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TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 5, May, 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. 
 
-------- 
HOT NEWS 
-------- 
 
---------------------------- 
Eskom Nuclear Goes for Broke 
---------------------------- 
 
¶2. (SBU) State-owned power utility Eskom has applied for 
environmental authorizations for three conventional PWR nuclear 
power plants.  If approved, these will be built at three coastal 
sites; two in the Western Cape (one on the site of the existing 
Koeberg nuclear plant) and one in the Eastern Cape provinces.  Eskom 
halted its bidding program last year for one nuclear plant 
(Nuclear-1) because of the huge capital cost of the project. 
Amendments to the environmental legislation in the pipeline have 
enabled Eskom to apply to the Department of Water and Environmental 
Affairs to "sequentially construct" all three plants in a combined 
application.  The application includes the planned "roll-out dates" 
for the three plants.  Site preparation for Nuclear-1 is scheduled 
to start in January 2010 and come online in July 2018; site 
preparation for Nuclear-2 is to begin in January 2013 and come 
online in July 2020, and Nuclear-3 site preparation is to start in 
January 2015 and come online in July 2022.  The new Department of 
Energy (DPE) has advised that the procurement process should be 
ready by about September 2009, but it needs to get consensus on the 
way forward from the new cabinet. U.S.-based company Westinghouse is 
in the process of implementing a near-term action plan to provide 
information to influence the process.  This includes highlighting 
the technology transfer program underway in China. 
 
------ 
Energy 
------ 
 
------------------------------------- 
Projects to Meet Future Energy Demand 
------------------------------------- 
 
¶3. (SBU) Uranium prices seem set to increase, according to analysts. 
Mining groups such as AngoGold Ashanti, Gold Fields, DRDGold, and 
First Uranium are adapting their strategies to take advantage of the 
improving situation.   Both Gold Fields and DRDGold are planning to 
recover uranium from waste dams on the West Rand where the uranium 
content of the gold ores was highest.  AngloGold is planning a new 
$125 million-plus uranium expansion at its Kopanang mine in the 
Klerksdorp area to take production to more than two-million pounds a 
QKlerksdorp area to take production to more than two-million pounds a 
year by 2010, according to CEO Mark Cutifani, and is seeking further 
opportunities in the sector.  Gold Fields is assessing building its 
"fifth mine", which is a huge project to recover uranium from waste 
tailings created from the operations of its Driefontein and Kloof 
mines in the Carltonville area.  This would probably be similar to 
the former East Rand Gold and Uranium (Ergo) operation, which 
treated dump material successfully on the East Rand for almost 30 
years.  A JV between DRDGold and Australian-listed Mintails has 
rehabilitated the Ergo plant and will recover gold from dumps in 
that area and began producing gold in December 2008.  A new "super 
dump" is to be built into which hundreds of millions of tons of 
 
PRETORIA 00001429  002 OF 007 
 
 
retreated material from existing dumps can be re-deposited.  A 
number of options exist, but the final site chosen will require an 
environmental permit and right to establish the tailings facility. 
 
------------------------------------ 
DRC Plans New Power Law for Inga Dam 
------------------------------------ 
 
¶4. (SBU) The Democratic Republic of the Congo (DRC) plans to pass a 
new law this year to liberalize its energy sector over the next five 
years.  State-owned utility SNEL senior advisor Vika di Panzu said 
the DRC hopes to sign the act before the end of 2009, which would 
liberalize the sector controlled by SNEL.  The new law would be the 
driver for investment needed to tackle the Grand Inga hydroelectric 
project, which would dwarf China's Three Gorges Dam, and generate as 
much as 40,000 megawatts of power for DRC and the region.  The dam's 
potential has been estimated at greater than 100 gigawatts, which is 
more than the continents projected future needs, leaving an excess 
of power for export given the appropriate transmission technology. 
Estimates indicate that power demand on the continent will triple by 
¶2035. 
 
¶5. (SBU) Di Panzu said the plan is to unbundle SNEL over the next 
five years into generation, transmission and distribution companies. 
 He said the electricity act had already been drafted and sets out 
the reforms to provide legal, regulatory and fiscal incentives to 
encourage private investment in the DRC energy sector.  He said the 
process would take time because the social impacts of tariff 
increases needed to attract investors would have to be taken into 
account.  The Grand Inga project could be a long-term solution to 
Africa's power problems, but investors have held back because of the 
DRC's political risk, Inga's $80 billion price tag, and the 
estimated time to completion - earliest 2025.  Currently, the DRC, 
Angola, Namibia, South Africa, and Botswana are working on the 4,300 
megawatt Inga 3 facility, which will supply the DRC's growing mining 
industry and also link up with the southern African grid.  Depending 
on funding, construction at Inga 3 could start by 2012, and come on 
stream sometime after 2020. 
 
