Cablegate: South Africa: Minerals and Energy Newsletter "the Assay" -

DE RUEHSA #2730/01 3530953
R 180953Z DEC 08




E.O. 12958: N/A
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 13, November, 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.


Eskom Postpones Nuclear Reactor Project

2. (SBU) State power utility Eskom announced its decision not to
proceed with a second nuclear power plant. Department of Public
Enterprises Director General Portia Molefe said the SAG remained
committed to nuclear power to reduce carbon emissions and insure
energy security. Eskom made the decision on December 5, following a
number of delays during the year. Eskom said it would not proceed
with procurement of the proposed investment in the Nuclear-1 project
due to the huge capital investment required. The proposed Nuclear-1
project would have been the country's second pressurized water
reactor (PWR) plant, after the first and only Koeberg Power Station
in the Western Cape. Eskom has terminated the tender process, which
designated two bidders, the EPR Consortium led by Areva of France
and the N-Powerment Consortium led by Westinghouse of the USA. It
appears that the SAG will now play a greater role in advancing its
nuclear power program and is seeking a technology partner, who would
assist with developing and financing nuclear projects. It is not
clear what effect this decision will have on development of the
Pebble Bed Modular Reactor technology.

New Oil Discovery Offshore Angola

3. (SBU) Oil has been discovered in deep waters off the Angola coast
by Italy's oil and gas major Eni and Angola's state oil company
Sonangol. The discovery well Ngoma-1 is located about 350
kilometers offshore Luanda and was drilled in 1,421 meters of water
to a total vertical depth of 3,383 meters. The well encountered an
oil column of 127 meters in high permeability Miocene sands Eni said
in a statement. The statement said pumping tests were positive and
confirmed the high mineral potential of Block 15/06. The discovery
well is located close to the recently discovered Sangos field.
Other exploration wells are to follow to prove up the oil potential
and to achieve synergies for the development of the western area of
Qand to achieve synergies for the development of the western area of
the block, according to Eni. Eni is the operator and holds a 35%
stake in the block. Sonangol E.P. is the concessionaire and other
stakeholders include France's Total with 15% and Brazil's Petrobras
International Braspetro with 5%. Eni said it considers Angola to be
a strategic country for its future production growth and signed a
memorandum of understanding with Sonangol on broad economic,
industrial, and social cooperation in August. Angola's potential
oil production is around 2 million barrels per day.


Still a Girl's Best Friend?

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4. (SBU) The downturn of the financial markets has seen a rapid
withdrawal of mine development funds, particularly in developing
countries such as the DRC, Angola, and Zambia, but also in South
Africa where a number of new and expansion projects have been put on
hold. De Beers Chairman Nicky Oppenheimer has stated that it is too
early to gauge the effect of the economic downturn on gem sales.
However, the latest analysis of the polished diamond market by the
International Diamond Exchange (IDEX), derived from lower tender
prices reported by a number of rough producers including
BHP-Billiton, projects lower prices and sales for diamond jewelry in
all size and quality categories, with no end to this trend in sight.
This will determine what happens in the rough markets supplied by
De Beers and its competitors. De Beers has already sold off
marginal mines such as Koffiefontein and Cullinan, and is
negotiating the sale of its Namaqualand and Tanzania mines, while
struggling to bring its Snap Lake (Canada) and Voerspoed (South
Africa) mines into production. Miners with operations in South
Africa and projects in the DRC and Angola will have to use their
locally generated cash flows to fund their African projects as it is
unlikely that funding will be available for greenfield developments
in the region until stability returns to financial markets. This
will impact economic development in the region.

Proposed Boost for Jewelry Sector

5. (SBU) SA Diamond and Precious Metals Regulator (SADPMR) CEO Louis
Selekane has proposed establishing an Industrial Development Zone
(IDZ) near OR Tambo International Airport to encourage local and
international investment and skills in the jewelry trade. Selekane
says the jewelry industry would operate better in a free trade zone,
free from the usual bureaucratic constraints. He pointed to Dubai
and India, which have used free trade zones to develop their
respective industries. Both Selekane and Jewelry Council of SA CEO
Lourens Mar agree that the establishment of an IDZ at OR Tambo
airport would bring in more rough diamonds from the rest of Africa
and, together with another IDZ at the Rand Refinery (gold and
silver) east of Johannesburg, would encourage further development of
locally manufactured jewelry.

