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

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INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
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RUEHBY/AMEMBASSY CANBERRA 0561
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RUEHFR/AMEMBASSY PARIS 1197
RUEHOT/AMEMBASSY OTTAWA 0515
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 04 PRETORIA 003744

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DOE FOR SPERL AND PERSON

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TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 10A, October 1-15, 2007


PRETORIA 00003744 001.2 OF 004


This cable is not for Internet distribution.

1. (U) 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.

---
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.

--------
HOT NEWS
--------

------------------------------
U.S. Lifts Tariffs on SA Steel
------------------------------

3. (SBU) The U.S. International Trade Commission (ITC), an
independent agency that protects U.S. companies against harmful
imports, has lifted tariffs on hot-rolled steel imports from South
Africa. These tariffs were initially imposed in 2001 as a Safeguard
Measure to protect U.S. steel companies from low-cost imports. At
that time, the global price for hot-rolled steel was below $200 per
ton and many of the older integrated steel plants could not compete.
The Safeguard Measures were introduced to give the U.S. steel
industry a breathing space to re-equip and reorganize to become more
globally competitive. A year or so after the measures were imposed,
coinciding with the onset of the commodity boom, the price of
hot-rolled steel more than doubled. Under the WTO rules, the U.S.
must review countervailing tariffs every five years. The tariffs on
SA steel were revoked, along with those on steel from Argentina,
Kazakhstan and Romania because it was unlikely to cause harm to the
local industry.

---------
COMPANIES
---------

------------------------------------
Anglo American CEO Spills More Blood
------------------------------------

4. (SBU) Following the departure of a number of senior executives at
AngloGold Ashanti and Anglo Platinum in August/September, reportedly

PRETORIA 00003744 002.2 OF 004


at the behest of Anglo American's new CEO Cynthia Carroll, last week
brought the announcement of a new round of shakeups of the Anglo
Platinum board. Anglo American owns a 75% share of Anglo Platinum.
According to the announcement, Anglo Platinum's board will be cut to
just two members, compared to eight at the end of 2006. Of the
eight executive directors at the end of 2006, two have resigned, one
has retired and three others have effectively accepted demotions.
Since December 2006, 12 non-executive directors have also left the
company.

5. (SBU) The initial purge of AngloGold and Anglo Platinum CEOs was
apparently related to Carroll's demand that they take responsibility
for mine safety, following a number of accidents and fatalities at
their mines. However, this latest move seems more related to
efficiency concerns and the decision to get rid of "dead wood".
(Comment. Carroll is an American Citizen and was previously Senior
Vice President of Alcan, the Canadian Aluminum giant that has
recently been taken over by Rio Tinto. Her efficiency management
has resulted in the removal of a number of tiers of senior and
middle management. End Comment.)

------
ENERGY
------

---------------------------------------
Eskom Put to the Test and Found Wanting
---------------------------------------

6. (SBU) The inadequacy of South Africa's slim electricity reserve
margin of less than 8% has been exposed by significant rolling
black-outs around the country. The combination of cold and wet
weather, planned maintenance and unexpected outages at a number of
power stations, and additional losses allegedly due to wet coal
supplies has reduced state power company Eskom's installed capacity
by up to 20% since October 9. As a result, Eskom has imposed
"load-shedding" (enforced rationing or rolling black-outs) in
Pretoria, Johannesburg and other municipal areas to cope with the
generation shortfall. Pretoria neighborhoods, including the
downtown office of the Department of Minerals and Energy, have been
subjected to hours of unexpected blackouts. Eskom has asked its
industrial customers, such as gold mines and operators of aluminum,
ferrochrome, and steel furnaces to share the power cuts. It is
expected that the power supply deficit will last as long as the
inclement weather stays around. Eskom's scheduled maintenance
program should be completed by March next year.

----------------------------------------
Energy Summit Reviews 1998 Energy Policy
----------------------------------------

7. (SBU) The South African Department of Minerals and Energy (DME)
organized a two-day Energy Summit (September 24-25) to engage with
stake-holders to reassess SA's energy policy as set out in the 1998
Energy White Paper. DME Director General Sandile Nogxina said the
energy situation had changed drastically since 1998, therefore
requiring scrutiny of all areas of the policy to see whether the
assumptions made in its compilation were still valid. The price of
international crude oil has jumped from about $10 per barrel in 1998
to more than $85 per barrel today. Additionally, the output
capacities of South Africa's oil refineries and Eskom's generators
have swung from large surpluses and exports to an inability to keep
up with growing demand and the scurry to provide new supply capacity
and options. Exports have also been reduced to minimum contractual
requirements.

8. (SBU) Nogxina emphasized that in a developmental state like South
Africa, the role of the State was critical in striking a balance
between the interests of capital and national objectives, such as
universal access to affordable energy - some 70% of SA households
are linked to the electricity grid. Nevertheless, the SAG welcomed
private sector participation in energy supply (limited to 30% of new
electricity build), as exhibited by the appointment of an AES-led
consortium to build two gas-fired power plants with a total capacity
of 1,000 megawatts in Durban and Coega. However, Eskom would remain

PRETORIA 00003744 003.2 OF 004


the single buyer of electricity, and as the guaranteed off-take
provider would create the environment to attract other independent
power producers.

