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

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RR RUEHBZ RUEHDU RUEHMR RUEHRN
DE RUEHJO #0416/01 2931505
ZNR UUUUU ZZH
R 201505Z OCT 06
FM AMCONSUL JOHANNESBURG
TO RUEHC/SECSTATE WASHDC 5396
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCNSAD/SADC COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0017
RUEHJO/AMCONSUL JOHANNESBURG 2062

UNCLAS SECTION 01 OF 05 JOHANNESBURG 000416

SIPDIS

SIPDIS

PASS USAID, USGS, AND DOE

E.O. 12958: N/A
TAGS: EMIN ENRG EINV EPET ECON SF CH
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" --
ISSUE 10, OCTOBER 2006

JOHANNESBU 00000416 001.2 OF 005


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.

---
Key
---
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.

--------
HOT NEWS
--------
Chinese Gain a Foothold in South African Mining
--------------------------------------------- --
3. (U) The Chinese State-owned company that operates the
country's biggest gold mine, Hong Kong-listed Zijin Mining, has
bought 20% of AIM-listed platinum explorer Ridge Mining. Its
$20 million investment was made at a 35% premium to Ridge's
current share price. The Chinese interest is Ridge's
substantial nickel prospect on the eastern limb of South
Africa's Bushveld complex called Sheba's Ridge. A bankable
feasibility study currently underway is expected to give the
green light to the R5 billion ($690 million) Sheba's Ridge mine.
The prospect has resources (if proven) capable of producing an
annual 24,000 tons of nickel, 12,000 tons of copper, 94,000
ounces of platinum, and 274,000 ounces of palladium for at least
18 years. The Chinese investment closes out a $146 million
fund-raising exercise for the Blue Ridge platinum mine which is
10 km from the nickel project and about 190 km west of
Johannesburg. Anglo Platinum, the world's largest platinum
producer, owns 36% of Sheba's Ridge, the Industrial Development
Corporation 26%, and Ridge the rest.

Mining Royalty Rates Amended
----------------------------
4. (U) On October 11, National Treasury released the long
awaited second draft of the Mining Royalty Bill for comment.
The industry will be able to comment on the draft until the end
of January 2007. It is expected that the bill will be enacted
in 2007, after which it will be become effective in May 2009.
The proposed royalty will be tax deductible and is aimed at
encouraging local beneficiation. Chamber of Mines economist
Roger Baxter said that the latest draft was a significant
improvement but questioned whether the incentives offered were
sufficient to encourage further beneficiation within South
Africa. He said that the introduction of relief measures for
marginal mines, small miners and royalty liability adjustments
were also welcome. While general pleased with the new draft
bill, the industry still intends to push for a profit-based
instead of the proposed revenue-based royalty system.

5. (U) The diamond industry will benefit most from the redrafted
bill. The initially proposed 15% export levy on uncut diamonds
will be reduced to 5% and the royalty on diamond revenues from
8% to 5%. The royalty on unrefined PGMs will be 6% while the

JOHANNESBU 00000416 002.2 OF 005


refined metals will attract a 3% royalty, compared with 4% under
the first draft. Unrefined gold will draw a 3% royalty while
refined gold (99.5% pure, which is produced by most mines) will
attract a 1.5% royalty, compared with 3% proposed in the first
draft. Under the first draft, low-ash coal had a 2% royalty but
under the latest draft the royalty on high-ash coal will be 1%
and 3% on low-ash coal (less than 15% ash). One discordant note
for iron ore exporters, especially at a time when demand for and
prices of this commodity are running at record highs, is the
imposition of a 4% royalty on the raw ore, versus the initially
proposed 2%, which will apply only to an upgraded product.

US-SA Power Conference - October 16-19
--------------------------------------
6. (U) An estimated 35 American companies and an equal number of
SA firms participated in a conference to outline opportunities
for American suppliers of power equipment arising from the
state-owned utility, Eskom's $16 billion energy investment
program. The emphasis was on electricity generation,
transmission and distribution opportunities. The $16 billion
represents a portion of the $60 billion earmarked for
infrastructure development by the SAG. The conference had the
backing of EXIMBank and USTDA, which offers grant financing for
projects in which US firms participate or have the potential to
participate. Some 35 Eskom projects were showcased, including
substantial base-load and peaking generation initiatives
amounting to billions of dollars over the next five years. The
conference featured presentations from Eskom, the SAG and US
companies that were invited to present their latest
technologies. US companies were also guided through South
Africa's black economic empowerment legislative requirements,
which are an imperative for doing business in the country.

