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Cablegate: South Africa: Minerals and Energy Newsletter "the Assay" -

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INFO RUEHBJ/AMEMBASSY BEIJING 0033
RUEHJO/AMCONSUL JOHANNESBURG 2644

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TAGS: EPET ENRG EINV EIND ETRD ECON ELAB KHIV SF
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" -
ISSUE 7, MAY-JUNE 2007

This cable is not for Internet distribution.

1. (U) Introduction: The purpose of this monthly 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.

---

Key

---

2. (U) Key to some of the terminology and abbreviations used is
given to facilitate understanding.

BEE (Black Economic Empowerment) - the scheme whereby the South
African Government promotes black participation in business.

- t = tons,

- t/d = tons per day,

- c/l = cents per liter,

- t/m = tons per month,

- t/y = tons per year,

- oz = troy ounces (31.1 grams),

- cmg = centimeter grams,

- mcf = million cubic feet,

- tcf = trillion cubic feet,

- R = SA currency (rand),

- MW = megawatts,

- kt = thousand tons,

- bbl/d = barrels per day,

- MW = megawatts,

- PGM = platinum group metals.

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HOT NEWS

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Skills Shortage Beginning to Bite

---------------------------------

3. (U) The shortage of management and technical skills was cited
as one of the causes for the recent poor performance by Lonmin
Platinum, the world's third biggest platinum producer. In
similar vein, Assmang, South Africa's second biggest producer of

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iron ore has acknowledged (de facto) that it has a similar
problem. During the current set of industry wage negotiations,
the minerals industry has resisted double-digit settlements. By
contrast, Assmang has signed an agreement with its three unions
for a three-year wage deal that provides for a 15% wage increase
in the first year and nine percent a year for the remaining two
years. This is substantially above the current (formal)
inflation rate of 6.4%. However, it probably takes into account
the cost of a prolonged strike to the company, especially during
booming demand for iron ore, and food price inflation that is
between 8% and 9% for lower paid workers and 12% for poor rural
dwellers who spend more than 50% of their income on food.
Significantly, in terms of the agreement, a scarcity allowance
of $300 per month will be paid to artisans. This underscores
the gravity of the skills shortage that the mines are
experiencing and that is generally applicable throughout the
country. The Solidarity union has long asked companies to
consider a skills allowance as a way of retaining skilled staff.


Skills Trouble at Lonmin Platinum

---------------------------------

4. (U) The performance of Lonmin Platinum (Lonplats), the
world's third biggest platinum producer, has been a concern to
the market for more than a year. Problems relate to poor
management and technical performance on their mines, smelters
and refinery, which has impacted the company's financial
performance. The third quarter report reflects the difficulties
that Lonplats is experiencing. It points out that Lonplats has
had to revise its full-year platinum sales expectations down
from one million ounces to between 820,000 and 840,000 ounces as
a result of the loss of key managers, decreasing grades, and
reduced recoveries. Part of the problem has been attributed to
the fact that the top management of the group resides in London
and the CEO only spends 10 days a month in South Africa
attending to operations. On the production side, smelter
recoveries were down 10% due to lower grades and the changing
mineral composition of the ore as more UG2 reef is mined - the
UG2 contains more palladium and base metals than the traditional
Merensky reef for which the plants were originally designed.
This issue can only be resolved by changing the constituency of
feed to the smelters and by restoring the integrity of the
furnaces, which have had numerous shutdowns over the past few
years.

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U.S.-S.A. PARTNERSHIP

---------------------

Geophysics Partnership between Pennsylvania State and
Witwatersrand Universities

--------------------------------------------- --------

5. (U) During July 16 to 18, the Johannesburg-based
Witwatersrand University hosted the 3rd annual AfricaArray
workshop. AfricaArray is a joint Wits-Penn State initiative to
support capacity building for Africa's resource sector in the
field of seismic and remote sensing - used in exploration for
minerals and petroleum, tsunami early warning systems,
environmental monitoring (climate change), etc. Wits is the
only university in Africa with a recognized geophysics program
and the objective of AfricaArray is to train geophysicists from
the continent to be able to support their respective resource
sectors. The planned 20-year initiative provides training for
African graduate students at both Wits and Penn State (and other
institutions in the EU) and is in the process of establishing an
array of scientific observatories and monitoring stations across
the continent. It is currently undertaking a number of research
and exploration projects on the continent with funding provided
by government institutions in the United States and South Africa

JOHANNESBU 00000231 003 OF 007


and by a number of multinational mining and oil companies. The
purpose of the workshop was to provide an update on progress, on
research being undertaken, and plans for future work. Walter
Mooney of the USGS presented a paper on Earthquake and Tsunami
Training in Africa.