----------------------------------- 
$1 Billion Lost Due to Power Issues 
----------------------------------- 
 
¶6. (SBU) Projects with an estimated value of $1 billion were 
cancelled or postponed to May this year due to electricity capacity 
issues, the South African Cement and Concrete Institute (C&CI) said 
in its 2008 industry review.  Reflecting on a year in which the 
economic outlook started to deteriorate and consumer and business 
confidence weakened, coupled with Eskom's stringent approval policy, 
the C&CI reported that the construction industry was hit hard in 
¶2008.  However, civil engineering turnover remained healthy, 
particularly due to increased spending on infrastructure by state 
enterprises, most notably, Transnet and Eskom. 
 
--------------------------------------- 
Q--------------------------------------- 
Amended Constitution May Allow for REDS 
--------------------------------------- 
 
¶7. (SBU) The South African cabinet approved plans to amend the 
constitution in April 2009, in a move to give the national 
government new and extended powers of intervention at the local 
government level.  Government spokesperson Themba Maseko said the 
change was to facilitate service delivery and to achieve regional 
efficiencies and economies of scale at local government level, such 
as the long awaited implementation of the regional electricity 
distributors (REDS).  The REDS were first proposed over a decade 
ago, but have run into constitutional roadblocks and resistance from 
municipalities, which see their revenues from electricity 
distribution threatened.  The SAG has been working to remove the 
responsibility of electricity distribution from municipalities and 
centralize it within a number of regional distributors.  One of the 
arguments in favor of the REDS is that income from the sale of 
 
PRETORIA 00001429  003 OF 007 
 
 
electricity would actually be spent on maintenance and refurbishment 
of electricity infrastructure, instead of being used to 
cross-subsidize other municipal services.  This has resulted in a 
degradation of many municipal power networks and added to the 
problems of Eskom's power outages. 
 
------------------------------------- 
Minister Pushes Eskom Tariff Increase 
------------------------------------- 
 
 
¶8. (SBU) Public Enterprises Minister Barbara Hogan came out strongly 
(June 23) in favor of the National Energy Regulator of South Africa 
(Nersa) granting Eskom a 34 percent tariff increase - they were 
eventually given 31.3 percent.  She called for a review of the way 
tariff increases are determined, which would also take into account 
capital expenditure needs.  Energy Minister Dipuo Peters warned 
against putting electricity tariffs up too quickly because it would 
hit the poor hardest.  She said poor people had to be protected and 
electricity tariffs structured so key industrial users continue to 
subsidize domestic users, and not vice versa.  Hogan said if Eskom 
did not get the necessary tariff increase now the country would face 
much higher increases later.  She said the progressive tariff system 
would give poor households protection. 
 
¶9. (SBU) In her budget vote speech Hogan emphasized that it was 
imperative that Eskom's operational costs be fully funded through 
its tariffs and failure to obtain the necessary increase would 
result in a cash-flow shortfall for Eskom.  Hogan said it was vital 
for the country's power security that Eskom's $50 billion five-year 
capital spend program continue.  She said existing electricity 
tariffs had not been designed to provide Eskom with the cash flows 
to fund an aggressive build program.  The current low-tariff regime 
also hindered the ability to introduce private operators and funding 
into the system, as the returns were not sufficient to justify the 
investment. 
 
------ 
Mining 
------ 
 
---------------------------- 
Mine Deaths Threaten Economy 
---------------------------- 
 
¶10. (SBU) Ten miners were killed in South African mines during the 
week May 19 and 25, despite a concerted drive to make mines safer. 
Seven of the deaths occurred in gold mines and three in platinum 
mines.  Chief executives in major companies have made safety their 
priority.  New AngloGold Ashanti CEO Mark Cutifani said the company 
recorded its first-ever fatality-free quarter in the three months to 
end-June 2008.  South Africa's largest mine union, the National 
Union of Mineworkers (NUM) stated that their main concern was the 
gold mining sector, where the deep levels posed the biggest risk to 
mine workers.  In a statement, NUM said working conditions at South 
African mines had worsened and blamed management for the 
"deteriorating" situation.  The government has clamped down on mine 
safety, temporarily shutting working areas and mines where 
fatalities have occurred, as well as increasing fines for health and 
Qfatalities have occurred, as well as increasing fines for health and 
safety violations.  Solidarity and NUM both confirmed a figure of 72 
official fatalities to May 25, 2009, which on an annualized basis is 
equal to the 170 deaths in 2008.  The death toll in 2008 was 23 
percent down on the 221 fatalities in 2007 and the fatality rate per 
million hours worked dropped from 0.21 to 0.15, an improvement of 
28.6 percent. 
 
