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

DE RUEHSA #0381/01 0571015
R 261015Z FEB 08





E.O. 12958: N/A
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 2, 1-15 February, 2008

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.

Mining Indaba: Africa is Oen for Business

2. (SBU) Record attendance of nearly 5,000 of mining's "who's-who"
at Cape Town's annual Mining Indaba showed why it is the premier
mining networking convention on the continent and on a par with the
Canadian Prospectors and Developers Conference (PDAC) and the
Australian Diggers and Dealers Conference (DDC). All aim to attract
investment into their respective mineral sectors by providing the
opportunity for prospectors, small exploration and mining outfits,
and governments to display their mineral wares to international
investors and the larger multinational mining companies, who are
eager to acquire good mineral prospects and projects at the right
price and profitability profile.

3. (SBU) Africa is emerging as a major global supplier of raw and
processed mineral products in the face of a scramble for resources
lead by the economic revivals of China and India and the growing
industrial strength of other Far Eastern nations and Russia.
Appropriately, the conference theme was "Africa is Open for
Business". Despite the overall upbeat tempo at this Indaba, four
issues caused it to be slightly less euphoric than last year's.
These were: the energy situation confronting South Africa and its
neighbors, the prospect of a recession in the United States that
could dampen global mineral demand, the possibility of a slow-down
in China's demand for raw materials, and the rising level of
resource nationalism in a number of mineral and oil-producing

4. (SBU) Nearly 5000 delegates from five continents heard sixteen
African ministers extol reasons for investing in mineral projects in
their respective countries. Five keynote addresses addressed topics
ranging from infrastructure to global climate change, the
possibility of a U.S. recession, reasons for continued bullishness
of gold, and whether the synchronized commodities boom could become
a synchronized bust. The potential global ramifications of these
issues were discussed and mitigation possibilities put forward.

5. (SBU) Some seventy papers on thirteen strategic commodities and
on individual mines and projects (including energy) were presented
Qon individual mines and projects (including energy) were presented
and provision made for scheduled group and one-on-one meetings with
company and country representatives. The presence of numerous
African Ministers and senior executives from the global mining and
investment communities is indicative of the importance attached to
the Indaba. These included the South African Minister of Minerals
and Energy Buyelwa Sonjica, Anglo American's CEO Cynthia Carroll, De
Beers' Managing Director Gareth Penny, and senior executives from
major investment organizations and producers of gold, diamonds,
platinum group metals, chrome ore and Ferro-chrome, and from biggest
diversified multinational miners.

Electricity in the air at the Indaba

6. (SBU) The topic of the potential impact of lower power supplies
on South Africa's mine output and resource prices was low-key during

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formal presentations at the Mining Indaba. Nevertheless, it was a
hot topic at many social gatherings as investors and producers
mulled over the reasons and potential options for the country's
flagging power supply. Uncertainty surrounds the state of power
supplies since power utility Eskom asked miners to reduce their
power usage by 10percent after a series of power cuts stopped mine
production for five days in January.

7. (SBU) South African Minerals and Energy Minister Buyelwa Sonjica
used her address to reassure delegates that solutions to the
electricity shortage were being sought. She took pains to refute
newspaper reports of her own department's energy inefficient
conduct, which gained little sympathy from a critical audience, and
she encouraged all mining companies to cut their power usage. The
Minister later applauded Anglo American's Chief Executive Cynthia
Carroll when she spoke of her company's energy-efficiency

8. (SBU) The Minister said that a short-term solution to the power
shortage lay in the current program of de-mothballing and
recommissioning three power plants and constructing four 500
megawatt open cycle gas turbine generators - two have already been
commissioned. This would help ease shortages over the next two
years. South Africa also needed to embrace alternative power
sources to deal with the electricity issues. Eskom plans to spend
US$ 41 billion to boost power generation by 2013, but warned that it
plans to start power rationing starting in March. Thus, power cuts
(hopefully planned and communicated to users) are expected to
continue intermittently until at least 2013.

