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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 12, October, 2008

PRETORIA 00002556 001.2 OF 005


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
--------

------------------------------------------
Fire Closes Engen Refinery - Fuel Imported
------------------------------------------

2. (SBU) Some Engen fuel refiner and retailer will import refined
oil and oil products after a fire caused by a mechanical problem
destroyed the main processing unit at its South African crude oil
refinery in Durban, the country's second largest. Engen said the
135,000 barrels-per-day refinery would be shut for months of
repairs caused by a fire on November 12. A spokesman said the fire
destroyed 50,000 liters of crude and the shutdown would force it to
import refined oil and oil products for the period of closure.
Engen is South Africa's biggest supplier of oil and related products
with a market share of about 26%. Engen is 80% owned by Malaysia's
state firm Petronas and the rest is held by South African
black-owned Worldwide African Investment Holdings empowerment group.
This is the second fire to affect the Engen refinery this year.
The first fire was caused by lightning and destroyed a refined
products storage tank. The refinery General Manager Willem
Oosthuizen said the company would sustain a daily financial loss of
more than $600,000 each day it remains closed.

----------------------------------
Fire Closes Anglo Platinum Smelter
----------------------------------

3. (SBU) Anglo Platinum confirmed that a fire had occurred at its
Polokwane platinum smelter, located in the northern Limpopo Province
of South Africa, on November 5. A furnace run-out occurred in the
morning causing hot matte to come into contact with rain water. The
smelter will be shut down for about six weeks at an estimated loss
to Anglo of 150,000-200,000 ounces of refined platinum. A statement
by Anglo says that their remaining smelting and refining capacity is
fully committed and that losses associated with the shut down would
not be recovered during 2008, but only during the first half of
2009. At current platinum prices of about $820 per ounce, loss of
export earnings would amount to $123-164 million or less than 2% of
total PGM revenues and 0.5% of total mineral revenues.

--------------------------
U.S. Soda Ash Cartel Fined
--------------------------

4. (SBU) The South African Competition Commission has claimed
Q4. (SBU) The South African Competition Commission has claimed
victory in a nine-year old dispute with the U.S. industry body the
American Natural Soda Ash Corporation
(Ansac), according to media reports. Ansac represents four major
U.S. producers of soda ash and was accused of organizing an export
cartel in the South African market. U.S. law allows such a body to
operate in markets outside the U.S., but is prohibited from
operating in the U.S. as this would contravene U.S. anti-trust laws.
Ansac has effectively admitted fixing prices on soda ash by
eliminated price competition between its members in exports sales in
contravention of the South African Competition Act. Ansac has
agreed to withdraw from the Southern African market and allow its
members to operate individually in South Africa. Its settlement
with the commission brings to an end the longest-running case in the
commission's history. Ansac will pay a nominal $1 million fine,
equal to 8% of its annual turnover in South Africa. It also agreed

PRETORIA 00002556 002 OF 005


to pay the legal expenses of Botswana soda ash producer Botswana Ash
(Botash), which brought the initial complaint. Ansac's legal team
opines that its withdrawal from the South African market is
strategic and cannot be construed as an admission of anticompetitive
behavior. South African experts believe Ansac was let off lightly
and that the judgment failed to distinguish between the actions of
an illegal cartel and those of a legitimate joint venture.

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MINING
------

-----------------------------------------
Falling Commodity Prices Knock SA Revenue
-----------------------------------------

