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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 8, July 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
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---------------------------
Moody's Downgrade for Eskom
---------------------------

2. (SBU) State utility Eskom has had its investment credit rating
downgraded from A1 to Baa2 by Moody's rating agency. Moody's also
lowered Eskom's baseline credit assessment from 8 to 13, 1 being the
highest. This will make borrowing money on the capital markets more
expensive, a cost that will inevitably be passed on to consumers.
Eskom is in the middle of a $45 billion electricity upgrade and
expansion program and believes it can raise $20 billion on local and
global capital markets. Director General of the Treasury Department
stated that the department was disappointed by the downgrade and was
prepared to guarantee Eskom's existing debt and any new debt so as
to ensure their access to money markets. Eskom said in a press
statement that if the current economic climate continued and its
capital expenditure program remained unchanged, annual tariff
increases of between 20 - 25% would be needed over next three years.
It should be noted that Eskom's downgrading does not affect South
Africa's credit rating.

3. (SBU) Moody's downgrade occurred despite Eskom's generally
improved situation. The SAG has advanced the disbursement of its $8
billion loan from five to three years; the National Energy Regulator
has approved a tariff increase of 27.5% for 2008 and further
increases determined by the costs of coal and diesel; and generation
plants have performed well during the winter months with no
significant unplanned outages. Eskom has cited the spike in coal
and diesel costs over the past year as putting a dent in their
bottom line for the fiscal year ending March 31, 2008. Primary
energy input costs accounted for 46% of running costs and rose by
$700 million to $2.4 billion. Eskom has also appointed ex-CEO of
AngloGold Ashanti Bobby Godsell as its new chairman, and Kumba Iron
Ore CEO Ras Myburgh has been seconded to Eskom to help manage coal
supply logistics, which were a major contributor to nationwide load
shedding earlier this year. The appointment of the new executives
is intended to help Eskom restore investor and public confidence.
Eskom still has problems with coal availability and high prices, and
also had to temporarily shut down one of the two units at its
Qalso had to temporarily shut down one of the two units at its
Koeberg nuclear power station because of technical problems in a
generator. Latest developments are that the Koeberg unit is back on
line, and Eskom is discussing borrowing up to $1 billion a year from
the World Bank over five years, as it adjusts its funding strategy
to cope with difficult global markets and ratings downgrades. These
loans would be backed by government guarantees and be the largest
yet extended by the World Bank to South Africa. The SAG has been
reluctant in the past to accept World Bank funding.

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MINING
------

----------------------------------------
Mining Output Up Again in Second Quarter
----------------------------------------

4. (SBU) Total mining production for the second quarter of 2008
increased by 7.7% compared with the first quarter. The increase was
due to quarterly increases of 8.2% in the production of non-gold

PRETORIA 00001856 002 OF 006


minerals and 4.2% in the production of gold. The production of
platinum group metals (PGMs) contributed 4.4% and diamonds
contributed 1.5% to the 7.7% increase. Nickel was the only
significant negative contributor (-0.1%) to the quarterly change in
total mining production. Total seasonally adjusted value of mineral
sales at current prices for the three months ended May 2008 reflect
an increase of 23.8% compared with the previous three months. This
increase of 23.8% (R15,272 million) can be attributed to an increase
of 26.1% (R2,469 million) in the sale of gold and 23.5% (R12,803
million) in the sale of non-gold minerals. During the first quarter
of the year, mining output fell by 22% due to power outages and mine
closures for safety reasons and strikes.

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

---------------------------------------
Next Energy Crisis - Power Distribution
---------------------------------------

5. (SBU) The majority of South Africa's 187 electricity distributing
municipalities have failed to maintain and upgrade their power
distribution networks, preferring to use the electricity revenues to
cross-subsidize other services and pay ample salaries to managers.
In fact, the smaller independent municipalities lack financial,
managerial and technical capacity to do their job efficiently. With
the possible exception of major metropolitan centers, the country's
distribution network is old (30-40 years), out-dated and in a poor
state of repair. The SAG has been aware of this situation for more
than a decade but has been unable to rectify the situation. This is
mainly because of constitutional constraints and the unwillingness
of municipalities and Eskom to voluntarily cede their power
distribution function, assets, revenues, and staff to the proposed
six Regional Electricity Distributors or REDS. In general, the SA
Constitution grants municipalities the right to distribute
electricity, and municipalities are not willing to give up their
right to do so or the revenues generated therefrom.

