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UNCLAS SECTION 01 OF 04 PRETORIA 005319 
 
SIPDIS 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
 
E.O.   12958: N/A 
TAGS: EPET ENRG EINV EIND ETRD ECON SF
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE 
ASSAY" - ISSUE 11 
 
REF: A) PRETORIA 3049, B) PRETORIA 2998 
 
*THIS CORRECTS PRETORIA 5282, UPDATING ISSUE NUMBER 
 
THIS CABLE IS NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (U) Introduction:  In January 2004, the Economic Section 
of Embassy/Pretoria produced the first issue of a new monthly 
newsletter called "The Assay".  The purpose of this monthly 
newsletter 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. 
 
--- 
Key 
--- 
¶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. 
 
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HOT ISSUES 
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ISPAT ISCOR Looks for a Power Alternative 
----------------------------------------- 
¶3. (U) According to Bateman Africa, ISPAT ISCOR is planning 
to build its own power station in order to secure a future 
power supply and reduce pollution at its Vereeniging Steel 
Works in Pretoria.  Management is concerned that South Africa 
could run into a national base-load power shortage by 2010, 
which could have a detrimental effect on the company.  If the 
ISPAT ISCOR project becomes a reality, it would be South 
Africas first industrial independent power producer and the 
first power station to be built in South Africa by Bateman, 
one of the top five engineering and construction companies in 
South Africa.  The National Energy Regulator (NER) has 
already granted a license for the construction of the power 
station.  Waste heat from the Vereeniging Steel Works would 
drive the planned 140 MW plant.  BHP-Billion is investigating 
similar options for its Richards Bay and Maputo aluminum 
smelters, and its Samancor ferro-alloy plants.  These 
operations are heavy users of electricity and generate huge 
amounts of process heat that could be recycled to generate 
additional electricity. 
 
Rolling Over Slow Moving Spoornet 
--------------------------------- 
¶4. (U) The inability of South Africas rail parastatal, 
Spoornet, to grow with the economy and provide efficient 
service has caused a number of mining and manufacturing 
companies to resort to road transportation, and others to 
consider purchasing their own rolling stock.  James Lennox, 
Chief Executive of the South African Chamber of Business, has 
publicly encouraged chamber members to get involved in the 
rail business because he thinks it would be good for them and 
the economy.  He argues that the economic benefits would 
include reducing transportation costs for customers and the 
more efficient use of rail assets. 
 
¶5. (U) Because of the lack of rail capacity, iron and 
manganese ore producers have not been able to ride the 
current global commodity boom driven by China demand.  Rail 
inefficiencies have also frustrated automobile manufacturers. 
As a result, two iron ore mining companies, Kumba Resources 
and Assmang, are now negotiating with the government for 
permission to buy their own rolling stock so that they are no 
longer dependent upon Spoornets limited ability to respond 
to growing demand.  Kumba and Assmang are situated next to 
each other in the Northwest Province, and want to increase 
their exports to China through ports at Saldanha Bay and Port 
Elizabeth.  Also on the table for these iron ore exporters is 
the construction of a new rail spur to Coega, where a new 
deep-water port is under construction some 20 km east of Port 
Elizabeth.  Meanwhile, the automotive industry, largely based 
in Port Elizabeth, has indicated interest in investing in new 
rail capacity between the Port of Durban and Johannesburg. 
 
¶6. (U) Bulk commodities such as coal, iron ore, manganese 
ore, steel, and ferro-alloys account for more than 70% of 
Spoornets business.  Add motor vehicles to this and the 
total exceeds 80%. 
 
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MINERALS 
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Uranium Byproduct Worth its Weight in Gold 
------------------------------------------ 
¶7. (U) Afrikander Lease (Aflease) is a junior gold mining 
company that operated a now mothballed gold mine in the North 
West Province where uranium was an important byproduct.  The 
mine occurs in the Dominion Reef geological formation, which 
is older than the gold-rich Witwatersrand formation and has 
relatively high uranium values.  The mine contains so much 
uranium, in fact, that commodity prices determined whether 
one called it a gold, uranium, or dual-metal mine.  Over the 
past decade, Afrikander Lease operated the mine as a marginal 
gold producer.  Last year, the company closed the mine due to 
high costs of operation associated with the strength of the 
rand.  Since 2003, however, the price of uranium has risen by 
more than 37%, and this may give the mine a new economic 
lease on life as a uranium mine  this time with gold as the 
by-product. 
 
