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Cablegate: Platinum Group Metals - Rising Star at Risk

VZCZCXRO5207
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #1959/01 2481234
ZNR UUUUU ZZH
R 041234Z SEP 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5574
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHBJ/AMEMBASSY BEIJING 0836
RUEHBY/AMEMBASSY CANBERRA 0712
RUEHLO/AMEMBASSY LONDON 1585
RUEHMO/AMEMBASSY MOSCOW 0841
RUEHFR/AMEMBASSY PARIS 1421
RUEHOT/AMEMBASSY OTTAWA 0680
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 07 PRETORIA 001959

SIPDIS
SENSITIVE

STATE PLEASE PASS USAID
STATE PLEASE PASS USGS
DEPT FOR AF/S, EEB/ESC AND CBA
DOE FOR SPERL AND PERSON

E.O. 12958: N/A
TAGS: EMIN EPET ENRG EINV EIND ETRD ELAB SF ZI
SUBJECT: Platinum Group Metals - Rising Star at Risk

REF: A) 07 Johannesburg 0214
B) Pretoria 585
C) Pretoria 565

-------
Summary
-------

1. (SBU) Platinum has been the star performer in the South African
mining industry for a number of years. South Africa is the world's
number one producer of the platinum group metals (PGMs): platinum,
rhodium, ruthenium and iridium, while Russia supplies the bulk of
the world's palladium. The country hosts more than 85 percent of
the world's PGM reserves, and South Africa's PGM revenues exceeded
the combined income from coal and gold in 2007. PGMs accounted for
35 percent of total mineral revenues, 41 percent of mineral exports,
and 12.3 percent of the country's merchandised exports. Output of
newly mined PGMs declined marginally (except for rhodium) in
2007-2008 due to labor disputes, power outages, temporary closure of
shafts for safety reasons, and smelter problems. The industry has
thus not been able to fully capitalize on the prevailing record
prices of early 2008. Prospects for PGMs looked good for 2008 and
beyond, but this has changed since the end of June as falling prices
and escalating costs threaten to reduce cash flows and squeeze
profit margins in the months ahead. Some project delays have been
announced, but so far most mine and plant expansions and new mine
developments are proceeding. Recent price falls and cost escalation
are causes for particular concern to junior miners, many of which
are developing lower grade deposits and are dependent on a sustained
high rhodium price. Industry consolidation is highly likely,
possibly at lower prices, reminiscent of consolidation in the South
African gold industry eighty years ago. End Summary.

2. (SBU) Minerals/Energy Officer and Specialist visited senior
officials in a number of platinum mining companies, toured Impala
Platinum's underground mine in Rustenburg and Xstrata's new
Elandsfontein open pit mine outside Pretoria, and attended a number
of mining conferences including South Africa's premier mining
convention, the Mining Indaba 2008 in February, as preparation for
this comprehensive PGM cable. The organizations visited include the
Chamber of Mines and the Council for Science and Industry Research
(CSIR) - Miningtek and Embassy officers also met with Senior
Executives of Anglo Platinum, Impala Platinum, Aquarius Platinum and
Mintek (the government mineral processing research arm).

--------------------------------------------- ----------
The Bushveld Complex - the World's Great Treasure House
--------------------------------------------- ----------

3. (SBU) The Bushveld Complex is the world's most valuable orebody.
All its minerals have industrial, oil refinery, chemical and
electronic uses (and jewelry for platinum and palladium) and demand
for them is likely to continue to grow, absent a significant global
economic slowdown or substitution by other commodities. The
Bushveld Complex is an east-west trending, oval-shaped, layered
igneous intrusion that covers an area of more than 65,000 square
kilometers. It has known under-explored extensions off the main
Qkilometers. It has known under-explored extensions off the main
body to the north, south and west. The complex contains the world's
greatest accumulation of PGMs (platinum, palladium, rhodium,
ruthenium, iridium and osmium), chromium, vanadium, titanium, iron
ore in the form of magnetite, fluorspar, alumino-silicates such as
andalusite, and feldspar. It also hosts smaller but valuable
concentrations of copper, nickel, gold, tin, cobalt, selenium,
tellurium and other minerals.