6. (SBU) Government attempts to establish six country-wide REDs that
would pool technical, financial and management capabilities and
services, and harmonize electricity tariffs have met resistance from
many municipalities. Attempts to woo municipalities to voluntarily
merge with the proposed REDs have failed mainly because government
has not satisfactorily addressed municipal (and Eskom's) concerns
regarding ownership structure of the REDs, compensation for assets
incorporated in REDs, and the sharing of revenues generated by REDs.
The six REDs were meant to be operational by end-June 2007, but
none exist at present. Restructuring is extremely complex as it
cuts across all spheres of government and needs constant
consultations and persuasion. Unless there is a constitutional
amendment to give national government power over electricity
distribution, municipalities are likely to cling to their right to
distribute power because it is their largest single source of
income. Many municipal finances are in a mess and the lack of
investment in electricity distribution could worsen and cause the
Qinvestment in electricity distribution could worsen and cause the
next power crisis.

---------------------------
SAG Promotes Nuclear Energy
---------------------------

7. (SBU) The SAG has approved a nuclear energy policy that promotes
nuclear energy as a primary source of power generation. The cabinet
statement indicated that the policy would also reduce the country's
over-reliance on coal, which contributes to SA being a significant
emitter of greenhouse gases. The Department of Minerals and Energy
has been tasked to flesh out the practical details of the policy and
oversee its implementation. Adoption of the policy will require the
recapitalization of the National Nuclear Regulator (NNR) and the
Nuclear Energy Corporation of SA (NECSA). NECSA's research and
development budget will also need to be bolstered.

8. (SBU) Three new agencies are proposed under the policy: the
National Nuclear Security Agency (to integrate the existing nuclear
safety responsibilities into a single agency); the National Nuclear

PRETORIA 00001856 003 OF 006


Architectural Capability (to oversee the development of a national
supplier network of nuclear equipment and nuclear reactors); and the
National Radioactive Waste Management Agency (to manage radioactive
waste). NECSA has been designated the lead agency in the
implementation of this policy, while Eskom is the only power company
allowed to build nuclear energy stations. According to the
timelines provided in the policy, SAG hopes to encourage the
establishment of local manufacturing capacity for nuclear equipment
and components by 2015. It has also indicated potential interest in
the reprocessing of spent fuel to manufacture additional feed for
reactors.

-----------
ENVIRONMENT
-----------

--------------------------------------
SA Companies to Disclose GHG Emissions
--------------------------------------

9. (SBU) Over fifty SA companies are expected to disclose
information about their carbon emissions, which will be incorporated
into the world's largest databank of greenhouse gases (GHG) later
this year. The exercise known as the Carbon Disclosure Project
(CDP) was launched in 2007 with an initial target of 40 SA
companies. The CDP project entails GHG emissions accounting,
management, reduction and costing. Of the 40 companies targeted in
2007, only 15 provided quantitative data on emissions. Local CDP
operators Incite Sustainability and National Business Institute
observed that many companies now acknowledge that the carbon
footprint issue affects business. SA firms in the agriculture
sector and wine production are already feeling external pressure
from importers and retailers, who demand to know the size of the
exporters' carbon footprint. Targeted corporations include Sasol,
BHP Billiton and Anglo-American.
-----------------------------------------
Eskom to Implement Air Quality Safeguards
-----------------------------------------

10. (SBU) Currently, state power utility Eskom only captures
particulate emissions in its combustion stacks. Under pressure to
also capture gaseous emissions, Eskom is finalizing tenders for a
$700-million project to include flue gas desulphurization (FGD)
technology in its Kusile (previously Bravo) power station, currently
under construction near Witbank in Mpumalanga Province. This will
be the first deployment of FGD technology in South Africa to remove
sulfur from exhaust flue gases. Eskom CEO Jacob Maroga announced at
a sod turning ceremony held at the site in August that Eskom was
fitting FGD to Kusile to ensure compliance with air quality
standards. The 4,800 megawatt coal-fired power station is to be
ramped up in six 800-megawatt phases between 2013 and 2017, and will
significantly reduce South Africa's power problems as it reaches
completion.

11. (SBU) FGD technology is water-intensive, but was chosen as the
preferred option in a trade-off between additional water usage and
reduced atmospheric emissions in an area that already suffers from
high levels of air pollution from coal-fired power stations. Eskom
has signed a letter of intent with Anglo Coal to supply the plant
Qhas signed a letter of intent with Anglo Coal to supply the plant
with 17-million tons of coal per year over Kusile's 47-year life.
The coal is to be supplied by Anglo's empowerment subsidiary Anglo
Inyosi Coal, with first coal deliveries expected in 2011 to build a
stockpile before start-up of the first unit in 2013. Coal is likely
be transported by a dedicated conveyor system, which will relieve
pressure on the area's deteriorating road network.

