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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 6, May 2008

PRETORIA 00001387 001.2 OF 006


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
--------

---------------------------------------
NERSA Approves Limited Power Price Hike
---------------------------------------

2. (SBU) The National Energy Regulator of SA (NERSA) granted Eskom
an additional 13.3% average increase in electricity tariffs in
addition to the 14.2% already approved in December 2007. NERSA
chairman Collin Matjila said NERSA decided to allow Eskom to recover
additional primary energy costs of $353 million through its
electricity tariff. The increase is well below the 53% (real) or
60% (nominal) increase that Eskom had asked for. Two weeks ago
NERSA hearings showed households would face a 76% increase in their
municipal bills, and many industrial and commercial customers would
be ruined, if the full 53% was granted. Municipalities had also
expressed concern that the high prices would cause payment levels to
drop and cases of illegal connections and tampering to escalate.
However, NERSA's decision to not approve a higher rate could cause
international credit rating agencies to downgrade Eskom's credit
rating, increasing the future cost of Eskom's massive capital
expenditure program estimated to be more than $40 billion over the
next five years. Another key factor in this decision will be
whether the SAG decides to increase or bring forward its capital
support for Eskom.

----------------------------------------
Embassy's Visit to DRC-Zambia Copperbelt
----------------------------------------

3. (SBU) Minerals/Energy Officer and Specialist completed an
extensive two week mission May 12-23 to assess developments in the
DRC-Zambia copperbelt, visiting six mines in DRC and four mines in
Zambia, some of which are new mega-projects under development. A
number of American, Canadian, and Australian companies have made
substantial investments to bring extensive copper reserves into
production, despite challenges associated with government
intervention, logistics, power, and skills development. DRC and
Zambia are competing to see which government can interfere more,
with Zambia's new onerous tax regime slightly trumping the
uncertainty associated with the DRC mining license review. These
A-list companies are committed to social development, but Chinese
and Indian investors are much less committed to social development
Qand Indian investors are much less committed to social development
and safety standards.

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MINING
------

---------------------------
Old SA Gold Mines Never Die
---------------------------

4. (SBU) The Central Witswatersrand Rand, on which the city of
Johannesburg was established, once hosted many of the world's
biggest and richest gold mines. These included well-known names
such as City Deep, Village Main, Robinson Deep, Crown Mines and
Consolidated Main Reef (CMR). All have closed, but they still have
a visible presence denoted by old shaft head-gears and waste dumps
that characterized Johannesburg in the past, but are rapidly giving
way to city expansion and dump reworking. Economic factors such as

PRETORIA 00001387 002.2 OF 006


depth, water, gold price, and old technology were responsible for
closure of the mines, rather than their running out of gold ore.
Most of the mines produced from above 2,500 meter depth, which is
relatively shallow compared to mines on the West Rand that are
producing from depths approaching 4,000 meters. The new Central
Rand Gold Company (CRG) was established to prospect the area between
City Deep in the east to CMR in the west, initially in search of
unmined and accessible close-to-surface ore that was left behind by
the old miners.

5. (SBU) CRG executives stated at the company's annual general
meeting that exploration results indicated that the "mine" could
comfortably produce 100,000 ounces of gold per month from ore left
in old mine workings. The company's updated work program,
environmental management, and social and labor plans have been
submitted to the Department of Minerals and Energy, along with its
application for mining rights, and the new order mining right is
expected to be granted by July or August. CRG CEO Greg James said
the company had completed its metallurgical feasibility study, its
base-line mine design, as well as the mining plant. He said that
once the required licenses were granted, CRG expected to start trial
mining by October. The plant is capable of processing 12,000 tons
of ore per month and full-scale gold production is planned for the
first quarter of 2009. Gold production targets are: 100,000 ounces
in 2009, 250,000 ounces by 2010, and one-million ounces by 2012.