4. (SBU) The Bushveld's numerous chromite layers are generally
continuous throughout the complex. They host PGMs in varying
concentrations and relative proportions, but only the Merensky and
UG2 (Upper Group 2 chromite seam) reefs in the main body and the
Plat reef in the northern extension have been economic to mine to
date. Ores from the western Bushveld generally contain a higher
proportion of platinum. The eastern and northern limbs are
generally of lower grade, have a lower platinum/palladium ratio, and
have a higher content of palladium, rhodium and base metals. The
PGM orebodies outcrop on surface and extend to depths greater than
2,200 meters. Compared to the Merensky reef, the UG2 is generally

PRETORIA 00001959 002 OF 007


of lower grade, but has higher percentages of palladium, rhodium and
base metals.

----------------------------
South Africa's Platinum Boom
----------------------------

5. (SBU) South Africa supplied 77 percent of the world's platinum,
85 percent of the rhodium, 32 percent of the palladium, and nearly
all of the ruthenium and iridium in 2007. Its export earnings from
PGMs were nearly $1 billion more than the combined revenues for gold
and coal in 2007. PGMs in South Africa accounted for:
-- 35 percent of the value of mineral production;
-- 41 percent of mineral exports;
-- more than 12 percent of merchandised exports; and
-- nearly 3 percent of GDP.
The economy was further boosted by the manufacture and export of
16.2 million auto-catalytic converter units (15 percent of global
production), valued at more than $3 billion, and local beneficiation
of PGMs to refined metal worth $1.3 billion. Output of newly mined
PGMs declined marginally (except for rhodium) in 2007-2008 due to
labor disputes, power outages, temporary closure of shafts for
safety reasons, and smelter problems. The industry was, thus, not
able to fully capitalize on the record prices prevailing during the
period. Prospects for 2008 and beyond looked rosy for PGMs until
the July fall in platinum and rhodium prices. Most announced mine
expansion and development projects are proceeding, but a few
longer-term projects are being delayed, supposedly because of power
concerns.

6. (SBU) Major beneficiaries of the PGM industry growth have been
the wealth created for the local Bafokeng Nation of 300,000 people
and employment on PGM mines, which continues to increase. The
Bafokeng have exchanged their royalties for 13.4 percent equity in
Impala Platinum mine, which makes them Impala's single biggest
shareholder. They also share ownership in the Bafokeng Rasimone
50/50 JV (platinum mine) with Anglo Platinum. Estimates show
Bafokeng assets to be $4 to $5 billion and annual dividends of the
order of $200,000 to $300,000. The PGM industry employs
170,000-180,000 people, each of whom support (statistically) some
ten family and extended family members, most of whom live in poor
rural communities in and outside the country.

-----------------
PGMs Eclipse Gold
-----------------

7. (SBU) During the 10-year period from 1998 to 2007, PGM production
increased by some 52 percent compared to gold, which declined by 46
percent (Ref C). Over the past 7-years employment in PGM mines
increased by 60 percent, accounting for about 38 percent of the
total mining industry workforce, whereas employment on gold mines
declined by 25 percent and now accounts for 32 percent of the
workforce. The value of PGM production over the past 10-years
increased by 560 percent in rand terms and 460 percent in US dollar
terms compared to gold, which increased by 56 percent and 26
percent, respectively.

------------------------
Production and Producers
------------------------

8. (SBU) PGM mining generally takes place from surface to some 1,600
meters, but the Northam platinum mine is already probing depths of
Qmeters, but the Northam platinum mine is already probing depths of
2,200 meters. Mines will have to go deeper as the shallow ore is
depleted and will require costly cooling ventilation (at 1,300 meter
depth the ambient rock temperature is about 43 degrees Celsius).
The Merensky and UG2 reefs are thin and working stopes are seldom
higher than 1 to 1.2 meters (similar to gold reefs). Conventional
opencast and underground narrow reef and mechanized bulk mining
methods are in use. Underground mining is generally labor-intensive
but low-profile mechanized units are being introduced to increase
productivity. The Plat reef measures up to 100 meters thick in
places, and lends itself to bulk open-pit mechanized mining methods.
South African PGM production in 2007 comprised:
-- Anglo Platinum 48 percent;

PRETORIA 00001959 003 OF 007


-- Impala Platinum 22 percent;
-- Lonhro Platinum 17 percent;
-- the rest (including ARM, Aquarius and Northam) 13 percent.

