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

DE RUEHSA #2128/01 2700934
R 260934Z SEP 08




E.O. 12958: N/A
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 10, September 1-15, 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.

SA Mining Output Falls

2. (SBU) Statistics South Africa (StatsSA) reported that total
mining production dropped by 12.6% in July as the production of gold
and non-gold minerals fell by 16.4% and 12%, respectively, compared
with July 2007. The platinum group metals recorded the largest
decrease of 32.8% compared with July 2007. This decline was mainly
due to smelter problems and deferred maintenance, which would
normally have occurred in the first half of the year.

PetroSA's Coega Refinery May Treat
Venezuelan Heavy Crude

3. (SBU) PetroSA Vice President of New Ventures Jorn Falbe said last
week that PetroSA's proposed $11 billion Coega oil refinery project
was the last opportunity for SA to build a refinery that would
concentrate on handling heavy crude supplies from the Atlantic
region to maximize economic returns. Such a refinery would source
its crude from Venezuela, Brazil and Angola, reducing SA's
traditional reliance on light sweet crude from the Middle East.
This statement follows Venezuelan President Chavez recent visit to
SA on September 2-3, which sparked renewed interest in the project.
Chavez is believed to have an interest in the project as a means of
both increasing the market for Venezuelan heavy crude and reducing
Venezuela's dependence on the U.S. market for the same crude. Falbe
said that, contrary to perceptions, the refinery would not be
reliant on oil supplies promised by Chavez during his visit, since
it could also count on potential supplies from Brazil and Angola,
which have similar heavy crude deposits. A mission from SA will
visit Venezuela during the week of September 22 to look into the
possibilities of crude oil exploration (most probably in the Orinoco
Belt) while a Venezuelan team will visit SA during the same period
to look into the details of the proposed refinery and the use of
bulk state-owned storage facilities at Saldanha Bay on the west

4. (SBU) Falbe said the next six months would be critical for the
refinery project as it moves into the front-end engineering and
design (FEED) phase. HSBC has been appointed as a financial advisor
for the project and the pre-feasibility study has been completed by
Qfor the project and the pre-feasibility study has been completed by
the KBR global engineering, construction and services company. The
next step will be to select and engineering partner to complete the
FEED study. PetroSA began with 30 potential partners and has
reduced this number to four unidentified "global players". A final
decision on the project will be made after the completion of the
FEED study. Falbe said PetroSA found itself in the same position
that state power company Eskom did a few years ago when the SAG
declined to commit to major investments in the electric power
sector. The implication is that if the SAG does not finance the
project, SA will suffer refined product shortages or have to import
these products. Falbe said that the refinery would be strategically
placed to serve the rapidly growing Chinese and Indian markets and
that the opportunity to build the refinery was "now or never".
Minister for Public Enterprises Alec Erwin was reportedly committed

PRETORIA 00002128 002 OF 006

to drive this refinery project forward, but he submitted his
resignation on September 23, following the unexpected resignation of
President Mbeki on September 20.


Major Miners Resist Self-Generation

5. (SBU) Major South African deep-level miners want to stick to
mining and avoid generating their own electricity, except for
emergency power. The Australian company Braemore has accused South
African miners of being "spoilt" and pointed to Australia where many
miners generate their own electricity. Chamber of Mines official
Dick Kruger said self generation was not economically feasible in
South Africa. Harmony Gold CEO Graham Briggs held a similar view,
adding that the cheapest option for Harmony was to continue using
Eskom's electricity, while assuring back-up for safety during power
outages. Outgoing Gold Fields COO Terence Goodlace agreed and said
that Gold Fields was accelerating energy saving rather than power

6. (SBU) On the other side of the issue, emerging junior miners such
as Wesizwe Platinum and Braemore Resources, with platinum properties
on South Africa's Bushveld Complex, are taking self-generation in
stride. Wesizwe is planning to co-generate its own power on a large
scale at its new 230,000 tons-of-ore-per-month platinum mine in the
North West Province. CEO Mike Solomon said this was an imperative
because Eskom could not guarantee sufficient power for its new mine
and they needed contingencies to prevent project and production
delays. Wesizwe intends to install heavy fuel generators for
back-up power supply.


