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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 9, August 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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Venezuela - SA Cooperation (for Real?)
--------------------------------------

2. (SBU) President Chavez was in South Africa on September 2 and 3
for a first-ever state visit by a Venezuelan president. During the
visit he signed a number of agreements and memoranda of
understanding for energy cooperation in areas of: mining, trade and
upstream oil and gas, exploration and exploitation of offshore
oilfields and the production of heavy oil in Venezuela. As part of
the agreement, South Africa would also gain access to Venezuela's
oil reserves. Venezuela has large oil reserves and developing
commercial relations in this sector could provide alternative
sources of supply for South Africa. South Africa's State-owned oil
company PetroSA reportedly said that it had acquired an
oil-producing asset in Venezuela and has qualified as an operator
for offshore gas exploration in Venezuela. PetroSA has invited its
Venezuelan counterpart Petrsleos de Venezuela S.A. (PDVSA) to
participate as an investor in South Africa's proposed crude oil
refinery at Coega.

3. (SBU) Speaking at a joint press briefing with President Thabo
Mbeki in Pretoria, President Chavez urged PetroSA to immediately go
to Venezuela to start working to exploit the resources in the
Orinoco Heavy Oil Belt that he said has the largest oil reserves in
the world. He said it "will be a wonderful day when the first
Venezuelan tanker delivers oil to South Africa". Cost and price
structures have not yet been developed, but Mbeki said the purpose
of the agreement was to cut out intermediaries and have a direct
state-to-state relationship. South African Minerals and Energy
Minister and Venezuelan Energy and Petroleum Minister signed the
agreements. South Africa's Minister visited Venezuela in July and
this paved the way for closer cooperation between the two countries.
Venezuela is also keen to explore South Africa's gas-to-liquids
technology. Editorials question whether potential reliance on
Venezuela's high-sulfur heavy oil would improve South Africa's
energy security.

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ENERGY
------

---------------------------------------
Pebble Bed Moves Closer to Construction
---------------------------------------

4. (SBU) South Africa's Pebble-Bed Modular (nuclear) Reactor (PBMR)
Q4. (SBU) South Africa's Pebble-Bed Modular (nuclear) Reactor (PBMR)
project has moved a step closer to construction of a
commercial-scale power station at Koeberg near Cape Town. The PBMR
company has signed a contract for engineering, procurement, project
and construction management (EPCM) services with the South
African-Canadian joint venture company Murray & Roberts SNC-Lavalin
Nuclear (Pty) Ltd. (MRSLN). The project entails the construction of
the demonstration reactor at Koeberg and a fuel plant at Pelindaba
near Pretoria. Construction is due to begin in 2010 and the plant
is scheduled for completion by 2014. This is some 10 years later
than originally planned due to technical, environmental and funding
hold-ups. Licensing and the environmental impact assessment still
need to be successfully completed. The demonstration plant will

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supply about 165 megawatts to South Africa's national grid once in
service. High-temperature, gas-cooled reactors, like the PBMR, are
also a source of process heat that can be used to generate bulk
hydrogen for numerous applications.

-------------------------------------
Eskom Plans to Reprocess Nuclear Fuel
-------------------------------------

5. (SBU) South Africa plans to expand its nuclear industry and
diversify its energy mix as it battles crippling power shortages.
The Department of Minerals and Energy's Nuclear Chief Director
Tseliso Maqubela has said that state-owned electricity producer
Eskom is seeking commercial contracts with foreign companies for the
reprocessing of spent nuclear fuel. In the medium to long-term the
country would look to establishing a reprocessing facility in South
Africa if it were economically viable, he said. But in the
short-term it made sense to contract out to experienced reprocessors
such as France's Areva and U.S.-based Westinghouse Electric, which
is majority owned by Toshiba of Japan.

6. (SBU) Contracts would be managed by Eskom and radioactive waste
would be shipped overseas for reprocessing and returned for re-use
in local reactors. South Africa hosts Africa's largest uranium
reserves, and the recently approved nuclear policy permits the SAG
to regulate uranium exports to secure supplies for Eskom. Eskom
plans to build and commercialize up to 24-30 165 MW PBMR units once
the demonstration plant has been successful commissioned and tested
between 2014 and 2017. Westinghouse Electric, Eskom, and South
Africa's Industrial Development Corporation are investing millions
of dollars to prove the PBMR technology.

