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

DE RUEHJO #0415/01 2931504
R 201504Z OCT 06





E.O. 12958: N/A

JOHANNESBU 00000415 001.2 OF 004

This cable is not for Internet distribution.

1. (U) Introduction: The purpose of this monthly 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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2. (U) Key to some of the terminology and abbreviations used is
given to facilitate understanding.

BEE (Black Economic Empowerment) - the scheme whereby the South
African Government promotes black participation in business.

* t = tons,
* t/d = tons per day,
* c/l = cents per liter,
* t/m = tons per month,
* t/y = tons per year,
* oz = troy ounces (31.1 grams),
* cmg = centimeter grams,
* mcf = million cubic feet,
* tcf = trillion cubic feet,
* R = SA currency (rand),
* MW = megawatts,
* kt = thousand tons,
* bbl/d = barrels per day,
* MW = megawatts,
* PGM = platinum group metals.

SA-US Exports Surge 25% on Firm Metal Prices
3. (U) South Africa's exports to the US surged more than 25% to
$3.6 billion in the first half of 2006, compared with the same
period last year. The figures are from trade data released in
August by the US State Department. The strongest growth came
from South Africa's single biggest export to the US by value,
namely minerals and metals, which registered 33% growth to $2.6
billion or 72% of total exports. Of this, 34% were platinum
group metals and 7% diamonds. South Africa's exports to the US
represent about 9% of its total exports.

Coal Ports Improve Productivity
4. (U) During September, the Richards Bay Coal Terminal (RBCT),
owned by the major coal exporters and the world's second-biggest
coal-export port, shipped 7.17 million tons of coal. This is
23% more than the 5.83 million tons shipped a year earlier.
According to Kuseni Dlamini, CEO of the terminal, the surge was
due to a combination of increased efficiency at the port and
recovery of mine production after the heavy rains earlier this
year. RBCT has the capacity to move 72 million tons of coal a
year and shipped a record 69.2 million tons in 2005. In similar
vein, Mozambique's Matola terminal, the second-biggest port for
South African coal exports, loaded 94,084 tons of coal during
the month compared with 40,160 tons a year earlier. The
terminal also shipped 88,169 tons of magnetite (a type of iron
ore) in the month compared with 45,245 tons the previous year.
Grindrod, South Africa's biggest shipping group owns the

South Africans Invest in Gold
5. (U) The general view is that unless you invest in your own
mines, no one else will. Thus, Gold Fields and AngloGold
decided to expand production from their Witwatersrand gold
mines. The extreme depths at which mining takes place on the
Witwatersrand gold field (approaching 4 kilometers in some

JOHANNESBU 00000415 002.2 OF 004

mines) is a major reason why international mining companies are
loath to invest in fixed gold assets in South Africa. The
Witwatersrand formation was formed as a sedimentary basin with a
perimeter of more than 1,000 kilometers. Some twelve known
major river systems fed material containing gold and uranium
into the basin and these subsequently became the focus of mining
operations. While mining conditions are difficult, grades are
relatively high ranging from four to more than thirteen grams
per ton across the basin.

6. (U) Gold Fields, South Africa's second biggest gold producer
owns two of the country's richest mines, Driefontein and Kloof.
On September 7, the company announced that it would invest an
estimated $650 million to deepen the mines - Driefontein to
4,121 meters and Kloof to 3,827 meters. The projects will
access an additional 10.8 million ounces (345 tons) of gold
below the current infrastructure at the two mines, and extend
their lives to at least 2035. Additionally, Gold Fields
acquired Barrick Gold's 50% stake in the South Deep gold mine
for $1.525 billion and has made a bid for all the outstanding
shares in Western Areas, owner of the other 50% of South Deep.
South Deep has gold reserve of 29.2 million ounces (930 tons)
and at least that amount of resources below the current mine
infrastructure. This would give it a production life of more
than 60 years. Not to be outdone, AngloGold Ashanti plans to
spend $461 million to deepen two of its mines.

Gold may have Medicinal Uses
7. (U) Newly mined gold adds about 2,600 tons annually to the
estimated 150,000 tons mined since antiquity. The problem is
that because gold is generally seen to be store of wealth, is
seldom used up, and has a ready market. As a consequence, most
mined gold is still available above ground in some form or
other, be it as bullion, jewelry, investment coins and products,
or scrap that gets recycled into the aforementioned forms.
Additionally, producers and marketers have generally failed to
capitalize on the gold "brand" - as good as gold or as pure as
gold - by comparison with the marketers of diamonds and
platinum. Neither has much effort gone into developing
high-value and high-volume uses for gold, be they industrial or
medicinal that could use up the huge quantities that overhang
the market and generally keep prices comparatively low.

