VZCZCXRO8092
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0565/01 0781351
ZNR UUUUU ZZH
R 181351Z MAR 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3846
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHBJ/AMEMBASSY BEIJING 0764
RUEHBY/AMEMBASSY CANBERRA 0633
RUEHLO/AMEMBASSY LONDON 1456
RUEHMO/AMEMBASSY MOSCOW 0762
RUEHFR/AMEMBASSY PARIS 1309
RUEHOT/AMEMBASSY OTTAWA 0594
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 04 PRETORIA 000565 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, EEB/ESC AND CBA 
DOE FOR SPERL AND PERSON 
 
E.O.   12958: N/A 
TAGS: EMIN EPET ENRG EINV EIND ETRD ELAB SF
SUBJECT: Gold's Glitter is Fading in South Africa 
 
REF: 07 Johannesburg 0214 
 
¶1. (SBU) SUMMARY: The South African gold mining industry has not 
been able to fully capitalize on record gold prices during 
2007-2008.  Gold mining was disrupted by a number of events, which 
have cost millions of dollars in lost production and export 
revenues.  First, a power crisis came to a head when gold mines (and 
most of the rest of the mining industry) were shut down for almost a 
week in January 2008 when a number of Eskom's power plants went 
off-line and power output fell to less than 75 percent of capacity. 
Eskom first restricted supply to mines to 90 percent of historical 
demand when power was restored, but has since agreed to increase 
this to 95 percent on a case by case basis because of potential 
impact on mine closures and job and export revenue losses.  Second, 
safety issues caused the Department of Minerals and Energy to close 
some mines for up to a week during fourth quarter 2007 in response 
to a spate of fatal accidents, fueling limited strikes focused on 
safety.  Finally, declining ore grades and rising costs have also 
contributed to declining production in some mines.  China overtook 
South Africa as the world's number one producer in 2007 and is 
likely to retain this position.  South Africa will likely continue 
its decline in production in 2008.  End Summary. 
 
 
¶2.  (U) Energy Officer and Specialist met with the CEO's of South 
Africa's three largest gold mining companies and mining research 
organizations, attended Africa's premier Mining Indaba, and 
descended into one of South Africa's "cutting edge" deep mines early 
in 2008 in order to prepare this cable. 
 
¶3. (SBU) BACKGROUND: The Witwatersrand sedimentary gold basin was 
discovered in South Africa's north-central region in 1886 and has 
proved to be the world's biggest and richest gold deposit, supplying 
almost one-half of the world's gold ever produced.  Initial mining 
was carried out on small scale outcrops around Johannesburg, and 
then mining consolidated and went deeper as easy-to-recover gold 
from the shallow oxide zone was depleted.  Some 70 individual mines 
were listed on the Johannesburg Securities Exchange (JSE) in the 
1970's, but this was reduced to less than 10 by the early 2000's. 
Currently, mining takes place from surface outcrops to 4,200 meters 
below surface and South African gold mines are discounted on 
international stock exchanges because of depth, cost, safety and 
political risk.  Gold accounts for about 1.5 percent of South 
Africa's GDP, 18 percent of total minerals produced, and 20 percent 
of mineral exports (9 percent of merchandised exports). 
 
¶4. (SBU) South Africa has missed out on much of the current 
commodities boom (reftel), partly because of the normal time-lag 
between new demand and gearing up to deliver new supply.  This has 
been exacerbated by uncertainty in the implementation of the SAG's 
new minerals policies and legislation.  Lack of experience and 
capacity within the Department of Minerals and Energy (DME) has 
caused the re-licensing process to take a long time and some 
companies have resorted to the courts to get their permits approved. 
Qcompanies have resorted to the courts to get their permits approved. 
 Uncertainty has inhibited potential investment in new mines and 
mine expansions, particularly in exploration.  By the end of 2006, 
investors seemed to have overcome some of their concerns.  Gold 
mining investment increased rapidly during 2007 and major new 
projects were announced.  This positive development was short-lived 
as the gold mining industry ran into a number of additional 
obstacles during late 2007 and early 2008.  These obstacles include 
a power crunch, safety challenges, and declining ore-bodies in the 
face of rising costs. 
 