SAG Intervention Loses Jobs in Jewelry

7. (SBU) "The introduction of the State Diamond Trader (SDT) has
destroyed the local small diamond-cutting and polishing industry and
has resulted in the loss of about 1,500 jobs (out of 2,500) due to
its inability to supply gem-stones to the industry." So said United
Diamond Association (Udasa) Chairman Ernest Malakoane at an
association meeting in mid-September. Udasa's Deputy Chairman Derek
Thema said the SDT Chief Executive Abbey Chikane had been dismissed.
In addition, Udasa had decided to sue the Minister of Minerals and
Energy and the SDT for losses suffered by its 200 members because of
its failure to supply adequate diamonds. Before the introduction of
the SDT, small cutters bought diamonds from De Beers' Diamdel (small
diamond marketing) unit. Diamdel's role (and staff) has since been
transferred to the SDT, a move that Malakoane called "a disaster".
Malakoane blamed the state-owned Industrial Development Corporation
(IDC) and Treasury for not providing SDT with sufficient funding to
buy the gems required and noted that the downstream diamond industry
was in chaos due to the new Diamond Amendment Act. The SDT began
trading in January and can by law acquire up to 10% of locally
diamond production from the mining industry's annual run-of-mine
Qdiamond production from the mining industry's annual run-of-mine
(ROM) output.

8. (SBU) (Comment. SDT's fumbling appears to be an unintended
consequence of the skills shortage and inexperienced government
officials getting involved in technically sophisticated commercial
activities. For years the local diamond cutting industry pressed
for legislation to force De Beers to sell locally, as opposed to
getting an allocation of their composite global production. Cutters
complained that De Beers' rough diamond pricing and marketing system
discriminated against them and that they were capable of cutting any
and all locally produced stones economically. De Beers' response
has been that because of SA's relatively high wage structure, only
stones above a certain quality and size can be cut locally. Cutters

PRETORIA 00002128 003 OF 006

are currently receiving only 40% to 60% of required stones from the
SDT and have been forced to shed staff. Problems facing the cutters
and the SDT include:
-- the SDT is purchasing less than the legislated 10% and only from
De Beers, pending the determination of "fair market value" (FMV)
for stones from other producers;
-- stones from other producers are mainly alluvial and have a higher
-- funding from Treasury, which regards the SDT as a pilot project,
is inadequate;
-- less than 50% of ROM stones can be economically cut in SA. End

9. (SBU) The Jewellery Council of SA has confirmed that the South
African Diamond and Precious Metals Regulator requires all
white-owned micro-jewelers to submit plans to achieve 15% black
ownership in five years as part of the country's Black Economic
Empowerment (BEE) regulations. A goldsmith who works from home said
she had been told that this applied to her one-person business,
which she said was "totally impractical". A member of the Jewellery
Council added that the regulation would also affect dentists and
artists who work with gold and precious metals. Small jewelers
claim they will lose their businesses if the BEE regulations are
strictly applied. Spokesperson for the Department of Minerals and
Energy Bheki Khumalo said the department was sympathetic and had
communicated as much to the regulator. The regulator has an
independent board that will have to rule on the matter.

