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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 9, October 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
Eskom welcomes private investors in power expansion
U.S. support for Pebble Bed Modular Reactor
Strengthening gold, weakening dollar

ENERGY
Eskom eyes solar, thermal, gas from coal
PetroSA to seek Cabinet permission to take 37,5% equity stake in
$10bn Coega refinery
Nersa to include small-scale producers soon
Sasol studying conversion of CO2 into fuel
India may increase coal imports

MINING
Mining production down 11.5% in August
Gold Fields spending $1,15bn to complete mechanized South Deep
'tonnage factory'
Xstrata deadline for Anglo American bid
AngloGold forms marine mining JV with De Beers
Simmers reduced Buffelsfontein job cuts by 1,100 - union

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

--------------------------------------------- ------
Eskom welcomes private investors in power expansion
--------------------------------------------- ------

3. (SBU) South Africa's power utility Eskom is keen to have private
players participate in its expansion projects, but tariffs would
still need to rise substantially to encourage that investment, an
official said. The utility is battling to raise parts of the R385
billion ($ 53 billion) it needs to pay for new plants and said it
would rely on an increase in tariffs, borrowings and government
loans for support. Eskom has been criticized for fuelling inflation
by raising electricity prices by as much as 31.3 percent this year
and 27 percent last year. The utility has another application
pending with the regulator, asking for hikes of up to 146 percent.
"I can't see why someone would come into a business that is selling
its product at currently between half and two-thirds of the cost,"
Eskom Chairman Bobby Godsell told a recent industry gathering. Due
to a government policy of under-pricing power to attract industry
into the country, South Africa has been cushioned by one of the
world's cheapest electricity rates, with a kilowatt hour produced by
the utility costing on average 4.47 U.S. cents. Godsell said
independent power producer (IPPs) have so far proposed to generate
electricity at a cost of between 10 - 16 cents, without taking the
cost of distribution and transmission into account. "We have the
Qcost of distribution and transmission into account. "We have the
cheapest electricity in the world, but we just happen today to be
out of stock," he said. Eskom has been rationing power since early
2008 when the country's grid nearly collapsed, forcing mines and
smelters to shut for days, and costing South African economy
billions of dollars.

-------------------------------------------

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U.S. support for Pebble Bed Modular Reactor
-------------------------------------------

4. (SBU) The announcement by the U.S. government that it will
support South African efforts to research the pebble-bed modular
reactor (PBMR) nuclear technology signals more direct U.S. interest
in South Africa's conventional nuclear endeavors. This interest
relates to the role of Westinghouse (the U.S. nuclear vendor) within
what could be a multibillion-dollar, multisite, multi-decade South
African nuclear build program.

5. (SBU) A respected journalist with Engineering News has suggested
that, until relatively recently, French nuclear vendor Areva
appeared to have an edge over Westinghouse due to its ties to French
utility EDF. EDF is the world's largest operator of nuclear
facilities and is willing to invest in South Africa's nuclear
program. The virtue of the Westinghouse approach lies in the
longer-term benefits that could flow from the indigenization of
nuclear design, engineering and manufacturing. Technology transfer,
Westinghouse argues, is integral to its business model, despite the
fact that it ultimately leads to the creation of potential
competitors, able to design, manufacture and operate
third-generation PWRs. For their part, Eskom and government want
both worlds: they are caught between the need to spread the funding
risk and the desire to develop a sustainable nuclear industry. The
decision is likely to become politicized. Meanwhile Eskom quietly
continues with preparation processes at three possible nuclear sites
- Duynefontein (alongside the existing Koeberg nuclear plant, in the
Western Cape), Bantamsklip (near Pearly Beach, in the Western Cape)
and Thyspunt (near Oyster Bay, in the Eastern Cape).

6. (SBU) Officially, any US support for the PBMR following on from
the agreement will fall under the so-called next-generation nuclear
plant (NGNP) project, which is seeking to "commercialize a new
generation of advanced, passively safe, modular nuclear plants such
as the PBMR that use high-temperature gas reactor technology". In
fact, Westinghouse, the Shaw Group and the PBMR Company are jointly
promoting the PBMR under the NGNP scheme and are seeking a project
appropriation of $200 million for the 2010 financial year under the
program. PBMR spokesperson Tom Ferreira has confirmed that under
the recently signed bilateral nuclear agreement, there is the
potential for direct funding from the US Department of Energy under
the NGNP.