5. (SBU) South Africa is facing falling commodity prices and
decreasing global demand for its minerals and processed downstream
products. South African gold output fell 17.7% in volume terms,
while overall mineral production was down 3.5%, in September
compared to the same month in the previous year, according to
Statistics South Africa. Global steelmaker ArcelorMittal has
announced a 30% production cutback at its local steel plants, in
line with cutbacks at its facilities worldwide. However, Anglo
American's Kumba Iron Ore claims that it will not curb its
high-quality ore production, unlike other global producers like
Brazil's Vale which announced cutbacks of 10-20% in response to
lower Chinese demand. Kumba has said it intends to continue with
its 13 million tons per year expansion plans according to schedule.
Ferro-chrome producers are facing significant cutbacks and the
world's biggest producers, Xstrata-Merafe and Samancor have already
announced cutbacks of 30% and 50%, respectively. An analyst has
calculated that ferro-chrome and iron ore reductions alone could
reduce South Africa's export revenues by $6 billion per annum,
equivalent to losing more than one month's exports. He notes that
the affect on South Africa's current account will be somewhat
mitigated by reduced cost of oil imports and reduced demand for
other imports. Power demand should also decrease.

----------------------------------
Mine Job Losses at Lonmin Platinum
----------------------------------

6. (SBU) The world's third-largest platinum mining firm Lonmin plans
to close some of its South African platinum mines and halt two key
projects because of a 64% fall in the platinum price since March.
This would result in as many as 21,000 layoffs of people employed by
or dependent on income from platinum mining. Standard Bank
economist Johan Botha said each worker in the mining industry has an
average of eight dependents and each job in mining provides at least
12 jobs upstream in supplier industries such as power, water, and
mining equipment. He also said further jobs would be lost in the
downstream markets that used platinum group metals (PGMs) produced
by Lonmin. Econometrix Treasury Management economist George Glynos
said the cuts would reduce employment in rural areas near the
company's mines and this would have a disastrous socio-economic
impact in some regions. The closures compound the unemployment
situation in the wake of recent cuts by major producers of steel,
Qsituation in the wake of recent cuts by major producers of steel,
iron ore, and ferrochrome. The platinum industry generated $10.5
billion revenue in 2007 and employed 186,410 workers.

-------------------------------
Disruptions Cut Platinum Output
-------------------------------


7. (SBU) South Africa's platinum export earnings will be constrained
by a decline in output this year to a five-year low of 4.78 million
ounces. This is due to power cuts, safety issues, mine flooding,
smelter problems, skills shortages, labor stoppages and other
factors, according to UK refiner and catalytic converter maker
Johnson Matthey (JM). JM forecast that: the world platinum market
would be 240,000 ounces short this year, mainly due to falling South
African output; that global supply would fall 4.2% to 6.28 million
ounces; and that demand would dip 2.3% to 6.52 million ounces. JM
also forecast Russian platinum production to decline by 855,000

PRETORIA 00002556 003 OF 005


ounces this year and North American and Zimbabwean output to rise.
Demand for platinum used in automotive catalytic converters was
forecast to grow by 85,000 ounces to 4.23 million ounces this year,
driven by increasing use of platinum in diesel vehicles in Europe
and growing vehicle output in China and other developing nations.
North American demand for platinum was expected to fall by 305,000
ounces as vehicle production is being curtailed in that region. The
net purchase of new metal by jewelry manufacturers was forecast to
fall by 340,000 ounces to 1.12 million ounces.

------------------------------------
DRC Copper Plant Construction Halted
------------------------------------

8. (SBU) Copper-miner Anvil Mining has suspended construction at its
Kinsevere Stage II solvent extraction/electro-winning (SX/EW) plant
in the DRC until the company arranges additional funding and the
global financial and commodity markets stabilize. Copper and cobalt
prices have plummeted some 50% and 66%, respectively, since
September and the company faces a "difficult" financial position,
said an Anvil official. He said there is limited availability of
debt finance for mining companies in the current environment.
Nevertheless, the company was in discussion with a number of
possible lenders and expected that debt finance could be available
in the first half of 2009. In the meantime, Anvil plans to curtail
all but essential capital spending. Anvil posted a net loss for the
third quarter of $17.3 million, compared to a profit of $39.1
million for the same quarter in the previous year. Concentrate sales
for the quarter declined 44% year-on-year to $42.3 million, due to
operational difficulties.