-------------------------------- 
Grappling with the Energy Crunch 
-------------------------------- 
 
¶5. (SBU) Major gold mines in South Africa were shut down between 
January 25 and 31 when state power company Eskom announced that it 
could no longer guarantee power for production or the health and 
safety of workers.  The estimated production losses for the gold 
mines exceeded $30 million per day.  Eskom warned that it would take 
four to five years before significant new capacity comes on line to 
balance supply and demand.  Heavy power users agreed to a 10 percent 
power reduction for the foreseeable future to prevent a total system 
 
PRETORIA 00000565  002 OF 004 
 
 
failure, but at a substantial cost to output and employment.  DME 
and Eskom subsequently agreed to lift power supply to 95 percent of 
mine requirements in response to industry warnings that 90 percent 
power supply would lead to shaft closures and lay-offs.  The new 
allotment will be phased in as soon as possible, and Eskom intends 
to monitor the effect on the system.  Eskom has warned consumers 
that system instability and insufficient conservation measures could 
force resumption of load-shedding, applied sparingly since the 
occurrence of substantial power outages in January. 
 
¶6. (SBU) The mining industry is not happy about power rationing and 
continues to harp on negative impact on jobs.  However, biggest 
producers AngloGold Ashanti, Harmony, and DRDGold said they could 
implement efficiency measures to cope with a 90 percent supply, so 
the increase to 95 percent should ensure nearly full production. 
Anglo has stated they planned to reduce power consumption by 15 to 
17 percent over the next few years.  At the 90 percent level, 
Harmony announced that it would have to close some shafts, redeploy 
some 5,000 workers to other operations, and force a similar number 
to take early retirement.  Second biggest South African gold 
producer Gold Fields complained bitterly about the 10 percent power 
cut.  CEO Ian Cockerill said the company intended to close a number 
of less profitable shafts and sections, which would "initially" 
result in some 7,000 retrenchments.  He reasoned that 50 percent of 
the power dedicated to Gold Fields' 3,000 to 4,000-meter deep mines 
was required just to maintain essential services such as pumping, 
ventilation, and cooling, so a 10 percent cut in power was 
equivalent to at least a 20 percent loss of production.  Cockerill 
also asserted that retrenchments could escalate to 20,000 if 
production costs continue to increase by 20 percent per annum.  This 
could affect the livelihood of some 200,000 people, so this 
encouraged the union-backed ANC government to review the level of 
power rationing. 
 
-------------------------------- 
Wrestling with Safety Challenges 
-------------------------------- 
 
¶7. (SBU) Mining companies have applied increasing attention to 
worker safety and fatality and accident rates have shown a general 
decline over past decades, but the 2007 count was the highest in six 
years: 212 deaths up from 199 in 2006.  The tripartite (labor, 
government and industry) Mine Health and Safety Council reported 
that about 56 percent of fatalities and 30 percent of all serious 
injuries occurred in gold mines, most of which qualify as deep-level 
mines.  The South African Mines Reportable Accidents Statistical 
System showed the main causes of fatalities to be rockfalls, 
followed by rockbursts, locomotive accidents, and falling material. 
Many rockfalls relate to seismic events caused by deep mining and 
these made up about 63 percent of all gold-mining fatalities.  The 
Council says it has spent close to $25 million since 1994 in order 
to tackle the problems of rockfalls and seismic events.  A recent 
study on human factors in accidents points to cultural and 
Qstudy on human factors in accidents points to cultural and 
attitudinal criteria as playing a major role in some 72 percent of 
all accidents. 
 
¶8. (SBU) The issue of mine safety was highlighted in the local media 
when Anglo American's new Canadian CEO Cynthia Carroll removed 
senior executives on the basis of their inattention and poor 
performance on health and safety.  The issue was given further focus 
when 3,200 miners were trapped 3,000 meters underground at Harmony's 
Elandsrand gold mine for more than 24 hours on October 2-3, 2007. 
No fatalities or injuries were recorded, but the incident damaged 
the safety reputation of South Africa's gold mining industry and 
commanded a response from all players.  (COMMENT: The only good 
thing about the event was that it forced dozens of illegal miners to 
the surface, where they were promptly arrested.  End Comment.)  The 
National Union of Mineworkers accused the mines of practicing 
"genocide" against workers and staged a one-day strike to protest 
unsafe working conditions.  The DME reacted by closing entire shafts 
and mines after fatal accidents (instead of only the particular 
working area) and has mooted charging managers with criminal 
liability where insufficient safety practices exist.  President 
Mbeki ordered the Minister of Minerals and Energy to conduct safety 
audits on all the country's mines during 2008.  The DME inspectorate 
does not have sufficient capacity for the task and is being assisted 
 
PRETORIA 00000565  003 OF 004 
 
 
by industry. 
 