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

-----------------------------------
Costs May Delay Power from Botswana
-----------------------------------

6. (SBU) Plans by Canadian company CIC Energy to build a new
coal-based energy complex in Botswana have already been delayed by a
year and further delays are pending. Any further delay in the power
project could mean an extension of South Africa's power problems.
The Mmamabula power station was expected to come on stream from
2013, with full output in 2014. The first phase of the Mmamabula
Complex was to consist of a 2,500 megawatt power station fed by a
ten million-ton-per-year coal mine. Cost escalation, increased
project scale, and tightness in the market for power generating
equipment has meant the coal-fired facility can not be completed as
planned.

7. (SBU) Moody's rating agency said the Mmamabula energy project was
in danger of being scrapped or down-sized after costs soared to
almost triple the initial estimate of $6bn to $16 billion. CIC's
COO reported that the principal electricity off-takers, South
Africa's utility Eskom, which plans to take 75% of the power
generated, and the Botswana Power Corporation, were approached to
cover the additional cost and risk. They have not come to an
agreement as yet and this could present problems when seeking
finance for the project.

----------------------------------------
Mining Code Facilitates Coking Coal Mine
----------------------------------------

8. (SBU) South Africa is well endowed with steam coal, but has
limited quantities of coking coal, which is essential in the
Qlimited quantities of coking coal, which is essential in the
steel-making process. Some coking coal is produced in the northern
part of the country -- about one-fifth of what South Africa's steel
works require -- but most is imported from Australia at a cost of
some $700 million per year. All types of coals have escalated in
price over the past year, but steel makers have seen the price of
hard coking coal triple to $300 per ton. Significant deposits of
coking coal have been discovered by Rio Tinto and a few junior
companies in the under-explored Soutpansberg coalfield in Limpopo
Province. If these deposits prove viable, South Africa could be
transformed from a net importer to a net exporter of coking coal and
save some $700 million in foreign exchange, reduce the cost of coal
to current importers such as ArcelorMittal, and create needed
employment, social services and infrastructure in the region.


PRETORIA 00001387 003.2 OF 006


9. (SBU) Previous lack of rail infrastructure in the northern
province meant that it was cheaper to import coal, but the
Soutpansberg coalfield is now served by Transnet rail which links
with Richards Bay Coal Terminal via the Vanderbijlpark steelworks,
with an optional link to the Maputo port in Mozambique. One of the
new coal juniors, Coal of Africa (CoAL), is reported to have two
projects under way in the Soutpansberg that will produce a total of
6.65 million tons per year of hard coking coal. Global steel giant
ArcelorMittal is South Africa's biggest steel producer and has
entered into an off-take agreement with CoAL, which will secure a
minimum 2.5 million tons per annum of coal for its South African
operations, with the option to increase this to 5 million tons in
the future. ArcelorMittal also concluded a $130 million deal to
acquire 17.8% of CoAL, guaranteeing it a secure supply and some
influence on CoAL's Board. The agreement will take effect from
commencement of mining operations at both mines, which is expected
by the end of 2009, with full production by 2011. CoAL Managing
Director Simon Farrell said the company was drawn to South Africa by
the "use it or lose it" mineral rights system, which opened
opportunities for junior mining companies to get projects previously
sat on by the local majors.

---------------------------
New Cape Gas Well Discovery
---------------------------

10. (SBU) State-owned PetroSA has announced the discovery of a new
gas well off the southern Cape coast. The well is 95 kilometers
south of Mossel Bay and was found through PetroSA's $625-million
"Project Jabulani" initiative, which is focused on drilling around
existing gas and oil fields in the area. Upstream New Ventures
company's Vice President Everton September said the successful well
was started in March about 1.7 kilometers southwest of the known
limits of the E-M producing field. It was drilled to a total depth
of 2,856 meters. The gas-yielding formation is 28.4 meters thick
and represents a new previously untapped deposit of natural gas.
September said that the drilling program would shift to the Oryx
field to test for oil near the existing producing wells in that
field.

