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

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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 8, August 2009

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.

2. (SBU) CONTENTS:

HOT NEWS
SA Gold Production Down by 12.2%

ENERGY
Licenses for U.S. Forest Gas Project
Expertise for Angola Oil
Eskom's Plants on Track but Delayed
Carbon Capture a Transitional Measure
Promotion Renewable Energy Projects
Eskom Sole Purchaser of Electricity
Sasol Sponsors Solar Energy Research

MINING
Malawi's Mining Starting to Blossom
Using Acid Mine Drainage as Water Resource
Phosphoric Acid Plant to Close
Are Fatalities in SA Deep Mines Avoidable?
State Mining Company - No Final Decision
Redundant Diamond Equipment Scrapped

--------
HOT NEWS
--------

--------------------------------
SA Gold Production Down by 12.2%
--------------------------------

3. (SBU) South African gold and non-gold production was lower by
12.2% and 7.3%, respectively, in June 2009 compared to June 2008,
according to Statistics South Africa. Total mining production for
the second quarter of 2009 decreased by 10.7% compared with the
second quarter of 2008, but total mining production for the second
quarter of 2009 increased by 4.5% compared with the previous
quarter. Platinum group metal (PGM) production was up by 4% and was
the main contributor to this increase. According to the latest
mining production and sales data, total mineral sales decreased by
33.1% to $2.25 billion in May 2009 when compared with the same month
in 2008.

4. (SBU) Gold sales at $500 million were up 3.5% year-on-year in
May, while non-gold sales fell 39% to $1.75 billion in the same
month. The total adjusted value of mineral sales at current prices
for the three months ended May 2009 reflected a decrease of 0.8%
compared with the previous three months. This was a result of a
decrease of 2.5% in the sale of non-gold minerals. The estimated
total value of mineral sales at current prices for the three months
ended May 2009 decreased by 24.1% compared with the three months to
end May 2008. Statistics South Africa said major contributors to
this decrease were PGMs, manganese ore, coal, and other non-metallic
minerals. Iron ore and gold were the only major minerals that made
positive contributions to sales.

------
ENERGY
QENERGY
------

PRETORIA 00001914 002 OF 008

------------------------------------
Licenses for U.S. Forest Gas Project
------------------------------------

5. (SBU) Forest Oil Commercial Director John Langhus announced at
the end of August that the Department of Mineral Resources (DMR) had
granted Forest and its partners a 30-year Production Right for Block
2A of the Ibhubesi Gas Project. The Ibhubesi partners are U.S. firm
Forest Exploration International (52.8%), state oil company PetroSA
(24%), and U.S. firm Anschutz Overseas (22.2%). The license covers
the development of a natural gas field off the west coast of South
Africa. The area comprising 5,000 square kilometers is situated 350
kilometers northwest of Cape Town and 100 kilometers offshore from
the coast. Exploration will be in four phases and will involve the
sinking of 99 wells over a period of 20 years. The expectation is
that there will be sufficient gas to power a 700 megawatt station,
which would provide about 35% of the energy needs of the Western
Cape. The western region of South Africa has no energy resources or
power generation facilities, with the exception of the 1,800
megawatt Koeberg nuclear plant, and must import the balance of its
needs from coal-fired plants in the rest of the country.

6. (SBU) Ibhubesi was initially discovered by Soekor, the previous
government-owned oil exploration company, which has been merged into
PetroSA. The Ibhubesi partners began exploring the field 1998 and
have invested over $100 million to date. An estimated further
capital spend of $3-4 billion will be required over the period of
the Production Right. The marketing plan is to deliver gas to
industries along the west coast down to Cape Town in the south.
Direct employment is estimated to be 115 permanent jobs and about
twice that number during construction. Indirectly, it will provide
energy to fuel thousands of new jobs along the west coast. At a
signing ceremony held in Cape Town, speakers included: Petroleum
Agency of South Africa (PASA) CEO Mthozami Xiphu representing the
National Government; the Minister for Economic Development, Trade
and Tourism Alan Winde representing the Provincial Government; and
Wesgro Head of Investment Promotion, Rameez Johaar. Forest's John
Langhus and COO JC Ridens represented Ibhubesi Partners and Dr.
Alberta Mayberry, American Consul General in Cape Town, represented
the U.S. government. Dr. Mayberry said: "the agreement is an
example of what President Barack Obama would like to see, namely
economic development partnerships with South Africa and the whole of
Africa."