9. (SBU) South African President Thabo Mbeki has apologized for the
SAG's negligence that contributed to the power situation and
described the power outages as a "national emergency". He said the
government would give Eskom funds to help end the power problem that
has cut the estimate of the nation's GDP growth for this year by
some 1.5 percent - from 4.9 percent to about 3.6 percent. In his
budget speech to parliament on February 20, Finance Minister Trevor
Manual announced almost $10 billion in financial support to Eskom
over the next five years. Given present circumstances, it is highly
unlikely that the country can achieved the desired goal of a 6
percent growth rate by 2010.


Power Crisis Could Damage Long-Term Growth

10. (SBU) South Africa's energy crisis has caused short-term
financial losses to large and small businesses and has been a great
"inconvenience" to South Africans in general. A semblance of order
and electricity management has taken root by way of commitments by
consumers to reduce demand by 10 percent and power-rationing is set
to kick-in in March - except for certain designated industries and
strategic facilities such as oil refineries. Currently, electricity
supply is reasonably stable at lower output and companies and
government are looking at the longer-term impact of the energy
Qgovernment are looking at the longer-term impact of the energy

11. (SBU) Nedbank Group Chief Economist Arthur Dykes warned that the
electricity crisis threatened South Africa's productive potential
and was more than a "simple constraint on a vital input". He said
that the loss to production and sales in the short term by rationing
could be simply calculated and would reduce GDP growth by some 1.5
percent in 2008. However, he said that if government's response to
the crisis was not adequate, the gap between potential GDP and the
"constrained outcome" would amount to "a huge R166 billion ($21
billion) in today's rands".

12. (SBU) Dykes estimates that the cumulative loss in GDP over a
five-year period could amount to R377 billion ($50 billion) and that
government could lose R100 billion ($13 billion) in tax revenue. To
avoid this outcome, cutbacks must be carefully targeted at areas

PRETORIA 00000381 003 OF 005

that would not reduce the economy's productive capacity. In the
case of mining, the industry has been on an energy efficiency
program for the past few years. Forced reductions from current
levels would have direct, negative and possibly non-linear effects
on output. A 30percent cut in electricity would force a total
shutdown of production. The current 10 percent reduction would
reduce output by more than 10 percent as some 50 percent of energy
consumed in deep mining provides only for cooling, ventilation, and
pumping. The remaining 50 percent is used for extraction, implying
that a 10 percent overall cut in electricity effectively generates a
20 percent cut in production. This could entail a revenue loss of
some $60 billion over five years for the gold and platinum mines at
2007 prices, which are now 30 percent to 40 percent higher.


Africa Demands More from its Minerals

13. (SBU) Despite an abundance of mineral resources in many African
countries, Africans have generally not benefited greatly from mining
activities and are now looking for a greater share of wealth from
their natural resources. Much of this travesty is due to a lack of
transparency in agreements between governments and mining companies,
which determine the distribution of revenues, and to poor governance
and corruption by the ruling elite in many African countries. It is
ironic that Africa, with its vast mineral resources, remains the
poorest continent in the world.

14. (SBU) A further problem is the general lack of negotiating
capacity and experience in African governments that could lead to
equitable and mutually beneficial contracts. This often becomes a
politically and economically unstable situation when mines become
highly profitable and governments come under civil society pressure
to renegotiate contracts. This is always an unpopular event for
companies and investors and also gives the country concerned a bad
(investor) reputation. Renegotiation of the ownership and revenue
distribution terms have taken place in many developing countries,
from Papua New Guinea to South Africa, Botswana, the DRC, and
Namibia as they have become more aware of the potential wealth being
forfeited to offshore investors. This has been labeled mineral
"nationalism" and is one of the issues being debated globally.


Gold Production

15. (SBU) In the short-term, South Africa's gold production is
estimated (by the Chamber of Mines and analysts for existing
conditions) at 250-260 tons for 2008 and 245 tons for 2009.
However, if gold mines have to operate at 90percent of normal power
these figures could be lower by as much as 15percent to 20percent,
namely about 220 and 210 tons for the two years, respectively,
according to Gold Fields CEO Ian Cockerill. In the short term, the
mines are likely to find it difficult to adapt to the reduced power
allocation, but in the longer term, they should get back to near
Qallocation, but in the longer term, they should get back to near
normal production, bearing in mind that some 50 percent of power is
needed just to sustain the deeper mines. Miners are confident that
they can weather the current storm but there could be a substantial
loss of reserves, employment, exports and delayed investment.