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PLATINUM

--------

Consolidation for Junior Platinum Producers

-------------------------------------------

6. (U) The ongoing boom in price and demand for platinum in
particular, but also for its co- and bye-products, such as
rhodium, ruthenium, iridium, nickel, copper, cobalt and gold,
has given rise to some 20 exploration and mining companies
working on more than 30 new and expansion platinum projects on
South Africa's Bushveld Complex. Many of the companies are
juniors and do not have the capacity to develop large mines on
their own. Most of these projects could not deliver more than
250,000 ounces of platinum group metals each year, mainly in
concentrate form, and would have to rely on external smelters
and refineries to produce finished metal - roughly 1 million
ounces per year is needed to justify a smelter-refinery complex.
The lack of these facilities will inevitably lead to
consolidation of the smaller operations. There are only three
major players with refining and smelting capacity. They are
Anglo Platinum (Anglo Plats), Impala Platinum (Implats) and
Lonmin Platinum (Lonplats). Each currently has spare capacity
and toll or purchase arrangements with smaller producers.

Platinum Supply Increase by 50%

-------------------------------

7. (U) A junior mining platinum project review by the specialist
banking group Investec, estimates that over the next five years
2.5 million ounces of platinum will come from junior projects in
South Africa and another 2 million ounces from expansions by the
major companies. Thus, the current annual platinum supply of 8
million ounces could increase by more than 50%. Demand is
unlikely to increase by this amount and this would result in an
over supply of platinum and the other platinum group metals,
with a corresponding decrease in prices. Investec does not
expect all the junior projects to become mines because they lack
the capacity to raise capital or to achieve production targets.

8. (U) Currently, there are an estimated 17 shaft-sinking
projects in southern Africa and just three companies to do the
work. Potential platinum producers have placed orders for long
lead items and have secured shaft sinking contractors ahead of
completing bankable feasibility studies to avoid the rush for
supplies and services. CEO of Wesizwe Platinum, a developing
platinum project, believes that there are five to seven years
left for the current high platinum group metal (PGM) prices and
that juniors needed to get payback on projects in time to
survive future softer prices. If prices do come down, the
majors, which supply 85% of the world's PGMs, would cut back on
expansion plans. In such an environment majors would likely buy
out the more promising juniors to remove possible new ounces
from the market. However, other majors such as Gold Fields and
Xstrata could well take the opportunity to get into the platinum
business.

INFRASTRUCTURE

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Rail Link to New Coalfield

--------------------------

9. (U) Coal has been produced from the Mpumalanga coalfields for
nearly 100 years. However, output really only escalated in the
1970's when volume coal exports began and Sasol 2 and 3 plants
were commissioned (oil from coal). Currently, these two markets
account for 155 million tons per year or 63% of total saleable
coal production, most of which comes from Mpumalanga. Reserves
contained in these coalfields have declined and production is
increasing from other more remote areas. The Waterberg
coalfield in Limpopo Province, which spills over into Botswana
and becomes the Mmamabula coalfield, is estimated to contain
about 40% of South Africa's remaining exploitable coal
resources. It already hosts the 17 million ton per year
Grootegeluk coal mine which feeds the adjacent 4,200 Megawatt
Matimba power station. Additional development in the Waterberg
proposes two similar-sized plants, one next to Matimba (Medupi)
and another on the Botswana side. However, if this coal is
eventually to complement exports, an upgrade to the existing
rail line is a necessity.

10. (U) Spoornet, the state-owned railways utility has announced
its intention to build a $2.3 billion rail line to connect the
Waterberg coal mines to Coega, the deep water port under
development in the Eastern Cape Province. A further $114
million is to be used to construct a rail link to Richards Bay
Coal Terminal for export to Europe and China. This new
investment is in addition to the $5.1 billion already committed
for the purchase of new locomotives and wagons and the
installation of signal systems over the next five years.
Although the power utility, Eskom, will use most of the coal
from the new mines, substantial volumes will be available for
export. Spoornet has been blamed for chronic capacity
constraints and operational inefficiencies, which caused most of
its customers to move to road freighters - rail traffic grew by
only 0.3% between 1993 and 2004, while road traffic rose 5%. In
addition, the number of new trucks on South Africa's roads rose
by 16.5% over the past three years, whereas the number of
locomotives and wagons decreased by 33% and 28%, respectively.
This has caused substantial damage to roads on the affected
routes. Spoornet aims to increase its current 10% market share
to at least 30% in the next five years.

