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UNCLAS SECTION 01 OF 05 JOHANNESBURG 000416 
 
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TAGS: EMIN ENRG EINV EPET ECON SF CH
SUBJECT: SOUTH AFRICA: MINERALS AND ENERGY NEWSLETTER "THE ASSAY" -- 
ISSUE 10, OCTOBER 2006 
 
JOHANNESBU 00000416  001.2 OF 005 
 
 
This cable is not for Internet distribution. 
 
¶1. (U) Introduction:  The purpose of this monthly 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. 
 
--- 
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. 
 
-------- 
HOT NEWS 
-------- 
Chinese Gain a Foothold in South African Mining 
--------------------------------------------- -- 
¶3. (U) The Chinese State-owned company that operates the 
country's biggest gold mine, Hong Kong-listed Zijin Mining, has 
bought 20% of AIM-listed platinum explorer Ridge Mining.  Its 
$20 million investment was made at a 35% premium to Ridge's 
current share price.  The Chinese interest is Ridge's 
substantial nickel prospect on the eastern limb of South 
Africa's Bushveld complex called Sheba's Ridge.  A bankable 
feasibility study currently underway is expected to give the 
green light to the R5 billion ($690 million) Sheba's Ridge mine. 
The prospect has resources (if proven) capable of producing an 
annual 24,000 tons of nickel, 12,000 tons of copper, 94,000 
ounces of platinum, and 274,000 ounces of palladium for at least 
18 years.  The Chinese investment closes out a $146 million 
fund-raising exercise for the Blue Ridge platinum mine which is 
10 km from the nickel project and about 190 km west of 
Johannesburg.  Anglo Platinum, the world's largest platinum 
producer, owns 36% of Sheba's Ridge, the Industrial Development 
Corporation 26%, and Ridge the rest. 
 
Mining Royalty Rates Amended 
---------------------------- 
¶4. (U) On October 11, National Treasury released the long 
awaited second draft of the Mining Royalty Bill for comment. 
The industry will be able to comment on the draft until the end 
of January 2007.  It is expected that the bill will be enacted 
in 2007, after which it will be become effective in May 2009. 
The proposed royalty will be tax deductible and is aimed at 
encouraging local beneficiation.  Chamber of Mines economist 
Roger Baxter said that the latest draft was a significant 
improvement but questioned whether the incentives offered were 
sufficient to encourage further beneficiation within South 
Africa.  He said that the introduction of relief measures for 
marginal mines, small miners and royalty liability adjustments 
were also welcome.  While general pleased with the new draft 
bill, the industry still intends to push for a profit-based 
instead of the proposed revenue-based royalty system. 
 
¶5. (U) The diamond industry will benefit most from the redrafted 
bill.  The initially proposed 15% export levy on uncut diamonds 
will be reduced to 5% and the royalty on diamond revenues from 
8% to 5%.  The royalty on unrefined PGMs will be 6% while the 
 
JOHANNESBU 00000416  002.2 OF 005 
 
 
refined metals will attract a 3% royalty, compared with 4% under 
the first draft.  Unrefined gold will draw a 3% royalty while 
refined gold (99.5% pure, which is produced by most mines) will 
attract a 1.5% royalty, compared with 3% proposed in the first 
draft.  Under the first draft, low-ash coal had a 2% royalty but 
under the latest draft the royalty on high-ash coal will be 1% 
and 3% on low-ash coal (less than 15% ash).  One discordant note 
for iron ore exporters, especially at a time when demand for and 
prices of this commodity are running at record highs, is the 
imposition of a 4% royalty on the raw ore, versus the initially 
proposed 2%, which will apply only to an upgraded product. 
 
