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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 12-1, December-January, 2008 
 
 
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 
-------- 
 
-------------------------- 
Energy Crisis Developments 
-------------------------- 
 
¶2. (SBU) As of January 31, most South African mines and plants are 
back in production, but Chamber of Mines Technical Advisor Dick 
Kruger has told the Embassy that mines are receiving only 80 percent 
of power needs.  This is less than the 90 percent promised by Eskom 
and is, according to Dick, likely to stay at this level for some 
time.  This means that mines may have to implement staggered 
operations with the concomitant slowing of production.  Major mines 
and plants in South Africa have been at a standstill since January 
25 when Eskom could no longer guarantee sufficient power to operate 
and ensure workers health and safety.  Estimated production losses 
for the gold and platinum mines alone exceed $40 million per day. 
 
¶3. (SBU) In the interests of safety, Eskom agreed to provide 
sufficient power to allow maintenance crews underground to ensure 
safe conditions when the mines re-opened.  As power supply 
stabilizes and mines ramp up to full production, they have agreed to 
cut back on power demand by 10 percent.  AngloGold's Mponeng mine 
voluntarily reduced power consumption by 30 percent in advance of 
the crisis, according to the mine's General Manager.  However, as 
Hernic Ferro-chrome Operations Director Jasper Pieters put it, 10 
percent less electricity means 10 percent less production. 
 
¶4. (SBU) Coal supply to Eskom has also been severely compromised by 
the weather and stocks are at an all-time low.  Major coal suppliers 
are working at full throttle and have agreed to provide an 
additional 5 million tons per month for the next three months to 
build up stocks.  The weather has also caused production problems 
for open pit mines and material handling systems.  The Minister of 
Public Enterprises has indicated that if the coal supply situation 
does not rapidly improve, the SAG may impose emergency measures to 
divert some export coal to power stations.  The impact of mine 
closures on small mines and coal suppliers is not known, but could 
be severe. 
 
---- 
GOLD 
---- 
--------------------------------- 
SA Still on Top but for how Long? 
--------------------------------- 
 
¶5. (SBU) South Africa has been the world's biggest producer of gold 
since 1905, reaching a peak output of 1,000 tons in 1970.  According 
Qsince 1905, reaching a peak output of 1,000 tons in 1970.  According 
to London-based Gold Fields Mineral Services (GFMS), South Africa 
has produced 52,000 tons of gold from the Witwatersrand basin in the 
past 122 years, which accounts for 32 percent of all gold mined in 
the world to date.  Since then, output has steadily declined to the 
current estimated production for 2007 of 272 tons, as mines became 
deeper, operating costs increased, and gold price and the 
rand/dollar exchange rates showed extreme volatility. 
 
¶6. (SBU) At the same time, Chinese production increased, reaching an 
estimated 270.5 tons for 2007.  This ranks China as the number two 
producer, just short of South Africa's output.  South Africa could 
 
PRETORIA 00000217  002 OF 005 
 
 
add over one million extra ounces (32 tons) to annual output as 
planned production from new mines and expansion projects kick in 
over the next three to five years, provided that safety and 
electricity disruptions are contained and the gold price continues 
its upward march towards $1,000 per ounce, as is forecast by a 
number of analysts and (of course) mining companies. 
 
----------- 
OIL and GAS 
----------- 
 
-------------------------------- 
Oil Exploration Impasse Deja Vu? 
-------------------------------- 
 
¶7. (SBU) Exploration off South Africa's west and south coasts has, 
to date, come up with only a few small producing oil and gas fields 
in relatively shallow water.   However, seismic surveys of deeper 
areas indicate potentially favorable oil structures.  BHP-Billiton, 
the world's largest mining group, holds rights to two deep water 
leases off the west coast, which it has attempted to bring to 
account for years, but it continues to bump heads with the 
government over the conversion of its exploration leases to new 
order mining rights, as required by the Minerals Act of 2002. 
 
¶8. (SBU) A key obstacle is understood to relate to the Department of 
Minerals and Energy's (DME) insistence that local courts arbitrate 
in disputes while BHP wants the International Court of Arbitration 
to resolve commercial disputes - consistent with many oil-producing 
countries.  The government has also blocked stabilization provisions 
that would protect BHP from any future changes in the law.  BHP's 
old-order sub-leases are believed to include access to international 
arbitration and "stability clauses" and the government appears to be 
using the conversion requirement to remove these rights. 
 