8. (U) In an attempt to remedy this situation, Project AuTek was
set up as a joint venture between Mintek, the state-owned
mineral processing research parastatal, and the country's
largest mining houses, AngloGold Ashanti, Gold Fields and
Harmony. The aim was to research and develop medicinal and
industrial uses for gold. South Africa is struggling with one
of the world's highest incidences of HIV/AIDS and related
diseases and scientists are looking to develop gold-based drugs
to combat these illnesses as well as malaria and cancer.

9. (U) Judy Caddy, who heads the medical research group at
Mintek, said that 2006 had been an exciting year because they
had identified a series of gold-based drugs that are useful in
the fight against cancer. The group tested these drugs on other
illnesses with promising results in treating both malaria and
HIV. The gold-based drugs were found to have therapeutic value
for HIV and demonstrated the ability to inhibit HIV replication
in test tube experiments. The drugs still need to be tested on
animals and humans.

Gold Mine heads for Guinness Book of Records
10. (U) According to AngloGold Ashanti's senior project manager,
by July 2008, the TauTona (the Great Lion) gold mine will
celebrate the unveiling of a new Guinness Book of Records plaque
at a depth of 3,778 meters below surface. The plaque will bear
the words, "The deepest man-made hole in the world". Currently,
the deepest mine is the Savuka gold mine with a depth of 3,
777.4 meters, which is also an Anglo mine. TauTona development
will continue down to 3,902 meters where virgin rock
temperatures are 59 0C. This will extend mine life to at least
the year 2019 and facilitate the mining of an additional 72 tons
(2.3 million ounces) of gold. Anglo has notified Guinness to be
on standby to remove the plaque at neighboring Savuka and to
bring it across to TauTona when the record depth is achieved.

11. (U) In 46 years of production, TauTona has yielded some
1,100 tons (34 million ounces) of gold from the Witwatersrand
basin. The mine currently employs 5,500 people of which 1,100
are contract personnel. Those working in the new deep-level
area will have to travel 4 km to their working places, thus
reducing production time to about six hours in an eight-hour
shift. (Note: If Gold Field's succeeds in expanding its

JOHANNESBU 00000415 003.2 OF 004

Driefontein mine, it will replace TauTona as the deepest mine in
the world. End note.)

East Rand's First New Gold Mine in 28 Years
12. (U) In August, Aflease Gold's CEO Neil Froneman announced
the decision to open the first new gold mine on South Africa's
East Rand in 28 years. This area was a prolific gold producer
in the early days of mining on the Witwatersrand. The mine will
be known as Modder East, after its deeper namesake that was
closed decades ago. The Aflease board approved the full
implementation of a $120 million mine and gold plant that would
pour first gold in 2009 and yield 110,000 ounces per year. The
new gold operation will create 1,300 new jobs. Average cash
cost is estimated at $217 per ounce, due to the relatively
shallow depth of the reef, and has an internal rate of return
estimated at 31%. Modder East will mine two reefs, namely the
Black Reef and the Kimberley reef that lie at depths of 300 to
530 meters, respectively.

The Importance of Platinum to South Africa
13. (U) During an interview with the media at the end of August,
Roger Baxter, Chief Economist for the Chamber of Mines (COM)
presented facts about the importance of platinum-group metals
(PGM) to the South African economy. The combined value of PGM
production in 2005 (at a 6/1 Rand/Dollar exchange rate) was
above $6.3 billion, versus coal at just less than $6 billion,
gold at $4.5 billion, diamonds at $1.6 billion and iron ore at
$1.2 billion. Total PGM value was made up of platinum $4.7
billion, rhodium $1.1 billion, palladium $0.5 billion, ruthenium
$57 million, and iridium $27 million. About $5.8 billion was
exported, and the rest was sold locally into the catalytic
converter market and then ultimately exported in the form of
catalytic converters. Converter sales were valued at about $1.7
billion, which accounts for about 15% of the global market. PGM
sales represent 2% of South Africa's GDP, 11% of total
merchandise exports and the mining industry employs 156,000
people who earn $1.8 billion annually and account for 35% of the
total employment in the mining sector. Including multipliers,
estimates show that the PGM's contribute about 5% to the
country's GDP.