US-SA Power Conference - October 16-19 
-------------------------------------- 
¶6. (U) An estimated 35 American companies and an equal number of 
SA firms participated in a conference to outline opportunities 
for American suppliers of power equipment arising from the 
state-owned utility, Eskom's $16 billion energy investment 
program.  The emphasis was on electricity generation, 
transmission and distribution opportunities.  The $16 billion 
represents a portion of the $60 billion earmarked for 
infrastructure development by the SAG.  The conference had the 
backing of EXIMBank and USTDA, which offers grant financing for 
projects in which US firms participate or have the potential to 
participate.  Some 35 Eskom projects were showcased, including 
substantial base-load and peaking generation initiatives 
amounting to billions of dollars over the next five years.  The 
conference featured presentations from Eskom, the SAG and US 
companies that were invited to present their latest 
technologies.  US companies were also guided through South 
Africa's black economic empowerment legislative requirements, 
which are an imperative for doing business in the country. 
 
------- 
NUCLEAR 
------- 
PBMR Team Awarded U.S. Nuclear Engineering Contract 
--------------------------------------------- ------ 
¶7. (U) At the beginning of October, the US Department of Energy 
awarded a new generation nuclear plant contract to an 
international team that includes South Africa's Pebble Bed 
Modular Reactor Company (PBMR).  Jaco Kriek, PBMR's Chief 
Executive, said the contract was worth about $3 million (R23 
million) and was for the first phase of engineering work for the 
project at the Idaho National Laboratory.  The contract includes 
pre-conceptual engineering, design comparisons of various 
alternatives for reactor heat and hydrogen generation, 
conceptual cost estimates and accompanying schedules and 
research and development requirements for different options. 
 
¶8. (U) The initial 12-month phase is the first step in a 
multi-step program to deliver a high temperature, gas-cooled 
reactor prototype to increase US domestic energy supplies, 
reduce greenhouse gas emissions and move more quickly towards a 
national hydrogen economy.  The international team is led by 
Westinghouse Electric Company and includes Potchefstroom-based 
M-Tech Industrial of South Africa, Shaw Stone & Webster of 
Boston; Technology Insights of San Diego; Air Products and 
Chemicals of Allentown, Pennsylvania; Nuclear Fuels Services of 
Erwin, Tennessee; and Kadak Associates of Providence, Rhode 
Island. 
 
-------------- 
Platinum Group 
-------------- 
Bushveld's Eastern Lobe needs Higher PGM Prices 
--------------------------------------------- -- 
¶9. (U) South Africa's Bushveld complex hosts the world's largest 
resource of platinum group metals (PGMs).  The complex has the 
shape of a distorted four-leaf clover with well-developed 
western and eastern lobes, a partially developed northern lobe 
and an embryonic southern lobe.  Both the western and eastern 
lobes have two main reef horizons, namely the Merensky Reef and 
the UG2 Reef.  The Merensky is better developed on the western 
lobe and has a higher metal content and higher proportion of 
platinum than the UG2, while the UG2 is the dominant reef on the 
east lobe.  The ore from the Merensky is also easier to mine and 
to treat because of its lower chromium content. 
 
¶10. (U) The prolonged high price of platinum (sweetened by the 
high price of the relatively minor metal rhodium) has encouraged 
exploration on the eastern lobe and a number of mining companies 
are planning or have commissioned projects there.  The majority 
of resources on the western lobe are already in production or 
are tightly controlled by the platinum majors.  Mining on the 
eastern lobe requires higher palladium and platinum prices than 
 
JOHANNESBU 00000416  003.2 OF 005 
 
 
are required for operations on the western lobe.  According to 
Brad Mills, Chief Executive of Lonmin, the platinum price has to 
remain in excess of $1,000 per ounce at about R7 to the dollar 
for companies to successfully invest in the Eastern lobe, while 
the price required for mining ore bodies in the Western lobe is 
about two-thirds of that.  The current platinum price is $1,080 
per ounce and the rand/dollar exchange rate 7.5. 
 
