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

UNCLAS SECTION 01 OF 04 PRETORIA 002474 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 10, November 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's funding conundrum South Africa could have new nuclear power station by 2020 ENERGY Loan for Eskom's Medupi plant Eskom road repairs: $1.3 billion High coal demand raising prices Eskom's World Bank loan application MINING Multinationals team up to explore Karoo basin for shale gas Gold Fields 'catching the future' as it unlocks South Deep's treasure chest Cullinan diamond fetches US$6 million Gold hits record highs on firm investor sentiment -------------- HOT NEWS -------------- -------------- Eskom's funding conundrum -------------- ¶3. (SBU) As power utility Eskom emerges from a bruising leader-ship battle, in which both CEO Jacob Maroga and Chairman Bobby Godsell stepped down, it faces a bigger, more urgent battle: how to crack its funding crisis. Eskom has still not resolved its capacity shortfall, which led to sustained load-shedding in early 2008. The power utility has delayed construction of its second new power station, Kusile (in Mpumalanga),which is expected to provide 10 percent of SA's electricity demand. According to a senior Eskom manager, Eskom will decide at a December board meeting how long to delay the project. University of Cape Town's Prof Anton Eberhard says: "The Kusile power station will almost certainly have to be delayed as Eskom will not be able to pay the contractors." Pushing it back by two to three years from its originally targeted commissioning date of 2014 will free up a lot of cash flow, he says. Eskom draws its cash from four main sources: government support, bond issues, utility payments from customers and borrowing. It has received R232 billion ($31 billion) from government in loans and guarantees; tapped the bond market for R21 billion ($2.8 billion) over the past two years; secured $2 billion in loans from the African Development Bank; and increased its rates by 31 percent in ¶2009. Eskom estimates it can raise a maximum of R40 billion ($5.3 billion) a year in debt over the next three years, and a total of R232 billion ($31 billion) by 2015. But it needs substantially more to cover its R385 billion ($51 billion) expansion plan and rising Qto cover its R385 billion ($51 billion) expansion plan and rising operating costs. ¶4. (SBU) The National Treasury has confirmed that Eskom cannot look to government for any more money or loan guarantees, so tariff increases and partial privatization are the only remaining options. Eskom has asked for 45 percent tariff hikes each year over the next PRETORIA 00002474 002 OF 004 three years, but this would treble the country's electricity costs. After much outrage from every quarter, the utility is re-examining its final tariff submission to the National Energy Regulator of South Africa (Nersa). Even if Eskom is granted the 45 percent a year increases for three years, it would still be left with a significant R30 billion ($4 billion) shortfall in its balance sheet by the end of that period. Raising bonds and loans will help, but these will mainly be stopgap or supplementary measures. The utility has approached the World Bank for a $3.75 billion loan ($3 billion for the Medupi coal-fired power station; $260 million for renewable wind and solar energy; and $490 million for low-carbon energy efficiency components). -------------- South Africa could have new nuclear power station by 2020 -------------- ¶5. (SBU) Energy Minister Dipuo Peters said on November 20 that South Africa could have a new nuclear power station operational by 2020 and has an aspiration to add some 20,000 MW of nuclear capacity over the coming decades. However, a specific date for the building of the second nuclear power generator would only be set after the finalization of an integrated resource plan (IRP),she told journalists on the sidelines of a seminar on nuclear energy. Peters noted that the IRP would be finalized after the United Nations Framework Convention on Climate Change conference taking place in Copenhagen next month. "We will be releasing the IRP immediately after Copenhagen, we will then be finalizing our IRP, and within the IRP, you would then have the exact indicator of when South Africa would want to see the nuclear plant kicking in." She added that the IRP would be placed before Cabinet in February. Eskom terminated the procurement process for the multibillion rand "Nuclear 1" project late last year, after the company's board decided that it could not make an investment decision to proceed, owing to financial pressures. Eskom operates South Africa's only nuclear plant, the 1,800 MW Koeberg station, in the Western Cape. -------------- ENERGY -------------- -------------- Loan for Eskom's Medupi plant -------------- ¶6. (SBU) The African Development Bank (AfDB) said on November 26 that it had loaned South African State-owned utility Eskom 1,86 billion ($2.85 billion) to finance the construction of the Medupi power project. The bank said the 4,800 MW Medupi power plant, Eskom's first new base-load power plant in more than two decades, will significantly boost the energy capacity of South Africa and the southern African region. AfDB president Donald Kaberuka said "South Africa's energy problem has been a major impediment to Africa's leading economy. This operation should be seen in the context of the bank's ongoing efforts to help Africa bridge the infrastructure gap." Medupi is in South Africa's northern Limpopo Province, and is Qgap." Medupi is in South Africa's northern Limpopo Province, and is expected to be commissioned by February 2012. -------------- Eskom road repairs: $1.3 billion -------------- ¶7. (SBU) Power utility Eskom will have to fork out at least R10 billion ($1.3 billion) for road repairs and construction on the network servicing its power stations from now to 2015. The cost of the road repairs is likely to be questioned when Eskom's tariff increase application of 45 percent a year for three years is considered because road repair is not its responsibility. In its application, Eskom argued that the bad state of some roads was a danger to security of supply. The Democratic Alliance