----
GOLD
----

----------------------------------------
Power Rationing no Problem for AngloGold
----------------------------------------

12. (SBU) Eskom has followed through on its agreement to supply
South Africa's deep level mines with 95% of their normal power

PRETORIA 00001856 004 OF 006


demand. This level was negotiated as the minimum necessary for
mines to maintain production levels in a situation where 50% of the
power is needed to supply essential services of ventilation, cooling
and pumping water from underground. AngloGold Ashanti's Quarterly
Report to Shareholders for the end of June 2008, stated that Eskom
had maintained a steady power supply of 96.5% during the second
quarter and that the company had successfully operated at full
production using less than 94% of the power supplied. This means
Anglo has reduced its normal power requirements by 10.3%.

13. (SBU) At a meeting with Anglo in January, on the eve of Eskom's
force majeure to the mining industry, Anglo management stated that
their aim was to cut power consumption by as much as 17% over time
and still maintain full output. They appear to be moving quickly
toward that goal. Cuts by the mining industry have been good for
the country as a whole and this winter has not seen any power
outages of significance. Eskom may have achieved their goal of
providing consistent power throughout the winter months, which in SA
is mid-April to mid-September.

-------------------------
Gold Fields in Safety Fix
-------------------------

14. (SBU) The world's fourth biggest gold producer Gold Fields will
lose about 12% of its South African production in the current
financial year after a safety check revealed that it needed to make
substantial repairs to the main shaft at its nearly 4000-meter deep
Kloof Mine. Safety is a top priority for mining groups in South
Africa after a spate of mining deaths in the past year, and
government's response of closing mines for days following
fatalities. One of the worst accidents happened in May, when a lift
cable snapped at Gold Fields' South Deep Mine, killing nine miners.
New CEO Nick Holland said at the year-end results presentation that
a review of infrastructure at the entire group's South African mines
showed that the steelwork in the main shaft of the 40-year old Kloof
Mine had deteriorated and needed repair.

15. (SBU) Analysts were generally positive about Gold Field's
decision, but noted that closures due to maintenance backlogs could
become industry-wide and impact on both costs and production in an
industry with shrinking margins. Gold Fields also announced that it
had switched to fully mechanized mining at its 3,000-meter deep
South Deep Mine, necessitating a voluntary lay-off scheme for 1,885
workers. The company offered miners relocation to its other mines,
but a National Union of Mineworkers spokeswoman said the workers
refused to be redeployed to Kloof and Beatrix mines because of their
"poor safety records." She said that miners would rather go home
than risk their lives in those mines.

-----------------------------------
Hope Flickers for the Gold Industry
-----------------------------------

16. (SBU) The South African gold industry, which accounted for 80%
of world production as recently as 1970, could decline gracefully
over the next 40 years, if challenges are managed well. This
statement was made in The Fortis Yellow Book, a publication by
Qstatement was made in The Fortis Yellow Book, a publication by
Virtual Metals on gold supply and demand. It says South Africa
still has a large amount of technically accessible gold underground,
of which 8,000-10,000 tons can be profitable at current prices. The
prospect of a consistently high gold price in rand terms might
encourage long-term development (decades instead of years), despite
the fact that it is difficult and costly to access the deep
resources. Further, the book states that new industry leaders face
a number of challenges, including an unreliable power supply, rising
costs, labor strikes, lack of skills, demanding shareholders,
government intervention, political leadership, and the challenging
issue of safety, but with hard work and co-operation the challenges
are manageable.

17. (SBU) On the negative side, the publication said that increased
capex investment of $1.08 billion in 2007 and $811 million in 2006
was not sufficient to ensure the long-term expansion of the gold
industry. These investments would only slow the pace of decline in
production over the next three to five years. South Africa has

PRETORIA 00001856 005 OF 006


world-class gold deposits, but they are extremely deep and require
mining as deep as four kilometers to exploit them. The deep
underground environment involves ambient rock temperatures of 55
degrees Celsius, and a higher risk of seismic activity. Huge costs
are incurred in mining these deposits and require an investment
horizon measured in decades, as opposed to the short-term horizon of
current shareholders who wanted to see monthly or quarterly results.
The risk to the country's gold mining sector is rising costs and
not the lack of gold resources in the ground.