Lonmin Platinum gets Mining Rights Converted 
-------------------------------------------- 
¶11. (U) The start of October saw Lonmin became the first South 
African platinum producer to convert its old order mining rights 
for its Marikana operations into new order mining rights.  This 
is a requirement of the new Minerals Act which converted all 
privately held mineral rights to State custodianship.  The 
conversion gives Lonmin's South African operations, namely 
Western Platinum and Eastern Platinum, the exclusive right to 
mine for platinum group and associated metals within its 
property boundaries for the next 30 years, renewable thereafter 
for 30-year periods.  Simultaneously the company announced a $1 
billion investment plan to expand its operations over the next 
three to five years.  This will boost platinum production to at 
least 1.3 million ounces a year by 2010 and create about 4,000 
jobs in various areas of its business. 
 
¶12. (U) Lonmin achieved its mining right conversions with social 
and labor plans for its mining areas, which included the 
development of people and housing schemes. This was commended by 
Minister of Minerals and Energy, Buyelwa Sonjica, who said that 
social and labor aspects were very important in preventing 
mining towns from turning into ghost towns once reserves were 
depleted.  Brad Mills, Chief Executive of Lonmin, said the 
conversion of the company's mining rights removed uncertainty 
around the future of its operations and gave the company great 
confidence in its current and future capital investments in 
South Africa.  Currently, Lonmin is looking at a wide range of 
beneficiation issues with the Department of Minerals and Energy 
(DME), including the relocation of upstream and downstream 
activities and facilities to South Africa. 
 
Implats Exchanges Royalty Payments for Equity 
--------------------------------------------- 
¶13. (U) With agreement from both the Royal Bafokeng Nation (RBN) 
and the South African National Treasury, Impala Platinum 
(Implats) will convert royalty payments to the RBN to a 13.4% 
share of the company.  This was driven out of concern by Impala 
(the world's second biggest platinum producer) that under the 
revised Royalty Bill, royalties paid to the RBN would not be 
offset against those paid to the state. 
 
¶14. (U) Under the new deal, Implats will issue shares worth 
about $1.6 billion (R12.1 billion at the current rand/dollar 
exchange rate of 7.5) to the RBN, its principal black economic 
empowerment (BEE) partner.  This is equivalent to an advance 
payment of all royalties due to the RBN over the 32-year royalty 
agreement.   The royalties amount to $1.4 billion (R10.6 
billion), and the $200 million (R1.5bn) difference, equivalent 
to a 12% discount, will be recorded on the Implats balance sheet 
as a "BEE charge."  To facilitate the deal, Treasury plans to 
change a section of the income tax act (by the end of November) 
to allow Implats to deduct the equivalent of $1.4 billion from 
its taxable income over 32 years.  All new agreements must be 
ratified by the end of this year. 
 
----------- 
LEGISLATION 
----------- 
Mining Industry Blames Government for Losses 
--------------------------------------------- 
¶15. (U) The mining industry has blamed government policies for a 
33% decline in investment since 2004 that has resulted in an 
estimated loss of 20,000 jobs.  On the other hand, while 
Minerals and Energy Minister Buyelwa Sonjica has established a 
departmental task team to investigate reasons for the decline, 
she has accused the industry of using this to avoid its Mining 
Charter obligations.  The Charter mandates that industry 
transfer 15% of its assets to Black organizations and 
individuals by 2009 and 26% by 2014, plus other social and 
training obligations.  This is seen as a major disincentive to 
international investment, particularly to junior exploration 
companies, many of which have relocated to the DRC, Angola, 
Zambia and other African countries with less onerous mining 
codes.  It has also seen many South African companies diversify 
operations overseas and into the rest of Africa. 
 
¶16. (U) The Chamber of Mines has provided the Minister with 
 
JOHANNESBU 00000416  004.2 OF 005 
 
 
investment data and cited a number of government policies 
(including those of the Charter, Minerals Act, and proposed 
Royalty and Beneficiation bills) which could have contributed to 
a lack of investor confidence.  These included the negative 
effect of delays in approvals for environmental assessments; the 
issuing of water rights; the issuing of exploration licenses; 
and delays and impediments to converting old order rights to new 
order rights (the conversion of existing operating licenses for 
exploration and mining that should have been almost a "rubber 
stamp" exercise).  Department (of Minerals and Energy) officials 
said that they had received 9,000 applications for conversion of 
old-order mining rights to new-order rights and that 1,421 were 
rejected for various reasons, including the failure to commit to 
Charter obligations. 
 