Petra Takes Over the Cullinan Diamond Mine

10. (SBU) The Petra Diamonds Cullinan Consortium (PDCC), led by a
relatively minor BEE diamond miner Petra Diamonds, finalized the
purchase of the famous 100-year old De Beers Cullinan diamond mine
for $140 million in cash in July. The Cullinan kimberlite pipe
hosts the world's second largest diamond resource by value and will
transform Petra into a major diamond-producer. Cullinan's total
underground resources consist of the B-Cut with an estimated 58
million carats, and the C-Cut with 133 million carats. Surface dump
resources accumulated over more than 100 years of mining are an
undetermined quantity, but are currently estimated at 17 million
carats. Petra has estimated a mine production of 700,000 to 850,000
carats in 2008/09 and full production of 1 million carats per year
from 2009-10, with annual revenues of around $100 million. Petra's
acquisition of mines from De Beers continues with the latest
transaction being the purchase of a 75% stake in the Williamson
Diamond Mine in Tanzania for $10 million cash in August 2008. The
mine made a $29 million loss in 2007. Petra also purchased De
Beers' Koffiefontein diamond mine in July 2007 and has agreed to buy
its Kimberley underground mines. De Beers' strategy is to sell its
marginal South African diamond assets. Its last big transaction is
likely to be the sale of its Namaqualand alluvial diamond mine on
the west coast to mid-tier company Trans Hex.

11. (SBU) The Cullinan mine is renowned for producing some of the
Q11. (SBU) The Cullinan mine is renowned for producing some of the
world's most spectacular diamonds, including the famous Cullinan
Diamond, which is the largest rough gem-quality diamond ever found,
and more than 300 stones of over 100 carats each. The Cullinan
diamond was found shortly after the end of the Anglo-Boer War in
1905 and weighed 3106-carats (621 grams or 1.37 pounds). It was cut
into 105 stones including the 530-carat Cullinan 1 (the Great Star
of Africa), and the 317-carat Cullinan 2 (the Lesser Star of
Africa). Both the Great Star of Africa and the Lesser Star of
Africa are in the British crown jewels. The share holders of PDCC
comprise Petra and Al Rajhi Holdings, each with a 37% initial
interest, and PDCC's Black Economic Empowerment (BEE) partners
(26%), which meets the requirements of South Africa's Mining
Charter. (Pictures of the original rough Cullinan and the cut
Cullinan 1 were included in the e-mailed version of the Assay.)



PRETORIA 00002128 004 OF 006

Union Calls for a State-Owned Mining Company

12. (SBU) The new ANC-administration is likely to push for more
government involvement in and control of (stopping short of outright
nationalization) the country's strategic mining industry. As a
first step, National Union of Mineworkers (NUM) President Senzeni
Zokwana has called for the creation of a state-owned mining company.
Speaking to delegates at the September Mining Summit in
Johannesburg, he said that this would "create a new-culture mining
company that cares - not only for shareholders, but also for
workers". He said human resource development needed a lot of work
and adult basic education and training should be encouraged, so as
to fast track the development and promotion of those already in the

13. (SBU) This idea was first mooted earlier this year by ANC
Secretary-General Gwede Mantashe, who spoke about the creation of
more State-owned enterprises, especially in the mining sector, and
asserted that plans would move ahead when the new (post-Mbeki)
government came to power. The NUM had also called for
nationalization of coal mines following the power crisis in January,
when insufficient coal stocks at power stations were said to play a
role in the crisis. Zokwana softened this view by saying that
establishing a state-owned mining company did not mean nationalizing
existing operations, but that such a company would exploit the many
greenfield projects that were still available, particularly in
platinum, in partnership with private companies. He cited Norway,
Botswana, Namibia, and Ghana, where the State holds interests in
mining operations, and questioned why this could not be done in
South Africa.

--------------------------------------------- -
Zambian Windfall Tax Deferred (Contribution by
Vedruna Santana, U.S. Embassy in Lusaka)
--------------------------------------------- -

14. (SBU) The Zambian Government (GRZ) introduced a new minerals tax
regime in April 2008, which entailed a higher minerals royalty and
corporate tax rate as well as a windfall tax ranging from 25% to
75%. Several international mining companies threatened to take
legal action against the GRZ for introducing tax rates that violate
the terms of their development agreements. According to recent
reports, some of these companies have been reassessing whether they
will continue operating in Zambia. These companies have expressed
no difficulties with the mineral royalty and corporate tax
adjustments, but describe the windfall tax as particularly onerous.
The Zambia Chamber of Mines has re-opened a dialogue with the
government to discuss the mining regime.