¶9. (SBU) The BHP/DME dispute over rights dates back to 2005 when, in 
partnership with Occidental Oil (U.S.), BHP planned to begin 
drilling a deep well at a cost of about $50 million.  The drilling 
program would have given South Africa its first deep-water oil 
exploration well, but was postponed because of a number of 
uncertainties in the new mining legislation.  These concern issues 
related to production-sharing, conversion of mineral rights, taxes 
and royalties, and the decision-making power given to the Minister 
of Minerals and Energy.  This followed a decision in November 2005 
by the board of the oil and gas licensing authority (Petroleum 
Agency of SA known as PASA) to reject an application for a permit 
for two lease blocks off the country's east coast by Global Offshore 
Oil Exploration (a U.S. company) on the grounds that it was "not 
happy about the applications process" - Global was one of BHP's 
partners in the deep-water venture. The postponement has delayed the 
drilling for two years and may delay it again unless the impasse 
with the DME is resolved, and provided a drilling rig is available. 
 
-------- 
DIAMONDS 
-------- 
 
-------------------------------- 
De Beers Retains Rights to Dumps 
-------------------------------- 
 
¶10. (SBU) More than 130 years of diamond mining has created huge 
waste dumps of discarded material around mining areas.  Early 
Qwaste dumps of discarded material around mining areas.  Early 
recovery processes were inefficient and large quantities of diamonds 
landed on the dumps.  The majority of stones are in the smaller 
categories but larger stones have been recovered from dump 
re-treatment operations.  It is now recognized that these dumps 
constitute a valuable resource of diamonds and they are being 
processed together with mined kimberlite or as a stand-alone 
operation.  Many have been acquired by small black empowerment 
companies.  It has always been assumed that the dumps belonged to 
the mine operators and represented an integral part of the mining 
right.  However, this right was challenged when the Department of 
Minerals and Energy (DME) granted a prospecting right to Ataqua 
Mining for dumps at De Beers' Jagersfontein mine in the Free State 
Province, where mining operations ceased in 1971.  De Beers 
 
PRETORIA 00000217  003 OF 005 
 
 
immediately took the case to court. 
 
¶11. (SBU) The High Court ruled in favor of De Beers and set aside 
the granting of that right by the DME, stating that South Africa's 
new mining legislation did not apply to the treatment of old 
tailings dumps.  The judgment has far-reaching implications in that 
it means mining companies recovering minerals such as gold, diamonds 
and platinum from tailings dumps do not have to apply for a mining 
right in terms of the Minerals and Petroleum Resources Development 
Act (MPRDA), which came into effect from 2004.  This, in turn, means 
the tenets of the Mining Charter and social and labor plans do not 
apply to dump recovery operations.  A specialist on mining issues 
says that the significance of this judgment is huge and means that 
every dump in South Africa can be mined without having to apply for 
a mining right if ownership can be proved. 
 
----------- 
ELECTRICITY 
----------- 
 
---------------------------------- 
Pouring Water on the Energy Crisis 
---------------------------------- 
 
¶12. (SBU) The very wet rainy season that South Africa is "enjoying" 
has poured cold water on power utility Eskom's attempts to maintain 
a semblance of reliability to its power supply.  With a 3 percent to 
8 percent nominal reserve capacity and demand frequently exceeding 
supply (due to planned and unplanned maintenance), scheduled and 
(mainly) unscheduled outages have occurred daily and now the heavy 
rains have added another dimension to Eskom's (and the country's) 
woes.  Open cast coal mines have reduced output because of flooding, 
coal handling from mine mouth to power station by either road or 
conveyor belt has been impeded, coal stockpiles at plants have been 
flooded, and wet coal has caused feeding and efficiency problems in 
the boilers.  Added to this is the fact that the price of export 
coal is fetching well over $100 per ton (some seven times the 
domestic price), and more of the higher quality coal is being 
diverted to this market, leaving Eskom with an even lower quality of 
coal than it is used to.  As a result, power station stocks are down 
to four days supply and one mega-station is feeding directly from 
mine delivery. 
 
¶13. (SBU) Two years ago, an electricity outage (blackout) was an 
extremely rare event in South Africa.  Then, in December 2006 one of 
the two generating units at Koeberg (900 megawatt capacity each), 
the country's only nuclear power station, was severely damaged when 
a loose bolt got into the rotor.  This set off a series of 
blackouts, mainly in the Western Cape, which lasted until a new 
rotor was installed in about May-June of 2007. 
 