----
GOLD
----

--------------------------------------
SA Still World's Leading Gold Producer
--------------------------------------

9. (SBU) South Africa's gold production has been in decline for
years and it is now producing less gold than it did in 1922. South
African gold production was 275 tons in 2006, 296 tons in 2005, 428
tons in 2000, and 1,000 tons in 1970, which represented two-thirds
of the world production of 1,500 million ounces in that year.
However, the country maintains a slim lead over competitors as these
have also seen a decrease in gold output. For instance, U.S. gold
output declined from 262 tons to 260 tons in 2006, Australian
production fell from 263 tons to 251 tons, Peru production declined
from 207 tons to 203 tons, Russian output dropped 4 tons to 152
tons, and Canada's output fell from 118 tons to 104 tons. In total,
gold output from these Countries fell by 57 tons or about 1.75
million ounces. Much of this is due to problems that beset the
industry in the past and resulted in low prices and low levels of
new investment in future production. However, with the price of
gold at a 28-year high, new investment is flowing in for exploration
and mine expansions.

---------------------------
Deep Gold Mining Fatalities
---------------------------

10. (SBU) Thirty-one legal and illegal miners were fatally injured
in accidents, fires and rock falls in South African gold mines
during the past month. A further 3,200 miners (including 200 women)
were trapped underground at a depth of 2,200 meters for up to 48
hours when a pressurized air pipe in a shaft at a Harmony mine broke
loose and fell down the shaft and damaged the shaft infrastructure
and severed electricity and communication cables. Ambient rock
temperatures at that depth reach 40 degrees C and without proper
ventilation and cooling, work is impossible. Fortunately, no
injuries were reported in this incident and all miners were safely
brought to surface. Included in the thirty-one fatalities were 23
illegal miners who were caught in a fire in abandoned portions of
the Harmony's St Helena Mine in the Free State Province. The
illegal's gain access to old working places via co-worker compliance
or through other shaft systems. They spend weeks at a time
underground perilously chipping away at gold ore in shaft and
boundary pillars left unmined to stabilize the mine and shafts.

--------------------------------------
Deep Mining Can Still Be Fatality Free
--------------------------------------

11. (SBU) Despite the above accidents, Africa's leading gold
producer AngloGold Ashanti maintains that it is possible to mine at
depths exceeding 3,000 and even 4,500 meters without incurring
fatalities. Years were spent on a Deep Mine design research project
carried out by industry and the State-owned research organization,
CSIR-Miningtek, to verify the technical feasibility of mining down
to 5,000 meters. The project findings were put on hold because of
the low price of gold at the time. However, the current 28-year
record high gold price could cause these plans to be dusted off and
implemented.

12. (SBU) South African gold mines employ more than 200,000 miners,
account for at least the same number of jobs in other supporting and
service industries and each employee supports another four or five
dependents. Annually, the mines pay out billions of dollars in
taxes, wages, salaries and procurement of supplies, equipment,
research and services, and earn some $5 billion in foreign exchange.
Therefore, the answer is not to close the mines, a sentiment
endorsed by the unions. Instead, companies like AngloGold Ashanti

PRETORIA 00003744 004.2 OF 004


are aiming to work with labor and government to effect a cultural
change that would lead workers to understand the reasons for safety
and the need to implement safety regulations.

--------------
FERROUS METALS
--------------

-----------------------------------
Nickel Mine to Quadruple Production
-----------------------------------

13. (SBU) South Africa has only one small nickel mine, the Nkomati
Nickel Mine, which is located in Mpumalanga Province. Other nickel
production is a by-product of platinum mining. Nickel is an
essential ingredient in the production of stainless steel and is
currently at record high prices. The joint owners of Nkomati are
African Rainbow Minerals (ARM), a black-owned South African company,
and the Russian miner Norilsk, which is the world's leading producer
of palladium, a platinum group metal. The owners have approved a
$460 million expansion plan to quadruple the yearly production of
the mine to 20,500 tons of nickel and extend the mine life by 18
years, to 2027.

14. (SBU) ARM and Norilsk plan to start construction early next year
and production could start in the third quarter of 2009. Full
production is expected in the first quarter of 2011. In addition to
nickel, the mine would annually produce 9,000 tons of copper, and
110,000 ounces of platinum group metals (PGMs). The Nkomati
resource is estimated at 904,000 tons of nickel with capacity to
produce 625,000 tons ore per month from underground and open-pit
mining. The existing 100,000 ton per month concentrator is to be
upgraded to take 250,000 tons per month and a new 375,000 ton
concentrator will be built, which will provide a total smelting
capacity of 625,000 tons per month. The expansion secures 254 jobs
and will create an additional 330 new operational jobs and employ
2,000 contractors during the construction phase.
BOST

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