---------------------------
SA Expertise for Angola Oil
---------------------------

7. (SBU) South African President Jacob Zuma visited Angola in
mid-August on his first official state visit, together with the
largest business-related delegation to Angola since South Africa's
1994 democratic elections. Frost and Sullivan's African program
manager for energy and power supplies said South Africa, an
Qmanager for energy and power supplies said South Africa, an
oil-dependent country, imports much of its oil from Iran. Friendly
ties with Angola would be of mutual benefit to both countries and
possibly ensure a secure supply of oil for South Africa. South
Africa has engineering skills and expertise in project management
and financial systems, which are needed in Angola and could be
applied in exchange for oil. This represents an opportunity for
South African companies and a major deal with Angola would boost the
South African economy. An agreement between the countries would
open up new markets for South African companies and provide access
to some of Angola's minerals and oil.

8. (SBU) Angola is also China's biggest supplier of oil in exchange
for which it has given Angola financial aid and expertise. China's
Sinohydro Corporation's spokesperson says the company has invested
$2.4 billion in Angola since the end of the civil war in 2002 to
rebuild infrastructure. It is currently building new hospitals,
irrigation canals, and other infrastructure aimed at improving the
lives of ordinary Angolans. Frost views China as a competitor to

PRETORIA 00001914 003 OF 008


South Africa, but says the rebuilding of Angola needs more help than
China can deliver on its own. However, corruption is a major
stumbling block for future development. Angola's total oil exports
in October are set to hit their highest level this year at around
1.90 million barrels per day (bpd) of crude, up 50,000 bpd from
September and well above its implied OPEC target. Angola's
production is higher than its exports as it has a refinery able to
process 60,000 bpd. Its crude oil exports approached 2.0 million
bpd in the fourth quarter of 2008, but fell to 1.60 million bpd in
February 2009, according to Reuters data.

-----------------------------------
Eskom's Plants on Track but Delayed
-----------------------------------

9. (SBU) Power utility Eskom's new Kusile coal-fired power station
will be commissioned in June 2013, despite some teething problems,
according to civil engineering contractor Stefanutti Stocks. The
company is leading a consortium of construction companies, which
were awarded the civil works contract for the new 4,800 megawatt
power station in Mpumalanga Province. The contract is worth about
$360 million. The project manager claims that some 20% of the early
civil structures are complete and, given no further delays, the
plant should be completed within four years, with the first unit
operational in two-and-a-half years and the others commissioned at
six-monthly intervals thereafter. The power station will house six
800 megawatt units and a closed cooling system. Eskom is also
currently building the 4,800 megawatt Medupi power plant in Limpopo
Province, which will be its first new power station in more than two
decades. Medupi's first 800 megawatt unit was expected to be
operational by September 2011, but is four to six months behind
schedule. Similarly, commissioning of the first unit of its Ingula
pumped-storage plant, on the border between the Free State and
KwaZulu-Natal provinces, has been delayed by between three and four
months from its initial 2012 commissioning date.

10. (SBU) Industry analysts worry that Eskom's failure to resolve
its $20 billion funding shortfall may cause it to delay any one of
its three major projects, namely coal-fired Medupi and Kusile, or
pump-storage Ingula -- costing a total of about $30 billion. This
would have negative implications for the country's energy-intensive
industries, employment, and possibly slow its emergence from the
economic recession. Eskom and the state are likely to do all they
can to avoid this happening. First power from Medupi is set for
April 2012, Kusile by June 2013, and Ingula's commissioning by
October 2013. Eskom says these key projects are unaffected by its
cash problems. However, construction industry sources say Eskom
appears to be taking longer to issue the smaller project tenders.
Analysts believe there are three ways that Eskom could fund its
expansions during the next five years to March 2013:
Qexpansions during the next five years to March 2013:
-- getting the National Energy Regulator to grant substantial tariff
increases;
-- raising debt on local and international markets;
-- raising soft loans from the government.
All these are problematic, given the current financing environment
and political sensitivities. However, Eskom's funding demands could
be ameliorated by making investment in power generation attractive
to private and foreign independent power producers (IPPs). This
would require a realistic tariff structure and an investor-friendly
fiscal, legal, and regulatory framework. The government's stated
aim is to have IPPs produce 30% of new power, but under existing
circumstances their contribution is unlikely to increase, despite
the latest tariff increases.