14. (U) Platinum's history is extensive. In the eighteenth
century King Louis XV declared that platinum was the only metal
fit for a king. The Spanish conquistadors picked up platinum
for the first time in Colombia but today South Africa dominates
in this metal. In 2005, it produced 77% of the world's
platinum, 31% of the palladium (here Russia is the dominant
supplier, much of it believed to come from large stockpiles),
83% of the rhodium and more than 80% each of ruthenium and

15. (U) The current high price of platinum together with
increasingly stringent emission regulations has altered the
demand side for the metal. Whereas in 2002, the demand profile
was auto catalysts 31%, jewelry 43%, and industrial uses 26%, in
2005 it was 45%, 30% and 25%, respectively. PGM production
cannot be valued on platinum alone, but has to take into
consideration the market values of the other metals. Thus on a
product-weighted basket basis using palladium, platinum and
rhodium, the basket was valued at about R150 000/kg
($23,400/kg)at the beginning of 2006, whereas during the first
six months of this year it had risen by over 40% to some R223
000/kg ($32,800/kg).

Uranium Enrichment Mooted for South Africa
16. (U) South Africa has very large low-grade resources of
uranium ore. Uranium minerals occur with gold in the
Witwatersrand formation (Wits) and in the rocks of the Karroo
formation, which cover more than one-half of the country.
During the 1950's and 1960's South Africa was one of the top
three producers of uranium, which was recovered as a by-product
of gold mining on the Witwatersrand. Most of these plants
closed when the price declined to uneconomic levels and there
are only one or two operating today. This left the high-grade
mines in Australia and Canada as the major suppliers of raw
uranium product. However, with the resurgence of interest in
nuclear power generation a number of new and old mines with
uranium potential are being evaluated.

JOHANNESBU 00000415 004.2 OF 004

17. (U) The South Africa government is pursuing a number of
initiatives in nuclear power generation, including the expansion
of the nuclear plant at Koeberg (two 920 MW units) and the
development the Pebble Bed Modular Reactor (PBMR), which should
reach demonstration stage by about 2013. Minerals and Energy
Minister Buyelwa Sonjica has mooted a nuclear build program that
would add at least 5,000 MW to the country's electricity
capacity. These initiatives would require increasing quantities
of enriched uranium feed, currently imported, but which the SAG
plans to produce locally. Sonjica has stated that the
government is to launch an investigation into the viability of
uranium enrichment - SA enriched uranium in the 1970s and 1980s
for the Koeberg station and for weapons development - and that
any enrichment program would be pursued within South Africa's
international obligations.

Eskom Blamed for Blackouts but no Sabotage
18. (U) The National Energy Regulator of South Africa (Nersa)
has placed the blame for the power outages that occurred in the
Western Cape between November 2005 and February 2006 firmly at
the door of state-owned power utility Eskom. A major
contributing factor was the freak accident, when an 8-cm casing
bolt found its way into the generating set and severely damaged
the Koeberg nuclear plant's Unit 1 rotor at the same time that
Unit 2 was due for refueling. This resulted in the partial
shutdown of the plant until mid-year. The Cape Town Regional
Chamber of Commerce and Industry, which represents the interests
of about 4,500 businesses in the city, claimed that its members
incurred losses estimated at $800 million.
19. (U) In its report, Nersa found Eskom guilty of breaching its
license conditions, of negligence and of having inadequate
maintenance policies in place. On the issue of whether the
Koeberg accident was one of human error or the result of
sabotage, the final conclusion was that the incident was the
result of human negligence. No evidence was found of any action
by any organized group or individual to sabotage the
installation and no Koeberg employee was the subject of
Zimbabwe Delays Investor Protection Law
20. (U) The issue of a bilateral investment protection agreement
between Pretoria and Harare hit the headlines about two years
ago when South African-owned farms in Zimbabwe were taken during
Mugabe's land-grab under the guise of land reform. The two
governments undertook to negotiate an investment agreement but
by mid-August it was still not in place. The South African
Foreign Affairs Minister said at the time that although details
had been negotiated the agreement was not signed by the GOZ,
keeping South African mining investment in Zimbabwe on an
insecure footing. The SAG has noted the GOZ's stated intention
to nationalizing all foreign-owned mines.

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