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Cablegate: Ambassador Visits Zimbabwe's Premier Platinum

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PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0172/01 0661443
ZNR UUUUU ZZH
P 071443Z MAR 07
FM AMEMBASSY HARARE
TO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 1197
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1497
RUEHAR/AMEMBASSY ACCRA 1354
RUEHDS/AMEMBASSY ADDIS ABABA 1501
RUEHBY/AMEMBASSY CANBERRA 0763
RUEHDK/AMEMBASSY DAKAR 1127
RUEHKM/AMEMBASSY KAMPALA 1556
RUEHNR/AMEMBASSY NAIROBI 3954
RUEHFR/AMEMBASSY PARIS 1324
RUEHRO/AMEMBASSY ROME 1980
RUEHBS/USEU BRUSSELS
RUEHGV/USMISSION GENEVA 0654
RHEHAAA/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1718
RUEKJCS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 04 HARARE 000172

SIPDIS

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR M. COPSON AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: EMIN ECON PGOV ZI
SUBJECT: AMBASSADOR VISITS ZIMBABWE'S PREMIER PLATINUM
OPERATION; DISCUSSES RISK AND REWARD

REF: A. 2006 HARARE 1377

B. 2006 HARARE 0629

-------
Summary
-------

1. (SBU) On February 6, Zimplats executives guided
Ambassador Dell on a day-long tour of the company's platinum
mining and processing operations in the second largest
platinum deposit in the world. Having made peace,
temporarily at least, with the GOZ under pressure of
expropriation by ceding a third of its claims, the company is
undertaking a major expansion project and investing heavily
in infrastructure. Although the company is in a favorable
position for now, both business and sovereign risk remain
extremely high. Lingering uncertainty over potential
government expropriation, plus deep distortions in the
economy and a looming regional electric power shortage keep
the company's pace of investment cautious at a time when its
claims, expertise, and high precious metal prices argue for
maximum investment. End Summary

---------------------------------------
World's Second Largest Platinum Deposit
---------------------------------------

2. (SBU) Zimplats CEO Greg Sebborn and COO Jack Murehwa
guided Ambassador Dell and econoff on a day-long tour of the
company's mining operations in Ngezi and its processing plant
in Selous, an hour's drive southwest of Harare. Zimplats'
platinum claims lie in the unique mineral-rich geologic
structure called the Great Dyke, which stretches 515 km
across Zimbabwe passing just to the West of Harare. At its
widest only 12 km across, the Great Dyke contains the world's
second largest deposit of platinum group metals in four
locations, and significant chromite, magnetite and other ore
minerals.

3. (SBU) Owned 86 percent by South Africa's Impala Platinum
Holdings (Implats) and traded on the Australian Stock
Exchange, Zimplats is by far the largest of Zimbabwe's three
platinum mining companies. Sebborn told the Ambassador that
the company hoped to list on the Zimbabwe Stock Exchange this
year with shares traded interchangeably, like Old Mutual
shares, on both exchanges. The move would widen the
company's ownership base and, the executives hoped, further
relieve the pressure to "indigenize" that led the company to
release 36 percent of its claim to the government last year.
It also provides a market-based approach to indigenization
rather than government mandated changes in ownership )
usually imposed by fiat without investment or compensation to
the foreign owners.

------------------
Massive Investment
------------------

4. (SBU) Following the agreement with the GOZ last year, the

HARARE 00000172 002 OF 004


Zimplats Board approved the first US$258 million phase of its
long term expansion plan (Ref B). The investment will shift
production entirely underground, where costs are lower and
the recovery rate higher. Sebborn showed the Ambassador
first hand the highly mechanized operation in which Zimplats
mined and processed 2.16 million tonnes of ore per annum in a
roughly 50:50 split between underground and surface
excavation. He told the Ambassador the company currently
employed 1,900 employees and contractors and was producing
85,000 oz platinum, 71,000 oz palladium, 1,500 tons of
nickel, 1,100 tons of copper, and 11,000 oz gold (all
associated metals) per annum.

5. (SBU) The executives showed the Ambassador Zimplats'
extensive investment in infrastructure, which in scale and
scope(if not style)resemble nothing so much as the original
infrastructure build-up needed to explore and develop the
early mining activities in South Africa more than one hundred
years ago: the 77 km highway connecting Ngezi to the Selous
processing plant, built at a cost of US$19 million to handle
the 105 ton haulage trucks that the Ambassador observed
plying the route from mine to plant; a 132kV electric power
line, and plans for a further US$25 million investment to
upgrade the national electric power grid so Zimplats can
import power from Botswana; a fiber optic line and switching
equipment built for TelOne; water purification plants, and a
fresh water reservoir.