¶11. (SBU) Government's shutting of mines for extended periods 
following fatal accidents has the potential to cause huge losses to 
the economy.  At the Sustainable Development Conference in 2007, 
then Chamber of Mines president Lazarus Zim pointed out that, 
without mining, South Africa would directly lose $17 billion or 7 
percent of the country's GDP and $43 billion, or around 18 percent 
 
PRETORIA 00001429  004 OF 007 
 
 
of GDP in total.  Also at risk was $31 billion per year in export 
earnings, equivalent to about 40 percent of South Africa's total 
foreign exchange earnings, and about one million jobs (450,000 
direct and the balance in related service sectors) that provide 
daily subsistence to between seven and ten million people.  Industry 
has said that the safety process needs a step-wise change in the 
attitude and discipline of management, unions, and government, but 
the differences between the main players make it difficult to 
achieve.  Some mining executives believe the government has come 
down heavily on the side of the unions on the issue of safety for 
reasons of political expediency.  They want the issue of safety 
depoliticized and NUM to share responsibility for workers safety and 
training.  The NUM want a pay structure that gives higher basic 
wages and relies less on bonus-related pay structures.  They reason 
workers take risks to earn production bonuses. 
 
--------------------------------------- 
When Commodity Cycle Turns be in Africa 
--------------------------------------- 
 
¶12. (SBU) Africa is the place to be when the commodity cycle resumes 
its upward march.  Frontier Advisory CEO Dr Martyn Davies told 
mining investors at a seminar in Johannesburg that if they believe 
in the long-term urbanization of China and India, you buy Africa, 
because that's where the commodities are going to come from.  He 
said there was great potential for Chinese demand to rekindle the 
commodity supercycle, which came to an abrupt halt in October 2008. 
He said senior Chinese delegations were visiting the Democratic 
Republic of Congo and Mozambique to make commodity-related 
acquisitions.  McKinsey principal Dr Heinz Pley told the seminar 
that capital was coming from China and India and not from 
traditional Western economies.  He said China and India were taking 
advantage of low commodity prices to invest in mining opportunities 
in Africa. 
 
¶13. (SBU) Pley said the Chinese and Indians were striving to reach 
the personal income levels of the Europeans and Japanese and this 
would create a sustained long-run demand for commodities.  Standard 
Bank African mining specialist Mark Cohen said the African continent 
is endowed with some 30 percent of the world's minerals and African 
governments had begun building enabling regimes and policies to 
foster investment in mining.  He said that the future of 
commodity-mining projects on the African continent was facing the 
worst economic crisis in decades and reiterated the importance of 
mining to job creation and economic development in Africa.  For 
every formal job lost in the mining sector in South Africa between 
eight and eleven people lose an income and this was probably worse 
in other parts of Africa.  He gave examples of major Chinese-Africa 
deals which ranged from a mines-for-infrastructure agreement with 
Guinea, the world's top bauxite exporter, to a $9 billion package 
QGuinea, the world's top bauxite exporter, to a $9 billion package 
with the DRC to build roads, railways, hospitals and schools in 
exchange for copper and cobalt.  Earlier in May, copper producer 
Zambia picked NFC Africa, a subsidiary of China Non-ferrous Metals 
Corporation (CNMC), to run its Luanshya Copper Mines, a major 
operation that shut in December due to the economic downturn. 
 
--------------------------------------- 
New Code Puts Mining Investment at Risk 
--------------------------------------- 
 
¶14. (SBU) The government-proposed new "codes of good practice" in 
mining effectively seek to extinguish black economic empowerment 
(BEE) debt after two years, whether or not there has been any debt 
repayment.  Analyst Barry Sergeant said the Royal Bank of Canada 
Capital Markets (RBCCM) analysts found the recently published Codes 
of Good Practice for the SA Minerals Industry, a reason for concern. 
 The codes where published in the South African Government Gazette 
on 29 April, and are seen as an attempt to implement the Broad-Based 
Socio-Economic Charter, which requires 15 percent of mining assets 
be in the hands of BEE companies by 2009 and 26 percent by 2014. The 
RBCCM analysts interpret the code as saying companies will not be 
given full BEE credits if the BEE company has debt associated with 
 
PRETORIA 00001429  005 OF 007 
 
 
the purchase two years after the deal was done.  A number of BEE 
deals, particularly in platinum, are deeply in debt and struggling 
to generate positive cash flows at current metal prices.  The 
analysts say the new code could destabilize the now 'accepted' BEE 
activity when investing in South African companies.  The uncertainty 
around these codes needs to be resolved if the mining industry hopes 
to attract new investment. 
 