9. (SBU) Conventional processing methods are used for PGM mineral
extraction, concentration and smelting. Refining is a more costly
and complex process only affordable by the big companies that
produce more than 1-million ounces of platinum per year. South
Africa has six PGM smelters and four refineries, each of different
design, and a total annual refinery capacity of 6-million ounces of
platinum. These facilities process their own mine concentrates as
well as those bought from other producers. They also offer a
toll-smelting and refining service to small producers. State-owned
research organization Mintek and Australian company Braemore are
jointly developing a low-cost smelter that will allow great
flexibility in ore types, will tolerate high chromite ores, and will
not limit the quantities of base metals or sulfur contained in the
concentrates. This will enable junior mining companies to afford
their own smelters. The final refined PGM products are 99.95
percent pure metal ingots, granular powders, and sponge. These are
very valuable so security around the plants is tight and PGM
products are transported by air under heavy guard.

--------------------
PGM Price Volatility
--------------------

10. (SBU) The commodity boom took off in about 2002 and PGM prices
climbed steadily. During the 6-months to the end of June 2008,
platinum, palladium, and rhodium prices were volatile and increased
by 29, 20, and 39 percent, respectively. The average price fell in
July by 16 percent and August has seen further declines and high
volatility. These extreme price movements are variously blamed on
the current economic slowdown, speculators, and mismanagement and
offloading of excess PGM stocks by automakers. High prices for
platinum and rhodium have resulted in:
-- metal thrifting (less metal for the same purpose);
-- substitution (up to 25 percent) of platinum by cheaper
palladium in catalytic converters for diesel engines;
-- reworking of PGM tailings dumps;
-- increased recycling of PGM scrap; and
-- increasing use of palladium in jewelry.

--------------------
Missing the PGM Boom
--------------------

11. (SBU) South Africa has to some extent missed out on the PGM boom
(Ref A) because of the normal time-lag between new demand and
gearing up to deliver new supply, which can take many years. This
has been exacerbated by:
-- uncertainty in the implementation of the SAG's new
minerals and labor policies and legislation;
-- lack of experience and capacity within the
Department of Minerals and Energy (DME);
-- skills shortage, much of it through emigration; and
-- production cut-backs due to power outages and
rationing, labor strikes, and forced mine closures
following fatal accidents.

-------------------------------
Grappling with the Power Crunch
-------------------------------

12. (SBU) Most mines and plants in South Africa were shut down
between January 25 and 31 when state power utility Eskom announced a
Qbetween January 25 and 31 when state power utility Eskom announced a
force majeure on power supply to mines. Estimated production
losses by the PGM mines exceeded $40 million per day and the
National Energy Regulator (NERSA) also estimates that load-shedding
cost the country $7 billion. Heavy power users agreed at the time
to a 10 percent power reduction to prevent total system failure.
This was later decreased to 5 percent on a case by case basis to
minimize potential job losses in deep mines and mines with large
labor complements. Most mines have shown that they can maintain
near-capacity output by employing energy-efficient practices, and
that over time they will be able to resume full production at

PRETORIA 00001959 004 OF 007


reduced power levels.

13. (SBU) There are more than 30 new and expansion PGM projects
underway, mostly in the eastern and northern sections of the
Bushveld Complex. So far, few significant project delays or
cancellations have been acknowledged by either major or junior
companies. One notable exception is Impala's announcement that
plans to produce 2.5 million ounces of platinum by 2012 have been
delayed to 2015. It is not clear whether this is the result of the
energy situation or the economic down-turn. The big-three PGM
producers, Anglo, Impala and Lonrho, are going ahead with mining and
plant expansions and juniors with mine development. Eskom has
warned that its power safety margin is razor-thin at less than 5
percent, and that this could further decline and possibly become
negative in 2011, if consumer savings of 5-10 percent are not
achieved. It would be five to six years before new capacity can
provide a satisfactory margin of 10 to 15 percent. Eskom's ability
to provide nearly uninterrupted power during the recent local winter
months is attributed to:
-- industry power savings of 5 to 10 percent;
-- production cut-backs and delayed expansions by
aluminum and ferro-alloy smelters;
-- new megawatts (2,000 to 3,000) from rehabilitated
coal-fired units and new (very costly) dieselGQKQN]ng
fatal accidents (for up to a week in some instances). Continuation
of this practice is likely to cause further production losses as the
inspectorate is understaffed, has little experience in accident
investigation, and must rely on and be taught by industry. Industry
representatives argue that mine closures increase the risk of
accidents when work resumes, due to rapid deterioration of roof
conditions and equipment integrity when unattended. President Mbeki
ordered that safety audits be conducted on all mines during 2008.
The report has been completed, but is not yet been made available.