------------------------------------
Strengthening gold, weakening dollar
------------------------------------

7. (SBU) The gold price surged to a record $1,045/oz high in New
York on Tuesday 6 October 2009. Analysts believe this is a reaction
to concern about US inflation and a weakening dollar spurring demand
for the metal as an alternative investment. The higher gold price
is good news for SA's gold mines, struggling with rand strength,
Qis good news for SA's gold mines, struggling with rand strength,
rising costs, such as for labor and electricity, and falling ore
grades. The JSE index of gold mines shot up 6.7 percent, with
AngloGold Ashanti up 6 percent, Gold Fields up 7.4 percent and
Harmony rising 7.5 percent. Higher inflation traditionally erodes
the value of the dollar against other currencies, causing the prices
of commodities to rise as investors use these investments as an
alternative store of wealth. The price of Brent crude oil rose as
much as 2.3 percent to $69.52 a barrel. Copper, an indicator of
industrial activity, rose 2.7 percent in London. A further
potential contributor to dollar weakening was a report by Britain's
Independent newspaper that Arab states, China, Russia, and France
had secretly discussed replacing the dollar as the currency
denominating in oil trades.

------
ENERGY
------

----------------------------------------

PRETORIA 00002240 003 OF 006


Eskom eyes solar, thermal, gas from coal
----------------------------------------


8. (SBU) Eskom's Managing Director for Corporate Services Steve
Lennon said projects would take shape next year. "You will be
seeing the timing of big renewables, the timing of nuclear, you will
be seeing more certainty on under-ground coal gasification ... first
quarter next year you will see a lot of things come together,"
Lennon said in an interview. He said Eskom was designing a 42
megawatt pilot plant to test a technology to gasify deep coal
deposits underground and feed the gas into a combined cycle gas
turbine. It then plans to scale up the project to a 2,100 MW plant.
"Probably by the end of 2011 that gas pilot will be up and running,
which means that a full-scale plant, everything going well, could be
running around 2015-16," he said.

--------------------------------------------- ---
PetroSA to seek Cabinet permission to take 37,5%
equity stake in $10bn Coega refinery
--------------------------------------------- ---

9. (SBU) South Africa's national oil company PetroSA will submit a
recommendation to the Department of Energy during October requesting
that it be allowed to retain a non-controlling 37,5 percent equity
position in a proposed new $10 billion, 400,000 bl/d, crude oil
refinery. The State-owned group has completed the technical
feasibility study for the project, which it is proposing for
construction at the Coega industrial development zone, landside of
the country's newest deep-water harbor, the port of Ngqura, in the
Eastern Cape. The commissioning of the refinery is scheduled for
2015. Should Cabinet approve PetroSA's ownership model by December,
the group's next move would be to finalize its front-end engineering
design for the Coega refinery by March 2010 - setting out the
technical design of the plant and the types of material it would
process.

10. (SBU) The plant would probably be designed to convert so-called
"heavy sour" material, found predominantly in parts of the Middle
East and South America, into diesel and petrol. However, it was
also possible that "sweeter" crude from Angola could be blended into
the final mix, with PetroSA hoping to secure supply contracts in
tranches of 100,000 barrels or more. Wherever possible, PetroSA
would also seek to conclude deals giving it ownership over the crude
inputs, and the recent joint-venture-agreement (JV) with Venezuela's
PDVSA offered some indication as to the type of deal being pursued.
Earlier in October, PetroSA and PDVSA announced the creation of a
joint venture to exploit a mature oilfield in the South American
country. Some $400 million could be invested over four years to
extract oil from the fields in the Venezuelan state of Anzoategui.
PetroSA announced plans to invest $10 million within the next 6
months to finalize the technical studies, and should the JV succeed,
production of 30,000 bl/d is possible within the next 24 months.
Qproduction of 30,000 bl/d is possible within the next 24 months.

11. (SBU) PetroSA and the Coega Development Corporation (CDC) signed
a co-operation agreement for the planned Coega oil refinery on 6
October 2009. The agreement clarified the roles and
responsibilities of the parties in the Coega Industrial Development
Zone (IDZ) during the construction and operation of the refinery,
PetroSA's president and CEO Sipho Mkhize said. The refinery would
generate close to 27,500 temporary jobs during the construction
phase and 18,500 permanent direct, indirect and induced jobs once
operational.

