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Cablegate: Richards Bay's Heavy Mineral Industry

DE RUEHDU #0118/01 3571134
R 231134Z DEC 09




E.O. 12958: N/A

REF: A) 05 DURBAN 00019; B) 09 PRETORIA 2498

DURBAN 00000118 001.2 OF 003

1. (U) Embassy Minerals and Energy Officer and Specialist, and
Consulate Pol/Econ Officer, visited Richards Bay Minerals and
Exxaro's KZN Sands in Richards Bay, KwaZulu-Natal (KZN) on
November 17 and 18. This cable is a collaboration between
Embassy Pretoria and Consulate Durban.

2. (SBU) SUMMARY: Experienced titanium and zircon producer and
mineral sands mining company, Richards Bay Minerals (RBM), is a
robust operator that looks set to out-compete its local rival
Exxaro KZN Sands and survive the 2008-2009 global recession.
RBM's challenges of increasing electricity tariffs, social
responsibility, and a difficult market for its "lifestyle"
products are offset by a highly experienced management team, a
well refined mining and beneficiation process, industry leading
rehabilitation practices, and a sound social and labor plan.
Unlike Exxaro KZN Sands (EKZNS), who have only two years of
mineral reserves and a less reliable beneficiation process, RBM
is supported by its Rio Tinto and BHP Billiton joint ownership.
Subsequent to the visit, on December 1, Exxaro the holding
company of EKZNS, announced their intention to curtail its
mineral sands operations in favor of a focus on coal. Such
action is likely to impact negatively on employment and social
welfare projects in the surrounding communities, free up power
and, possibly, provide an acquisition opportunity for RBM. End

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Mining Heavy Mineral Sands from Dunes

3. (U) Richards Bay Minerals (RBM) and Exxaro KZN Sands (EKZNS)
compete for the recovery of ilmenite, rutile and zircon from
coastal dune deposits around Empangeni and Richards Bay in
northern KZN. RBM excavates 33 million tons run of mine (ROM)
annually from beach dunes along a 60km strip along the KZN north
coast (made up of mineral leases: Zulti North, Tisand, and Zulti
South). EKZNS is about one fifth the size of RBM, with a six
million ton annual ROM from inland, historic dunes at Hillendale
mine, south of Empangeni.

Lifestyle Dependent Market - Sun Screen and More

4. (SBU) Ilmenite, rutile and zircon make up about five percent
volume of KZN's heavy mineral sands and yield titanium dioxide
(TiO2), pig iron, and zircon, used in a wide variety of
lifestyle and industrial products. TiO2 pigment accounts for
about 94 percent of world demand for titanium; three percent is
used to produce titanium metals and metal alloys. The pigment
is ultra white, highly refractive and non-toxic, making it
sought after for use in: paint, plastics, pharmaceuticals
(toothpastes, sun screens, and cosmetics) and candy. Titanium
metal is used in the aerospace industry for its high
strength-to-weight ratio. Zircon is used in the production of
ceramics, refractories, jewellery and electronics, and high
purity pig iron is used for ductile iron castings such as engine
blocks. South Africa is ranked second behind Australia for TiO2
production and supplies about 20 percent of world demand. RBM
holds the largest market share with an annual production of one
million tons of titanium slag (containing about 85 percent TiO2)
and 525,000 tons of iron. Comparatively, Exxaro produces
250,000 tons of titanium slag and 50,000 tons of iron.

Dig, Separate, Smelt, Ship

5. (SBU) Titanium, iron and zircon beneficiation is achieved
through a process of: bulk dune mining, gravity assisted
concentration of the heavy minerals, magnetic and electrostatic
separation, and smelting. RBM and EKZNS work slightly different
deposits and this affects the way they mine and rehabilitate.
RBM reserves comprise a more recent series of coastal barrier
dunes along the KZN north coast. They create a large artificial
freshwater pond in the dunes and use this to float dredgers and
a concentrator plant. As the mining face of the dune collapses
into the pond, dredgers suck up the slurry and pump it to a
floating concentrator. At this point, the heavy minerals are
separated from the sand using a gravity process and stockpiled
as heavy mineral concentrate (HMC) for transportation to the
smelter site. The pond moves parallel to the sea, as the mining
operation proceeds. Smelting separates heavier pig iron matte;
which is tapped, cast and shipped, and lighter titanium slag,
which is tapped, cast and crushed to customer specifications.
EKZNS mines older, clay rich deposits that are more labor
intensive, requiring man-held hydraulic "guns" to collapse the
dune and create a slurry-feed to a land-based concentrator

DURBAN 00000118 002.2 OF 003

plant. While EXZNS's processing technique is similar to RBM's,
EXZNS employs new direct current-arc smelting technology as
opposed to RBM's more reliable "six-in-line" alternating current