-------------------------------------
Carbon Capture a Transitional Measure
-------------------------------------

11. (SBU) Carbon capture and storage (CCS) will be a transitional
measure to bridge the gap between South Africa's reliance on fossil
fuels and its greater reliance on nuclear and renewable energy
forms, said South African National Energy Research Institute

PRETORIA 00001914 004 OF 008


(Saneri) senior manager Tony Surridge at an Energy Efficiency
conference in mid-August. He noted that it was unlikely that CCS
could be implemented in South Africa without carbon trading to
offset the high cost of CCS. The Clean Development Mechanism (CDM)
does not accept CCS for trading, but the United Nations Framework
Convention on Climate Change (UNFCCC) is dealing with this issue.
South Africa is currently compiling a carbon dioxide (CO2) storage
atlas using existing geological information to identify potential
sites for the storage of CO2 from industrial sources that primarily
use coal and is on schedule for completion by the middle of 2009.
The country is also planning to implement a CO2 injection pilot
project by 2016 and a demonstration plant by 2020. The atlas is
being sponsored by petrochemical company Sasol, power utility Eskom,
state oil company PetroSA, multi-national mining company Anglo
American, and Saneri for an amount of $250,000.

12. (SBU) The captured CO2 will be compressed into liquid form and
injected into storage sites in deep geological formations, such as
saline reservoirs, coal seams, and depleted oil and gas fields.
International capture technology can be acquired, but storage
potential is specific to local circumstances that must be identified
and measured. Storage reservoirs are commonly associated with the
sedimentary basins in which oil and gas occur. South Africa lacks
these, but the onshore central basin of the Karoo Supergroup, with
its substantial sedimentary formations, may offer storage
opportunities. Offshore sedimentary rocks along the coastline also
hold some potential for storage. The Council for Geoscience (CGS)
and PetroSA intend to publish the initial assessment of storage
potential in a user friendly atlas by April 2010. The atlas will
illustrate the distribution and ranking of potential geological CO2
storage reservoirs, including:
-- estimated CO2 storage capacities;
-- main CO2 emission sources;
-- location of industrial hubs;
-- location of pipelines; and
-- other factors that may have a bearing on storage feasibility.
This information will provide guidance for further exploration
should CCS technologies be used in South Africa.

-----------------------------------
Promoting Renewable Energy Projects
-----------------------------------

13. (SBU) The South African Department of Energy's (DOE) Clean
Energy Division Chief Director David Mahuma said it was developing
financial instruments to promote renewable energy in South Africa.
Mahuma said the government recognized and accepted that there were
economic barriers to the uptake of renewable energy. He mentioned a
number of initiatives established by DOE to develop financial
instruments, such as the recently published renewable energy
feed-in-tariff (REFIT); the renewable energy finance and subsidy
office (REFSO); the renewable energy market transformation (REMT)
project; and the potential use of tradable renewable energy
Qproject; and the potential use of tradable renewable energy
certificates.


14. (SBU) DOE's New and Renewable Energy Director Nomawethu Qase
explained that a renewable energy policy framework was established
in 2003 and was currently under review. This framework set a
renewable energy contribution target of 4% of total power generation
capacity, equal to about 10,000 gigawatt-hours (GWh) by 2013. Qase
encouraged independent power producer (IPP) participation in meeting
these targets and said there was also a role for power utility Eskom
to play and that Eskom should contribute some 6,000 GWh towards the
target. The criteria for selecting IPPs still needs to be clarified
and will remain unclear until an integrated resource plan is
completed. This would deal with plant location preferences to allow
for grid stabilization and mitigate transmission losses.

