This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 000745 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
DEPT PLEASE PASS TO USGS 
 
E.O. 12958: N/A 
TAGS: EMIN EINV CA SF
SUBJECT: SOUTH AFRICA: BIG GOLD AT SOUTH DEEP 
 
REF: A. 04 PRETORIA 4813 
 
     ¶B. 04 PRETORIA 4117 
     ¶C. 04 PRETORIA 1695 
 
Sections of this cable are Sensitive But Unclassified, please 
handle accordingly. 
 
¶1. (SBU) Summary.  Placer Dome (Canada) and Western Areas 
(South Africa) officially commissioned their new ultra deep 
Twin Shaft Complex at South Deep on February 4.  Deputy 
President Jacob Zuma attended the event on behalf of the 
government, and used the occasion to deliver a hard-hitting 
speech on the importance of the government's black economic 
empowerment (BEE) policy.  The Deputy President's message was 
not lost on Placer Dome, which is having difficulty meeting 
BEE equity requirements.  With proven and probable reserves 
of 55.6 million ounces, South Deep promises to be one of the 
most lucrative gold mines in the world.  The new Twin Shaft 
Complex consists of a single drop ventilation shaft to 2759 
meters below the surface and a single drop main shaft to 2993 
meters below the surface.  The primary advantages of a single 
drop shaft are that it obviates double handling of ore 
underground, and it affords direct and immediate access of 
men and materials to 25 million ounces of gold.  Management 
plans to increase South Deep's annual gold production from 
490,000 ounces in 2005 to 560,000 ounces in 2006, and to 
800,000 ounces by 2010.  Western Areas held the original 
mining rights to South Deep, and for this it receives 50.875% 
of the gold revenue.  Placer Dome, however, appoints the 
joint venture chairman who can cast the tie-breaking vote. 
End Summary. 
 
Speeches 
-------- 
 
¶2. (SBU) Western Areas majority shareholder Brett Kebble 
introduced Deputy President Jacob Zuma, who attended the 
official commissioning ceremony of the Twin Shafts Complex at 
South Deep on February 4 on behalf of the government and 
Minister of Minerals and Energy Phumzile Mlambo-Ngcuka. 
(Note: Mlambo-Ngcuka's husband investigated and initiated 
prosecution of a close associate of Zuma's on corruption 
charges that involved Zuma's support for a French arms deal. 
The trial of his close associate is ongoing.)  Zuma spoke to 
over 200 guests for about 20 minutes on the history and the 
precepts of the government's broad-based black economic 
empowerment (BEE) policy as it pertained to the mining 
sector.  This included meeting percentage targets on black 
ownership, black management, basic education and skills 
transfer to black workers, and a commitment to improve the 
living conditions of black mine workers.  He also stressed 
the development of downstream industries, such as jewelry 
manufacturing.  Zuma's message on the importance of BEE to 
the government was not lost on Placer Dome executives, who 
find it difficult to meet BEE ownership targets without 
diluting controlling interest or future profits. 
 
¶3. (SBU) Placer Dome President and CEO Peter Tomsett spoke 
for about ten minutes.  He noted that Placer Dome's 
investment was the first and largest foreign mining 
investment in the new South Africa.  Despite criticism from 
shareholders and stakeholders for delays (i.e., 20 months) in 
completing the Twin Shaft Complex, he believed that the 
project was now on track.  However, more investment would be 
required to meet his vision of a profitable mine producing at 
over 700,000 ounces a year.  Tomsett said that achieving 
productivity results, worker training, and meeting equity 
requirements demanded cooperation from all parties involved. 
He was confident that Placer Dome's investment fulfilled the 
objectives of the mining bill. 
 
The Mine and the Ore Body 
------------------------- 
 
¶4. (U) South Deep is located in the district of Westonaria in 
Gauteng Province, about 30 miles from Johannesburg on the 
edge of the Witwatersrand basin.  Housing one of the largest 
known but unexploited gold ore bodies in the world, the 
property has proven and probable reserves of 55.6 million 
ounces (as reported by Placer Dome on December 31, 2004). 
Such an ore body will support more than 60 years of mining. 
Currently, investment in the mine totals more than R6.5 
billion ($1 billion in today's rand). 
 
