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

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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 3, 16-29 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.

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HOT NEWS
--------

--------------------------------
France's Nuclear Charm Offensive
--------------------------------

2. (SBU) French President Nicholas Sarkozy, accompanied by his wife,
led a senior commercial delegation of 40 business people on a
two-day state visit to South Africa during February 28-29. The
President signed a number of cooperation agreements with the SAG and
handed out a package of monetary and technical assistance incentives
in support of French company Areva's bid for large nuclear
contracts. Their competitor is U.S. company Westinghouse. The
French President hoped to help secure South Africa's lucrative
long-term fleet of new nuclear build and his timing was impeccable
as the closing date for the tender submission for the first 3,500
megawatt tranche of new build was January 31. The initial
evaluation of the bids from Areva and Westinghouse was done on
February 15 and Eskom's board is due to give its recommendation on
the preferred vendor by June after receiving final bids on March 31.
The final decision will be made by parliament and will include soft
issues that contribute 20 percent to the scoring of the tenders.
They soft issues deal with social, labor and technology transfer
spin-offs that are important to the SAG's transformation and
upliftment goals.

3. (SBU) The first tranche, known as Nuclear 1, is for the
construction of a nuclear power plant (with two to three individual
reactor units) with capacity between 3,000-3,500 megawatts ($16
billion). The grand prize however will be the tender for a 20,000
megawatt fleet of nuclear plants by 2025 ($100 billion). The French
are pulling out all the stops to win these contracts. They believe
they have the advantage because they built South Africa's only
nuclear plant in the Western Cape, the twin-unit 1,800 megawatt
Koeberg facility that has operated successfully for more than 20
years. Areva also stepped in to provide a replacement rotor when
one of the Koeberg units was damaged in a freak accident in 2006.
Westinghouse believes that their newer more flexible reactor
technology and their proven ability to technically empower local
people to manufacture, build and operate nuclear plants through
training and technology transfer, as they did in France and have
Qmost
recently done in South Korea, will swing both the technical and
political decisions in their favor.

-----------
EXPLORATION
-----------

-------------------------------------
Exploration Boom for Tomorrows Metals
-------------------------------------

4. (SBU) The Metals Economics Group says that global exploration is
alive and well. Expenditures have increased by more than 450
percent since the nadir of 2002 when a total of only $1.9 billion
was spent on exploring for non-ferrous minerals. The amount spent
in 2007 was $11.4 billion. Most exploration is carried out by small
and junior companies that generally sell finds to major mining
companies in order to maintain their cash flows. Juniors accounted

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for more than 53 percent, intermediaries 16 percent and majors 31
percent of exploration expenditures. In terms of where the money
was spent, 24 percent went to Latin America, 19 percent to Canada,
16 percent to Africa, 12 percent to Australia, 8 percent to the
United States, 4 percent to Pacific/SE Asia and 17 percent to the
rest of the world. The commodity split heavily favored the precious
minerals with 42 percent going to gold, 36 percent to base metals,
10 percent to diamonds, 3 percent to platinum group metals (PGMs),
and 9 percent for others

5. (SBU) The African tranche of exploration expenditures went mainly
to South Africa, DRC, Angola, Tanzania, Botswana and Ghana, with
South Africa taking 4 percent of the global figure. Exploration in
South Africa was focused on PGMs in the Bushveld Complex, but gold
and diamonds also featured strongly. This exploration took place
despite concerns about government policies and the prevailing
electricity shortage, which casts doubt on Eskom's capacity to
supply new mines for the next few years. Diamonds dominated
exploration in the DRC and Angola and there was also significant
activity in the DRC/Zambian copper-cobalt belt that straddles the
border between the two countries. The DRC government's review of
all exploration leases and mining contracts has sent a wave of
uncertainty through the mining community that could impact on
further investment until the matter is resolved. Copper and uranium
were the main targets in Zambia, gold in Tanzania and Ghana, uranium
and diamonds in Namibia, and diamonds, copper, nickel and coal in
Botswana. Botswana is already the world's biggest diamond producer
and appears destined to become prominent in coal where resources are
estimated to exceed 200 billion tons of steam coal. A number of
other African countries have on-going exploration programs for a
variety of minerals and oil and gas.