-----------------------------------
Eskom Sole Purchaser of Electricity
-----------------------------------

PRETORIA 00001914 005 OF 008

15. (SBU) State power utility Eskom has been designated the
renewable energy purchasing authority (REPA), and the sole buyer of
electricity. It is responsible for entering into agreements with
renewable energy (RE) power generators and for payment of power
purchased from them. Eskom said it is committed to shortening the
time taken to conclude power purchase agreements and would also be
responsible for the cost of transporting power from the place of
generation to the Eskom transmission grid. Eskom Market Development
Manager Yousuf Haffajee said that the challenge of connecting
generators to the grid should not be underestimated. He also said a
successful renewable energy program required supportive government
policies and a feed-in-tariff (REFIT) that gives a fair return to
both project developers and purchasers. Eskom would need to ensure
that it had sufficient funds to pay for the more expensive RE.
Haffajee noted that an estimated $375 million per year would be
needed to meet the 700 megawatt target for RE set for 2013 and that
a large electricity price increase would be required to meet the
target and costs. He noted that tariffs were already under pressure
for Eskom's build programs and decisions would have to be made for
additional funding schemes, beyond tariffs, and to ensure that cost
recovery mechanisms where in place.

------------------------------------
Sasol Sponsors Solar Energy Research
------------------------------------

16. (SBU) Petrochemicals giant Sasol has announced a sponsorship of
$375,000 over the next five years to support solar thermal energy
research by the University of Stellenbosch's Department of
Mechanical and Mechatronic Engineering. The money will be used to
appoint a senior researcher to lead the research effort and to
purchase new equipment for the University's Solar Roof Laboratory.
The funding is in addition to an investment of $500,000 by the
university to expand solar research facilities and to appoint
additional staff. Senior Director of Research and Innovation Dr
Therina Theron said Stellenbosch sees environmental sustainability
and renewable energy as a key focus area for research and was
looking forward to developing more industry partnerships in this
area. The department has focused on bulk renewable solar power
generation over the last 11 years. Solar thermal energy research
also supports Sasol's initiative to investigate opportunities in the
field of renewable energies and low-carbon electricity. Sasol has
been identified as the world's single biggest point source of green
house gas.

17. (SBU) During 2008, Sasol formed a New Energy division with the
prime aim of developing business opportunities to reduce the
company's green house gas footprint. Southern Africa is blessed
with some of the best solar radiation in the world, which is why
Sasol supports the development of solar energy technologies as a
viable renewable energy source for Southern Africa within a carbon
Qviable renewable energy source for Southern Africa within a carbon
constrained future. Sasol reiterated its commitment to renewable
energy research saying: "In bridging the gap towards a carbon
constrained energy future, renewable energy and specifically solar
energy, will play an ever increasing strategic role. We need to
understand this technology environment and be ready with the
technology alternatives." Stellenbosch University has established
research and teaching expertise spanning a wide spectrum in
renewable energy, and in particular in solar thermal energy.

------
MINING
------

-----------------------------------
Malawi's Mining Starting to Blossom
-----------------------------------

18. (SBU) Malawi is not generally recognized as a mining country.
Nevertheless, Australia's Paladin Uranium recently started
production at its $200 million Kayelekera uranium mine. The country

PRETORIA 00001914 006 OF 008


also has known resources of the aluminum-bearing mineral bauxite,
and there is the prospect of it becoming a producer of niobium.
Niobium is a rare ductile transition metal used in the production of
steel, super alloys, and super-conductors. The South African
engineering firm Thuthuka has agreed to invest $10.6 million in a
joint venture to develop the Kanyika niobium project, owned by
Australian-listed Globe Metals & Mining. A bankable feasibility
study is due to be completed by December 2010. Kanyika's planned
production is 3,000 tons per year of niobium metal, which is
expected to start in 2012. This will establish the company as the
world's fourth-largest producer of ferro-niobium.