----------------------------------
Six Ferro-Alloy Furnaces Shut Down
----------------------------------

9. (SBU) The world's largest ferrochrome producer Xstrata-Merafe
Resources joint venture halted six of its ferrochrome furnaces in
South Africa, in reaction to slowing global demand that has also
forced a 30% cut in steel production. The six furnaces represent
500,000 tons or 29% of its annual ferrochrome production.
Ferrochrome is used mainly in the production of stainless steel.
Xstrata said these measures were temporary and it expected to
redeploy personnel within its operations. Xstrata also announced
that the closures of the highest-cost furnaces would result in
energy savings of 300-400 MW of power, thereby contributing to
easing the power crisis. This represents about 10% of Eskom's
savings reduction target, or close to 1% of total production
capacity.

---------------------------------------
Titanium Designated a Strategic Mineral
---------------------------------------

10. (SBU) South Africa is the second biggest producer of titanium,
after Australia, and hosts the second largest reserves of titanium
minerals, after China. South African titanium concentrates are
produced at two operations mining extensive beach sands located
along the east coast in Kwazulu/Natal and along the west coast north
of Saldanha Bay. A new mine, Xolobeni, located on the southern
Qof Saldanha Bay. A new mine, Xolobeni, located on the southern
coast of the Eastern Cape, is currently under negotiation. The SAG
has designated titanium strategic to economic development because of
its unique industrial properties around which it intends to develop
an industry - from ore to pigment, metal, and manufactured products.
The Department of Science and Technology's (DST) Advanced Metals
Initiative group organized a conference November 18-20 to promote
R&D, innovation, technology, and skills in titanium and other "new"
metals such as zirconium, hafnium, and tantalum.

11. (SBU) Some 94% of titanium minerals are converted to pigment
because of its opacity, inertness and non-toxicity, which gives
"whiteness" to paint, plastics, and paper and confidence in use in
foods and pharmaceuticals (tooth-pastes, sun-screens, and
cosmetics). Approximately 5% is converted to metal, which has a
high strength-to-weight ratio, exhibits corrosion-resistance, has
high-temperature heat strength, and is consumed primarily in the
commercial and military aerospace industries and for artificial

PRETORIA 00002556 004.2 OF 005


prostheses. Chamber of Mines Economist Roger Baxter pointed out in
the opening address that South Africa should be cautious when
embarking on an added-value initiative. He said that manufacturing
differed from mining in that it depended on policies, skills, and
technology, rather than natural mineral endowment, to provide a
competitive advantage in the global market. Moreover, South Africa
has a major shortage of skills throughout the economy.

-----------------------------------
SA Gold Miner Closes Zimbabwe Mines
-----------------------------------

12. (SBU) Zimbabwe's biggest gold miner Metallon Gold, owned by
South African mining entrepreneur Mzi Khumalo, has been forced to
close its five gold mines because the Reserve Bank of Zimbabwe has
not paid for the $20 million worth of gold delivered to it, as
required by law. The Bank owes the gold sector a total of some $30
million dating back to 2007, and this has crippled the industry's
ability to continue operations. In an economic climate where
interest rates are 9,500 percent and the official inflation rate is
230-million percent, borrowing money is not a viable option and
foreign investment has all but dried up. Metallon produced about
55% of Zimbabwe's gold output in 2007 and its closure will result in
the loss of 3,500 jobs in a country where unemployment is already
more than 80%. Zimbabwe's annual gold production has plummeted from
27 tons in 1999 to the current annualized 3.2 tons as a result of
power cuts, lack of foreign exchange, and the exodus of skilled
expatriates. Zimbabwe was Africa's third biggest gold producer
after South Africa and Ghana until 2000. It has since been
surpassed by Tanzania and Mali, which enjoy political and
investor-friendly environments.