-----------
ELECTRICITY
-----------

------------------
Saving Power in SA
------------------

6. (SBU) South Africans are thought to use energy very inefficiently
and some experts believe that a 30 percent to 50 percent reduction
in household use is attainable. Eskom made a plea to residential
consumers in a recent three-page Sunday newspaper advertisement to
adopt conservation and efficiency measures because the country no
longer had the luxury of excess capacity and will have to embrace
energy efficiency as a way of life. Eskom said the situation would
remain tight for the next five years until new build comes on line,
and also outlined its National Response Plan for mitigating and
resolving the power shortage.

7. (SBU) The National Response Plan identifies three phases:
-- Phase 1 - Stabilization (generally completed). A 10 percent
reduction in power consumption has been imposed on mining and
industrial consumers and coal stock-piles have been replenished.
(The power allocation to mines has subsequently been increased to an
average of 95 percent.)
-- Phase 2 (March-July). A 10 percent across-the-board power
reduction will be applied to municipalities. Eskom intends to
Qreduction will be applied to municipalities. Eskom intends to
monitor progress during this time. (Eskom has also threatened to
re-impose load-shedding on residences, absent adequate conservation
gains.)
-- Phase 3 - Power conservation (next four years) and fast-tracking
new power build, while sustaining the power reduction to enable
growth and assure operational reserves.

------
MINING
------
------------------------------------------
SA Mines Expansion Stymied by Power Crisis
------------------------------------------

8. (SBU) Chamber of Mines executive Frans Barker says that the
recent decision by Eskom to increase the average power supply to
mines to 95 percent is welcomed and will save jobs, but it will not

PRETORIA 00000609 003 OF 005


be enough for the sector's expansions plans. Mining created 40,000
new jobs last year. Barker said some mines might not receive more
than 90 percent power and others could receive their full
requirement where the 10 percent reduction would impact heavily on
jobs. Whatever the split, therewould still be some losses in jobs
and production in the short term. In the longer-term, the mines can
probably adjust to the reduced power levels. Barker said the
biggest concern was that many projects in the pipeline would likely
be delayed or shelved, and there was an urgency to develop a
strategy to mitigate these effects in the medium term. BHP-Billiton
has announced that it plans to reduce aluminum production by 120,000
tons a year from its southern African smelters (15 percent of total
output valued at $500 million at current metal prices) due to
Eskom's power rationing.

-------------------------------
Post Boom SA Mining - Where To?
-------------------------------

9. (SBU) A Business Day editorial writer lamented that increasing
state bureaucracy, intervention, and politicization of the business
process is "poisoning South African business". He cited the
increasing scope of state licensing required to carry out business
and noted that mining licensing requirements are now so onerous that
although South Africa has some of the most attractive mining assets
in the world, its mining sector is being stifled by excess
government regulation. This was especially unfortunate during the
current super commodity boom, according to the writer. Thousands of
exploration and mining license applications await processing by the
Department of Minerals and Energy (DME), but the ministry lacks the
capacity and experience to process them. Booming commodity prices
have given the industry respectable financial returns, but little
increase in production. In other words, mining is doing well, but
it could be doing a great deal better if the state would step aside
and allowed miners to work. The real question is what will happen
if the boom comes to an end and prices return to their earlier
levels? Investors would again be able to pick and choose from a
range of global projects and South Africa may be low on their
investment list. Under these circumstances, could marginal mines
survive, would the low level of exploration have produced new mines,
and would new investment be available to fund expansions to existing
mines or bring new mines on stream?

10. (SBU) This uncertainty was exacerbated when the newly elected
ANC Secretary-General Gwede Mantashe hinted at the creation of more
state-owned enterprises in the resource sector after the country's
upcoming elections in 2009. Speaking at a Centre for Development
and Enterprise function in Johannesburg, Mantashe argued for greater
state intervention in the economy. He targeted the commodity sector
in general, and platinum mining in particular but stressed that he
was not talking nationalization but rather partnerships with private
companies in productive enterprises. He said this would accelerate
Qcompanies in productive enterprises. He said this would accelerate
the release of mineral rights and create new financial resources for
wealth redistribution. He noted that such models were common in
other parts of the world, including neighboring Botswana and Namibia
where the states are in 50/50 partnerships with De Beers in diamond
mining. Mantashe's comments were made as platinum jumped to a new
record high of above $2,200 per ounce on supply fears resulting from
electricity rationing at South African mines.