------------------------- 
The Other Precious Metals 
------------------------- 
 
¶15. (SBU) Cheaper palladium is providing increasing competition to 
platinum in jewellery.  Palladium has been used in alloys such as 
white gold for decades, but was not favored as a jewellery metal in 
its own right because it has about half the density of platinum. 
This has changed since platinum became too expensive and the 
jewellery industry, particularly in China, saw the potential for 
making and marketing cheaper jewellery pieces using palladium.  Over 
the past five years, annual consumption of palladium in jewellery 
manufacture has soared 237 percent, while that of platinum has 
fallen 42 percent. 
 
¶16. (SBU) Platinum and palladium are much rarer than gold or silver 
and have characteristics that favor their use in industry, 
particularly in reducing combustion engine emissions.  Half of world 
demand for these metals is for use in autocatalysts.  There is 
greater political and geological risk to supplies, compared to the 
better-known precious metals, as production is largely restricted to 
mines in South Africa and Russia, where almost all the world's 
reserves are concentrated.  The turbulence in investment markets 
over the past year has seen platinum soar to $2,273 an ounce, then 
collapse to $763, before bouncing back to about the current $1,150. 
Over the past 12 months platinum has been about 13 percent below its 
average dollar price over 2007, whereas gold was 12 percent higher 
over the same period.  This is due to the platinum's greater 
exposure to fluctuations in industrial demand, particular by the 
auto industry, which has been hit hard by global economic collapse. 
 
------------------------------- 
Ferrochrome Industry Bottoming? 
------------------------------- 
 
¶17. (SBU) The price of ferrochrome seems to have bottomed at about 
$0.69 per pound according to International Ferrochrome Metals (IFM) 
CEO David Kovarsky.  IFM is 30 percent owned by Jisco of China. 
Kovarsky said ferrochrome was almost exclusively used in the 
production of stainless steels and it was important for ferrochrome 
stocks and stainless steel production to be in balance.   He said 
that since the end of March, IFM had shipped 28,000 tons of 
ferrochrome to China.  Kovarsky also noted that inventories were 
declining and spot prices firming, but not yet to levels to justify 
an unlimited resumption of production at its operation in South 
Africa's North West province.  The plant had shed 680 jobs out of a 
complement of 920 employees since October 2008.  Over the same 
Qcomplement of 920 employees since October 2008.  Over the same 
period its former mining contractor had retrenched 120 of its 
permanent staff.  In another development Kovarsky announced that IFM 
would spend $10 million to self-generate 15 percent of its power 
requirements at a fraction of power utility Eskom's rate 
 
¶18. (SBU) The situation with other ferrochrome producers varies. 
Ferrochrome production at the Xstrata-Merafe Chrome Venture was 76 
percent lower for the first quarter of 2009 compared to the same 
period in 2008.  Seventeen out of twenty furnaces, equivalent to 
some 80 percent of annual production capacity, remained suspended in 
response to weak demand.  Hernic Ferrochrome, which shut the last of 
its four furnaces in January, restarted some production to build 
inventories on signs of revived Asian demand, according to 
Operations Director Jasper Pieters.  He said he did not know for how 
long they would continue producing because the market was 
"fundamentally challenged" by idled output capacity and Chinese 
stockpiles. 
 