¶8. (U) Afleases infrastructure, inherited from AngloGold, is 
still in place, but requires repair.  Chief Executive Neal 
Froneman said that by 2005 the mine could resume gold 
production and move toward exploiting South Africas largest 
deposit of "near available" uranium by 2006.  The project 
could provide 4 million pounds of uranium oxide a year to a 
growing nuclear energy market.  Froneman said that the United 
States, Canada, Britain, France, Switzerland, and Japan had 
already shown interest in the mines 330 million pound 
uranium resource, and current and future market and price 
fundamentals looked good.  At full production, the mine would 
also produce 100,000 oz a year of gold as byproduct.  The 
projected capital cost tostart up the open-pit mine is $27 
million, resulting in a breakeven cost of $14 a pound of 
 of 
uranium oxide (i.e., yellow cake).  The price of yellow cake 
is currently about $20 a pound. 
 
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DIAMONDS 
-------- 
De Beers and the Draft Precious Metals and Diamonds General 
Amendments Bill 
--------------------------------------------- -------------- 
¶9. (U) De Beers has long struggled with the problem of how to 
align its diamond production and "supplier of choice" 
marketing strategy with the new Mineral and Petroleum 
Resources Development Act and BEE Mining Charter.  One way 
would be to become more involved in creating a local cutting 
and polishing industry and supplying BEE companies with rough 
diamonds mined in South Africa.  Government has put 
considerable pressure on De Beers on this score, which some 
believe may be behind the 8% royalty on diamond revenues 
proposed in the draft Royalty Bill and the 5% excise tax on 
all rough diamond exports proposed in the draft Precious 
Metals and Diamonds General Amendments Bill (the Diamond 
Bill).  De Beers and the diamond industry oppose both these 
bills, but see the BEE writing on the wall. 
 
¶10. (U) At the end of a two-day workshop to solicit the 
diamond industrys input into the draft Diamond Bill, 
Minister of Minerals and Energy Phumzile Mlambo-Ngcuka 
announced that De Beers had agreed to incorporate BEE 
requirements into its "supplier of choice" program.  The 
"supplier of choice" program replaced De Beers old Central 
Selling Organization sight holder method that characterized 
its monopoly in rough diamonds until the late 1990s.  Under 
the "supplier of choice" program, De Beers selects its 
customers for their ability to promote and market diamond 
jewelry.  It will now select its South African suppliers 
based also on their ability to meet BEE requirements as 
prescribed by the mining industry charter.  The De Beers 
Diamond Trading Company (DTC), the successor to the Central 
Selling Organization, currently distributes to 14 "suppliers 
of choice" in South Africa, but has committed to add BEE 
EE 
suppliers and to facilitate the development of BEE diamond 
cutting and polishing businesses.  Israel-based diamond 
consultant Chaim Even-Zohar, who coordinated the workshop, 
explained that De Beers would require its "suppliers of 
choice" to supply diamonds to BEE cutters and polishers.  In 
a parallel move, De Beers invited the South African 
Government to take a 50% stake in its Diamdel rough diamond 
trading subsidiary that sells diamonds to small clients. 
 
¶11. (U) The diamond industry in South Africa employs about 
28,000 people, of which 13,000 are in mining, 300 in sorting 
and valuing, 2,100 in cutting and polishing, 3,000 in jewelry 
manufacturing, and 9,000 in retailing.  Locally mined 
production is valued at about $l billion, with $550 million 
worth of rough diamonds supplied to the South African market 
and a similar value of polished diamonds exported.  De Beers 
operates as a worldwide wholesaler of rough diamonds, 
producing about 40 million carats worth $5.5 billion last 
year (about 62% by value of total world demand).  Most of the 
rough diamonds come from Botswana, South Africa, and Namibia, 
but De Beers also purchased $800 million worth of diamonds 
from Russia last year. 
 
Synthetic Diamonds Worry De Beers 
--------------------------------- 
¶12. (U) BHP-Billiton, the world's largest mining company, and 
De Beers, the worlds largest producer and distributor of 
rough diamonds, are concerned that synthetic diamonds might 
adversely impact their $57 billion retail diamond market for 
natural stones.  In an attempt to protect the high mark- up 
on its product, De Beers wants jewelers to buy analytical 
machines that can distinguish the synthetic stones from 
natural diamonds; the difference is not otherwise 
discernable.  Two U.S. companies, Apollo Diamonds (Boston) 
and Gemesis (Florida), produce synthetic diamonds with 
equipment that replicates the high pressures and temperatures 
found in the earth.  These synthetic diamonds make up about 
4% of annual diamond production, but only 0.3% by value since 
they are sold at much lower prices.  Until recently, 
synthetic diamonds were mainly used for industrial purposes, 
such as in drill bits for oilrigs.  However, new technology 
has enabled the production of larger and more impressive 
stones.  Blackie Marole, the Managing Director of Debswana, 
the Botswana Government's joint venture with De Beers, 
recently said that the marketing challenge posed by synthetic 
stones was as great as that recently posed by conflict 
diamonds.  Sales of rough diamonds grew 8% in the first half 
of 2004 after totaling $8.9 billion last year. 
 