6. (SBU) To further boost the regional jewelry industry, the
Gemological Institute of America (GIA) plans to open a laboratory in
Gaborone (Botswana) by the end of 2008. The GIA also plans to start
educational classes on site in the first quarter of 2009. Botswana
was the world's top diamond-producer in value terms in 2007, earning
about $3 billion in diamond revenues. It ranked second in volume of
diamonds produced at 33.64 million carats. GIA Laboratory and
Research Senior VP Tom Moses said that the GIA has hired more than
20 local staff who will be offered scholarships, education and
Q20 local staff who will be offered scholarships, education and
training. He said GIA reports would help add value to the
high-quality diamonds being mined and cut in Botswana.


Threat to Recognition of SA Engineers

7. (SBU) The SAG is proposing to introduce legislation to regulate
"built environment professionals," such as engineers, architects and
project managers. The purpose of the legislation is to have a
single (government) body to register and control the activities and
continuing education of "built" professionals, which would replace
the existing statutory body, the Engineering Council of SA (ECSA).
It would, presumably, also legislate the activities of member
societies such as the SA Institute of Mining and Metallurgy (SAIMM).
Government claims that the current system of "peer review" (PR) is

PRETORIA 00002730 003 OF 006

blocking transformation (the process of including previously
disadvantaged people in the main-stream economy) of the sector by
preventing newly graduated black engineers with little practical
experience from being certified by ECSA as Professional Engineers.
ECSA maintains that the PR system is there to protect the public and
is universally accepted as a prerequisite for international
recognition of professional qualifications. ECSA claims the new
legislation would allow the minister to exempt companies and
individuals from the PR process and would effectively disqualify
South African engineers from international accreditation. This
would, in turn, lead to prospective engineers moving overseas to get
accreditation, to a further loss of skills, and a decline in
enrollment at local engineering universities. The SAG maintains
that the registration process would be unchanged and that the PR
system (without using the words "peer review") would remain intact
in the legislation. It says that those opposing the legislation are
trying to maintain the status quo and retard transformation. The
SAG has since withdrawn the proposed legislation "for further study
and consultation".


Sasol Seeks Own Resources for GTL Projects

8. (SBU) South African petrochemical producer Sasol and Malaysia's
state oil company Petronas have announced a joint venture to
undertake oil and gas exploration in offshore Mozambique. Drilling
commenced in early October with Sasol Petroleum International (SPI)
the operator and holding a 50% share in the JV. Petronas Carigali
Mozambique E&P holds 35%, and Mozambique's national oil company,
Empresa Nacional De Hidrocarbonetos De Mozambique (ENH), has 15%.
Sasol already operates the on-shore Pande and Temane gas fields, has
other holdings onshore, and has access to some offshore leases in
Mozambique. Petronas has a proven track record of offshore oil and
gas developments in conditions similar to those found in Mozambique.

9. (SBU) In recent months SPI has acquired assets in Australia,
Mozambique, Gabon, and Papua New Guinea. Analysts note a shift in
Sasol's strategic emphasis towards the acquisition of natural gas
reserves for its downstream gas-to-liquids (GTL) and coal-to-liquids
processing. This could indicate an end to the Sasol-Chevron joint
venture, formed in 2000 for the purpose of combining Chevron's
access to gas reserves with Sasol's technology to convert stranded
gas to liquid fuels. The venture has failed to deliver many
opportunities for GTL and Chevron is whittling down its stake in
their Nigerian joint venture. Sasol's first commercial GTL plant
was developed in partnership with Qatar Petroleum, rather than
Chevron. Sasol has a three-year capital expenditure program of $700
million, which probably includes a "war chest" for upstream
Qmillion, which probably includes a "war chest" for upstream
acquisition for more gas resources for GTL projects in various parts
of the world.

Prequalifiers for Eskom's IPP Program

10. (SBU) Eskom released the names of the 23 national and
international developers that it had unconditionally pre-qualified
to produce electricity under the multi-site base-load independent
power producer (IPP) program. Eskom Demand-Side Management General
Manager Andrew Etzinger confirmed that the bids predominately
featured conventional coal technologies. He noted that developers
would submit detailed plant design and environment mitigation steps
during the next round of the process. There was also one liquefied
natural gas plant, a liquefied petroleum plant, one hydro power
plant, and one solar plant under consideration. Eskom said it
required between 2,100 and 4,500 MW of electricity under the

PRETORIA 00002730 004 OF 006

program, with a minimum individual project capacity of 200 MW. The
pre-qualified developers listed include a mix of French, Chinese,
Indian, and other companies, but no U.S. firms. Requests for
proposals are to be issued at the end of November, final bids will
close in May 2009, and deals will be concluded in the first quarter
of 2010.


