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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 7, June 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.
--------
HOT NEWS
--------

-----------------------------------
Godsell Confirmed as Eskom Chairman
-----------------------------------

2. (SBU) Former AngloGold Ashanti CEO Bobby Godsell was appointed
Chairman of state-owned power utility Eskom at the company's annual
general meeting on July 17. Godsell is to replace Valli Moosa, who
has faced criticism for South Africa's power crisis because he
failed to lobby government to authorize expansion of electricity
capacity when it was evident as early as 1998 that the country was
heading for a power shortage. Godsell currently serves as Chairman
of Business Unity SA (BUSA) and is also a former President of the
Chamber of Mines. His appointment follows that of another prominent
mining figure, former Kumba (iron ore company) CEO Ras Myburgh, and
together it is hoped they will advise Eskom on coal procurement and
provide the sorely-needed leadership and attention to detail in
Eskom. Speaking at a recent conference on electricity, Godsell
called for a "Team SA" approach to dealing with the energy crisis,
asserting that the crisis was a national problem needing a national
response. He also said that there was no point in having the
cheapest electricity in the world if you did not have electricity.


3. (SBU) Godsell first endeared himself to the trade union movement,
particularly the National Union of Mineworkers (NUM), during the
1999 gold crisis. He and the Acting Secretary General of the
umbrella Congress of SA Trade Unions (Cosatu) went to London to
demand a stop to both Central bank gold sales and the proposed IMF
sale of 10 million ounces (320 tons) of gold. They also marched
together in the streets of Johannesburg to protest these sales. At
the time, the gold price had fallen to $260 an ounce, average SA
production cost was $246 an ounce, and the industry had shed more
than 100,000 jobs in three years. NUM welcomed Godsell's
appointment, but the National Union of Metalworkers of South Africa
(Numsa) complained that they had not being consulted ahead of the
appointment. Public disputes and divisions between Cosatu and Numsa
have been reported in the past.


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

--------------------------------
Policy Release for Nuclear Power
--------------------------------

4. (SBU) Minerals and Energy Department Chief Director of Nuclear
Q4. (SBU) Minerals and Energy Department Chief Director of Nuclear
Tseliso Maqubela said Minister Buyelwa Sonjica would shortly launch
the new nuclear energy policy which was adopted by the cabinet last
month. Maqubela said the major change between the final policy (not
yet released) and the draft released for public comment last July
(available on the SA DME web-site at
http://www.dme.gov.za/energy/documents.stm) was the removal of a
proposal to set up an agency devoted to nuclear security. He said
this function would be performed by the National Nuclear Regulator
(NNR), in line with international practice. He said nothing else
had changed except the wording to indicate that nuclear would not be
the only energy developed. Flexibility has been built into the

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policy to accommodate the development of new technologies and
changing market conditions. Maqubela said the SAG would no longer
set a fixed target of 25% of total power generation for nuclear by
2025-2030 (from existing 6%) because clean coal technology or
methods for carbon capture and storage are still being developed.

5. (SBU) Eskom is currently assessing bids from Westinghouse and
Areva for construction of the first 3,000 megawatt tranche of
proposed new nuclear power plants, but the decision on the preferred
supplier has been deferred to September from June. Meanwhile, the
SAG has enlisted the aid of a brand consultant, Freedthinkers, to
give a make-over to the image of nuclear power in South Africa and
attempt to correct misperceptions and apprehensions on the part of
the public. Opponents fear that the move may be an attempt to
short-circuit public consultation as the SAG presses ahead with its
program to build five or six conventional plants and potentially
twenty-four pebble-bed modular reactors.

---------------------------------
SAG Favors Recycling Nuclear Fuel
---------------------------------

6. (SBU) South Africa depends on coal for some 79% of its total
energy and 23% of its liquid fuels requirements. Sasol's coal to
liquid (CTL) process is a heavy emitter of greenhouse gases and has
been tagged as the world's single biggest point source of CO2.
South Africa's heavy reliance on coal has also made it one of the
world's highest emitters of greenhouse gases. The SAG approved a
nuclear energy policy on June 18 that promotes atomic energy as a
significant source for power generation, which would also ensure the
reduction of unfriendly emissions. The Department of Minerals and
Energy has been tasked to flesh out the practical details of the
policy and oversee its implementation.