¶9. (SBU) Mining representatives argue that it is counter-productive 
to close the entire mine after a fatality and that by doing so the 
DME is exceeding the requirements of its own legislation.  Moreover, 
they assert that such closures exacerbate rather than improve safety 
conditions and that deep mines require continuous attention at 
working faces to maintain safe roof conditions and to forestall 
dangerous rockbursts.  However, government remains determined to put 
an end to safety violations where they are found to exist. 
 
¶10. (SBU) Gold mining companies agree that the government's strong 
reaction serves to focus attention on mine safety issues and can 
encourage stakeholders to work together.  They believe, however, 
that the causes of accidents include skills shortages and a 
workforce where as many as 50 percent have no previous mining (or 
industrial) experience.  Depth of mining is not considered a safety 
issue if properly managed.  There is a critical need to increase 
safety training and awareness among managers and workers in order to 
change cultural attitudes toward safety. 
 
--------------------------------------------- -- 
Resisting Declining Ore Grades and Rising Costs 
--------------------------------------------- -- 
 
¶11. (SBU) South Africa has been the world's major gold producer 
since 1905 when it overtook the U.S., reaching a peak output of 
1,000 tons in 1970.  Production declined by another 7.4 percent in 
2007 to 254.7 tons, and estimates predict a further 10 percent 
decline in 2008 due to power shortages.  At the same time, Chinese 
output increased to between 270 and 276 tons in 2007, garnering them 
the rank of world's number one producer, as acknowledged recently by 
the South African Chamber of Mines.  Gold's contribution to the 
economy has declined and the size of its revenues has been overtaken 
by platinum, coal and the ferro-alloy industry (see table below). 
Nevertheless, gold mining remains important as an employer of 
unskilled labor and a generator of foreign exchange.  South Africa 
maintains the potential to add over one million extra ounces (32 
tons) to annual output if planned production from new mines and 
expansion projects comes on line over the next three to five years, 
assuming that costs, safety and electricity disruptions are 
contained, and that the gold price continues its upward march past 
$1,000 per ounce. 
 
¶12. (SBU) Seismic surveys indicate that gold reefs extend nine 
kilometers below the surface in many areas of the 65,000 square 
kilometers gold-bearing Witwatersrand basin.  Major mining houses 
have committed to significant mine expansions in 2006-7, a number 
going deeper than four kilometers.  As mines go deeper, operating 
costs will increase for ore-body access and worker transportation, 
rock hoisting, health and safety, ventilation and cooling, and 
pumping.  Some of these expansions may be delayed or indefinitely 
postponed should power shortages remain in place for an extended 
period.  Regulatory and licensing uncertainty also remains a major 
impediment to investment and production commitments. 
Qimpediment to investment and production commitments. 
 
¶13. (SBU) COMMENT: Gold production is expected to decline further in 
2008 due to challenges associated with power shortages, safety 
issues, and declining ore grades in the face of rising costs.  The 
South African gold industry will remain a significant employer and 
export earner, even if its place in the economy and the minerals 
sector gradually declines.  Government will need to work 
collaboratively with labor and industry in order to lessen the rate 
of decline and take advantage of remaining harder-to-reach 
geological potential.  Otherwise, the South African gold industry 
will continue to lose its glitter.  End Comment. 
 
¶14.  (U) Appended tables below show: 
-- Decline in actual employment of South African gold mines and as a 
percentage of the industry as a whole 
-- Increase in employment on non-gold South African mines, 
particularly since 1995-2000 
-- Decline in actual South African gold production and as a 
percentage of global production 
-- Increase in the value of sales of non-gold commodities compared 
to gold and gold's declining share of total sales 
 
PRETORIA 00000565  004 OF 004 
 
 
 
Employment (1000's) 
             1985  1995  2000  2005  2006  2007  %Change 
All Mines    807   599   418   444   459   500     -38 
Gold Mines   528   380   217   161   160   160     -70 
Non-Gold 
Mines        279   219   201   283   299   340     +22 
%Employed by 
Gold Mines    65    63    52    36    35    32     -51 
 
 
Gold Production (tons) 
SA           673   524   431   295   272   255     -62 
SA as % of 
Global        44    23    17    12    11    10     -77 
 
 
Sales Value (R billions) 
All Mines    27.2  55.1  98.5  143.4 195.5 223.0  +720 
Gold Mines   15.3  23.5  25.2   24.6  37.4  38.2  +150 
Gold as % 
of Sales      56    43    26     17    19    17    -69 
 
BOST