Anglo in another Dispute over Licensing 
--------------------------------------- 
¶17. (U) In mid-September, Anglo Platinum (Anglo Plats), a 
subsidiary of Anglo American, filed actions against the 
Department of Minerals and Energy (DME) for refusing to grant 
prospecting rights on four properties located on South Africa's 
Bushveld Complex.  Two weeks later, Anglo Coal, also a 
subsidiary of Anglo American, filed action jointly on the DME 
and on Abarawaki Investments, a subsidiary of mining exploration 
company Thabex Exploration, to defend its applications for coal 
prospecting rights.   Abarawaki was cited as a respondent 
because it had received a notice of acceptance from the 
department on a prospecting right over an area held by Anglo 
Coal.  As a result of the negotiations, Anglo Coal has received 
some of its prospecting rights. 
 
¶18. (U) (Comment: The new Minerals and Petroleum Resources 
Development Act requires that exploration and mining companies 
convert their old licenses (so-called old order rights) to new 
order rights to comply with the Act and with the Mining Charter. 
 However, according to the law firm Webber Wentzel, in terms of 
the Act the minister has very limited powers to decline 
applications for conversions of rights, for which the deadline 
was April 30. The law also provides for mining companies to 
obtain a "mandamus", or order to compel the minister to process 
both conversions and new applications.  Unfortunately, the law 
is complex and open to interpretation and the capacity of the 
DME to handle this is limited by the number and experience of 
their staff.  End Comment.) 
 
-------- 
DIAMONDS 
-------- 
Firms Shed Diamond Cutting Jobs 
------------------------------- 
¶19. (U) Pending legislation aims to see more South African 
diamonds cut and polished locally in the belief that this would 
create substantially more jobs.  Instead, cutting firms are 
shedding jobs as they grapple with squeezed margins.  Cutters 
claim that this is due to an imbalance between the high price of 
rough and revenues for finished gems.  At the beginning of 
September, a trade union official said that some 400 cutting and 
polishing jobs had been lost in Johannesburg since January, 
bringing employment in the city down to 1,800 cutters, with 
another 600 cutting jobs elsewhere in the country. 
 
¶20. (U) MacDonald Temane, Chairman of the South African Master 
Diamond Cutters Association, said a delay in putting in place 
the government's new diamond laws was not helping the industry. 
He said that this had a destabilising effect and caused 
uncertainty.  The mining ministry concurred that there were many 
elements of the complex diamond law that had to be put in place, 
including input from the National Treasury on proposed export 
duties and royalty taxes.  It is expected that the laws will be 
implemented early next year. 
 
De Beers Opens its High-Tech Macrodiamond Laboratory 
--------------------------------------------- -------- 
¶21. (U) On October 5, the world's leading diamond miner, De 
Beers, officially opened a $16 million geological exploration 
macrodiamond laboratory (GEMDL) opposite its headquarters west 
of Johannesburg.  The facility was designed to speed up the 
process from discovery (of a kimberlite body) to mine 
development.  For the immediate future De Beers plans to process 
sample material from its world-wide exploration projects at the 
new laboratory.  The company budgeted some $100-million for 
exploration in 2006 and is likely to sustain or increase that 
level into the future in an effort to increase rough diamond 
supply.  There have been few new major discoveries during the 
passed decade.  De Beers is pursuing prospects in Botswana, 
Angola, the Democratic Republic of Congo, and Canada, and has 
 
JOHANNESBU 00000416  005.2 OF 005 
 
 
plans for India and Russia. 
 