-------
NUCLEAR
-------
PBMR Team Awarded U.S. Nuclear Engineering Contract
--------------------------------------------- ------
7. (U) At the beginning of October, the US Department of Energy
awarded a new generation nuclear plant contract to an
international team that includes South Africa's Pebble Bed
Modular Reactor Company (PBMR). Jaco Kriek, PBMR's Chief
Executive, said the contract was worth about $3 million (R23
million) and was for the first phase of engineering work for the
project at the Idaho National Laboratory. The contract includes
pre-conceptual engineering, design comparisons of various
alternatives for reactor heat and hydrogen generation,
conceptual cost estimates and accompanying schedules and
research and development requirements for different options.

8. (U) The initial 12-month phase is the first step in a
multi-step program to deliver a high temperature, gas-cooled
reactor prototype to increase US domestic energy supplies,
reduce greenhouse gas emissions and move more quickly towards a
national hydrogen economy. The international team is led by
Westinghouse Electric Company and includes Potchefstroom-based
M-Tech Industrial of South Africa, Shaw Stone & Webster of
Boston; Technology Insights of San Diego; Air Products and
Chemicals of Allentown, Pennsylvania; Nuclear Fuels Services of
Erwin, Tennessee; and Kadak Associates of Providence, Rhode
Island.

--------------
Platinum Group
--------------
Bushveld's Eastern Lobe needs Higher PGM Prices
--------------------------------------------- --
9. (U) South Africa's Bushveld complex hosts the world's largest
resource of platinum group metals (PGMs). The complex has the
shape of a distorted four-leaf clover with well-developed
western and eastern lobes, a partially developed northern lobe
and an embryonic southern lobe. Both the western and eastern
lobes have two main reef horizons, namely the Merensky Reef and
the UG2 Reef. The Merensky is better developed on the western
lobe and has a higher metal content and higher proportion of
platinum than the UG2, while the UG2 is the dominant reef on the
east lobe. The ore from the Merensky is also easier to mine and
to treat because of its lower chromium content.

10. (U) The prolonged high price of platinum (sweetened by the
high price of the relatively minor metal rhodium) has encouraged
exploration on the eastern lobe and a number of mining companies
are planning or have commissioned projects there. The majority
of resources on the western lobe are already in production or
are tightly controlled by the platinum majors. Mining on the
eastern lobe requires higher palladium and platinum prices than

JOHANNESBU 00000416 003.2 OF 005


are required for operations on the western lobe. According to
Brad Mills, Chief Executive of Lonmin, the platinum price has to
remain in excess of $1,000 per ounce at about R7 to the dollar
for companies to successfully invest in the Eastern lobe, while
the price required for mining ore bodies in the Western lobe is
about two-thirds of that. The current platinum price is $1,080
per ounce and the rand/dollar exchange rate 7.5.

Lonmin Platinum gets Mining Rights Converted
--------------------------------------------
11. (U) The start of October saw Lonmin became the first South
African platinum producer to convert its old order mining rights
for its Marikana operations into new order mining rights. This
is a requirement of the new Minerals Act which converted all
privately held mineral rights to State custodianship. The
conversion gives Lonmin's South African operations, namely
Western Platinum and Eastern Platinum, the exclusive right to
mine for platinum group and associated metals within its
property boundaries for the next 30 years, renewable thereafter
for 30-year periods. Simultaneously the company announced a $1
billion investment plan to expand its operations over the next
three to five years. This will boost platinum production to at
least 1.3 million ounces a year by 2010 and create about 4,000
jobs in various areas of its business.

12. (U) Lonmin achieved its mining right conversions with social
and labor plans for its mining areas, which included the
development of people and housing schemes. This was commended by
Minister of Minerals and Energy, Buyelwa Sonjica, who said that
social and labor aspects were very important in preventing
mining towns from turning into ghost towns once reserves were
depleted. Brad Mills, Chief Executive of Lonmin, said the
conversion of the company's mining rights removed uncertainty
around the future of its operations and gave the company great
confidence in its current and future capital investments in
South Africa. Currently, Lonmin is looking at a wide range of
beneficiation issues with the Department of Minerals and Energy
(DME), including the relocation of upstream and downstream
activities and facilities to South Africa.

Implats Exchanges Royalty Payments for Equity
---------------------------------------------
13. (U) With agreement from both the Royal Bafokeng Nation (RBN)
and the South African National Treasury, Impala Platinum
(Implats) will convert royalty payments to the RBN to a 13.4%
share of the company. This was driven out of concern by Impala
(the world's second biggest platinum producer) that under the
revised Royalty Bill, royalties paid to the RBN would not be
offset against those paid to the state.