15. (SBU) The Zambia Daily Mail reported on September 10 that
Secretary to the Treasury Evans Chibiliti, who appeared before a
parliamentary committee on estimates, said that the GRZ had deferred
its collection of windfall tax until discussions between the two
parties are completed. He said the mining companies had appealed
the windfall taxes to the late President Mwanawasa, who had asked
Qthe windfall taxes to the late President Mwanawasa, who had asked
the Minister of Finance to review it. He said government would
defer the tax until it had concluded a proper assessment with the
Zambia Revenue Authority. The parliamentary committee was informed
that only two companies had paid the windfall tax so far. It is
hoped that a compromise will be struck between the mining companies
and GRZ for the benefit of the Zambian economy. Zambia's copper
output for the six months rose to 286,750 tons, an increase of 20%
over the same period last year, and is on course to reach 600,000
tons for 2008 versus 535,000 tons in 2007. Cobalt production rose
2,230 tons, an increase of 2% over the 2,188 produced in the first
half of last year.

Slow Mining Right Conversions Worry SAG

16. (SBU) South African Minister of Minerals and Energy Buyelwa
Sonjica expressed her concern about the slow pace of mining rights
conversions at a Mining Summit in Johannesburg on September 9. The
Summit was convened to discuss transformation issues in preparation

PRETORIA 00002128 005 OF 006

for review of the Mining Charter in 2009. She said less than 30% of
old-order mining rights applications had been submitted for
conversion and submissions close to the deadline of April 30, 2009
would create unnecessary bottlenecks in processing. On the issue of
black economic empowerment (BEE), Sonjica stated that although there
had been a number of large transactions in the sector, the issue of
historically disadvantaged individuals fronting as legitimate BEE
partners remained a challenge. She said that few of the empowerment
transactions embraced the true spirit of broad-based BEE, which is
to introduce effective participation of the historically
disadvantaged into the SA mining industry.

17. (SBU) The Minister also urged mining houses to find more
meaningful ways of working with local communities, and expressed
worries about tensions between these communities and the mining
companies. In this context, unions are planning to protest the
mining sector's failure to provide power and infrastructure to rural
communities from which they source labor. Sonjica said that
communities would not oppose mining if they were meaningful
beneficiaries and were consulted on mine development plans. She
criticized comments by local analysts about disinvestment in South
Africa and said the DME had constituted a task team to investigate
such reports. She cited the South African Reserve Bank figures
indicating progressive growth of fixed-capital formation in the
mining sector from approximately $3 billion in 2004 to $5 billion in
2007. (Comment. The Minister made no mention of the much larger
capital inflows into mining countries such as Australia and Canada
during the same period, or the dearth of investment between 2000 and
2004, when mining companies were waiting for the new Act to be
announced. End Comment.). Analysts cite the following as
impediments to investment: lack of infrastructure and skills; power
disruptions and shortages; distance to new markets, typically the
Far East; the new mining and BEE legislation that have created
investor uncertainty; and currency fluctuations. The minister
claimed, without being specific, that the government had taken many
steps to address these challenges.

Mine Fatalities Down But Not Out

18. (SBU) The National Union of Mineworkers (NUM) has launched a
series of one-day protests against on-going fatalities in mining
(and other industries), despite an annualized 18% reduction in fatal
accidents in 2008 compared to 2007 (132 deaths to September 23, 2008
compared to 221 for the whole of 2007). The NUM has proposed heavy
fines and jail sentences for mine managers who fail to observe the
tenets of the South African Mine Health and Safety Act (1996). NUM
also blames government for a lack of qualified and experienced
inspectors able to carry out routine mine inspections. Minister
Sonjica said mine safety audits ordered by President Mbeki earlier
this year had been completed and would be released after being
presented to the President. A mining industry expert said the audit
Qpresented to the President. A mining industry expert said the audit
was not credible, due to skills shortages at the ministry.
Official figures for deaths in other industries are not available,
but a number of fatal accidents on construction sites and in
factories have been reported. The mining industry has placed blame
at the door of the SAG's black economic empowerment (BEE) policies
because they claim it pushes inexperienced and unqualified people
into positions of authority and leadership for which they are not
yet ready.