Outlook Mixed for SA Mining

11. (SBU) The SAG has proposed massive investment in electricity
supply and in road, rail, port, and pipeline infrastructure to
increase mining output capacities. It has also provided a grant of
some $450 million over three years to increase the number of dams
and water supply systems to mines, including supply to 23 platinum
mines on the eastern limb of the platinum-rich Bushveld Complex.
National Treasury said in its Medium-Term Budget Policy Statement
that the government was injecting $6 billion (at a R/$ exchange rate
of 10:1) into Eskom, but the electricity provider needed a total of
$34 billion over the next five years, which will have to come from
financial markets. This amount might be difficult to raise since
Moody's Investors Service downgraded Eskom in August to a Baa2, the
second-lowest investment grade. This is likely to impede Eskom's
ability to raise capital even though the SAG has said it would
guarantee that debt.

12. (SBU) South African mineral production in the first eight months
of 2008 was down nearly 9% year-on-year and export volumes stagnated
because of electricity shortages, mine safety issues, and
transportation limitations and inefficiencies. However, export
earnings in rand for the period were 33.7% higher than in the same
period of 2007, due to then higher commodity prices and a weaker
rand. The Treasury said it was optimistic about continued strong
mineral demand from Asia because growth had been less affected in
the Far East than in Europe and North America. However, there were
some negative issues confronting the South African economy, which
included financial volatility, exchange rate turbulence, and the
uncertain economic and political situation.

Gold Production "in Crisis"

13. (SBU) Gold production is "in crisis" and a gold price of $900
-$1,000 per ounce is needed to arrest the downward trend, according
to AngloGold Ashanti CEO Mark Cutifani. (Note: the gold price was
$820 on December 12. End Note.) Cutifani said the world has seen a
global decline in gold production over the past seven years and this
could continue at up to 5% a year for the next five years. South
African production had declined 20-30% in the last five years, and
grades were continuing to diminish in opencast mines around the
world. However, declining production would result in gold's
fundamentals improving, he said. The industry was not investing
enough in future production and there were also increasing cost
Qenough in future production and there were also increasing cost
pressures on those with deeper operations and increasing strip
ratios. Production has also been set back by the current financial

14. (SBU) The price of gold in the last month or two had done better
than all of the other commodities Cutifani said, but expansionary
investment in production was much less than for other minerals. He
said the quarter ending September had seen gold trading in a range
from $988 to $736 per ounce and had subsequently even dipped below
$700 per ounce. However, the rand weakening to as much as R11 to
the dollar had seen South African mines receiving record rand prices
for their product. For the same quarter, AngloGold Ashanti produced
1.265 million ounces (up 1%) and 346,000 pounds of uranium (up 7%)

PRETORIA 00002730 005 OF 006

at a total cash cost of $486 per ounce of gold, which was one of the
lowest in the industry and is projected to decrease to $460 per
ounce in the fourth quarter. Cutifani said South African operations
continued to perform steadily, using 92.4% of historic power supply,
while operating at 100% capacity.

Titanium Mining in the "National Interest"

15. (SBU) The Eastern Cape Xolobeni titanium sand project was given
a mining license by Minister of Minerals and Energy Buyelwa Sonjica
in September after easing aside comments by the Department of
Environment and Tourism (DEAT) in favor of "the national interest".
Titanium has been identified by the SAG as a strategic commodity
that will be the basis of a new industrial sector for South Africa:
mining to metal and manufacturing. The initial license covers the
Kwanyana block, which contains some 139-million tons of
titanium-bearing minerals and represents about 30% of the original
area applied for. The remaining areas will be held under a
prospecting right, valid until 2010 and extendable until converted
to mining rights. However, the Department of Minerals and Energy
(DME) has stated that it is not yet possible to determine whether
further licenses will be granted, as the areas are still under
consideration for environmental concerns about developments in the
sand dune zones.

16. (SBU) The Xolobeni project will be a dry mining operation and
its annual production is expected to yield some 250,000 tons of
ilmenite, 19,000 tons of rutile, 15,000 tons of leucoxene (all
titanium-containing minerals), and 15,000 tons of zircon over an
expected life of about 22 years. The project will cost an estimated
$200 million to implement and will include access roads to the site
and mining area, water supply and pipelines, power reticulation and
power supply to the area, a wet separation plant, a tailings storage
facility, and a dry minerals separation plant. The mining operation
will be located 30 km south of Port Edward in the Eastern Cape and
the smelter near Mbizana, some 40 km north of the mining site.
(Comment. The anti-mining lobby has submitted another appeal
against mining the dunes, which may further delay the project. The
fact that the operation will generate some 400 jobs and pump
millions of dollars into the region, which is one of the poorest in
the country, has failed to impress the lobby. Information
confirming whether mining is, in fact, taking place currently and
whether the environmental management plan has been approved is not
available. End Comment.)