14. (U) Under the new deal, Implats will issue shares worth
about $1.6 billion (R12.1 billion at the current rand/dollar
exchange rate of 7.5) to the RBN, its principal black economic
empowerment (BEE) partner. This is equivalent to an advance
payment of all royalties due to the RBN over the 32-year royalty
agreement. The royalties amount to $1.4 billion (R10.6
billion), and the $200 million (R1.5bn) difference, equivalent
to a 12% discount, will be recorded on the Implats balance sheet
as a "BEE charge." To facilitate the deal, Treasury plans to
change a section of the income tax act (by the end of November)
to allow Implats to deduct the equivalent of $1.4 billion from
its taxable income over 32 years. All new agreements must be
ratified by the end of this year.

-----------
LEGISLATION
-----------
Mining Industry Blames Government for Losses
---------------------------------------------
15. (U) The mining industry has blamed government policies for a
33% decline in investment since 2004 that has resulted in an
estimated loss of 20,000 jobs. On the other hand, while
Minerals and Energy Minister Buyelwa Sonjica has established a
departmental task team to investigate reasons for the decline,
she has accused the industry of using this to avoid its Mining
Charter obligations. The Charter mandates that industry
transfer 15% of its assets to Black organizations and
individuals by 2009 and 26% by 2014, plus other social and
training obligations. This is seen as a major disincentive to
international investment, particularly to junior exploration
companies, many of which have relocated to the DRC, Angola,
Zambia and other African countries with less onerous mining
codes. It has also seen many South African companies diversify
operations overseas and into the rest of Africa.

16. (U) The Chamber of Mines has provided the Minister with

JOHANNESBU 00000416 004.2 OF 005


investment data and cited a number of government policies
(including those of the Charter, Minerals Act, and proposed
Royalty and Beneficiation bills) which could have contributed to
a lack of investor confidence. These included the negative
effect of delays in approvals for environmental assessments; the
issuing of water rights; the issuing of exploration licenses;
and delays and impediments to converting old order rights to new
order rights (the conversion of existing operating licenses for
exploration and mining that should have been almost a "rubber
stamp" exercise). Department (of Minerals and Energy) officials
said that they had received 9,000 applications for conversion of
old-order mining rights to new-order rights and that 1,421 were
rejected for various reasons, including the failure to commit to
Charter obligations.

Anglo in another Dispute over Licensing
---------------------------------------
17. (U) In mid-September, Anglo Platinum (Anglo Plats), a
subsidiary of Anglo American, filed actions against the
Department of Minerals and Energy (DME) for refusing to grant
prospecting rights on four properties located on South Africa's
Bushveld Complex. Two weeks later, Anglo Coal, also a
subsidiary of Anglo American, filed action jointly on the DME
and on Abarawaki Investments, a subsidiary of mining exploration
company Thabex Exploration, to defend its applications for coal
prospecting rights. Abarawaki was cited as a respondent
because it had received a notice of acceptance from the
department on a prospecting right over an area held by Anglo
Coal. As a result of the negotiations, Anglo Coal has received
some of its prospecting rights.

18. (U) (Comment: The new Minerals and Petroleum Resources
Development Act requires that exploration and mining companies
convert their old licenses (so-called old order rights) to new
order rights to comply with the Act and with the Mining Charter.
However, according to the law firm Webber Wentzel, in terms of
the Act the minister has very limited powers to decline
applications for conversions of rights, for which the deadline
was April 30. The law also provides for mining companies to
obtain a "mandamus", or order to compel the minister to process
both conversions and new applications. Unfortunately, the law
is complex and open to interpretation and the capacity of the
DME to handle this is limited by the number and experience of
their staff. End Comment.)

--------
DIAMONDS
--------
Firms Shed Diamond Cutting Jobs
-------------------------------
19. (U) Pending legislation aims to see more South African
diamonds cut and polished locally in the belief that this would
create substantially more jobs. Instead, cutting firms are
shedding jobs as they grapple with squeezed margins. Cutters
claim that this is due to an imbalance between the high price of
rough and revenues for finished gems. At the beginning of
September, a trade union official said that some 400 cutting and
polishing jobs had been lost in Johannesburg since January,
bringing employment in the city down to 1,800 cutters, with
another 600 cutting jobs elsewhere in the country.

20. (U) MacDonald Temane, Chairman of the South African Master
Diamond Cutters Association, said a delay in putting in place
the government's new diamond laws was not helping the industry.
He said that this had a destabilising effect and caused
uncertainty. The mining ministry concurred that there were many
elements of the complex diamond law that had to be put in place,
including input from the National Treasury on proposed export
duties and royalty taxes. It is expected that the laws will be
implemented early next year.