¶5. (U) South Deep comprises the old South Shaft Complex and 
now the new Twin Shaft Complex.  The South Shaft Complex 
consists of a main shaft and three sub-vertical shafts that 
reach to 2693 meters below the surface.  The new South Deep 
Twin Shaft Complex, in full operation from November 19, 2004, 
consists of a single drop ventilation shaft to 2759 meters 
and a single drop main shaft that currently services mining 
from 2590 to 2890 meters below the surface.  The primary 
advantages of a single drop shaft are that it obviates the 
double handling of ore underground and affords direct and 
immediate access for men and materials to 25 million ounces 
of gold.  The Twin Shafts are located as close as possible to 
the center of the ore body, allowing miners to reach the ore 
body in less than 10 minutes, as opposed to three hours using 
the old South Shaft.  Together with the South Shaft, the Main 
Shaft will sustain a hoisting rate of 235,000 tons per month 
of gold bearing rock and waste from 3000 meters over a 
60-year life span.  With 17 MW of hoist power, the main shaft 
can hoist at speeds up to 64 kilometers and hour.  This 
exceeds the newly installed milling capacity of 220,000 tons 
per month. 
 
¶7. (U) The Twin Shafts each have an inside diameter of 9 
meters.  Construction required excavating 633,311 tons of 
earth, pouring 43,000 square meters of concrete, and 
assembling more steel (7,700 tons) than in the Eiffel Tower. 
Complicating construction were two faults running through the 
shaft area: the Fargo at 2409 meters down and the East Arrow 
Fault at 2841 meters.  These faults required steelwork 
independent from the shaft pillar.  The ventilation shaft was 
the first ultra deep shaft in South Africa completed without 
a fatality.  No fatalities occurred during the 17-month 
construction and equipping period for Twin shifts.  In all, 
the project took 10 years and seven months to complete. 
 
¶8. (U) The mine has been divided into three areas: the 
extended sub-vertical shaft area serviced by the old South 
Shaft, and phase 1 and phase 2 areas serviced by the new Twin 
Shafts.  Extended sub-vertical mining is taking place 1630 
meters below the surface.  Phase 1 mining is taking place at 
2393 meters and 2800 meters below the surface (where a 
crusher is located).  The plan is for future Phase 2 mining 
to take place at 3360 meters below the surface.  More than 
60% of current production at South Deep is from fully 
mechanized mining methods: trackless drift and fill, and 
benching.  Management wants to mechanize as much as 80% of 
production at the deeper levels.  Ore is transported by an 
underground rail system to a shaft loading system before it 
is hoisted to the surface.  Tramming on the main levels is by 
means of electric rail locomotives and 14-ton hoppers.  At 
2890 meters, virgin rock temperatures are 50 degrees 
centigrade.  To maintain comfortable work conditions, cooling 
is provided by 10 MW of site-specific underground 
refrigeration.  In addition, about 760 kilograms of air per 
second gets cooled to 6 degrees centigrade in 35 MW worth of 
bulk air coolers on the surface and force ventilated through 
subsurface air drifts into the main shaft. 
 
¶9. (U) Reef horizons currently being mined include 
Ventersdorp Contact Reef on the western edge of the property 
and the Upper Elsburgs on east and northeast.  The beds 
thicken from 1.5 meters to 120 meters as one moves north and 
east.  Conventional longwall methods are being utilized on 
Ventersdorp ore, while a variety of methods are being 
utilized on Elsburgs ore, including conventional longwall, 
drift and fill, benching, and long-hole stoping.  The 
lucrative Elsburgs section especially lends itself to bulk 
mining and mechanization. 
 
Production 
---------- 
 
¶10. (U) South Deep management plans to increase annual gold 
production from 490,000 ounces in 2005 to 560,000 ounces in 
2006, and then to 800,000 ounces by 2010.  A significant 
transition will occur when primary operations move from South 
Shaft Complex to the new South Deep Twin Shaft Complex in the 
fourth quarter of 2005.  Cost savings should be derived from 
increasing the economy of scale bringing cash costs down from 
R74,873 per kilogram gold in 2004 to R66,700 per kilogram in 
¶2005.  When production reaches full potential, management 
expects costs to decline to R60,000 per kilogram (about 
$10,000 in today's dollars).  Management expects to achieve 
positive cash flow in second quarter 2005.  Cash flow should 
be further enhanced with cost savings of almost R5 million 
per month when the company halts production at the old 
Harmony 4 shaft.  By accelerating development on three 
levels, management wants to increase mining to 330,000 tons 
of ore bearing rock and waste per month.  With an additional 
investment of R1 billion, Kebble believes that South Deep 
could double production over the next three years. 
 