PRETORIA 00001429  006 OF 007 
 
 
 
---------------------------- 
Sasol Fined for Price Fixing 
---------------------------- 
 
¶19. (SBU) South Africa's coal-to-liquid (CTL) and petrochemicals 
group Sasol would pay a higher fine than initially agreed to after 
admitting to additional charges in a fertilizer price-fixing case, 
the firm said in mid-May.  Sasol and the South African Competition 
Commission said in separate statements that Sasol would now pay 
$29.63 million as a penalty for fixing prices in the fertilizer and 
phosphoric acid sectors, which is up from the $22.22 million 
announced earlier.  Sasol has undertaken a forensic audit of its own 
subsidiaries since allegations of price-fixing first surfaced.  The 
competition authority said Sasol, which was fined 318 million euros 
by the European Commission last year for its role in a paraffin wax 
price-fixing cartel, had divided markets and fixed prices along with 
its competitors, Omnia and Yara.  The deals also led to Sasol 
becoming the sole wholesale supplier of limestone and ammonium 
nitrate, both fertilizer products.  Sasol and SAG-owned phosphate 
and phosphoric acid producer Foskor had a deal by which Foskor 
became the sole supplier of phosphoric acid in South Africa.  The 
authority has also launched a probe into possible price-fixing by 
gas and petroleum companies, including Sasol, the world's top 
producer of diesel from coal. 
 
¶20. (SBU) Sasol could also face civil action from agricultural 
associations as farmers demand compensation for its price-fixing 
activities.  Deputy General Manager at the agricultural association 
Chris van Zyl said only the state would be the beneficiary of the 
fine imposed on Sasol and therefore proposed some form of 
compensation to farmers.  According to the association's figures, 
grain and oil seed producers spent nearly $500 million on fertilizer 
in the 2004/05 crop season alone.  If uncompetitive practices had 
caused a 5 percent increase in fertilizer prices this would have 
cost farmers $20 million.  Sasol's CEO Pat Davies admitted that the 
company was expecting civil claims, but denied that other 
subsidiaries were being investigated.  Sasol has more than 200 
subsidiaries in all major regions of the world, and about 34,000 
employees internationally. 
 
-------------------------------- 
Illegal Diamond Miners in Angola 
-------------------------------- 
 
¶21. (SBU) Angola has increased its military personnel along the DRC 
border to try and stem the tide of illegal miners looking to mine 
and smuggle diamonds from the area's diamond fields.  Hundreds of 
DRC diamond smugglers are pouring into Angola's eastern diamond 
region of Lundas, according to an Angolan general.  He said Angola 
had recently invested $13 million to increase military patrols along 
the 2,000-kilometer land border with the DRC to stop the flow of 
illegal immigrants from as far away as Senegal.  Angola emerged from 
an almost three-decade civil war in 2002 to become the world's fifth 
Qan almost three-decade civil war in 2002 to become the world's fifth 
biggest diamond producer and only allows companies that partner with 
state-run firm Endiama to explore for diamonds.  In May, Angola's 
immigration office announced that over 62,000 illegal immigrants had 
been deported from the eastern diamond provinces of Malange, Lundas, 
and Moxico, but did not specify whether they were diamond 
smugglers. 
 
----------------------------------------- 
Shake up Energy and Minerals Institutions 
----------------------------------------- 
 
¶22. (SBU) The newly separated Departments of Energy and Mineral 
Resources tabled plans in Parliament on June 23 to shake up some of 
their institutions to improve their effectiveness.  Energy Minister 
Dipuo Peters said her department planned to separate the system 
operator from power utility Eskom and establish an independent 
entity.  The move would enhance the National Energy Regulator of 
South Africa's oversight over Eskom.  Speaking during her maiden 
 
PRETORIA 00001429  007 OF 007 
 
 
budget vote speech in Parliament, Peters said the independent system 
operator would be responsible for planning, procurement, and 
scheduling for Eskom's generators to balance the system 
demand-supply equation daily.   Peters also announced that the 
department was developing regulations regarding the planning for new 
power stations and the procurement process.   This was to shift the 
responsibility for security of electricity supply from Eskom to the 
energy ministry. 
 
¶23. (SBU) The new Department of Mineral Resources was considering a 
new business model for the State Diamond Trader, Mining Minister 
Susan Shabangu said during her budget vote speech.  The problem with 
the current model was that it was business-oriented, rather than 
developmental, in its approach.  The new plan would enable the 
trader to promote equitable access to, and beneficiation of, diamond 
resources and address distortions in the industry.  Concerns have 
been raised by diamond industry participants about the time taken 
for the trader to buy diamonds from miners, disagreement on market 
valuations, and the Trader's lack of funding.   Other issues 
Shabangu said her department would address this year include: a 
review of the five-year-old mining charter, with emphasis on making 
communities meaningful beneficiaries of mining in their areas; a 
review of all social and labor projects; the adoption of a mineral 
beneficiation strategy; the recruitment of more mine health and 
safety inspectors; and the development of a comprehensive approach 
to stopping illegal mining. 
 
CONNERS