7. (SBU) The SAG has also issued a policy statement that its goal is
to have local engagement in all phases of the uranium fuel and power
chain, from mining to reprocessing of spent fuels to the
construction of nuclear reactors, power stations and components for
local use and export. The government is in favor of recycling the
estimated 1,150 tons of highly radioactive spent fuel at Pelindaba
and Koeberg, the bulk of it at Koeberg. Minerals and Energy
Department's Nuclear Safety Director Schalk de Waal told a
Parliamentary Committee on Energy that the nuclear policy favored
recycling because it was sustainable, provided energy security,
could reprocess up to 95% of the spent fuel to produce new fuel for
the reactors, and reduce the amount of disposable high-level waste.
De Waal acknowledged there were international concerns, mainly from
the United States, over reprocessing of used fuel. He said that
although the recovered plutonium would not be weapons-grade it still
offered the potential for making a nuclear bomb and that the United
States was against reprocessing in terms of non-proliferation. He
said that in view of the world energy crisis, the US could change
its position.

----
GOLD
----

-----------------------------------
Q-----------------------------------
Global Gold Production Losing Steam
-----------------------------------

8. (SBU) Global gold production has declined by some 5% since 2001,
along with that from South Africa, Australia, Canada and the United
States. Countries showing significant growth in output include
China, Indonesia, Peru and Tanzania. South Africa was the leading
gold producer for more than 100 years, but lost its crown to China
last year. The country's output has declined steadily since the
1970's when production reached a peak of 1,000 tons (32 million
ounces) and represented more than 75% of new global production.
Output has gone from 480 tons in 1996 to 252 tons in 2007, and could
be down to about 210 tons this year. South Africa's decline can be
attributed to labor-intensive mining at ever increasing depths with
associated problems and costs. South Africa is not alone in this
dilemma. The gloss also appears to be coming off Australian gold
mining. Australian production rose rapidly in the early 1980s with

PRETORIA 00001595 003 OF 005


the then rising gold price and new processing technology that
enabled the treatment of oxide ores. Production remained strong
into mid-2007 when several new factors kicked in. These included:
decreasing grades; increasing operating and equipment costs; loss of
skills to other mining sectors; less exploration due to hassles over
indigenous land claims; and the cost of maintaining fly-in-fly-out
workforces. Australia has now slipped from third rank to about
sixth in global production, and its ability to stop the decline
appears limited.

---------------------
PLATINUM GROUP METALS
---------------------

------------------------------
South Africa's Platinum Future
------------------------------

9. (SBU) Platinum-group metals (PGMs, which include platinum,
palladium, rhodium, iridium, ruthenium, and osmium) are South
Africa's most important mineral resource. One ounce each of
platinum and rhodium is worth about $2,000 and $10,000,
respectively. PGMs accounted for $9 to $10-billion in exports,
equivalent to 15% of total merchandise exports in 2007, followed by
gold at $5-billion and coal at $3.5-billion. The industry employed
some 170,000 people in 2007, and paid out $3 billion in wages.
About 62,000 people were also employed in associated industries and
an estimated total of 2 million people were sustained by the
industry. Chemicals company Johnson Matthey reported South Africa's
production in 2007 as 5.04 million ounces, down from 5.3 million
ounces in 2006. South Africa holds 85% of the world's platinum
reserves, most of it in North West province in the huge geological
feature known as the Bushveld (Igneous) Complex.

10. (SBU) South Africa's gold output is declining and so are its
reserves of diamonds, leaving platinum as the country's most
formidable resource of precious metals and minerals. South Africa's
PGM reserves should last well beyond 70 years at current levels of
production and demand, and it is government's and industry's
responsibility to ensure that they are used strategically to promote
industrial projects. The bulk of PGMs are used worldwide in the
production of auto-catalytic converters to reduce noxious exhaust
emissions from vehicles. The South African catalytic converter
industry produces 16 million units every year, almost all of which
are exported, and this represents about 15% of the global market,
valued at $3 billion. The current high spot prices of platinum and
rhodium are promoting the search for less costly substitutes, more
efficient metal loadings, and more use of less expensive palladium
($450 per ounce). The unique chemical characteristics of the PGMs
as durable and efficient catalysts make this unlikely in the near
future.

---------------------------
Reliable Water for Platinum
---------------------------

11. (SBU) More than twenty mining developments are taking place on
the Eastern Limb of the Bushveld Complex in South Africa, the
world's greatest depository of platinum group metals (PGMs). These
cover a strike length of more than 120 kilometers in Mpumulanga and
Qcover a strike length of more than 120 kilometers in Mpumulanga and
Limpopo provinces in the northeast of the country. The area lacked
a reliable supply of water and was underdeveloped until the mining
companies entered the area in the late 1990s. The upsurge in mining
and commercial activity required that dams be built to remedy the
situation. The SAG responded by initiating the Olifants River Water
Project, which will supply water to mines, farmers and industry over
a wide area, and include damming and raising dam walls on a number
of water sources. The project cost is estimated at $1 billion and
also involves the construction of pipelines and pump stations.

