation agreement for the planned Coega oil refinery on 6 October 2009. The agreement clarified the roles and responsibilities of the parties in the Coega Industrial Development Zone (IDZ) during the construction and operation of the refinery, PetroSA's president and CEO Sipho Mkhize said. The refinery would generate close to 27,500 temporary jobs during the construction phase and 18,500 permanent direct, indirect and induced jobs once operational. -------------- Nersa to include small-scale producers soon -------------- ¶12. (SBU) Small-scale producers of renewable energy - those producing less than 1 megawatt - may be included in the next phase of the renewable energy feed-in tariff (Refit) published by the National Energy Regulator of SA (Nersa). Nersa's regulator member PRETORIA 00002240 004 OF 006 for electricity Thembani Bukula said that small-scale producers were likely to be included in Refit's third phase, due in about six months. Small-scale producers do not necessarily aim to feed energy into the national electricity grid, as substantial amounts of their power may be lost in the transmission process. In many cases they would rather use this electricity for their own production processes or supply it directly to closely situated industries. Refit currently excludes off-grid power generation. -------------- Sasol studying conversion of CO2 into fuel -------------- ¶13. (SBU) South Africa's coal-to-liquids company, Sasol, is studying the conversion of carbon dioxide (CO2) into fuel. Engineers and scientists in Sasol's technology division are working on algaeic forms of methanol production. This follows the Singapore's Institute of Bioengineering and Nanotechnology's (IBN's) report of a CO2-to-methanol breakthrough earlier this year. IBN announced that they had succeeded in unlocking the potential of carbon dioxide - a common greenhouse gas - by converting it into a more useful product. Using organocatalysts, the IBN researchers activated carbon dioxide in a mild and non-toxic process to produce methanol, a widely used industrial feedstock and clean-burning biofuel. Sasol produces large volumes of CO2 in the production of synthetic transport fuels from coal at its plant in Secunda and is committed to reducing its CO2 footprint through the introduction of greater production efficiencies, carbon capture and storage and through innovations such as methanol production from algae. -------------- India may increase coal imports -------------- ¶14. (SBU) India may increase imports of coal from 57 to 60 million metric tons in the year ending March compared with last year. According to a Coal India director, N.C. Jha, the company's annual production may increase to 435 million tons this year from 403.7 million tons last year. The state-owned company is seeking mines in the US, Australia, South Africa and Indonesia and may invest as much as $1.5 billion for acquisitions to help address supply needed to almost double its power generation capacity by 2012. The company estimates a shortage of about 228 million tons a year of coal by March 2012. Coal India has secured two blocks in Mozambique that may hold a combined 1 billion metric tons of thermal coal along with some coking coal. India 's coal demand is estimated to reach 731 million tons a year by March 2012. -------------- MINING -------------- -------------- Mining production down 11.5% in August -------------- ¶15. (SBU) Mining production for August 2009 decreased by 11.5 percent compared with August 2008, reflected by a 12.7 percent decrease in the production of non-gold minerals and a 2.9 percent Qdecrease in the production of non-gold minerals and a 2.9 percent decrease in the production of gold, according to Statistics South Africa (Stat SA). Seasonally adjusted mining production increased by 2.6 percent in the three months to August 2009 compared with the previous three months, Stat SA said. This is the fourth consecutive quarter-on-quarter increase since April 2009, it said. Platinum group metal (PGM) production was the main contributor (1.7 percentage points) to the 2.6 percent increase. Seasonally adjusted mining production decreased by 5.8 percent month-on-month in August ¶2009. PGM production was the main contributor (-4.3 percentage points) to this decrease. The total mining production for the three months ended August 2009 decreased by 4.5 percent compared with the three months ended August 2008. PRETORIA 00002240 005 OF 006 -------------- Gold Fields spending $1,15bn to complete mechanized South Deep 'tonnage factory' -------------- ¶16. (SBU) JSE-listed gold major Gold Fields announced that it would be spending R8,5 billion ($1.15 billion) to complete its 50-year-life mechanized South Deep mine. The R8,5 billion would be spent to 2014, when South Deep would be producing gold at a rate of 750,000 oz a year. The mine employs 4,500 people, whereas similar-sized