13. (SBU) On a more positive note, South African government-owned
Industrial Development Corporation (IDC) Mining Strategic Business
Unit (SBU) Head Abel Malinga said the IDC along with some private
mining companies is considering investing in mining projects in
Zimbabwe. Malinga estimates Zimbabwe's coking coal reserves to be
50 billion tons, comparable in size to the trans-South
Africa/Botswana-border steam coal reserves of the Waterberg
coalfield. In addition, Zimbabwe has known, under-developed
reserves of gold, platinum, iron ore, chrome, tin, lithium, copper,
zinc and nickel. However, their exploitation will depend on a
positive outcome to the power-sharing talks between Robert Mugabe
and his Zanu-PF party and Morgan Tsvangirai and his Movement for
Democratic Change (MDC). The MDC won the country's March 2008
primary elections and withdrew from the subsequent run-off election
under protest. An IDC policy requirement is that investments must
be covered for political risk, but not even the SAG-backed Export
Credit Insurance Corporation is able to offer this cover, Malinga
said.

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

------------------------------
Possible Nuclear Program Delay
------------------------------


14. (SBU) The decision to select a successful bidder and proceed
Q14. (SBU) The decision to select a successful bidder and proceed
with South Africa's nuclear build program seems certain to again be
postponed, after being postponed twice already this year. The
problem revolves around raising money to pay for the system under
the current turbulent economic climate, made worse by the
downgrading of the investment standing of state-owned power producer
Eskom. Moody's Investors Service recently downgraded Eskom to a
Baa2, its second-lowest investment grade. Department of Minerals
and Energy (DME) Acting DDG of Hydrocarbons and Energy Planning
Tseliso Maqubela, speaking at the conference on Energy in Southern
Africa, said the DME would publish its revised Nuclear Energy Policy
soon. He said that nuclear energy required substantial up-front
investment and decisions made in this regard were difficult, even in
the best of economic climates. Another speaker, French nuclear
company Areva Plant Business Development Manager Dr. Yves Guenon
said there would be tangible benefits for South Africa and its

PRETORIA 00002556 005 OF 005


intention to create a manufacturing industry around nuclear if Eskom
makes a firm commitment to build the new nuclear reactor this year.
Areva and Toshiba's Westinghouse of the US have both submitted bids
to build Eskom's Nuclear-1 power plant, which would be a new
generation pressurized water reactor (PWR) with a capacity of
between 3,200 and 3,500 MW.

--------------------------------------------
Eskom Accused of Meddling in Economic Policy
--------------------------------------------

15. (SBU) Chamber of Mines (COM) President and Xstrata CEO Sipho
Nkosi has accused state-owned power company Eskom of meddling in
national economic policy. He said its actions caused the mining
industry to lose an estimated $1.6 billion of production, wiped
$11-12 billion from the value of mining equities in just one week in
January, and severely compromised mine safety. He also accused
Eskom of making decisions that impacted national economic policy
that was the prerogative of the SAG. The COM has demanded that a
protocol be developed to handle power supply emergencies and prevent
Eskom from unilaterally taking policy decisions in the future.
Nkosi also accused Eskom of treating miners as a "soft target" in
its drive to reduce power supplies. In response, Eskom spokesman
Fani Zulu said the utility hoped for a "ground-breaking result" in
the development of the proposed protocol and justified the
nationwide power cuts in January due to the necessity to prevent a
total system collapse.

16. (SBU) Nkosi wants a protocol drafted and signed into legislation
immediately to ensure Eskom does not usurp state policy powers. The
proposed protocol would rank customers according to their
contribution to the economy, with the major contributors only having
power cuts as a last resort. He said the mining sector was of major
importance in regard to foreign currency earnings and employment,
but was being forced to bear the brunt of the electricity crisis.
Nkosi was also critical of new provisions in the Mine Health and
Safety Amendment Bill awaiting the approval of the National Council
of Provinces, which legal experts had concluded were
unconstitutional. These provisions related to a new section that
made it obligatory for an inspector of mines to close down a mine
site following a death, serious injury or illness. Another
provision made it a criminal offence for an employer, chief
executive officer or employee to fail to comply with the proposed
act.

BOST

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