¶22. (U) The new laboratory has a 150 ton per year sampling 
capacity, which will enable it to process about ten advanced 
exploration projects a year as compared to one currently.  This 
capability is likely to have an immediate positive spin-off for 
their joint venture AK6 project in Botswana with African 
Diamonds and Wati Ventures.  The plant uses South 
African-developed technologies and enhanced international 
innovations to carry out the process in a secure 'hands-free' 
environment.  The laboratory is designed for 100% recover of 
diamonds and diamond chips down to a few microns in size. 
Additional value-added services are aimed at determining and 
evaluating the characteristics and properties of diamonds and 
the geological environment in which they occur. 
 
¶23. (U) (Comment.  DeBeers' strategy for South Africa appears to 
be to sell off marginal mines to Black Economic Empowerment 
enterprises, increase recoveries from profitable mines, cut back 
on head-office staff and dispatch previously centralized 
services to the operations, and concentrate on high technology 
development and innovation in diamond exploration, recovery and 
industrial diamond manufacture.  End Comment.) 
 
Lesotho's Monster Diamond Find 
------------------------------ 
¶24. (U) The Lesotho Promise, a 603 carat white diamond of 
exceptional color, was discovered at the Letseng mine in 
Lesotho, and sold in Antwerp for $12.4 million.  This is the 
biggest diamond found since the 777 carat Millennium Star, owned 
by De Beers, was discovered in the Democratic Republic of Congo 
in 1993.  Last year the Letseng mine was also the source of 
another two exceptional stones, one exceeding 100 carats and 
another of 83 carats, also soon to be sold in Antwerp.  The mine 
was previously owned and worked by De Beers between 1977 and 
1982 but demands by the Lesotho government caused them to cease 
operations.  Letseng is currently owned by the Government of 
Lesotho (30%) and Gem Diamonds (70%) and operated by Gem since 
mid-year.  Gem recently received shareholder approval to 
purchase the operation from JCI.  The mine is low grade but is 
known to produce large high quality diamonds.  Of the 100,700 
carats recovered since restart of operations in April 2004, 90% 
were of gem-quality and some 1.5% exceeded 100 carats each. 
 
--------- 
COMPANIES 
--------- 
Two Major Companies Formed 
-------------------------- 
¶25. (U) On August 16, the Competition Tribunal unconditionally 
approved the merger of Kumba Resource's coal assets with those 
of Eyesizwe Coal within a newly created company, Exxaro 
Resources.  This forms part of a black economic empowerment 
transaction involving the unbundling of Kumba into two 
separately listed entities, namely Exxaro and Kumba Iron Ore 
Limited.  The Competition Tribunal also unconditionally approved 
Exxaro's proposed acquisition of Namakwa Sands, Anglo American's 
mineral sands operations on the west coast.  The two companies 
will be separately listed on the Johannesburg Securities 
Exchange (JSE) by the end of the year. 
 
¶26. (U) Kumba Resources, 66% held by Anglo American, is Africa's 
biggest iron ore producer and also has substantial assets in 
coal, minerals sands, zinc, ferrosilicon and dolomite as well as 
ferroalloys.  November will see Kumba unbundled into Kumba Iron 
Ore and Exxaro.  Exxaro will hold the coal and metal mining 
assets and retain a 20% stake in the Kumba's Sishen iron ore 
mine.  It also has a 90-day option after listing to buy 100% of 
Namakwa Sands for $310 million, as well as options to buy 26% of 
the Black Mountain zinc mine and the Gamsberg zinc project in 
the Northern Cape.  If it exercises the Namakwa Sands option 
Exxaro would become the world's third-largest producer of 
titanium mineral sands - used mainly in making pigments for 
paint.  Exxaro will also be South Africa's fourth-largest coal 
mining company, the biggest supplier of coal to Eskom for power 
generation and top producer of metallurgical coals.  If it keeps 
to its planned output of 70 million tons of coal by 2012, it 
will become South Africa's biggest coal producer. 
COFFMAN##