conventional labor-intensive deep-level South African gold mine employs about 10,000 people. Gold Fields reports employees of the mechanized mine are compensated at higher levels of pay, with high-performing drill rig operators taking home up to R50,000 ($6,800) a month. ¶17. (SBU) South Deep, a total departure from South Africa's conventional narrow-vein gold mine with 30 meter tall ore bodies, is the world's first mechanized deep-level gold mine with the world's deepest hoisting shaft to 3,000 meters. Gold Fields is introducing special safety-support measures for the scale and nature of the large excavations. According to the company these measures have resulted in a 66 percent reduction in serious injuries and a lost-day injury rate improvement of 71 percent. -------------- Xstrata deadline for Anglo American bid -------------- ¶18. (SBU) Diversified miner Xstrata has until 17:00 on October 20 to announce a firm intention to make an offer for Anglo American or to walk away, the UK Takeover Panel has announced. If Xstrata announces that it does not intend to make an offer for Anglo American, it will be restricted from making an offer for Anglo for six months. Anglo American has rejected the proposed merger saying that it would not be in the shareholders best interests. Anglo had noted in earlier statements that a merger with Xstrata would "profoundly impact [on] the nature of the group's portfolio by significantly diluting Anglo American's unique exposure to the structurally attractive platinum, iron-ore and diamond markets, while increasing exposure to nickel and zinc". Anglo American controls the world's biggest platinum-miner, Anglo Platinum, and holds a 45 percent stake in diamond giant De Beers, as well as almost 70 percent of South African iron-ore producer Kumba Iron Ore. Mining analysts believe that would make sense for Xstrata to make a formal, but realistic, bid for Anglo American before the deadline closes. Xstrata could, however, opt to buy Lonmin (the world's third largest platinum producer). -------------- - AngloGold forms marine mining JV with De Beers -------------- - ¶19. (SBU) JSE-listed gold-miner AngloGold Ashanti and diamond giant De Beers have announced the formation of a joint venture (JV) to explore for gold and other minerals in the ocean. The JV would Qexplore for gold and other minerals in the ocean. The JV would initially focus on exploration, but would ultimately mine marine deposits on the continental shelf. De Beers have developed certain skills, expertise and proprietary technology in relation to the exploration and mining of marine deposits on the continental shelf. AngloGold have one of the world's most successful gold exploration teams. ¶20. (SBU) The establishment of this JV allows AngloGold Ashanti "first-mover advantage" of the opportunity of partnering with a world leader in the field of marine exploration and mining. AngloGold Ashanti and De Beers will establish a jointly-owned technical services company (Techco),which they intend to develop into a fully-functional marine exploration and mining services company. Techno will host all the skills, expertise and further PRETORIA 00002240 006 OF 006 proprietary technology that might be developed or acquired within the JV. AngloGold Ashanti will sole fund the JV and Techco until the completion of an initial exploration period of at least three consecutive sampling seasons, or until the gold-miner had funded a total amount of $40 million. -------------- Simmers reduced Buffelsfontein job cuts by 1,100 - union -------------- ¶21. (SBU) JSE-listed Simmer & Jack Mines (Simmers) has been able to limit retrenchments at its Buffelsfontein mine, in the North West province, to about 1,400 job losses, 1,100 less than initially expected, trade union Solidarity reported on Tuesday. The union said that the Section 189 consultation process at the mine has not yet been finalized and that the gold-miner could still "significantly reduce" the number of retrenchments. Solidarity spokesperson Jaco Kleynhans said that Simmers CEO Gordon Miller had recently indicated in a management report that Buffelsfontein's risk profile should soon improve significantly, as the incorporation of the newly-acquired Tau Lekoa mine could lead to a doubling in production. South African gold major AngloGold Ashanti agreed to sell the Tau Lekoa mine to Simmers for R600 million ($81 million) in February 2009. The Competition Commission, in September, approved the merger of the two mines. ¶22. (SBU) Meanwhile, Solidarity said it believed that the current problems between Simmers and its Black Economic Empowerment (BEE) partner, Vulisango, could have negative consequences for the group and Buffelsfontein. After its shareholding was diluted to 22 percent through various capital raising exercises, Vulisango has demanded that Simmers restore its interest in the company to 26 percent. GIPS