---------------
PRECIOUS METALS
---------------

---------------------------------
SA Platinum May Have a Competitor
---------------------------------

11. (SBU) Mitsui Mining and Smelting Company official said the
company plans to start commercial production of its new,
less-costly, silver auto-catalyst that they believe will replace
expensive platinum in 2011/12. The use of silver would enable the
company to cut metal costs by more than 90%, which was the primary
aim of the five-year-old project. Senior Mitsui Sales Department
official Kentaro Kato said that after testing several metals, silver
showed the most promise, was much cheaper, and had a comparable
ability (to platinum) to remove sulfur particulate emissions from
diesel exhausts. Kato said the company planned to begin commercial
production for application in construction machinery diesel engines
Qproduction for application in construction machinery diesel engines
and other industrial equipment to meet stricter emission standards
planned for 2012. The new technology will be used to manufacture
diesel particulate filters (DPFs). He could not say how much silver
would be needed for each catalyst as this depended on the particular
engine characteristics.

12. (SBU) South Africa produces more than 80% of the world's
platinum. Development of the new silver-based catalyst could have
wide implications for the platinum mining industry and the auto
industry, which is struggling under cost pressures from higher metal
prices for platinum, steel and aluminum. The major industrial use
of platinum is in catalysts, particularly for diesel vehicles.
Platinum's much cheaper sister metal palladium is also used to
filter out carbon monoxide and particulate emissions, and is
particularly effective as a catalyst for gasoline engines. The
world's top platinum refiner and distributor Johnson Matthey said in
a mid-May report that the metal could spike at a record high of

PRETORIA 00001387 004.2 OF 006


$2,500 an ounce this year. Platinum has already jumped 50% from the
beginning of the year and hit a record high $2,290 per ounce on
March 4. Silver is currently trading at around $18-19 per ounce.
Silver, copper and nickel all have catalytic properties but because
of their short working lives require frequent replacement; platinum
group metals are never used up and are recyclable.


-------------------------------------------
Refrigeration Key to Future Platinum Supply
-------------------------------------------

13. (SBU) Witwatersrand gold mines require refrigeration at depths
below 2,500 meters. However, platinum mines in the Bushveld
Complex, which has a much higher thermal gradient, need
refrigeration below 1,000 meters. As platinum mines get deeper they
need to cool intake air to maintain reasonable working conditions.
Without refrigeration, working conditions become too hot for miners
to maintain concentration over a full shift and there is the
attendant risk of death from heatstroke. Refrigeration will require
a big increase in power consumption (and costs), which may not be
available in the short to medium-term as power utility Eskom battles
to meet burgeoning demand. As an example of the amount of power
needed, Northam Platinum, which is already deep enough to require
intake air refrigeration, uses around 40% of its power allocation
just to keep the cooling systems running.

14. (SBU) South Africa supplies some 80% of the world's platinum,
mined mostly above 1,000 meters. Nevertheless, the Anglo Platinum
(Angloplats) and Impala Platinum (Implats), world's two largest
producers, are both approaching mining depths where refrigeration
will be vital to maintain safe working conditions and productivity.
If power to the mines remains at 95% of normal levels for the
foreseeable future, both Angloplats and Implats may be unable to run
refrigeration plants on grid power and will require some form of
additional power to mine the deeper levels. This would have a
serious impact on production costs and platinum prices. Current
platinum prices, if maintained, could probably cover these costs.
On the brighter side, platinum is not lost in usage and the
recycling of catalytic converters is likely to supply increasing
quantities of platinum group metals in the future.

--------
DIAMONDS
--------

--------------------------------------
De Beers Denies Breaching Export Rules
--------------------------------------

15. (SBU) Diamond giant De Beers has again rejected repeated
allegations by the SAG that it irregularly exported large quantities
of diamonds to London during the 1990s, prior to the 1994 elections
that brought the ANC-lead government to power. Reuters reported
that the SA Parliament had decided to form a new task team to
investigate De Beers' records, despite claims by De Beers and a
senior South African government official that the dispute was
settled last year. The SAG alleged that an amount of up to $125
million in outstanding taxes might arise should De Beers' records
indicate a breach. A De Beers spokesman said that when the
Qindicate a breach. A De Beers spokesman said that when the
allegations were first raised in 2005, its Managing Director at the
time had strongly denied the insinuation that the company had
exported diamonds unlawfully; had improperly obtained an exemption
from export duties (15%); had exported 19 million carats of diamonds
in 1994; and owed the State billions in taxes. The De Beers
spokesman said the company's position remained the same and that De
Beers always complied with the regulations of the 1986 Diamond Act,
helped maintain a globally competitive South African diamond-cutting
industry, and continued to supply both clients and the secondary
market.