¶14. (SBU) From then on, outages became increasingly frequent until, 
with the advent of summer (September), they have become an almost 
daily occurrence culminating on January 25 with the closure of most 
mining operations throughout the country because Eskom could not 
guarantee supply.  This is likely to cost the mines and the country 
billions of rand in lost revenues and foreign exchange and in 
potential investment in energy-intensive ventures.  The SAG has 
Qpotential investment in energy-intensive ventures.  The SAG has 
declared the power outages a national emergency that must be treated 
with urgent actions, including a hike in electricity prices and 
mandatory quotas with penalty and incentive systems.  The next week 
will tell whether the situation has improved. 
 
 
¶15. (SBU) Comment. The energy crisis has resulted in the inevitable 
apportioning of blame and making of excuses by major players in the 
industry.  These include policy interventions by government, poor 
planning and management by Eskom, the mining industry's failure to 
produce sufficient coal, transport contractor's inability to deliver 
coal to the power stations, and the high rainfall over the early 
summer months.  However, the primary causes of the crisis are: 
government's failure to do anything when it was clear as early as 
1997/8 that a power shortage was pending; at the same time 
state-owned utility Eskom was forbidden from building new capacity 
as government wanted the private sector to do this; government 
continued to procrastinate until 2004 when it was obvious that the 
 
PRETORIA 00000217  004 OF 005 
 
 
private sector was not coming to the party; failure of heavy users 
of power to make adequate provision to protect themselves against 
power shortages; and government and Eskom's black empowerment 
policies (transformation) which saw skilled and experienced 
employees and contractors replaced by inexperienced people.  End 
Comment. 
 
----------------------------------------- 
First Greenfield IPP to be Online in 2010 
----------------------------------------- 
 
¶16. (SBU) South Africa's energy and skills crises have inspired the 
SAG to offer 30 percent of planned new energy projects to the 
private sector (IPPs or independent power producers) in an attempt 
to speed up the building of new generation capacity.  The AES-Khanya 
consortium has been designated as preferred bidder to build two 500 
megawatt open-cycle gas-turbine (OCGT) power stations (probably 
fueled by diesel to start with).  Start of construction has been 
delayed, but the Department of Minerals and Energy's (DME) Chief 
Director for Electricity said that the stations could still come on 
line by the end of 2009.  The two power plants will together add 
1,000 megawatts to the national grid and will be located in 
KwaZulu-Natal and Coega (site of Rio Tinto's proposed 725,000 ton 
aluminum plant) in the Eastern Cape.  DME estimated the cost of the 
two plants at $750 million, of which $120 million would be foreign 
direct investment.   The AES-Khanya project represents the first IPP 
involved in a significant greenfield project.  The consortium is led 
by U.S.-based AES and incorporates three local black economic 
empowerment partners. 
 
-------------------------------------- 
Gas Turbines the Way to Go in a Crisis 
-------------------------------------- 
 
¶17. (SBU) The Managing Director of Eskom's Enterprises Division said 
that gas turbines are the only way to beat power cuts faster.  If 
this option were not taken, frequent power cuts would continue for 
many years until new base load plants were completed from 2015.  He 
said that a gas turbine plant was quick to build and had a 
relatively low capital cost but that fuel would be expensive and 
would require millions of liters of diesel.  State power supplier 
Eskom has already completed two 500-megawatt peak-demand gas 
turbines on the west and south coast, respectively.  These plants 
were completed in 18 months and designed for a load factor of 6 
percent but were now running at 50 percent to meet regular demand. 
A further two turbine plants with a combined 1,000 megawatts are 
being built, but would only be completed next year after Eskom had 
to wait six months for the decision on the environmental impact 
study.  Eskom is considering converting these plants to closed 
cycle, which would make them more fuel efficient and produce more 
power. 
 
---------------------------- 
Power Hike of 14.2 percent for 2008 
---------------------------- 
 
¶18. (SBU) South Africa produces the lowest cost electricity in the 
world and has used this advantage to attract heavy energy users, 
such as metal smelters, refiners and fabricators, to set up shop in 
Qsuch as metal smelters, refiners and fabricators, to set up shop in 
the country.  The developing energy generation shortfall has 
resulted in scheduled and unscheduled electricity cuts that have 
already caused production losses to large and small businesses 
amounting to hundreds of millions of dollars.  Eskom has budgeted 
some $50 billion over the next five years and expects to spend $150 
billion by 2025 to double its generating capacity to 80 gigawatts. 
 
