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

UNCLAS SECTION 01 OF 04 PRETORIA 000309 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 1, January, 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. -------------- HOT NEWS -------------- -------------- Harmony Sensitive to Power Price Increase -------------- ¶2. (SBU) Harmony Gold Mining Company, Africa's third-largest producer of gold, said an increase of more than 30% in power tariffs in South Africa would cause the company to reconsider its deep mining operations. The company has budgeted for a rise of 20% this year by the state-owned power utility Eskom, said Harmony's CEO Graham Briggs in an interview in Johannesburg. -------------- ENERGY -------------- -------------- General Electric Does Deals in South Africa -------------- ¶3. (SBU) Power generation technology supplier GE Energy announced a $50 million deal to upgrade old steam turbines at synthetic fuels producer Sasol. The announcement follows a 15-year service agreement signed in November by the two companies that provides for installation and maintenance of gas turbines at Sasol's Secunda plant, aiming to increase power efficiency and produce power from otherwise flared methane (also targeting Kyoto-related Clean Development Mechanism credits). GE Transportation announced that it had also been awarded a contract by Anglo Platinum to provide 26 emergency diesel generators for its mining operations, providing up to 15.4 MW back up capacity at individual mines. Middle East and Africa CEO Nabil Habayeb, who was speaking at the "GE Day" in Johannesburg, was bullish on business in South Africa and Africa, and said he was comfortable with the alignment of the business to Africa's key growth sectors, particularly infrastructure, including energy, water, and transport. GE remained sanguine about Africa's growth potential and touted not a single order cancellation across the continent as a consequence of the economic slowdown. -------------- MINE SAFETY -------------- -------------- President's Safety Audit Shows Gaps -------------- ¶4. (SBU) South Africa's Minister of Minerals and Energy Buyelwa Sonjica released the long-awaited national Mine Safety Audit on February 2, ordered by past President Thabo Mbeki to investigate QFebruary 2, ordered by past President Thabo Mbeki to investigate compliance with safety regulations in mines across all sectors. Buyelwa said the audits indicated a number of gaps in the safety standards in the mining industry. She called on stakeholders to take the findings and recommendations very seriously. The average compliance across all sectors was identified as 66%, with gold mines PRETORIA 00000309 002 OF 004 earning highest compliance. Critical issues were mine design, shaft installation and maintenance, communication systems, backup power, secondary outlets, safety risk management, health risk management, and training. The ministry said stakeholders would have two weeks to analyze the report and make plans to implement the recommendations. Mbeki ordered the safety audit in 2007, after 3,200 workers were trapped underground at Harmony Gold's Elandsrand mine. ¶5. (SBU) Chamber of Mines Senior Executive Dr Frans Barker in a media interview said safety had played a role in the relatively poor production performance of the gold mines through voluntary and forced closures following serious accidents. Leaders of industry decided safety was a priority and a number of companies had made significant improvements in safety standards, training, and monitoring. Gold Fields lost revenue of more than $300 million over the past 18 months (equivalent to more than 250,000 ounces of gold) as a result of safety stoppages and measures to improve its safety record, mainly in South Africa. Implementation of safe measures contributed to the relatively positive score gold mines received in the President's report. Mining CEO's have committed to eliminating fatal accidents by 2013 and a number of shafts have been shut to allow for safety audits and maintenance. Barker said the depth at which gold is mined in South Africa was also a factor contributing to accidents and the industry was looking at more cooperative research in health and safety. Barker said the industry had already started to implement some of the recommendations in the report. He said one of the most important recommendations was the need to instill a culture of safety throughout the industry and to make greater use of full-time occupational health and safety representatives. -------------- MINING -------------- -------------- Mining Job Losses -------------- ¶6. (SBU) The mining industry has shed more than 10,000 jobs since the end of December, according to the National Union of Mineworkers. The unions list of layoffs include 1,417 at DRDGold's marginal East Rand Proprietary Mines (ERPM); 1,800 at the Everest platinum mine in Mpumalanga; 1,500 at Gold Field's mines; and 1,550 at Lonmin Platinum in Limpopo. The Anglo American Group has indicated its intention to cut its workforce by 10,000 and Rio Tinto plans to layoff some 14,000 workers from its global operations, but only a small number will likely come from its South Africa operations. Many miners are still cautiously optimistic about a commodity upturn later in 2009 and are reluctant to loose skilled and experienced workers. The Department of Minerals and Energy mining task team has urged mining companies to refrain from dismissing contract workers with only a 24-hour notice period. Since its inception in December, the task team has urged mining companies to view retrenchments as a Qthe task team has urged mining companies to view retrenchments as a last resort and to only take such actions in full compliance with the country's labor law and mining companies' social and labor commitments under licensing. -------------- China Looks to African Minerals -------------- ¶7. (SBU) Chinese investment continues to flow into Africa, especially in the minerals and metals sectors. Chinese businessmen are taking a long-term view and pursuing strategic expansion in Africa even though China's investments on the continent have slowed due to the global downturn. The Beijing government and Chinese companies have pledged tens of billions of dollars to Africa in loans and investments, mostly to secure raw materials for its still fast-growing economy (albeit at a slower rate). Its long-term PRETORIA 