6. (SBU) Both KZN operators are required by legislation to
rehabilitate their lease areas to a condition "similar to that
which existed prior to mining." This mandate is far more
complicated for RBM, which is required to, in part, reinstate
the ecologically sensitive coastal dune system. RBM is a local
industry leader in the field, rehabilitating one third of their
mined out lease with indigenous coastal dune forest and two
thirds with Beefwood for a local charcoal industry. The complex
coastal dune forest is restored through a "successional growth"
process (starting with cereals, grassland and then acacia
shrubland) and requires about 30 years to reach maturity. They
leave the 200-meter dune cordon adjacent to the beach untouched,
ensuring a "reservoir" from which seed and animal colonization
can take place. EKZNS is required to restore sugar cane farming
in their comparatively simpler rehabilitation program. They
achieve this by resculpting the original dune topography,
covering this with remixed clay (or "slimes") and sand,
pioneering with a year's growth of Rhodes grass, and replanting
carefully selected sugar cane strains. The Embassy/Consulate
team witnessed pristine-looking 30-year growth in one area that
had undergone the RBM rehabilitation process.

Social Responsibility

7. (U) Both operators are vital "providers" for the Richards
Bay and Empangeni regional economy, a relatively poor area in
South Africa. Their challenge and social responsibility is to
implement plans that ensure economic growth continues post
mining. Both RBM and EKZNS invest significantly in community
development, education and healthcare; business development, and
promotion of black economic empowerment.


8. (SBU) EKZNS, with an efficiency of 8,500 tons per employee
(per annum), is a far more labor intensive operation than RBM
with 20,000. RBM has a permanent complement of 1700 employees
and about 1000 contractors. The company estimates that 70
percent of the workforce is historically disadvantaged South
Africans (HDSA) and 10 percent is female. By comparison EKZNS
has a permanent workforce of 700, of which 80 percent is HDSA
and 13 percent is female, and 300 contractors. Both operators
estimate that about 75 percent of their employees have
voluntarily tested for HIV/AIDS and that the prevalence is about
19 percent. This is lower than the general prevalence in the
area, reflecting greater education in their skilled workforces.
They both provide antiretroviral treatment (ARV) to the affected
employees and their immediate families.


9. (SBU) Cost and availability of power, increasing poverty
levels in surrounding and affected communities, and difficult
market conditions are the key challenges currently facing the
heavy minerals mining firms. The uncertainty over the future
cost of electricity affects production planning. RBM is storing
equipment for the cogeneration of smelter power in the event
that the tariff increases to above a "break-even" price of 9.25c
(US cents) per kilowatt hour; it is currently 4.51c. Both
producers estimate that electricity accounts for 25 percent of
their cost basket. RBM and EKZNS are both active in programs
aimed at reducing poverty, but are struggling to overcome the
impact of HIV/AIDS, lack of entrepreneurship, poor education
levels, and population growth in their surrounding communities.
RBM has been less affected by the 2008-2009 global economic
downturn than EKZNS, as it has strong marketing links through
Rio Tinto Iron and Titanium and long-term contracts for exported
product. Both producers benefit from being within a 30km rail
trip to Richards Bay's bulk-handing harbor. EKZNS appears to be
struggling with sales and - at the time of the visit - had a
20,000-ton stockpile of unsold product.

Strategic Outlook: Business as Usual versus "On Edge"

10. (SBU) The two mineral sands operators present significantly
different strategic futures. RBM has a remaining life of mine

DURBAN 00000118 003.2 OF 003

(LOM) of about 20 years, a well tested and refined recovery
process, and is owned by diversified majors (Rio Tinto and BHP
Billiton) that are committed to these commodities. EKZNS has a
2 year LOM, a relatively untested recovery process, and is owned
by Exxaro, which is focused on expanding coal mining concerns.
Without its new potential "Fairbreeze" resources located about
20km south of the Hillendale Mine (which have yet to be proved
as reserves), an improved TiO2 and pig iron market and a renewed
commitment from its holding company, EKZNS is likely to be
closed in 5 years. In fact, subsequent to our visit, Exxaro
announced its intention to focus on coal and close the EKZNS
operations in five years.


11. (SBU) RBM and EKZNS are important contributors to the local
economy of the Richard's Bay area and as such, electricity
tariff hikes and the closure of EKZNS's Hillendale Mine are
likely to have a significantly negative impact on the region.
The curtailing of mining operations could see EKZNS withdraw
from its social responsibilities, with an impact on jobs,
healthcare and education in affected communities. The impact on
the environment will probably be less severe, with the mine on
track with its closure and rehabilitation plans. The closure of
EKZNS's processing plant is likely to free up power availability
for other local industries. These assets (primarily the
concentrator and smelter) together with the "Fairbreeze" mineral
resources may represent a useful and cheap acquisition for RBM.
The announcement of the closure constitutes a "fire-sale" with
few other likely buyers. If EKZNS chooses to mothball its
operations, the maintenance costs in a corrosive coastal climate
are likely to be high.


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