Titanium Mining Go-Ahead for Wild Coast

19. (SBU) A twelve-year-old turf battle between the Department of
Minerals and Energy (DME) and the Department of Environmental
Affairs and Tourism (DEAT) ended in July when DME approved titanium
dune mining on the Transkei Wild Coast, located on the coast of the
Eastern Cape Province. The DME granted Australian mining company
Mineral Commodities (MRC) rights to extract titanium from the
Xolobeni Mineral Sands project. The sand dunes are reported to
contain over 346 million tons of titanium, with an estimated value
of $1.46 billion, and in an area of high unemployment and rural
poverty. A DME spokesperson was adamant that decisions on mining

PRETORIA 00002128 006 OF 006

applications should not be driven "only by environmental issues",
and must take into consideration the socio-economic circumstances of
the communities in the area.
20. (SBU) the Department of Environmental Affairs and Tourism (DEAT)
and an environmental group called "Sustaining the Wild Coast"
maintain that the mining project would cause irreparable harm to the
ecosystem, which includes internationally recognized unique biomes.
They also claim that the environment, land, and mineral rights of
local inhabitants will be violated. The DEAT minister nevertheless
plans to streamline the processing of environmental applications so
as not to hold up needed development. Environmentalists also object
to a proposed coastal extension of the N2 national highway (which
would also serve the mine) from Port Edward in KwaZulu/Natal to Port
Elizabeth in the Eastern Cape. The existing highway goes inland and
has little scenic attraction. A coastal road from Port Edward to
Port Elizabeth would extend the touristically attractive Garden
Route from Port Elizabeth to Cape Town and open 800 kilometers of
Eastern Cape coastline to tourism and employment.


Nuclear Project Decision Process in Progress

21. (SBU) State-owned power utility Eskom said on September 16 that
the procurement and investment decision process for the proposed
Nuclear-1 pressurized water reactor (PWR) nuclear power stations is
underway, noting that no decision had yet been taken. Eskom
appealed to the media "and other interested parties" to allow space
for the process to unfold and be concluded. One Eskom manager said
the decision was imminent, but another spokesman said the decision
would be finalized by year-end. Eskom is evaluating bids for the
proposed nuclear power stations from two suppliers of PWR
technology: the N-Powerment Consortium led by Westinghouse of the
U.S, and the EPR Consortium led by Areva of France. The N-Powerment
Consortium is offering three 1,140 MW AP1000 units for a total
station capacity of 3,420 MW, while the EPR Consortium is offering
two 1,650 MW EPR units for a total station capacity of 3,300 MW.
The decision could be further delayed by President Mbeki's
resignation on September 21 and the appointment of a new cabinet on
the 25th.


Air Quality Monitors Measure Hot Spots

22. (SBU) The Department of Environmental Affairs (DEAT) and the
Mpumalanga Provincial Department of Agriculture and Land Affairs
(DALA) installed new air quality monitoring stations over a 31,106
square kilometer area encompassing a number of small towns in
Mpumalanga Province. The region is noted for its concentration of
coal-fired power stations, heavy industries, residential coal
burning, and veld fires, all of which contribute to its severe air
pollution problems. The DEAT Deputy Minister has stated that the
new air quality monitoring stations will identify pollutants,
Qnew air quality monitoring stations will identify pollutants,
including benzene, carbon monoxide, lead, and sulfur dioxide, and
the specific areas from which they come. The data collected will be
made available to the general public and to relevant stake holders
such as the Air Quality Officers Forum, which includes
representatives from other effected municipalities. The deputy
minister noted that DEAT would present identified polluters with
proof of their pollution levels and would work with them to remedy
the situation over a stipulated time frame. Polluters could be
subjected to fines or jail terms if they failed to comply with
quality standards and/or time frames. The monitoring stations were
installed at a cost of $134,000 each, and were partly sponsored by
the Royal Danish Embassy.


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