Further Ferro-Chromium Production Cuts

17. (SBU) The joint venture between the world's leading ferro-chrome
producer Xstrata Alloys and Merafe Resources announced on December 1
that it had suspended production at another five ferrochromium
Qthat it had suspended production at another five ferrochromium
furnaces. This represents a cut of approximately 406,000 tons of
annual capacity and follows the shutdown of six furnaces with a
capacity of 500,000 tons earlier in November. Total capacity
closures will amount to 906,000 tons or 52% of annual operating
capacity. Xstrata said the furnaces would remain closed until the
market improves, but no lay-offs are planned for permanent
employees, enabling a quick return to full capacity when market
conditions allow.

Samancor Cuts Manganese Production

18. (SBU) The world's largest diversified mining company
BHP-Billiton announced on December 2 that due to weak market
conditions it was temporarily reducing manganese production at its
60%-owned Samancor operations at Hotazel in the Northern Cape
Province; Anglo American owns the other 40%. The cuts in output

PRETORIA 00002730 006 OF 006

will be balanced between GEMCO in Australia and Hotazel and will
reduce ore production by 21% (1.5 million tons) in 2009. Samancor's
current total annual ore output capacity is 7.0 million tons. The
company expects to reduce alloy production at its ferro-manganese
plants at TEMCO (Australia) and Metalloys (South Africa) by 170,000
tons from a current output capacity of 725,000 tons. Furnace
re-builds will be brought forward at both facilities, and certain
furnaces will not be re-started until market conditions improve.

19. (SBU) This situation contrasts markedly with that prevailing in
the earlier part of the year when record output was achieved from
these same mines. BHP increased its manganese production in the
quarter ended September 30 to 1,830,000 tons of manganese
metal-equivalent, which was a 27% increase over the quarter ended
September 2007, despite using 10% less power. Manganese alloy
production was also up 10% at 203,000 tons over the 2007 quarter.
This was the "payback" on BHP Manganese President Peter Beaven's
investment of $100 million to expand the Hotazel mines and to import
large diesel generator sets to boost power supply. BHP is also
expanding its cogeneration manganese alloy facility south of
Johannesburg. South Africa holds some 80% of the world's manganese
resources and is the second biggest producer and exporter of
ferro-manganese metal and manganese ore. Beavan said he expected
volatility and uncertainty to continue in the short term, but was
confident that ongoing industrialization and urbanization of China
would continue to drive longer-term demand for manganese.

BHP Billiton's $1.4 billion Coal Investments

20. (SBU) BHP-Billiton is developing two steam-coal mining projects
in South Africa with a combined value of $1.4 billion for production
in 2009 and 2010. These are the $450 million Klipspruit project,
which is more than 50% completed, and the larger $975 million
Douglas-Middleburg project. BHP South African CEO Marius Kloppers
said that Klipspruit would ramp up to 3.9 million tons of coal per
year, made up of 1.8 million tons for export and 2.1 million tons
for domestic power generation by power utility Eskom. The
Douglas-Middelburg Optimization project would ultimately produce
18.5 million tons a year, of which 10 million tons would be for
export and 8.5 million tons for the local power-generation market.
BHP already supplies coal to three Eskom power stations in
Mpumalanga province.

Zambian Copper under Threat

21. (SBU) The current financial crisis will adversely affect demand
for Zambian copper and hurt the flow of foreign direct investment,
the Zambian Central Bank has warned. Zambia Financial Markets
Director Richard Chembe addressed a workshop in Zambia and said a
prolonged financial crisis would affect demand for copper among
Qprolonged financial crisis would affect demand for copper among
major consumers like China and lead to a stagnation of growth in the
copper mining industry and a reduction in the country's foreign
direct investment and exchange earnings. The Zambia Chamber of
Mines also painted a bleak outlook for the Zambian mining industry
during and after the current financial problems. Chamber President
Nathan Chishimba said the majority of mining companies relied
heavily on foreign capital to provide the bulk of capital for
exploration, pre-development operations, and overall mine
development. Mid-tier exploration companies funded more than half of
the ongoing exploration. Chishimba said the GRZ was watching
developments with a view to quick intervention to save the economy
and particularly the mining sector should the knock-on effects of
the financial crisis lead to a slump in long-term investment in the
mining industry.


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