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

DE RUEHSA #4002/01 3241128
R 201128Z NOV 07





E.O. 12958: N/A
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 10B, October 16-31, 2007

This cable is not for Internet distribution.

1. (U) 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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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.


Westinghouse Electric South Africa Launched

3. (SBU) The Westinghouse Electric Company officially launched its
South African operation under the name Westinghouse Electric South
Africa on November 5. This followed the approval by the Competition
Commission of its acquisition of the South African company, IST
Nuclear (ISTN), which is a leading provider of nuclear services and
systems. Regional Vice President South Africa said the acquisition
brought together local experience and international expertise that
should position Westinghouse to bid on the first tranche of Eskom's
new nuclear build. This is targeted to total 20,000 MW over the
next two decades. The ISTN purchase also meets the South African
Government's objective of building a local nuclear-industry capacity
around Eskom's multibillion dollar nuclear power program. ISTN has
been working with both South African and U.S. based investors in
developing the smaller, new-generation Pebble Bed Modular Reactor
(PBMR) being developed in South Africa.

4. (SBU) Westinghouse plans to promote its AP1000 nuclear power
plant, which is the company's third-generation plus pressurized
water reactor system (PWR). Bowser said Westinghouse's modular
design of units of 1,100 MW would be advantageous for power
distribution and would promote localization of suppliers. ISTN
supplied the helium test facility for the PBMR and is contracted to
design key systems for the PBMR demonstration unit to be built at
the Koeberg site by 2011. Westinghouse is a group company of
Toshiba Corporation, is the world's pioneering nuclear power company
QToshiba Corporation, is the world's pioneering nuclear power company
and is a leading supplier of nuclear plant products and technologies
to utilities throughout the world. Westinghouse supplied the
world's first Pressurized Water Reactor (PWR) in 1957 in

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Shippingport, Pennsylvania. Today, Westinghouse (PWR) technology is
the basis for approximately one-half of the world's operating
nuclear plants, including 60% of those in the United States and
South Africa's Koeberg plant. Westinghouse holds a 15% share in the


Diamond Cutting and Polishing

5. (SBU) World Federation of Diamond Bourses President Ernest Blom
said in his presentation at the recently held Southern African
Institute of Mining and Metallurgy's "Diamonds - Source to Use 2007"
colloquium, that South Africa's cutting and polishing industry is
estimated to be the world's fifth largest by value, after India,
China, Russia and Israel. Blom noted that there were 157
diamond-cutting factories in 2006, employing about 2,500 cutters and
consuming $700 million worth of rough diamonds from both domestic
production and imports. An additional 1,000 cutters operated micro
businesses in the informal sector. Exports were valued at $700
million with a further $100 million stockpiled or sold locally.
Blom said a South African cutter (Basil Watermeyer) produced one of
the most important text books on diamond cutting and another (Alex
Leibowitz) was the original inventor of the automated diamond
polishing and bruting machines that revolutionized the industry.

6. (SBU) Conventional wisdom (and economics) has it that the South
African cutting and polishing industry, with its relatively high
wage structure, cannot compete with low-wage countries like India
and China. Cutting costs per carat in those countries are 10% to
15% of those in South Africa. This effectively limits locals to the
larger and higher-quality stones. The SAG has challenged this
perception and maintains that with proper training, experience,
opportunity, and use of state-of-the-art technology, the local
industry could eventually compete for lower value and smaller
stones. However, for the present, the industry - as with most other
sectors - is in the throes of a major skills shortage, with
concomitant high wages. (Comment: Jewelry Council of South Africa
CEO said the local cutting industry could at least double in size if
gold and diamonds were leased at rates similar to those available to
competitors, such as Italy and the U.S. where bank finance rates are
3% to 5% compared to rates of 14% and more in South Africa.

Mixed Views on Diamond Fundamentals

7. (SBU) Views on the global diamond production outlook diverged at
the above "Diamonds - Source to Use 2007" colloquium. MSA
Geoservices Director Frieder Reichhardt said significant
opportunities exist for major alluvial, marine, and kimberlite
diamond finds in West and Southern Africa, specifically in Guinea,
Sierra Leone, Liberia, Angola, Namibia, the DRC, Zimbabwe and
Botswana. He said these countries are located on ancient "cratons",
which contain unique geological structures that tend to indicate the
presence of diamondiferous kimberlites. According to Reichhardt, in
Qpresence of diamondiferous kimberlites. According to Reichhardt, in
the 1960/70s, West Africa collectively accounted for some 200 to 250
million carats, but output had since declined due to political
turbulence. This region, as well as southern Africa, had now
achieved a level of stability and "juniors" (small mining companies)
were starting to make their mark. Reichhardt said he expected to
see a number of new mines starting up in the next few years. He
highlighted Angola, where 15 major companies are active, as having
tremendous diamond potential for both alluvial and kimberlite
production and forecast that Angola's yearly production would exceed
12 million carats by 2010, and as
much as 15 million by 2015.