6. (SBU) The tour included a visit to the town's new
residential area, where neat one, two and three-bedroom
employee homes are under construction along freshly bulldozed
streets in what had recently been wilderness. Murehwa
lamented the missed opportunity for local manufacturers to
profit from the boom, as the gross overvaluation of the
Zimbabwean dollar compelled Zimplats to import 80 percent of
the building materials rather than purchase them locally at
the official exchange rate of Z$250:USD (the parallel
exchange rate is about Z$10,000:USD). Sebborn noted that the
company had made a significant investment in the local
primary school, which would pay dividends by providing the
company with well-educated workers in the future.

-----------------------------
Uniquely Favorable Conditions
-----------------------------

7. (SBU) Sebborn said that over the next 16 years, Zimplats
could, under favorable investment conditions, expand annual
platinum production to one million ounces, and invest a
further US$3.25 billion (excluding refineries) in an
integrated production chain of mines, concentrators,
smelters, and later base metals and precious metals refining.
Employment could peak at 12,000 workers including
contractors. Counting family members, rural Ngezi could
swell to a population of 36,000.

8. (SBU) Sebborn noted that Zimbabwe's especially shallow
platinum reserves allowed the company to expand production
quickly from a technical point of view. The new, gently

HARARE 00000172 003 OF 004


sloping Ngezi portal, down which the engineers walked the
Ambassador to the room-and-pillar operation, will reach a
maximum depth of a mere 70 m compared to South Africa's very
deep platinum mine shafts. Sebborn also explained that
Zimplats' geologists and technicians had learned to identify
the precious metals in the all-gray rock face, where the
first mining company to try to exploit the deposit in the
1990s had failed.

9. (SBU) Also in Zimplats' favor, the company inherited the
right, negotiated in the first joint venture in which it was
a minority stakeholder, to hold all of its earnings offshore
in US dollar accounts, not "subject to the whim of the
Reserve Bank of Zimbabwe," in Sebborn's words. This
arrangement was doubly significant, as Zimplats was financing
its expansion primarily through re-investment of its own
capital, aided by buoyant precious metal prices.

---------------------------------------
But Risks, Constraints on Growth Abound
---------------------------------------

10. (SBU) Sebborn said that the company had lingering
concerns that the government might once again use
indigenization as an excuse to try to expropriate more of the
claim. He agreed with the Ambassador that the government was
desperate for hard currency and saw mining as a sector it
could exploit. Sebborn said another factor slowing Zimlats'
expansion was the severe price distortions in the economy,
which unsettled the sector, discouraged investment, and drove
the best trained potential employees to emigrate. (N.B.
Canada's Fraser Institute has rated Zimbabwe for two years
running the worst place in the world for the mining business.)

11. (SBU) In addition, according to Sebborn, Zimplats had a
reliable electric power supply through an agreement with the
Zimbabwe Electric Supply Authority (ZESA) to pay for power in
hard currency. However, its most optimistic expansion plan
foresaw a rise in the company's power requirement from
slightly under 50 MW today to about 400 MW in 2018/2019. It
was unclear where such a large increase in power could come
from in light of Zimbabwe,s increasingly severe power
shortages.

-------
Comment
-------

12. (SBU) Zimplats came out of its 2006 wrangle with the GOZ
over ownership of its massive claim, for the time being, in
an enviable position. Its revenue is secure offshore,
precious metal prices are soaring and its product is
traceable and can only be processed to the end stage in a
very few plants around the world - all outside Zimbabwe. It
still has a claim on the vast majority of Zimbabwe's known
platinum resources and it has kept for itself the easiest,
shallowest part of the deposit to exploit.

13. (SBU) It appears that Zimplats has succeeded, for now at

HARARE 00000172 004 OF 004


least, in convincing the GOZ not to kill the golden goose.
At the same time, however, due to the uncertain investment
climate, Zimplats is foregoing more substantial investment.
Moreover, the GOZ's suspect approach to mining policy is
frightening away other major foreign direct investors at a
time when precious metal prices have rarely been higher and
the government has never needed the revenue more.
DELL

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