-------------------------------------------
Nersa to include small-scale producers soon
-------------------------------------------

12. (SBU) Small-scale producers of renewable energy - those
producing less than 1 megawatt - may be included in the next phase
of the renewable energy feed-in tariff (Refit) published by the
National Energy Regulator of SA (Nersa). Nersa's regulator member

PRETORIA 00002240 004 OF 006


for electricity Thembani Bukula said that small-scale producers were
likely to be included in Refit's third phase, due in about six
months. Small-scale producers do not necessarily aim to feed energy
into the national electricity grid, as substantial amounts of their
power may be lost in the transmission process. In many cases they
would rather use this electricity for their own production processes
or supply it directly to closely situated industries. Refit
currently excludes off-grid power generation.

------------------------------------------
Sasol studying conversion of CO2 into fuel
------------------------------------------

13. (SBU) South Africa's coal-to-liquids company, Sasol, is studying
the conversion of carbon dioxide (CO2) into fuel. Engineers and
scientists in Sasol's technology division are working on algaeic
forms of methanol production. This follows the Singapore's
Institute of Bioengineering and Nanotechnology's (IBN's) report of a
CO2-to-methanol breakthrough earlier this year. IBN announced that
they had succeeded in unlocking the potential of carbon
dioxide - a common greenhouse gas - by converting it
into a more useful product. Using organocatalysts, the
IBN researchers activated carbon dioxide in a mild and
non-toxic process to produce methanol, a widely used
industrial feedstock and clean-burning biofuel. Sasol produces
large volumes of CO2 in the production of synthetic transport fuels
from coal at its plant in Secunda and is committed to reducing its
CO2 footprint through the introduction of greater production
efficiencies, carbon capture and storage and through innovations
such as methanol production from algae.

-------------------------------
India may increase coal imports
-------------------------------

14. (SBU) India may increase imports of coal from 57 to 60 million
metric tons in the year ending March compared with last year.
According to a Coal India director, N.C. Jha, the company's annual
production may increase to 435 million tons this year from 403.7
million tons last year. The state-owned company is seeking mines in
the US, Australia, South Africa and Indonesia and may invest as much
as $1.5 billion for acquisitions to help address supply needed to
almost double its power generation capacity by 2012. The company
estimates a shortage of about 228 million tons a year of coal by
March 2012. Coal India has secured two blocks in Mozambique that
may hold a combined 1 billion metric tons of thermal coal along with
some coking coal. India 's coal demand is estimated to reach 731
million tons a year by March 2012.

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

--------------------------------------
Mining production down 11.5% in August
--------------------------------------

15. (SBU) Mining production for August 2009 decreased by 11.5
percent compared with August 2008, reflected by a 12.7 percent
decrease in the production of non-gold minerals and a 2.9 percent
Qdecrease in the production of non-gold minerals and a 2.9 percent
decrease in the production of gold, according to Statistics South
Africa (Stat SA). Seasonally adjusted mining production increased
by 2.6 percent in the three months to August 2009 compared with the
previous three months, Stat SA said. This is the fourth consecutive
quarter-on-quarter increase since April 2009, it said. Platinum
group metal (PGM) production was the main contributor (1.7
percentage points) to the 2.6 percent increase. Seasonally adjusted
mining production decreased by 5.8 percent month-on-month in August
2009. PGM production was the main contributor (-4.3 percentage
points) to this decrease. The total mining production for the three
months ended August 2009 decreased by 4.5 percent compared with the
three months ended August 2008.

PRETORIA 00002240 005 OF 006

----------------------------------------
Gold Fields spending $1,15bn to complete
mechanized South Deep 'tonnage factory'
----------------------------------------

16. (SBU) JSE-listed gold major Gold Fields announced that it would
be spending R8,5 billion ($1.15 billion) to complete its
50-year-life mechanized South Deep mine. The R8,5 billion would be
spent to 2014, when South Deep would be producing gold at a rate of
750,000 oz a year. The mine employs 4,500 people, whereas
similar-sized conventional labor-intensive deep-level South African
gold mine employs about 10,000 people. Gold Fields reports
employees of the mechanized mine are compensated at higher levels of
pay, with high-performing drill rig operators taking home up to
R50,000 ($6,800) a month.