8. (SBU) De Beers' Patrick Bartlett did not share this optimistic
view. He did not dispute that there were hundreds of kimberlites
known and still to be found in the region - estimated at 700 to
1,000 in Angola alone. However, Bartlett noted that no major

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economic finds (that significantly affect global supplies) had been
made in sub-Saharan Africa since the early 1970's and that
production from major mines worldwide had reached a peak or were in
decline. (Comment: This may be true of many producers, but
world-class mines such as South Africa's Venetia and Botswana's
Orapa and Jwaneng mines are still increasing production and will
only go underground in the later 2020's. End Comment.). Bartlett
also doubted that many new discoveries would be of the quality of
Botswana's and South Africa's mines. Canada was the one exception,
but while their kimberlites were of high quality, they were small in
area and had relatively short production lives. Bartlett explained
that most kimberlites are cone-shaped and decrease in area with
depth. He forecast that the major diamond producers would all lose
critical production percentages as mines went deeper and moved
underground. The one exception might be the Cullinan mine outside
Pretoria. It has a more cylindrical shape and could be mined to
greater depth.


Anti-Nuclear Group Challenges Nuclear Program

9. (SBU) The SAG has stated that electricity capacity has to more
than double over the next two decades, from the current 37 gigawatts
to some 80 gigawatts. Twenty gigawatts of the new capacity would be
generated by nuclear plants, (conventional PWR's and the new
generation Pebble Bed Modular Reactor or PBMR, which is currently
under development in South Africa). Previously, construction of a
PBMR demonstration plant at Koeberg was delayed when Earthlife
Africa, an anti-nuclear group, was successful in overturning the
environmental impact assessment (EIA) on procedural grounds. PBMR
did not dispute the need for a new EIA, given design changes to the
original plant. Now that plans for the PBMR are advancing and the
SAG has issued a Draft Nuclear Policy document for public comment,
Earthlife is again attempting to delay or entirely stop the
government's nuclear plans in favor of renewable energies, without
coming up with alternative bulk energy sources needed for the
countries energy-intensive economy.

10. (SBU) Earthlife Africa has called for the Draft Nuclear Policy
to be withdrawn. Their objection to the policy is that it is "a
hasty and ill-informed document replete with sweeping unsupported
statements as to the appropriateness of nuclear power". Earthlife
claims that the policy did not follow the Department of Minerals and
Energy's (DME) own procedures as determined by the White Paper (WP)
on Energy Policy of 1998. The WP implied that the decision on new
nuclear capacity would depend on the environmental and economic
merits of alternative energy sources (relative to nuclear) and the
political and public acceptance of nuclear power. (Comment. The
majority of South Africans support the government's nuclear
initiative and, for the foreseeable future, renewable energy sources
will not be able to provide the country's bulk power requirements.
Qwill not be able to provide the country's bulk power requirements.
End Comment.). DME Chief Director has said the comments may result
in the draft policy being revised to change the emphasis but would
not change policy. State power utility Eskom is moving forward on
nuclear expansion plans and is putting in motion EIA's at five
coastal sites. If all approvals are obtained, Eskom could start
construction of nuclear facilities by 2010, targeting first unit
operation in 2016 or 2017.


Economic Growth Calls for a New Oil Refinery

11. (SBU) State Oil Company PetroSA plans to invest $6 billion in a
refinery at the new deep-water port of Coega in the Eastern Cape.
When completed, the refinery would be able to produce 200,000
barrels of fuel per day, making it the largest refinery in South

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Africa. However, the project is only viable if investors with deep
pockets can be found. South Africa's crude oil refineries are
situated on the coast in the Western Cape and KwaZulu/Natal
provinces, the exception being the inland Natref refinery at
Sasolburg in Gauteng Province. Sasol's coal-to-liquid (CTL) and
PetroSA's gas-to-liquid (GTL) refineries are located at Sasolburg
and Mossel Bay in the Western Cape, respectively. South Africa's
refinery capacity is about 515,000 barrels per day and all crude is
imported. Output from the two synthetic Sasol and PetroSA plants is
205,000 barrels per day, giving a total refined capacity of 720,000
barrels per day. This capacity was surplus to the country's
consumption four years ago and fuel was exported to neighboring

12. (SBU) The past three years of 5% growth have seen this surplus
evaporate and the country now imports some 10% of its fuel in the
form of refined products. All refineries are old, expensive to run
with low margins, and have had serious environmental problems of
late. They need major upgrades or should be replaced by larger and
more efficient units. Further, most refinery capacity is located at
the coast and fuel is transported inland by road, rail and pipeline.
Road transport (mainly private) has grown to the extent that it now
impacts normal traffic and is damaging road surfaces. Rail traffic
(state-owned) has declined because it is expensive and inefficiently
run. The single pipeline from Durban to Johannesburg has exhausted
its capacity. Approval has been given for a new pipeline from
Durban. If the go-ahead is given for the 200,000 barrel per day
refinery, serious consideration will have to be given to how product
is to reach the major consuming areas, particularly as Coega is in a
relatively remote part of the country. This could have a major
impact on its cost structure.


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