said that a PRETORIA 00002474 003 OF 004 R1 billion ($133 million) upgrade was needed for roads even before construction began on Medupi. The roads bill is a significant cost addition to Eskom's build program, for which it has to raise R385 billion ($51 billion). -------------- High coal demand raising prices -------------- ¶8. (SBU) Exxaro Resources, South Africa's largest black-controlled, diversified mining company, said on November 26 that coal prices were likely to rise to between $70 and $75 per ton in 2010 from around $65 per ton this year on the back of rising global demand. Exxaro's executive general manager for business growth Ernst Venter said demand for coal had started to rise on the world market with India becoming a major market for steam coal. -------------- Eskom's World Bank loan application -------------- ¶9. (SBU) South Africa's power utility Eskom expects the World Bank to make a decision on a loan program of up to $5 billion in the first half of next year. In early November, the World Bank said on its website Eskom had applied for the initial three tranches of the loan, amounting to $3.75 billion, to fund projects at its Medupi power station as well as renewable energy and low-carbon energy efficiency program. -------------- MINING -------------- -------------- Multinationals team up to explore Karoo basin for shale gas -------------- ¶10. (SBU) A multinational gas exploration joint venture (JV) submitted an "exploration right application" to the Petroleum Agency South Africa (Pasa) on November 25 for an onshore shale-gas resource in the Karoo Basin, situated in the central region of South Africa. The participants in the JV include Sasol Petroleum International, a subsidiary of JSE-listed Sasol, Statoil ASA of Norway, and Chesapeake Energy Corporation of the US. It is anticipated that the application will take 12 months to process. Pasa, South Africa's agency for the promotion of onshore and offshore petroleum exploration, is empowered to issue exploration rights for an initial period of three years, which are renewable for a maximum of three additional two-year periods. Should exploration prove successful, the JV could move to secure a production right for a period of 30 years, also renewable. The Karoo basin program would focus on the natural gas produced from shale, a type of sedimentary rock formed from clay. Shale gas has become an increasingly important source of natural gas in the US and other countries, and interest has also grown in Canada and Europe. The partners noted in a joint statement that the Karoo basin has unproven shale gas potential and significant exploration efforts will be necessary to assess the resource. -------------- Gold Fields 'catching the future' as it unlocks South Deep's treasure chest -------------- Q -------------- ¶11. (SBU) Gold Fields executive vice president and operational head Vishnu Pillay says South Deep mine is "unlike any other operation in South Africa. It's fundamentally going to change the way South Africans mine at depth." Gold Fields acquired the mine from Western Areas in December 2006 and South Deep's next key milestone date is December 2014. South Deep, less than an hour's drive from the centre of Johannesburg, has the world's deepest single hoisting PRETORIA 00002474 004 OF 004 shaft that descends to a depth of 3,000 m. Out are the hand-held drills that have characterized South Africa's deep-level gold mining for more than 100 years, and in are big jumbo drills to provide high tonnage. While a conventional South African mine of its size may employ 10,000 people or more to do the South Deep job, the fully mechanized operation is able to make do with 4,500. All efforts at South Deep dovetail with the firm stand that Gold Fields CEO Nick Holland has taken: "If we can't mine safely, we won't mine at all." Pillay says "What South Deep does is prove that we can run deep-level mining operations without having fatal accidents." -------------- Cullinan diamond fetches US$6 million -------------- ¶12. (SBU) Petra Diamonds reported that a 168 carat white Cullinan diamond had sold for $6.28 million. The diamond, regarded as being of exceptional color and quality, fetched about $37,380 a carat when it was sold to an undisclosed buyer on November 26. It was recovered in the same production series as three other special diamonds: a 507.55 carat white diamond, which has not been offered for sale yet, as the company considers the best route to market in order to maximize value; and two diamonds of 58.50 and 53.30 carats, which were sold in November for a total of $2.8 million. Cullinan mine has produced more than 300 diamonds of over 100 carats and a quarter of all the world's diamonds over 400 carats. ¶13. (SBU) Petra Diamonds announced on November 26 that it plans to increase its ownership in Cullinan diamond mine from 37 percent to 74 percent, saying that it has entered into an option agreement with Al Rajhi Holdings that would allow it to acquire Al Rajhi's 37 percent interest in the mine. Petra also confirmed its intention to undertake an equity fundraising. -------------- Gold hits record highs on firm investor sentiment -------------- ¶14. (SBU) Gold rose to a record high, above $1,175 per ounce, on November 25, based on solid investor sentiment and expectations of more gold buying by the public sector. A recent purchase of 200 tons of gold by India's central bank sparked a rally that lifted the precious metal's value to successive record highs with it gaining about 12 percent in the month of November alone. The purchase was part of a planned sale of 403 tons by the International Monetary Fund. Russia, Sri Lanka and Mauritius have also announced gold acquisitions. Chief analyst at Fujitomi Co Ltd in Tokyo Kazuhiko Saito said investors continue to believe that other central banks will buy gold. "Gold is being bought even when the euro falls against the dollar, and what we are seeing is an active flow of funds," Saito said. He added that gold could face a correction, given the rapid pace at which its price has climbed. Traders say investors are also attracted to gold, seen as a hedge against Qinvestors are also attracted to gold, seen as a hedge against inflation, which erodes the value of paper assets. GIPS