-------------------------
AFRICAN MINING and ENERGY
-------------------------

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

PRETORIA 00001387 005.2 OF 006


China's Engagement in Zimbabwe
------------------------------

16. (SBU) Chinese firms have made few investments in Zimbabwe,
despite the publicity surrounding the signing of numerous Memoranda
of Understanding. State-owned China Aerotechnology Import and
Export Corporation (CATIC) entered into an investment understanding
with the Zimbabwe Electricity Supply Authority (ZESA) valued at
US$400 million for the refurbishment of power plants in 2005, but
never put any funds in the project. Chinese construction companies
entered the Zimbabwe market in the 1980s with the building of the
National Sports Stadium in Harare by the Gansu Province Construction
Company, but financing shortfalls on the part of the GOZ have
derailed subsequent construction projects.

17. (SBU) Chinese International Water and Electrical (CWE) was
awarded a tender in 2007 to construct the Gwayi-Shangani dam and lay
a 32-kilometer pipeline linking the Mtshabezi and Mzingwane dams in
drought-prone Matabeleland province. Construction came to a halt
when the GOZ failed to meet the "cash-upfront" demand from the
Chinese company. The GOZ also failed to raise funds to purchase
300,000 tons of cement required for the project. The Jiang Su
Province Construction Company also stopped refurbishment work on the
National Sports Stadium due to non-payment for work done and lack of
cement. The Zimbabwean Chamber of Mines stated that although the
Chinese have explored platinum deposits in Zimbabwe, they have not
developed any mines. On the contrary, they appear to have on-sold
some claims obtained in barter deals with the GOZ. Similarly, the
press reported in 2007 that Sino-Steel had bought a 67% stake in
chrome manufacturer Zimasco. Price and payment terms were not
disclosed.

-----------------------------------------
DRC Restricts Unprocessed Mineral Exports
-----------------------------------------

18. (SBU) The DRC's mineral-rich Katanga Province has threatened to
extend restrictions on mineral exports to include a ban on copper
concentrates if mining companies did not move to increase local
processing. Katanga Governor Moise Katumbi said only companies that
had already begun to build smelters would be allowed to restart
exports, after being inspected by a team of engineers. He had
previously halted exports of cobalt concentrate in May saying mining
companies were flouting a year-old ban on the export of ore. Mines
Minister Bartelemy Mumba Gama said the team would also be checking
on the progress of construction of copper processing plants and that
copper concentrate exports might be stopped if mining companies had
not begun to build smelters. DRC closed facilities belonging to
Congo Dongfang International Mining, a subsidiary of China's
Zhejiang Huayou Cobalt Co., at the end of May, accusing it of
breaking the ban on ore exports.

---------------------------------------
Zambian Power Plant Study by World Bank
---------------------------------------

19. (SBU) World Bank official Javier Calvio said the bank had
launched a feasibility study for the construction of a 700-megawatt
Qlaunched a feasibility study for the construction of a 700-megawatt
hydro-electricity generation plant in Zambia, which would ease power
shortages across southern Africa. The project is to be known as the
Kafue Gorge Lower Hydroelectric Project and will be the largest in
Africa to be financed under a public-private sector arrangement.
The study will cost $6 million and be completed during 2008. If
viable, physical construction of the power station should start in
the next three years, cost $1 billion and be financed by the Zambian
Government, the International Finance Corp (IFC), the Africa
Development Bank and the Development Bank of South Africa. Most
countries in southern Africa, including Zambia and South Africa,
have experienced power shortages over the past year that has led to
electricity rationing and blackouts. Zambia's electricity deficit
is some 400 megawatts and the new station will fill the gap and
allow for exports to the region and South Africa. The Kafue Gorge
is located in central Zambia and the power generated would be fed
into the Southern Africa Power Pool grid that serves more than a
dozen countries in the region.


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