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FERRO-ALLOYS
------------

---------------------------------------
ArcelorMittal SA to Build Fe-Mn Complex
---------------------------------------

7. (SBU) The world's (and South Africa's) biggest steel producer
ArcelorMittal has confirmed its intention to participate in building
a ferro-manganese complex. The project is to comprise the
development of a manganese mine, beneficiation plant and sinter
(pressure and heat used to bond metal particles) complex near
Hotazel in the Northern Cape Province, and a smelter complex in the
Coega Industrial Development Zone (IDZ) in the Eastern Cape
Province. This follows ArcelorMittal's decision to take a 50% share
of exploration firm Kalagadi Manganese. The $432.5m deal will
result in the establishment of the joint venture between Kalahari
Resources (40%), South African state-owned Industrial Development
Corporation (10%) and ArcelorMittal (50%). Manganese is vital to
the production of quality steel

8. (SBU) The proposed manganese mine and sinter plant would produce
2.4-million tons of sinter product per year from three million tons
of ore. This would feed into a new 320,000 ton per year
ferro-manganese alloy smelter to be located at Coega, which is
planned to come on-line in 2010. Drilling to date has confirmed the
presence of high-grade manganese ore, sufficient to support a
life-of-mine of more than 20 years. The project is located on the
Qlife-of-mine of more than 20 years. The project is located on the
Kalagadi Manganese Basin, which contains about 80% of the world's
known manganese resources. This greenfield project will facilitate:
ownership in manganese ore and ferro-alloys by previously
disadvantaged communities, create employment opportunities in an
area of high unemployment, and bolster export earnings for South
Africa. ArcelorMittal has indicated its intention to secure its
supplies of raw materials for steel production, such as coal,
manganese and iron ore.

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

------------------------------------
Plans for Carbon Capture and Storage

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

9. (SBU) Carbon capture and storage (CCS) is one of the recognized
mitigation measures to lower green-house gas (GHG) emissions. The
potential for CCS in South Africa requires an investigation into
locating and characterizing suitable long-term geological storage
sites for carbon. Large storage reservoirs are generally associated
with sedimentary basins in which oil and gas occur. South Africa
lacks these large natural reservoirs, but small sedimentary basins
hosting gas and oil accumulations occur off South Africa's south and
west coasts and may have some potential for large-scale CO2 storage.
The onshore central basin of the Karroo Group also has substantial
sedimentary formations that may offer CO2 storage opportunities.

10. (SBU) The newly established SA National Energy Research
Institute (SANERI) together with a number of industry and government
organizations have appointed the Council for Geoscience (CGS) and
the Petroleum Agency of SA (PASA) to compile a CO2 Geological
Storage Atlas of all potential CO2 storage sites in and around South
Africa. The Atlas is due to be completed by December 2009 and will
report on the methods and storage potential of all onshore and
offshore basins. It will rank basins in terms of risk and
geological settings, present storage options, provide maps showing
the distribution of basins and geological and seismic profiles to
support the findings. It will include an estimated storage
capacity for each basin, the location of the main emission sources,
and CO2 transportation issues. The Atlas will be carried out in
five phases:
-- storage site identification;
-- investigation of potential sites;
-- drilling sites to recover core for testing;
-- modeling sites for CO2 injection and retention;
-- conducting small-scale testing; and
-- developing an integrated strategy for CCS.

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PLATINUM
--------

-----------------------------
New Low-cost Platinum Smelter
-----------------------------

11. (SBU) Existing platinum group metal (PGM) smelting/refining
technology is relatively old and restrictive with regard to the ore
it can treat. Each complex requires a minimum throughput of about
one million ounces of PGMs per year to be cost-effective and is out
of the reach of many junior producers now coming on stream. Mintek,
the state-owned research organization, and Australian company
Braemore have jointly developed the ConRoast process for the
treatment of PGMs that will also give platinum juniors access to
affordable smelting capacity. The process removes sulfur by
roasting followed by smelting in a direct current (DC) arc furnace.
The environmental benefits are considerable in that nearly all the
sulfur is removed as a continuous stream of SO2, which can be fed to
a sulfuric acid plant or to a CCS process. The technology allows
great flexibility of ore types treated.