De Beers Opens its High-Tech Macrodiamond Laboratory
--------------------------------------------- --------
21. (U) On October 5, the world's leading diamond miner, De
Beers, officially opened a $16 million geological exploration
macrodiamond laboratory (GEMDL) opposite its headquarters west
of Johannesburg. The facility was designed to speed up the
process from discovery (of a kimberlite body) to mine
development. For the immediate future De Beers plans to process
sample material from its world-wide exploration projects at the
new laboratory. The company budgeted some $100-million for
exploration in 2006 and is likely to sustain or increase that
level into the future in an effort to increase rough diamond
supply. There have been few new major discoveries during the
passed decade. De Beers is pursuing prospects in Botswana,
Angola, the Democratic Republic of Congo, and Canada, and has

JOHANNESBU 00000416 005.2 OF 005


plans for India and Russia.

22. (U) The new laboratory has a 150 ton per year sampling
capacity, which will enable it to process about ten advanced
exploration projects a year as compared to one currently. This
capability is likely to have an immediate positive spin-off for
their joint venture AK6 project in Botswana with African
Diamonds and Wati Ventures. The plant uses South
African-developed technologies and enhanced international
innovations to carry out the process in a secure 'hands-free'
environment. The laboratory is designed for 100% recover of
diamonds and diamond chips down to a few microns in size.
Additional value-added services are aimed at determining and
evaluating the characteristics and properties of diamonds and
the geological environment in which they occur.

23. (U) (Comment. DeBeers' strategy for South Africa appears to
be to sell off marginal mines to Black Economic Empowerment
enterprises, increase recoveries from profitable mines, cut back
on head-office staff and dispatch previously centralized
services to the operations, and concentrate on high technology
development and innovation in diamond exploration, recovery and
industrial diamond manufacture. End Comment.)

Lesotho's Monster Diamond Find
------------------------------
24. (U) The Lesotho Promise, a 603 carat white diamond of
exceptional color, was discovered at the Letseng mine in
Lesotho, and sold in Antwerp for $12.4 million. This is the
biggest diamond found since the 777 carat Millennium Star, owned
by De Beers, was discovered in the Democratic Republic of Congo
in 1993. Last year the Letseng mine was also the source of
another two exceptional stones, one exceeding 100 carats and
another of 83 carats, also soon to be sold in Antwerp. The mine
was previously owned and worked by De Beers between 1977 and
1982 but demands by the Lesotho government caused them to cease
operations. Letseng is currently owned by the Government of
Lesotho (30%) and Gem Diamonds (70%) and operated by Gem since
mid-year. Gem recently received shareholder approval to
purchase the operation from JCI. The mine is low grade but is
known to produce large high quality diamonds. Of the 100,700
carats recovered since restart of operations in April 2004, 90%
were of gem-quality and some 1.5% exceeded 100 carats each.

---------
COMPANIES
---------
Two Major Companies Formed
--------------------------
25. (U) On August 16, the Competition Tribunal unconditionally
approved the merger of Kumba Resource's coal assets with those
of Eyesizwe Coal within a newly created company, Exxaro
Resources. This forms part of a black economic empowerment
transaction involving the unbundling of Kumba into two
separately listed entities, namely Exxaro and Kumba Iron Ore
Limited. The Competition Tribunal also unconditionally approved
Exxaro's proposed acquisition of Namakwa Sands, Anglo American's
mineral sands operations on the west coast. The two companies
will be separately listed on the Johannesburg Securities
Exchange (JSE) by the end of the year.

26. (U) Kumba Resources, 66% held by Anglo American, is Africa's
biggest iron ore producer and also has substantial assets in
coal, minerals sands, zinc, ferrosilicon and dolomite as well as
ferroalloys. November will see Kumba unbundled into Kumba Iron
Ore and Exxaro. Exxaro will hold the coal and metal mining
assets and retain a 20% stake in the Kumba's Sishen iron ore
mine. It also has a 90-day option after listing to buy 100% of
Namakwa Sands for $310 million, as well as options to buy 26% of
the Black Mountain zinc mine and the Gamsberg zinc project in
the Northern Cape. If it exercises the Namakwa Sands option
Exxaro would become the world's third-largest producer of
titanium mineral sands - used mainly in making pigments for
paint. Exxaro will also be South Africa's fourth-largest coal
mining company, the biggest supplier of coal to Eskom for power
generation and top producer of metallurgical coals. If it keeps
to its planned output of 70 million tons of coal by 2012, it
will become South Africa's biggest coal producer.
COFFMAN##

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