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ELECTRICITY

-----------

Cheap Energy a Thing of the Past

--------------------------------

11. (U) The reserve margin for the state-owned power utility
Eskom could fall to 3.8% next year if its peak demand forecast
is correct. Operational capacity will grow to 40,000 Megawatts
(MW) next year from the current 38,200 MW, but the peak demand
forecast of 38,500 MW could trim its reserve margin from 4.2% to
3.8%. Eskom's reserve margin will only start to widen when the
new coal-fired Medupi station in Limpopo Province comes on
stream from 2011. Mozambican power imports give Eskom an
additional 1,490 MW cushion, which will take its reserve to
about 7.3% next year - the globally accepted reserve margin is
15%. Peak demand this year has already exceeded forecasts.
Demand was expected to peak at 36,300 MW this winter, but
reached 36,500 MW on June 27. The return to service of three
mothballed power stations will be completed by 2011, which will
add 3,800 MW. Likewise, independent producers will generate
1,050 MW and the expansion of the Western Cape's open cycle gas
turbine plants will add 2,000 MW by 2009. Eskom wants to lift
prices by 13 percentage points above CPIX (consumer price index
excluding mortgages and currently running at 6.4%) from next

JOHANNESBU 00000231 005 OF 007


April and by 12% above CPIX in 2009. This has still to be
approved by the National Energy Regulator (NER).

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FERRO-ALLOYS

------------

Ferro-Chromium Production to Expand by 150%
-------------------------------------------

12. (U) South Africa is the world's biggest producer of
ferro-chrome metal. On July 2006, International Ferro Metals
(IFM) officially opened its Lesedi chromite mine at a ceremony
attended by representatives of the South African, Chinese and
Australian governments. IFM is a joint venture between
companies from these countries. At the time, IFM also confirmed
that the construction of the first phase of its integrated
ferrochrome smelting and mining operation at Buffelsfontein in
the North West province, was on schedule to achieve a production
rate of 267,000 tons of ferrochrome per year by the end of 2007
- phase 1 was officially opened in May 2007. Ferro-chrome is a
major constituent of stainless steel.

13. (U) On July 9, IFM announced that it had begun a feasibility
study to assess the viability of further expanding output from
the Buffelsfontein facility to 665,000 tons per year. The
expansion would involve the installation of up to three
additional 66 MVA furnaces, a 600,000 ton per year palletizing
and sintering plant (for aggregating fine material), and a 1.1
million ton per year beneficiation plant, at a capital cost of
about $460 million. The company said it expects ferro-chromium
demand to grow by 66% between 2007 and 2015. The feasibility
study is scheduled for completion in January 2008, with
construction to start in March and ramp-up beginning in
September 2009. IFM has an off-take agreement with Jiuquan Iron
& Steel Group Company (JISCO), the largest steel manufacturer in
North West China, for approximately 40% of its ferrochrome
production.

--------

DIAMONDS

--------

De Beers Can Again Buy Russian Diamonds

---------------------------------------

14. (U) In February 2006, the European Commission ordered De
Beers, the world's top diamond producer to stop buying rough
diamonds from Alrosa of Russia, the second biggest diamond
producer, on the grounds that this would constitute an abuse of
monopoly power. The decree was to take effect from 2009. At
the beginning of July, on appeal by Alrosa, the judgement was
reversed by a top European court on the grounds that it was
disproportionately harsh to prohibit all commercial relations
between the two parties after 2009. The court also said that EU
regulators had not proved that the two companies held a dominant
position in the EU market to justify limiting their business
freedom. The decision is not likely to have much effect on the
way De Beers does business in other jurisdictions.

15. (U) De Beers has been under legal pressures for decades due
to its marketing practices. In 2004, the company pleaded guilty
to conspiring to fix prices for industrial diamonds and paid a
$10 million fine. This agreement cleared the way for it to

JOHANNESBU 00000231 006 OF 007


resume selling diamonds in the United States. In November 2005,
De Beers agreed to pay $250 million to settle a class action
suite in the U.S., brought by previous clients and others who
claimed that the company's marketing practices were
discriminatory and a restraint of trade. De Beers is also
facing regulatory pressures in South Africa for allegedly
exporting rough diamonds without properly offering stones to
local cutters and polishers. De Beers is also accused of not
paying export taxes on a large parcel of diamonds exported just
prior to the inauguration of the African National Congress (ANC)
government in 1994. The fear of being accused of
anti-competitive behavior has effectively prohibited De Beers
from buying other operational diamond mines. As a result,
during 2007 they will spend $100 million on searching for new
mines.