00000309 003 OF 004 strategic interest appears intact, despite the sharp decline in Africa's mineral shipments to China. China-Africa trade has grown by an average of 30% a year this decade, increasing to nearly $107 billion in 2008. Former U.S. Ambassador to Ethiopia and Burkina Faso David Shinn said China is in Africa for the long term. ¶8. (SBU) Chinese and Indian firms have expressed interest in taking over Zambia's top cobalt producer Luanshya Copper Mines since it halted operations in December, according to Zambian state media. South Africa's Standard Bank is itself 20% owned by the Industrial and Commercial Bank of China (ICBC). Standard Bank's head of mining and metals Thys Terblanche, said they were advising Chinese mining clients on buying opportunities in Africa and elsewhere. He said Chinese companies believe 2009 is likely to present buying opportunities. Apart from mining, Chinese state companies are also pushing ahead with strategic investments in energy and infrastructure. The former Chinese Ambassador to the DRC and Central African Republic (CAR) told a China-Africa trade forum that some Western countries were reducing investment in Africa because of the financial crisis, which presented Chinese businesses with opportunities to expand their investment and market share in Africa. Trade with Angola, China's biggest source of African crude oil, reached $25.3 billion in 2007 and Beijing has offered Luanda $5 billion in oil-backed loans. (Note: At the recent Mining Indaba, state-owned Chinese company Chinalco struck a $20 billion deal to purchase a share of mining giant Rio Tinto. End Note.). -------------- South Africa Gold Drops to Third Place -------------- ¶9. (SBU) London-based precious metals consultancy GFMS said South Africa dropped to third place as a world gold producer in 2008, after its biggest drop in output since the Anglo-Boer War in 1901. The country dominated gold production for more than a century, but has seen output decline as mines became deeper and more costly to operate. Mines had to shut down for a week in January 2008 because of electricity blackouts, followed by power rationing of 5-10%. South Africa is now number three behind China and the United States, Gold Fields Mineral Services (GFMS) said in its 2008 Gold Survey. China became number one in 2007 when its production rose to 276 tons against South Africa's 272 tons. South Africa's gold production fell by 14% in 2008, to about 234 tons. South Africa produced 1,000 tons of gold at its peak in 1970, but has been on a terminal decline since. Global gold production in 2008 fell to its lowest level since 1995 due to technical issues, skill shortages, power constraints, and a weakening global economy that made project financing difficult. -------------- Zambia Abolishes Windfall Mining Tax -------------- ¶10. (SBU) At the height of the copper/cobalt boom, the GRZ imposed a Q10. (SBU) At the height of the copper/cobalt boom, the GRZ imposed a number of new fiscal demands on mining companies. A number of mining projects have since been put on hold because of weakening commodity prices, spurring the GRZ to subsequently lessen the impact of the new taxes. Zambia is Africa's top copper producer and depends on copper and cobalt for more than 63% of government revenues and foreign exchange earnings. Copper production in 2008 rose 3.7% to 569 891 tons and cobalt production rose 19.5% to 5,275 tons. ¶11. (SBU) Following consultation with the mining sector, Zambia's Finance Minister Situmbeko Musokotwane announced the government would abolish the windfall tax to cushion the copper mining industry from weak prices. Musokotwane said he proposed to retain the 15% variable tax, which would still capture any windfall gains that may arise in the sector, but he would cut the import duty on heavy fuel oils from 30% to 15% and remove the customs duty on copper powder, copper flakes, and copper blisters. He said these measures would reduce the operating costs of mining companies as well as encourage PRETORIA 00000309 004 OF 004 the utilization of local smelting capacity. The move is seen as part of efforts to save jobs. Zambia's Luanshya Copper Mines (LCM) laid off almost all of its 1,740 miners after halting operations in November. Foreign mining firms operating in Zambia include Canada's First Quantum Minerals, Australia's Equinox Minerals, Swiss firm Glencore International, and London-listed Vedanta Resources. -------------- -------------- ZIMBABWE - Gold Wins but Platinum and Diamonds Lose -------------- -------------- ¶12. (SBU) Zimbabwe's Reserve Bank announced it would allow gold producers to sell their own bullion after gold output slumped by more than 50% in 2008. Gold now contributes less than one-third of Zimbabwe's export earnings since the collapse of commercial agriculture. Reserve Bank Governor Gideon Gono announced in his monetary policy statement that gold production fell from 6,798 kilograms in 2007 to a low of 3,072 kilograms in 2008, mainly due to non-payment by the Reserve Bank for gold purchases, rising production costs, frequent power cuts, and equipment shortages. Gono said the Reserve Bank would allow miners to retain 92.5% of their gold earnings in line with other exporters, in order to reverse the decline in gold production. The remainder would be sold to the Reserve Bank at a market-determined exchange rate. However, he revoked the concession allowing platinum and diamond miners to keep offshore foreign currency accounts, ordering that accounts be held in local banks, and he announced increased Reserve Bank control over the marketing of platinum and diamonds. ¶13. (SBU) Miners have struggled to contend with a severe economic crisis that includes the highest inflation rate in the world -- officially reckoned to have been in the millions over seven months ago -- and foreign currency shortages, which have forced most mines to cease operations. In addition, the Reserve Bank, which has been the sole marketer of gold, owes the gold miners millions of dollars. Gono said funds owed to miners for previous deliveries would be converted into special foreign currency bonds, payable after 12 months. He also urged the government to amend empowerment laws that were of concern to foreign investors. Zimbabwe passed an empowerment law in 2008 seeking to transfer majority control of all foreign firms to local blacks, but has yet to implement this law. La Lime