------------------------------------
Q------------------------------------
Long-Term Increase in PGM Production
------------------------------------

16. (SBU) South Africa, Russia and Zimbabwe together host more than
90 percent of the world's known reserves and resources of platinum,
palladium and rhodium. These metals are essential catalysts for
neutralizing nitrate and sulfate emissions from motor exhausts and
are also essential inputs to the electronics, chemical, oil, and
glass industries. Continuing global pressure for a cleaner
environment ensures that demand for PGMs will increase with time,
unless cleaner engines and fuels, metal thrifting, or cheaper
substitute metals and technologies are developed. Recycling of PGM
scrap is likely to increase in the future, which will contribute to
satisfying global demand, but could also pose a threat to new
production. Platinum is the dominant PGM metal mined in South

PRETORIA 00001959 005 OF 007


Africa and all other metals are produced as by-products and
dependent on platinum production. At current prices rhodium
contributes significantly to company gross revenues, while
representing less than 10 percent of the PGM mix.

17. (SBU) Future PGM production growth in South Africa depends on
the implementation of expansion plans by Anglo, Impala and Lonrho,
and on new production from the many active junior miners. These
estimates include:
-- 2-million PGM ounces (1.2-million platinum ounces)
from the big-three producers;
-- 460,000 PGM ounces from three mines scheduled for
production during 2008;
-- 1.9 million PGM ounces from six projects scheduled for
production in the next 3-5 years; and
-- unknown output from some 16 projects, at various
stages of evaluation, with a production horizon beyond
5-years.
Environmental challenges to PGM mining and expansions have to date
been sporadic and limited because of the thoroughness of pre-mining
studies. Social challenges mainly relate to the movement of
communities off land to be mined, but in most cases companies have
proved they have adequately compensated the communities.


----------------------------
International PGM Production
----------------------------

18. (SBU) South African and Zimbabwean PGM deposits are unique in
that they are mined primarily for platinum. The Stillwater Complex
in Montana (U.S.), has geological similarities with the Bushveld
Complex, but palladium is the dominant metal. Other PGM production
outside Africa is a by-product of copper-nickel mining and contains
a high proportion of palladium and minor platinum, rhodium. Most of
this production comes from the Russian Norilsk deposits in the Ural
Mountains, and Canada's Sudbury Basin in Ontario. Small Russian
platinum alluvial deposits are the exception, but are said to be
depleted pending further discoveries. Africa's other major platinum
deposit is Zimbabwe's Great Dyke (Ref B). It is a layer igneous
intrusion, similar to the Bushveld Complex, and is approximately 550
kilometers long and averages 3 kilometers in width and 500 meters in
depth. Total PGM production is less than 600,000 ounces per year.
Impala Platinum has a major stake in the Dyke and says potential
production is as much as 4 million ounces of platinum per year, but
this is unlikely to be realized until political stability is
restored to that country.

---------------------------------------------
Rising Costs and Declining Prospects for PGMs
---------------------------------------------

19. (SBU) PGM producers face secular increase in costs and a
potential "bubble burst" in PGM prices, particularly platinum and
rhodium. A recent analysis by Royal Bank of Canada Capital Markets
(RBCCM) investment analysts found that at the current PGM blended
"basket price" of about $1,300 per ounce and total costs of $1,000
to $1,200 per ounce, at least one-third of South Africa's PGM
production now generates negative cashflows. Additionally,
according to these analysts the sector could see further cashflow
declines of between 30 and 50 percent in the near-term. They
Qdeclines of between 30 and 50 percent in the near-term. They
identified the two main culprits as runaway input costs and longer
term power shortages. Capital costs have more than doubled in the
last two years and operating costs are increasing annually by 20 to
25 percent. Input from Impala Platinum's Marketing Executive
generally confirmed the RBCCM findings. However, he also pointed
out that PGM mines generate some 10 to 20 percent of revenues from
by-products such as nickel, copper, gold and cobalt, and these are
credits against PGM costs. He also said that major negative
influences are declining car sales in the OECD, which he expects
will be slow to turn around, and substantial declines in production
efficiency. Impala attributes the latter to high labor turnover,
labor strikes, loss of skills to emigration, and mine closures by
the Department of Minerals and Energy for safety inspections
following fatal accidents.