12. (SBU) The Department of Water Affairs and Forestry (DWAF)
Minister recently signed a MOA with 23 mining houses for the
development of phase 2 of the Olifants River project, which will be
funded by private and State sources. This will facilitate further
investment of $5.5 billion in the region by mines and their support
industries will create about 90,000 jobs and generate $300 million

PRETORIA 00001595 004 OF 005


in wages each year. Mining companies have committed to off-take
agreements for all future water requirements on a take-or-pay basis,
where mines pay costs based on allocated capacity, regardless of
water used. (Comment: The same financial arrangement is being
proposed for the transport of bulk mineral commodities such as coal
and iron ore. End Comment.)

--------------
AFRICAN MINING
--------------

-----------------------------------------
Zambia Output 750,000 Tons Copper by 2009
-----------------------------------------

13. (SBU) Zambia's Minister of Mines Kalombo Mwansa has forecast
that the country's copper output should increase to 600,000 tons
this year, from 520,000 tons in 2007. This corresponds with the
industry production target of 750,000 tons by 2009, with increases
from expansions at First Quantum's Kansanshi mine and KCM's Konkola
mine, and new production from Equinox's Lumwana mine. The Minister
also estimated that smelter capacity would increase to about 300,000
tons during the next three years, from expansions at Mopani's
Mufulira and Konkola's Nkana and Nchanga smelters, and new capacity
from the smelter being built by Chinese investors at Chambishi Mine.
Mwansa also expects production to come on stream from South
African-based Teal Mining's Mwambashi mine, and from the smaller
Kashime mine that is located off the Copperbelt in central Zambia.
Some mining experts believe that Zambia is increasing its smelter
capacity to meet a growing demand from producers in the DRC, given
that the DRC government would be willing to moderate its demands for
local beneficiation.

-------------------------------
Anglo "Shaken Down" in Zimbabwe
-------------------------------

14. (SBU) Zimbabwe hosts the second biggest known platinum (and
chromite) deposit in the world, behind South Africa's Bushveld
Complex. It is known as the Great Dyke that runs in a north-south
direction for about 550 kilometers. For reasons such as its remote
location, difficult geology, and political uncertainty associated
with the Mugabe regime, only Impala Platinum (and its joint venture
partner in the small Mimosa Mine) is successfully mining platinum in
the country. Anglo Platinum recently announced its decision to
invest $400 million to develop its Unki platinum project, which is
also on the Dyke and has been idling along for years. This has
cause a great uproar in international circles, particularly in the
United States and Britain, which are seeking to impose sanctions on
the Zimbabwean government in the wake of human rights violations.
The U.S and Britain have accused Anglo of propping up the regime and
undermining current and future international sanctions. Anglo
American responded by saying that their choice was to either invest
in developing Unki or lose it to the government, which would have no
difficulty in finding Chinese or Russian developers.

15. (SBU) Media reports and discussions with senior management
confirm that the Zimbabwe government forced Anglo Platinum to enter
into a deal to give up some 31% of Unki's lease area in exchange for
Qinto a deal to give up some 31% of Unki's lease area in exchange for
indigenization (empowerment) credits. In a similar situation two
years ago, Impala Platinum was forced to cede 36% of their Zimplats
Mine concession to the government for indigenization credits. There
is uncertainty about who may have been awarded these claims, but it
appears they have been passed on to either Chinese interests or to
Mugabe cronies, including UK-listed mining junior Central African
Mining and Exploration (Camec). Camec recent lent $120 million to
the GOZ in mid-April to fund President Robert Mugabe's election
campaign. The loan was conditional on Camec getting the Unki
claims, which they did in April (for $120 million). Anglo
Platinum's underground development intercepted the orebody in
September 2007, and initiated the build-up of an ore stockpile.
Unki plans to mine 120,000 tons of ore per month and produce a PGM
concentrate that would be transported to the Anglo Platinum refinery
in South Africa. Camec has said that it plans to bring a mine into
production within 18 months and produce between 120,000 and 150,000
ounces of platinum per year at a capital cost of about $200 million.

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BOST

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