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MINING

------

South Africa's Mining Boom - Missed or Delayed?

--------------------------------------------- --

16. (U) The decade beginning in the year 2001 has seen
unprecedented demand and price increases for mineral
commodities, driven principally by China and supported by growth
in India, Russia and a number of countries in the Far East.
Mineral and mineral-based products account for nearly half of
South Africa's export revenues and more than one-sixth of its
GDP. Since the start of the commodities boom, South Africa's
mineral revenues have increased, mainly as a result of rising
prices, but production has not kept pace with international (and
domestic) demand.

17. (U) More worrying is that investment in mineral exploration
and mining has lagged that of competitors, which in turn will
delay the ability to increase output. Between 2003 and 2006,
South African exploration expenditures increased by 60% (mainly
for platinum) while the global average increase was 120%, and
South African capital investment decreased by 33%. The SA
Chamber of Mines (COM) blames this mainly on: new mining-related
legislation and delays in processing license applications and
permits. However, other factors also contributed, such as
currency volatility and cost escalations, skills shortages, and
the time required to bring new production on line.

18. (U) There is light at the end of the tunnel. The most
recent nine-month investment trend shows an 8% increase in
investment and this is likely to be reinforced by government and
industry commitments of tens of billions of dollars over the
next five years. Government has committed a total of $65
billion to upgrade and expand power, water and bulk mineral
transport infrastructure. Industry has committed some $20
billion to increase outputs of gold, platinum, coal, iron ore,
uranium, ferro-alloys, and diamonds. Provided that the demand
for commodities continues, the country's participation in the
commodities boom will have been delayed but not missed. The
investment drought is now over.

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ENVIRONMENT

-----------

Green Tape Choking New Mine Developments

----------------------------------------

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19. (U) Top government officials, including President Mbeki, and
industry leaders have long complained about the onerous
regulation and time required to get mining and exploration
licenses. The problem has been the number of departments
involved, including the Department of Minerals and Energy (DME),
the Department of the Environment (DEAT) and the Department of
Water Affairs and Forestry (DWAF). All lack capacity, each have
their own priorities and agendas, and there is little
communication or cooperation between or within departments.
This has been one of the major reasons for the delay in issuing
licenses since 2004.

20. (U) Now, Members of the Parliamentary Minerals and Energy
Portfolio Committee have been told by DME that the regulatory
environment is affecting mining, especially new projects. The
DME has accused "over-zealous officials" from the DEAT of
demanding a parallel process of compliance for environmental
impact assessments and of holding back mining projects that
don't meet their criteria. In terms of existing legislation,
mining houses need only comply with the DME environmental
management specs.

No Scenic Beauty in Poverty - Clouds on Titanium Project

--------------------------------------------- -----------

21. (U) The proposed Xolobeni Mining Project in the Eastern Cape
is an example of the above "Green Tape" problem. The Australian
mining company MRC Resources has, after nearly three years of
exploration and legal challenges by environmentalists, applied
for a mining license from the Department of Minerals and Energy
(DME), which has been accepted. This could lead to a $2.5
billion titanium mine and create 550 jobs in one of South
Africa's poorest regions with the highest unemployment. The
area to be mined is a remote, difficult to access, severely
eroded strip of land set back from the coast and away from
estuaries and other sensitive areas with tourism potential.
Exploration results show that the area hosts one of the world's
top ten titanium resources containing an estimated nine million
tons of titanium.

22. (U) However, the area is also renowned for its natural
beauty. Ecologists want the area ring-fenced for tourism and
protected for future generations. They also oppose an extension
to the N2 national highway that would open the area to mining,
and presumably to tourism, which they also seem to oppose. The
local communities in favor of development say they are
impoverished and have waited for the development and jobs
promised from ecotourism but nothing has happened. The mine
will ensure that they finally have access to electricity, water,
a sewerage system, and schools for their children. South
Africa's Mining Charter also provides for the local communities
to buy (with government and industry assistance) a 26% stake in
the mine. The whole issue has fueled emotions in a classic
standoff between ecologists and environmentalists on the one
side and miners, the DME, and local communities on the other.
The government is keen for the mine to go ahead but
environmental challenges could still delay, if not permanently
derail, production start up planned for 2010.

COFFMAN##
COFFMAN

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