The Joint Venture 
----------------- 
 
¶11. (U) Placer Dome Western Areas Joint Venture (PDWAJV) was 
established in 1999 to invest and build the Twin Shaft 
Complex and then manage South Deep.  Each partner owns 50% 
and has the right to appoint three joint venture board 
members.  As long as Placer Dome SA maintains a 40% interest 
in the joint venture, it has the right to appoint the Board 
Chairman, who casts a tie breaking vote -- except, as Brett 
Kebble is quick to point out, on matters that have a material 
impact on the business, in which case a unanimous decision of 
the board is required.  Western Areas receives 50.875% of all 
gold revenue.  Should production exceed one million ounces 
per year, Western Areas would receive a further 1.75% of 
Placer Dome's attributable gold production.  The new CEO of 
the joint venture company is John Bredenhann.  The new 
Chairman of Western Areas is Mafika Mkwanzi, who is also 
Chairman of Letseng Diamond Mine in Lesotho.  The Managing 
Director of Placer Dome SA is Sam Coetzer. 
 
Western Areas 
------------- 
 
¶12. (U) Western Areas is a company ultimately owned and 
controlled by the Kebble family, including Roger Kebble and 
his son Brett.  In 2004, Inkwenkwenzi, a broad based black 
empowerment consortium, acquired 13.7 million shares of 
Western Areas together with a call option for an additional 
5.3 million Western Areas shares.  The Kebbles believe that 
this new empowerment shareholding in Western areas, together 
with existing empowerment shareholdings from JCI and 
Randgold, will take Western Areas beyond the Mining Charter's 
five-year BEE ownership target of 15%.  This is what the 
government will look at when issuing new order mining 
licenses until 2009.  The 10-year target is 26%.  On February 
7, Western Areas launched a Level-1 American Depositary 
Receipt sponsored by the Bank of New York in the U.S. 
over-the-counter market.  One ADR equals one ordinary Western 
Areas share.  This gives Western Areas the benefit of a 
traded U.S. security without having to adapt to U.S. 
reporting requirements.  Western Areas also owns contiguous 
gold resources that in time can be accessed from existing 
South Deep mining infrastructure.  The company is fully 
exposed to rand currency fluctuations, but plans to 
restructure its hedging position. 
 
Placer Dome 
----------- 
 
¶13. (SBU) Having invested $630 million dollars in South 
Africa, Placer Dome believes it is now the largest foreign 
investor in the new South Africa, and the largest foreign 
investor in the mining sector (not counting South African 
companies that have relisted in the U.K.).  As a matter of 
shareholder policy, Placer Dome wants to control its 
investments.  To do so in this case, it negotiated a delicate 
balance of ownership and control in its joint venture with 
Western Areas.  If its investment in the joint venture falls 
below 40%, for example, Placer Dome loses control.  In 2004, 
the government promulgated the new Minerals and Petroleum 
Resources Development Act, which replaces South African 
property rights with new order mining licenses to be granted 
by government before May 2009.  The Act also gives 
legislative status to an industry charter that sets forth BEE 
targets and objectives.  Placer Dome feels that it scores 
well on these targets, with the exception of equity.  The 
prospect of diluting its shareholding in South Deep has 
caused much consternation at Placer Dome's headquarters in 
Vancouver and among its shareholders, almost half of whom are 
American.  In November of 2004, Placer Dome along with 
Southern Era (Canada) notified the Department of Mineral 
Resources and Energy, as it understood it was required to do 
under law, of its intention to lay claim should it incur 
future losses due to the implementation of the new mining 
law.  This angered Minister of Minerals and Energy 
Mlambo-Ngcuka and relations between the two have been frosty 
ever since.  Nevertheless, new President and CEO Tomsett did 
meet with Mlambo-Ngcuka at the 2005 Mining Indaba 
(Conference) the following week.  Mlambo-Ngcuka reportedly 
refused to waive the BEE equity requirements for Placer Dome, 
but left the door open for the company to substitute possible 
involvement with a BEE company in jewelry manufacturing.  "Be 
creative." she reportedly advised. 
FRAZER