12. (SBU) Australian mining company Braemore is planning to build a
10-megawatt co-generation ConRoast smelter in Rustenburg, with the
ability to produce 500,000 ounces of PGMs per year. The company
Qability to produce 500,000 ounces of PGMs per year. The company
also plans a 35-megawatt smelter for the high nickel-containing
platreef concentrates from the Bushveld's northern limb. The
ConRoast strengths include: the ability to handle the high-chromium
UG2 reef and other chrome-rich reefs containing platinum, it is a
smaller lower-cost plant with fewer process steps, and it does not
impose limits on the quantities of base metals or sulfur contained
in the concentrate. Braemore has proved the process at differing
scales at Mintek and has achieved a 99% recovery of PGMs from UG2
ore. The technology appears capable of reducing capital and
operation costs by 25% and 40%, respectively. Braemore plans to
commission the UG2 smelter during the first quarter of 2010 and the
Platreef smelter in the last quarter of the same year.

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ALUMINUM

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--------------------------------------
Coega Smelter in 2012 or 2018 (Maybe?)
--------------------------------------

13. (SBU) Power rationing and supply security considerations would
prevent the construction or expansion of aluminum smelters until
2018, said BHP-Billiton's South African CEO Marius Kloppers on
August 18. BHP-B operates and owns the Hillside and Bayside
smelters in Richards Bay and 47% of the Mozal smelter in Maputo,
Mozambique, plants which have been forced to cut production and
expansions because of power restrictions. Kloppers' statement is
relevant because BHP-B is currently bidding to take over mining
company Rio Tinto, which is negotiating a new $3.25 billion, 720,000
ton per year, 1,350 megawatt smelter at Coega in the Eastern Cape
Province with the SAG and Eskom. The uncertainty arose when
state-owned Eskom's CEO stated in July that Eskom could not make any
new connections until 2014, when it is expected that some new
base-load power units will become operational. He said Eskom's
reserve margin would drop to 2% in 2010 and then turn negative
between 2011 and 2013 unless power savings of 5% to 10% were made
nationally.

14. (SBU) Negotiations about the construction of an aluminium plant
at the Coega deep-water port and Industrial Development Zone (IDZ)
in the Eastern Cape Province between the SAG and French aluminium
company Pechiney began in 2001. Pechiney was bought out in 2003 by
Canadian aluminium producer ALCAN, which in turn was taken over by
Rio Tinto in 2007 to form the world's biggest aluminum producer Rio
Tinto Alcan. Later in the year BHP-B made a hostile take-over bid
for Rio Tinto, and this is still on-going. Each merger further
delayed the go-ahead for the project. The energy crisis in January,
when Eskom declared "force majeure" on power supply to mines, caused
Rio Tinto to re-think the power-hungry project, and on August 18 it
put the project on hold until 2012. In a joint statement by Eskom
and Rio Tinto on August 19, they said the aluminum smelter would
still go ahead in 2012. (Comment. If construction in fact begins
in 2012, the aluminum plant would be completed and ready to go in
about 2018. End Comment.)

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GOLD
----

------------------------------------------
Gold Firms Battle Costs and Falling Output
------------------------------------------

15. (SBU) New chief executives of Africa's three top gold producers
are seeking ways to cut costs and expand output. AngloGold Ashanti,
Gold Fields, and Harmony Gold (respectively, the world's third,
fourth, and fifth-biggest producers) have benefited from a strong
gold price that has tended to shield them from decreasing output and
costs that are escalating at 25% to 35% annually. Gold hit an
all-time high of $1,030.80 in March, but the global economic
slowdown and strengthening dollar have seen prices tumble to around
the $800 level. Given the current upward inflation spiral and faced
with challenges of government interference, power shortages, deep
hot mines, loss of skills, labor strikes, very hard rock, and
Qhot mines, loss of skills, labor strikes, very hard rock, and
falling productivity, it seems the only way out for South Africa's
gold mining industry is a sustained increase of the gold price
(analysts pose a minimum of $1,200 per ounce) and/or a weakening of
the Rand currency.

16. (SBU) Gold analyst Nick Goodwin says that South African gold
company margins are shrinking, shares of the big-three producers
have underperformed their peers in North America and Australia, and
they have failed to fully participate in the gold price rally due to
a stronger rand, high costs, power shortages, and safety shutdowns.
AngloGold is favored by investors compared to its African rivals due
to a wider production base outside South Africa, which contributes
about 40% of its output, as well as the group's relatively lower
costs. Gold Fields has some 80% of its total output from South
Africa, and virtually all Harmony's production (96%) is South Africa
based. To mitigate the South African "effect", all three companies

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are looking to increase their overseas footprints. AngloGold has
acquired mines in Brazil and Argentina, Harmony has the
joint-venture Hidden Valley project in Papua New Guinea, and Gold
Fields bought a $550 million Peru mine.
BOST

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