------------------------------------
Acid Mine Drainage as Water Resource
------------------------------------

19. (SBU) Watermark Global, a UK-listed company that focuses on the
treatment of acid mine drainage (AMD) in South Africa, has completed
verification of the mine water resource in the Witwatersrand gold
basin. The resource verification, carried out by Golder Associates,
has confirmed that the daily recharge into the western, central and
eastern basins is 155 million liters. Watermark's subsidiary,
Western Utilities Corporation, plans to produce between 50 and 70
million liters of industrial quality water per day for re-use by
mines, with excess AMD being converted to potable water for sale to
bulk distributors, including the state water utility Rand Water. The
results of the bankable feasibility study are expected at the end of
September, and the company plans to start construction by the first
quarter of 2010.

------------------------------------
Sasol to Close Phosphoric Acid Plant
------------------------------------

20. (SBU) Petrochemical company Sasol has announced the possible
closure of its Sasol Nitro phosphoric acid operations in Phalaborwa.
The plant manufactures phosphoric acid from phosphate rock and
sulfur and its profitability is determined by a combination of the
prices of the feed products and sale volumes and prices of
phosphoric acid on the international market. Sasol Nitro buys its
phosphate rock from the neighboring state-owned Foskor mine, which
increased the price to such an extent that Sasol considered shutting
down its plant in 2004. According to Sasol, despite having explored
a number of options, current feedstock prices and a declining
phosphoric acid market have rendered the plant's ongoing operation
unsustainable and the plant is projecting significant losses for
2009. Plant closure would affect 245 employees at the plant, and
another 250 service provider employees. Sasol says it will endeavor
to redeploy employees to other Sasol operations where possible. The
plant was designed to produce 325,000 tons of phosphoric acid of
which 100,000 tons have already been mothballed. Most of this
product is used by the fertilizer industry and to produce animal
Qproduct is used by the fertilizer industry and to produce animal
feed products.

21. (SBU) Conversely, state-owned mining and fertilizer
manufacturing company Foskor more than doubled its annual profit in
2008 from the production of phosphoric acid and phosphate
fertilizer. It has said it would like to buy Sasol's phosphoric
acid plant as it would form part of the group's core business.
Foskor's spokesperson said that at least one earlier attempt to buy
the plant had been blocked by the antitrust authorities. The Foskor
plant produces phosphoric acid from phosphate rock mined at the
company's adjacent mine. Foskor is spending $150 million to expand
production by 14% to 2.85 million tons of phosphate rock within the
next two years as part of its growth strategy and is conducting
feasibility studies to broaden its product range away from
conventional fertilizer. Foskor's chief executive said a
combination of record harvests and food shortages for both humans
and animals fuelled the need for better crop yields, thus boosting
fertilizer demand, and phosphoric acid prices almost doubled from
the start of the financial year and peaked at about $2,200 a ton in
August 2009. The cost of raw materials such as sulfur and ammonia

PRETORIA 00001914 007 OF 008


has increased exponentially, but the company has been able to
counter some of these increases as it is one of the few vertically
integrated companies in the world.

------------------------------------------
Are Fatalities in SA Deep Mines Avoidable?
------------------------------------------

22. (SBU) Recent mining-related deaths have once again raised the
question of whether fatalities in South Africa's deep gold and
platinum mines are avoidable. Some 167 deaths were recorded in 2008
and so far this year more than 100 miners have died, mainly on gold
and platinum mines. While mine management now universally recognize
a single death is unacceptable, the number of deaths and the
fatality rate per thousand workers has steadily declined from 774
and 1.12 in 1984 to 167 and less than 0.40 in 2008, respectively.
Mining journalist Brendan Ryan opines that the only way to mine at
great depths without fatalities is by mechanization. Otherwise he
says fatalities are inevitable. He says mine management has
dedicated itself to attaining a zero fatality rate over time, but
the realities of deep level mining with its generally unpredictable
seismic events, pressure bursts, and falls of rock mean fatalities
and accidents will occur, irrespective of management's best efforts.
Ryan says Australian resource giant BHP Billiton has not ventured
into platinum mining in South Africa because it concluded fatalities
are inevitable.