PRETORIA 00001959 006 OF 007


-------
Comment
-------

20. (SBU) PGM resources of the South African Bushveld are huge by
any measure, but if existing prices (fallen off by about 25 to 35
percent from early 2008 highs) and escalating costs prevail for any
length of time, a number of projects are likely to be merged, taken
over, curtailed or abandoned. Some new projects are relatively
low-grade and depend on the recent high prices of rhodium and
platinum for economic viability. Some are being developed by junior
companies, which lack sufficient resources to see them through an
extended economic downturn. Issues of safety, health, skills and
black economic empowerment will need to be addressed as these have
the potential to negatively affect the strategic value of PGMs as an
employer of unskilled and skilled labor, a generator of foreign
exchange, and an initiator of technology and research innovation.
Water should not be a problem, however, because of the number of
dams being built in the eastern Bushveld, where much of the new PGM
development is taking place.

21. (SBU) Appendix (sourced primarily from Johnson Matthey Platinum
2008)

---------------------------------------
Tables of PGM Supply, Demand and Prices
---------------------------------------

Platinum Supply (thousands of ounces)

2002 2003 2004 2005 2006 2007
S Africa 4,450 4,630 5,010 5,115 5,295 5,035
Russian 980 1,050 845 890 920 910
N America 390 295 385 365 345 325
Zimbabwe 150 225 250 270 270 280
Total 5,970 6,200 6,490 6,640 6,830 6,550

Platinum Demand (thousands of ounces)

Autocats 2,590 3,270 3,490 3,795 3,905 4,225
Recycled (565) (645) (690) (770) (860) (890)
Jewelry 2,820 2,510 2,160 1,965 1,640 1,585
Rest 1,625 1,395 1,580 1,705 1,790 2,110
Total 6,470 6,530 6,540 6,695 6,475 7,030

Surplus (500) (330) (50) (55) 355 (480)
Ave.Price$/oz 540 691 846 897 1,143 1,304

Palladium Supply (thousands of ounces)

S Africa 2,160 2,320 2,480 2,605 2,775 2,770
Russia 1,930 2,950 4,800 4,620 3,920 4,540
N America 990 935 1,035 910 985 990
Zimbabwe 170 245 265 270 270 285
Total 5,250 6,450 8,580 8,405 7,950 8,585

Palladium Demand (thousands of ounces)

Autocats 3,050 3,450 3,790 3,865 4,015 4,450
Recycled (370) (410) (530) (625) (805)(1,000)
Dental 785 825 850 815 620 635
Electronics 760 900 920 970 1,205 1,285
Jewelry 270 260 930 1,430 995 740
Rest 345 405 600 900 575 725
Total 4,840 5,430 6,560 7,355 6,605 6,835

Surplus 410 1,020 2,020 1,050 1,345 1,750
Ave.Price$/oz 337 201 230 201 320 355

Rhodium Supply (thousands of ounces)

S Africa 490 544 587 627 666 696
Russia 90 140 100 90 100 90
N America 25 26 17 20 17 17
QN America 25 26 17 20 17 17
Zimbabwe 10 14 16 17 19 19
Total 615 724 720 754 802 822

PRETORIA 00001959 007 OF 007

Rhodium Demand (thousands of ounces)

Autocats 599 660 758 829 863 879
Recycled (99) (124) (140) (137) (171) (183)
Chemical 39 39 43 48 49 64
Glass 37 26 46 57 65 64
Rest 16 19 22 30 32 32
Total 592 620 729 827 838 856

Surplus 23 104 (9) (73) (36) (34)
Ave.Price$/oz 838 530 986 2,056 4,552 6,191

Average Percentage Price Movements in 2008

January-June July-August January-August
Platinum +29% -26% -5%
Palladium +20% -28% -14%
Rhodium +39% -34% -9%
Ruthenium -25% flat -26%
Iridium flat flat flat

Percentage Price Movements in July and August 2008

July August
Platinum -15% -13%
Palladium -18% -20%
Rhodium -15% -43%

Estimated Average Profit Margins for Major Producers


2002 2003 2004 2005 2006 2007 Mid-2008
Margins 50% 35% 30% 30% 42% 44% 47%

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