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LIQUID FUELS 
------------ 
Biodiesel 
--------- 
¶13. (U) As the world price of crude oil climbs, the 
scientific community and the South African Government have 
begun to contemplate producing biodiesel from sunflower seeds 
or soya, and ethanol from maize and sugar cane.  According to 
Andre Otto, Deputy Director for Renewable Energy at the 
Department of Minerals and Energy (DME), locally produced 
biodiesel could reduce imports of crude oil and act as a 
cushion against sharp increases in oil prices.  Biodiesel 
might also create a viable market for South Africas new 
black farmers.  The Department of Science and Technology, the 
South African Bureau of Standards (SABS), the South African 
Revenue Service (SARS), and the South African Petroleum 
Association want to propose an implementation plan to 
government in March 2005.  Otto states that the aim is to 
supply 150 million gallons of biodiesel a year within 10 
years, equal to about 8% of the countrys annual diesel 
consumption or 2.5% of total liquid fuel consumption.  SARS 
says that there should be tax benefits given to farmers who 
grow crops to produce biodiesel.  However, local automobile 
manufacturers are concerned about biodiesel quality, and have 
asked SABS to set acceptable standards. 
 
¶14. (U) The greater fuel efficiency of new diesel engine 
e 
technology from Europe has helped diesel car sales reach 10% 
of all new vehicle sales in South Africa.  Econometrix senior 
economist Tony Twine believes that this could even rise to 
40% by 2013.  South Africans now pay about $3.00 for a gallon 
of gasoline. 
 
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Labor 
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AIDS Takes its Toll on Gold Miners 
---------------------------------- 
¶15. (U) Harmony Gold, the third largest gold producer in 
South Africa, estimated that AIDS would kill one third of the 
41,000 workers it employs in South Africa. In its 2004 annual 
report, Harmony stated that the HIV infection rate among the 
company's workforce would peak this year at 33.9%.  AngloGold 
Ashanti, the countrys largest gold producer, had an 
infection rate among its South African workers of 30.2%, 
according to Petra Kruger, head of the company's HIV/AIDS 
unit.  Gold Fields, the second largest producer, has an 
estimated 28% infection rate among its workforce.  The rate 
of infection among miners has placed a financial and 
healthcare burden on companies as they battle falling 
productivity among the sick and rising medical costs for 
their workers.  Harmony estimated that the impact of HIV/AIDS 
on their cash flow would be in the range of $2 to $5 an 
ounce. 
 
 
Russians Talk Minerals and Energy 
--------------------------------- 
¶16. (U) A large delegation of Russian officials met with 
their South African counterparts in Pretoria on November 17- 
¶18.  Heading the delegation was the Minister of Natural 
Resources, Yury Trutnev.  One of the most important agenda 
items for South Africa was assuring a long-term supply of 
crude oil.  In 2002, PetroSA, the state-owned oil company, 
bought crude oil from Russia in a once-off deal.  PetroSA 
officials have since visited Moscow several times to discuss 
further purchases, but without success. 
 
¶17. (U) Trutnevs visit could also signal interest in natural 
resource trade and investment by both countries.  South 
Africa and Russia are leading producers of platinum group 
metals, gold, and diamonds.  South African company sources 
said that this would depend on the resolution of disputes 
between South African companies and their Russian 
counterparts.  The most notable of these is the refusal by 
the Russian mining company, Arkhangelskgeoldobycha (AGD) to 
honor the investment and licensing partnership agreement 
signed with the De Beers-owned company, Archangel Diamond 
Corporation (ADC).  Other South African companies engaged in 
Russia include Mondis (Anglo American group) joint venture 
with the Syktyvkar paper and pulp mill, AngloGold Ashanti's 
recent $32 million purchase of shares in Trans Siberian Gold 
(a London-listed miner with projects in central and eastern 
Siberia, and Anglo Platinum's stake in a platinum deposit in 
the Urals, funded through Eurasia Mining (another London- 
listed miner). 
 
¶18. (U) In the news, Anglo American recently sold its 20.3% 
holding in Gold Fields Limited, South Africas number two 
gold producer, to Norilsk, the giant Russian nickel and 
d 
palladium producer.  Although Norilsk management stated that 
the purchase was purely for its portfolio, rumors persisted 
that they were positioning for a takeover of Gold Fields. 
Harmony may have beaten Norilsk to the punch, which is why 
Norilsk is now teaming with Harmony in a hostile takeover bid 
for Gold Fields. 
FRAZER