 
¶19. (SBU) Financing is likely to come from local and international 
money markets, from the SAG as owner, and from Eskom's own cash 
flows.  Eskom maintained that the current tariffs were significantly 
less than the 5.5 US cents it would cost to build 1 kilowatt-hour 
(kWh) of new capacity and that its cash flow was insufficient to 
fund the expansions.  It approached the National Energy Regulator 
(NERSA) for approval to hike rates by 18.7 percent in 2008, 17 
percent in 2009 and 11 percent in 2010.  The Regulator agreed to 
allow Eskom to increase tariffs to customers, excluding 
 
PRETORIA 00000217  005 OF 005 
 
 
municipalities, but by 14.2 percent (up to 3.5 US cents per 
kilowatt-hour) in 2008.   The 184 municipalities that distribute 
electricity are also set to raise tariffs by 12 percent from 
mid-2008. 
 
¶20. (SBU) Business has not taken the increases lightly and states 
that these are likely to worsen the already high inflation rate of 
8.6 percent.  They believe that more creative ways can be found to 
finance Eskom's needs that do not rely so heavily on tariff rises. 
The Technical Advisor to the Chamber of Mines said the hike would 
cause increases in working costs of at least 1.4 percent at gold 
mines, more than 1.4 percent at platinum mines, and 1.1 percent at 
collieries. However, he said that the mining industry was not 
surprised at the hike, especially due to the increase in the cost of 
coal.  NERSA calculated that the hike would add 0.5 percent to 
annual inflation.  While they took note of concerns that the hike 
would hurt the economy, particularly the poor, they believe that the 
long-term benefits far outweighed the short-term fears and that 
there had to be a trade-off between industry sustainability and 
other socioeconomic goals.  NERSA's Chief Executive said the 
increase would encourage more independent power producers to enter 
the local market. 
 
------ 
MINING 
------ 
 
-------------------------------------------- 
Mining Boosts South Africa's Export Revenues 
-------------------------------------------- 
 
¶21. (SBU) Record prices have been received for nearly all the 
commodities produced by South African mines during 2007 and these 
have carried over into 2008.  Critical commodities breached key 
psychological barriers and revenues for platinum, rhodium, palladium 
and gold are expected to earn $26 billion in 2008 compared with $16 
billion in 2006.  In the year to February 2007, the mining sector 
tax revenue exceeded the original estimate by nearly $4 billion. 
The Chief Economist of the Efficiency Group pointed out that 
traditionally 1 percent of state revenue came from the mining 
sector, but this is likely to increase to 3 percent in 2007. 
 
 
¶22. (SBU) Given adequate power and a continuation of the global 
commodities boom, South Africa's mining industry seems set to 
increase its foreign exchange earnings from both current operations 
and a number of new mining projects due to start or reach full 
production over the next few years.  The major supply expansion 
projects are in the hands of the private sector while the 
concomitant infrastructure expansions are state-owned and subject to 
government and environmental approvals, all of which tend to delay 
projects and increase costs. 
 
¶23. (SBU) Most of South Africa's mineral exports have experienced 
dramatic price increases.  Export steam coal hit $100 per ton in 
November and has since touched $130 per ton on the spot market. 
This is seven times the price paid for domestic coal, admittedly of 
inferior quality for power generation.  Gold crossed $900 per ounce 
and is forecast to hit $1,000 per ounce in early 2008.  Of the PGMs, 
platinum breached $1,700 per ounce, rhodium $7,000 per ounce and the 
Qplatinum breached $1,700 per ounce, rhodium $7,000 per ounce and the 
demand and prices for palladium and ruthenium increased 
substantially. 
 
¶24. (SBU) Uranium prices increased by a factor of ten to some $200 
per pound in mid 2007 but have since come back to about $60, which 
is still well above the $20 per pound of a few years ago.  Prices 
for iron ore and steel and for base metals such as copper, nickel, 
cobalt, lead, and zinc have doubled and tripled over the past two 
years and other commodities are at or near record levels.  Chinese 
demand continues to be the driving factor, while worries about the 
United States economy and the environment raise uncertainty, which 
is good for gold and platinum.  South African mining companies have 
benefited from higher commodity prices but are struggling to control 
higher costs and increase production. 
 
BOST