16. (SBU) South African gold output has seen an average decline of 4
percent per year over the past 28 years and this is likely to
continue unless the price increases at a rate above that of costs.
There are a number of major projects currently in the works, namely
at least one new mine and a number of others under evaluation,
including the re-opening of the central section of the Witwatersrand
basin over a length of some 45 kilometers and to a depth of about
1,000 meters. There are also a number of large expansion projects

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underway that could add some 30 to 40 tons of gold over the next
three to five years.

17. (SBU) In addition, if and when uranium production increases,
this will further increase gold output as a by-product - uranium is
associated with gold in the Witwatersrand gold field. However,
whether this new gold will compensate for that lost through lower
production (and closure) from the old deep-level mines remains to be
seen. Exploration within and around the basin is on-going and one
or more new discoveries, although highly unlikely, cannot be ruled
out. A number of mines have reserves/resources and production plans
for the next 25 to 50 years.

SA Gold Production Could Reach a 100-Year Low

18. (SBU) Electricity supply has recently become the vexing question
for gold-miners in South Africa. Gold Fields CEO Ian Cockerill said
that mines could lose as much as 20 percent of production for as
long as they received only 90 percent of their power needs. This
reduced output, together with the closure of marginal shafts, could
cause the country's gold production to drop to below 200 tons, a
level last seen about 100 years ago. A power cut of 10 percent over
a year equates to a foreign exchange revenue loss of about $1.5
billion at current prices and exchange rates. For over a century
gold has been one of South Africa's major foreign exchange earners
and a driving force behind the country's economy.

In Brief

Africa - Home to World's Most Wanted Minerals

19. (SBU) South Africa and the continent are rapidly being seen as
the storehouse of a variety of strategic minerals and energy
resources that are essential to industrial growth and economic
development. There are virtually no minerals that Africa does not
have in abundant and exploitable quantities, ranging from energy
deposits of coal, oil, gas and uranium, to gold, platinum group
metals, diamonds and gemstones, copper-zinc-lead base metals,
cobalt, titanium, tantalum, rare-earths and the ferro-alloy metals
of iron, nickel, chromium, manganese, vanadium and others. Africa
also has abundant untapped and under-exploited resources for hydro,
wind and solar power. Much of the new mineral development is being
driven by demand from China, India, Russia and the Far East.

Construction of DRC's Inga 3 Soon to Start

20. (SBU) The Western Power Corridor Company (Westcor) has announced
the launch of the Inga 3 Hydropower Project on the Congo River in
the DRC. The project is under the leadership of the African Union
(AU) and developed by Angola, Botswana, the DRC, Namibia, and South
Africa. The pre-feasibility study for the 4,300-megawatt base-load
station was completed at the end of 2007, and construction is
expected to start in 18 to 24 months. Westcor has called for
expressions of interest from advisors and consultants in a number of
Qexpressions of interest from advisors and consultants in a number of
disciplines including legal, power systems, economic and financial,
engineering, environmental, risk and project management, and
quantity surveying.

Eskom Needs Private Stopgap Power

21. (SBU) Electricity utility Eskom plans to turn to the private
sector to build and operate base-load power stations. The aim is to
plug a gap between the commissioning of two new coal-fired plants
that are due to come on line in about 2012 and new nuclear capacity
that should be commissioned in 2016. Eskom's head of generation,
primary energy and the new build program Brian Dames said that

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additional power needs to be brought on stream between these two
years and that Eskom plans to secure private sector participation in
a new base load power station to ensure that in 10 years South
Africa is not faced with power shortages again.

--------------------------------------------- -
Eskom Needs 45 Million Tons of Additional Coal
--------------------------------------------- -

22. (SBU) Eskom seeks an extra 45 million tons of coal, worth
between R11 billion and R22 billion, to restore its stockpiles to at
least 20 days' supply. This is over and above its running
requirement of 125 million tons used in 2007 and would be added
systematically over the next two years. Under its contracts, Eskom
pays on average $11 to $13 per ton for coal, but the 45-million
additional tons would have to be bought at near export prices as
high as $50 to $75 per ton. So far 34 million tons have been


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