------------------------------------------
Party Over for Precious Metals and Miners?
------------------------------------------

18. (SBU) JPMorgan has reduced its price forecast for platinum group
metals (PGMs) due to the worsening economic situation. The gold
price has also fallen, said to be due to the strengthening U.S.
dollar. Johannesburg-based analysts have said that despite the wide
range of uncertainties, they would not alter their positive
longer-term view on platinum. Since July 1 the price of PGM metals
has fallen precipitously - platinum and rhodium by 28%, and
palladium by 32%. Gold has also slipped by 13%. A combination of
clean-air legislation, restricted supply of PGMs, and lack of
alternatives for the control of auto exhaust emissions, makes it
virtually certain that demand and prices for PGMs will increase when
the global "recession" eases. The question is, when will this
happen, and for South Africa, what impact will the lower prices have
on the large number of new PGM projects being development? The
concern is that junior miners developing relatively low-grade
platinum mines may not have sufficient financial backing to see them
through a sustained (or even a short) downturn in PGM prices.

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

----------------------------------------
Element 6 is not Diamond Science Fiction
----------------------------------------

19. (SBU) Contrary to popular belief, diamonds have a much more
important role to play than simply being "a girl's best friend".
Diamonds have hardness, electrical and heat conductivity, and many
other properties that make them indispensable to modern high-tech
industries. These are the so-called "industrial diamonds" or
non-gem quality stones known as boart that generally make up the
majority of stones produced by mines. Boart is of inferior quality
and mainly used for cutting and polishing gem diamonds and other
hard materials. Decades ago De Beers began research on making high
quality synthetic stones for industrial use. Research turned into
production and now the majority of industrial stones are
manufactured and not mined. De Beers established manufacturing
plants globally, but about eight years ago the company moved much of
its production to its new, world-class research and manufacturing
plant in Springs, some 45 kilometers east of Johannesburg. The
plant was called Element 6, the atomic number for Carbon, which is
the chemical make-up of diamond. It is jointly owned by De Beers
Qthe chemical make-up of diamond. It is jointly owned by De Beers
(60%) and Belgian minerals group Umicore (40%). Element 6 has a
turnover of almost $500m a year and supplies synthetic diamonds and
other super abrasives to the engineering industry, mainly for use in
cutting tools.

20. (SBU) Element 6 launched a $100 million private equity fund in
March to invest in companies using artificial diamonds in innovative
ways. It has made four investments so far and is expected to close
another four deals in the next few months, according to E6 Ventures
head Brendon Grunewald. He said the fund invested in companies
doing innovative things with diamonds rather than new technologies.
There has been much interest in using synthetic diamonds in a range
of new applications, from electronics to medical devices. One of
the companies in which the fund has invested is Advanced Oxidation,
a British company that uses artificial diamonds to generate
electrical current to degrade chemical pollutants. Element 6's
website mentions its investments in the company Diamond Microwave
Devices, which is developing diamond semiconductor materials and
processing technology for civil and defense systems. It also

PRETORIA 00001856 006 OF 006


mentions the company Diamond Detectors, which uses synthetic
diamonds in sensors for high-energy physics, ionizing radiation and
deep ultraviolet monitoring.

----
COAL
----

---------------------------------
Mozambique to Export Coal in 2010
---------------------------------

21. (SBU) Mozambique plans to export coal in 2010 after completing
the rehabilitation of the 665 kilometer Sena rail line from the
Moatize coal fields in Tete Province to the port city of Beira. The
project began in 2002. Repairs are being carried out by an Indian
consortium, which has a 51% stake and Mozambique's Ports and
Railways Company (CFM), which holds the remaining 49%. The $475
million project cost is being paid through a World Bank loan. So
far the Mozambican authorities have issued 125 licenses for coal
exploration, mostly in western Tete Province and the northern-most
province of Niassa. The Sena line has been allocated 8 million tons
of coal per year, which is below the combined estimated mine output
of 40 million tons of coal per year. The railway will also carry 18
million tons of freight per year, consisting of various products
including sugar and cement.

22. (SBU) Three companies have committed to develop Mozambique's
extensive coal resources. Brazil's Vale, formerly Companhia Vale do
Rio Doce (CVRD), is investing over $2 billion to build a mine on its
25-year concession at Moatize, which has an estimated resource of
2.4 billion tons of coal. Australia's Riversdale Mining plans to
invest $2.1 billion to mine its concession at Benga, near Moatize,
which has an estimated resource of 1.9 billion tons of coal. The
third company is Changara Investments, a subsidiary of London-based
CAMEC (Central African Mining and Exploration Company), which has an
estimated resource of over 900 million tons of coal in its
concession west of the Zambezi river. Coal production is
conditional on the opening of the Sena rail line to provide access
to the port of Beira for export.

BOST

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