17. (SBU) South Deep, a total departure from South Africa's
conventional narrow-vein gold mine with 30 meter tall ore bodies, is
the world's first mechanized deep-level gold mine with the world's
deepest hoisting shaft to 3,000 meters. Gold Fields is introducing
special safety-support measures for the scale and nature of the
large excavations. According to the company these measures have
resulted in a 66 percent reduction in serious injuries and a
lost-day injury rate improvement of 71 percent.

---------------------------------------
Xstrata deadline for Anglo American bid
---------------------------------------


18. (SBU) Diversified miner Xstrata has until 17:00 on October 20 to
announce a firm intention to make an offer for Anglo American or to
walk away, the UK Takeover Panel has announced. If Xstrata
announces that it does not intend to make an offer for Anglo
American, it will be restricted from making an offer for Anglo for
six months. Anglo American has rejected the proposed merger saying
that it would not be in the shareholders best interests. Anglo had
noted in earlier statements that a merger with Xstrata would
"profoundly impact [on] the nature of the group's portfolio by
significantly diluting Anglo American's unique exposure to the
structurally attractive platinum, iron-ore and diamond markets,
while increasing exposure to nickel and zinc". Anglo American
controls the world's biggest platinum-miner, Anglo Platinum, and
holds a 45 percent stake in diamond giant De Beers, as well as
almost 70 percent of South African iron-ore producer Kumba Iron Ore.
Mining analysts believe that would make sense for Xstrata to make a
formal, but realistic, bid for Anglo American before the deadline
closes. Xstrata could, however, opt to buy Lonmin (the world's
third largest platinum producer).

--------------------------------------------- -
AngloGold forms marine mining JV with De Beers
--------------------------------------------- -

19. (SBU) JSE-listed gold-miner AngloGold Ashanti and diamond giant
De Beers have announced the formation of a joint venture (JV) to
explore for gold and other minerals in the ocean. The JV would
Qexplore for gold and other minerals in the ocean. The JV would
initially focus on exploration, but would ultimately mine marine
deposits on the continental shelf. De Beers have developed certain
skills, expertise and proprietary technology in relation to the
exploration and mining of marine deposits on the continental shelf.
AngloGold have one of the world's most successful gold exploration
teams.

20. (SBU) The establishment of this JV allows AngloGold Ashanti
"first-mover advantage" of the opportunity of partnering with a
world leader in the field of marine exploration and mining.
AngloGold Ashanti and De Beers will establish a jointly-owned
technical services company (Techco), which they intend to develop
into a fully-functional marine exploration and mining services
company. Techno will host all the skills, expertise and further

PRETORIA 00002240 006 OF 006


proprietary technology that might be developed or acquired within
the JV. AngloGold Ashanti will sole fund the JV and Techco until
the completion of an initial exploration period of at least three
consecutive sampling seasons, or until the gold-miner had funded a
total amount of $40 million.

----------------------------------
Simmers reduced Buffelsfontein job
cuts by 1,100 - union
----------------------------------

21. (SBU) JSE-listed Simmer & Jack Mines (Simmers) has been able to
limit retrenchments at its Buffelsfontein mine, in the North West
province, to about 1,400 job losses, 1,100 less than initially
expected, trade union Solidarity reported on Tuesday. The union
said that the Section 189 consultation process at the mine has not
yet been finalized and that the gold-miner could still
"significantly reduce" the number of retrenchments. Solidarity
spokesperson Jaco Kleynhans said that Simmers CEO Gordon Miller had
recently indicated in a management report that Buffelsfontein's risk
profile should soon improve significantly, as the incorporation of
the newly-acquired Tau Lekoa mine could lead to a doubling in
production. South African gold major AngloGold Ashanti agreed to
sell the Tau Lekoa mine to Simmers for R600 million ($81 million) in
February 2009. The Competition Commission, in September, approved
the merger of the two mines.

22. (SBU) Meanwhile, Solidarity said it believed that the current
problems between Simmers and its Black Economic Empowerment (BEE)
partner, Vulisango, could have negative consequences for the group
and Buffelsfontein. After its shareholding was diluted to 22
percent through various capital raising exercises, Vulisango has
demanded that Simmers restore its interest in the company to 26
percent.

GIPS

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