23. (SBU) The answer probably lies in the combination of better mine
planning and layout, safety awareness and training, changes in
attitude of both miners and management focusing on safety and safe
working conditions, more stringent safety regulations, and other
measures, short of stopping mining altogether. The latter step
would have a devastating impact on the country's economy,
employment, and social stability and is therefore not an acceptable
alternative, despite Gold Fields CEO's statement that if they cannot
mine without fatalities they would not mine at all. Similarly,
labor would not accept the loss of jobs and would probably push for
nationalization of the mines, with little improvement in safety.
The ultimate answer is to reduce the number of people underground
and place machines in high-risk areas. The challenge is nobody has
yet developed a viable mechanized mining system for the narrow ore
bodies found in South African mines. Unions generally oppose
mechanization because it would take away jobs -- recent attempts by
Impala Platinum to bring in a safer and more productive drilling
system at the mining face were opposed by workers concerned about
job losses. However, Secretary General of the National Union of
Mineworkers says that as long as the purpose of mechanization isn't
to reduce jobs the union is not opposed to it and they accept
AngloGold Ashanti's study that to mine five kilometers below surface
would require mechanization.

----------------------------------------
Q----------------------------------------
State Mining Company - No Final Decision
----------------------------------------

24. (SBU) The South African cabinet has agreed to suspend the
disposal of mining assets held by state entities, a move that may
lead to the creation of a state mining company, government spokesman
Themba Maseko said in early August. Maseko said at a post-cabinet
briefing that the moratorium was intended to provide the minister of
mineral resources adequate time to conduct and finalize an audit of
mining interests held directly or indirectly by the state. The
audit will enable the state to decide whether to consolidate,
retain, or dispose of such interests. Maseko said it was too early
to suggest the moratorium would lead to the establishment of a
national mining company, an idea mulled by the ruling ANC but
criticized by mining analysts as unworkable. He said there was no
decision to set up a state mining company, although the review may
lead government to set one up. He said state mineral assets were
owned without being registered on a central data base and there was
a need to decide what to do with these assets -- dispose or develop
them.

PRETORIA 00001914 008 OF 008

------------------------------------
Redundant Diamond Equipment Scrapped
------------------------------------

25. (SBU) Major diamond finds along Namibia's Coast at the turn of
the 20th century led to a thriving diamond mining industry that
stretched from the Orange River in the south to Luderitz and beyond
in the north, a distance of more than 200 kilometers. Mining
currently takes place along the beaches, in the surf zone, and in
the sea. The largest player until 1994 was Consolidated Diamond
Mines (CDM), which was wholly owned by the diamond giant De Beers.
In 1994, a new agreement was concluded with the government of
Namibia, resulting in the formation of the Namdeb Diamond Corp,
which is jointly owned by the Namibian government and De Beers.
Given the high intrinsic value of Namibian diamonds, all operations
are governed by strict security protocols for mining, processing,
handling, and transporting of diamonds. One security measure is
that all equipment going into any diamond mining area, albeit a
dozer, pick-up truck, or excavator, never comes out again. At the
end of its useful life it is dumped on a local scrap heap. Over
more than 60 years of mining, these scrap heaps have accumulated
tens of thousands of tons of valuable scrap metal.

26. (SBU) Namdeb has taken the decision to clear these scrap heaps
for environmental and practical reasons, and has given Cape Town
based SA Metal company the contract to recycle and process the
materials on site prior to their release from secured areas.
Barloworld Equipment Namibia and Caterpillar have supplied the
shearing equipment to cut up the scrap and training for SA Metal
operators in the use of this equipment. According to SA Metal, the
contract commenced in July 2008, is open-ended, is expected last for
about three years, and will yield some 250,000 tons of saleable
metal. Because of the corrosive nature of the west coast, any
pre-1960 metal will have rusted away. Namdeb's scrap metal
stockpile represents one of the world's largest and the scale of the
operation is so big that the site is clearly visible from space.
Everything was mixed together during dumping operations, so the
metal and non-metal materials must be separated and the metals
sorted into elements such as copper, steel, lead, and zinc. The
material is sourced from a main and an estimated 15 satellite mines
spread over a distance of some 110 kilometers up and down the coast.

GIPS

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