--------
BOTSWANA
--------

-----------------------
Mining Industry Booming
-----------------------


11. (SBU) Prior to the discovery of diamonds, Botswana was a poor
country that relied heavily on cattle ranching, subsistence
agriculture, and assistance from the British government for economic
survival. Some gold, copper-nickel, potash and coal mining was
active but their combined contribution to the economy was small.
Discovery of the world's richest diamond pipes at Orapa and Jwaneng
in the 1960's and 1970's changed all that and, together with good

PRETORIA 00000609 004 OF 005


governance and an investor-friendly fiscal regime, the country has
prospered. Diamonds have accounted for a major portion of the
country's exports and GDP over the past two decades and the GOB is
seeking to diversify the economy away from its reliance on a single
commodity. Botswana's enlightened mining code has encouraged
exploration and the country has experienced a resurgence of
exploration and mining activity over the last couple of years.
Exploration is continuing for a wide variety of minerals and several
new projects were launched during 2007. Recent discoveries include
new deposits of diamonds, coal, gold, uranium, copper-cobalt,
nickel, and coal-bed methane.

12. (SBU) Projects underway and planned include moving the
headquarters of the Diamond Trading Company (DTC), De Beers' rough
diamond marketing arm, from London to Botswana. The DTC should be
operational by the end of the year and has agreed to sell
$360-million worth of rough diamonds to Botswana gem cutters to
create some 3,000 jobs. A number of new diamond mining developments
are underway, which should add another one million carats per year
by 2012. The government is also making progress in promoting local
mineral beneficiation with metal refiner Activox to produce finished
copper and nickel cathodes in Botswana. At peak construction, the
project is expected to employ more than 4,000 people. There are
also plans to construct a third diamond plant at Orapa and to start
underground mining at Jwaneng. Botswana's huge coal resources,
estimated at more than 200 billion tons, are of major interest to an
energy-short South Africa. Canadian CIC Energy Corporation is
planning to build a $5.5 billion, 3,600 megawatt coal-fired power
station to supply energy to South Africa and the plant is scheduled
for commissioning in 2011. The potential for coal-bed methane is
also being investigated.

--------
IN BRIEF
--------

----------------------
SA Gold Dominance Ends
----------------------

13. (SBU) South Africa has been the world's major gold producer
since 1905 (when it overtook the U.S.), reaching a peak output of
1,000 tons in 1970. Since then, updated output figures show that
production declined by 7.4 percent in 2007 to 254.7 tons (8.19
million ounces), and estimates are for a further 10 percent decline
in 2008 due to power shortages. At the same time Chinese output
increased to between 270 and 276 tons, making them the world's
number one producer. Australia and the United States occupied third
and fourth positions with 248 and 240 tons, respectively, although
both countries saw a slight decline in annual output.

-----------------------------------------
Iran to Invest in Zimbabwean Oil Refinery

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

14. (SBU) The state-controlled Zimbabwean Herald has reported that
the Iranian Ambassador to Zimbabwe said his country plans to invest
in rehabilitating Zimbabwe's Feruka Oil Refinery. The refinery is
located in the eastern city of Mutare (previously Umtali), located
near the border with Mozambique. It is connected by pipeline to the
Qnear the border with Mozambique. It is connected by pipeline to the
Mozambican port city of Beira from where most of Zimbabwe's fuel
supplies are pumped. The Ambassador said that Iranian technical
teams had evaluated the plant, and had submitted their findings to
the respective Governments, which were negotiating legal and other
issues.

-------------------------------------
Coal Use could Increase by 73 percent
-------------------------------------

15. (SBU) At a recent energy conference in Johannesburg, the CEO of
business strategy consultancy firm Stratek said that over the next
25 years global coal use is set to increase by 73 percent, overall
energy demand by 50 percent, and oil demand to 116-million barrels a
day (from the current 82 million barrels). He said that coal's

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current share of the energy mix was 25 percent in 2005, but this
would rise to 28 percent by 2030.

--------------------------------------
Viable Uranium Price is $120 per Pound
--------------------------------------

16. (SBU) Speaking at a uranium conference in Johannesburg,
Witwatersrand University Geosciences Professor Judith Kinnaird said
that the current price of uranium would have to be $120 per pound
(currently below $70) to be equivalent to the price two decades ago.
She said that the 439 nuclear reactors operating in 41 countries
currently produced 16 percent of the world's electricity. She also
said that 34 reactors were in construction, 93 were on order or
planned, and 222 were being proposed.

BOST

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