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TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 4, 1-15 March, 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 
-------- 
 
--------------------------- 
DRC Mineral Contract Review 
--------------------------- 
 
¶1. (SBU) Mining is again booming in the DRC, although the 
government's mining contract review has created some uncertainty. 
The DRC's once mighty mining sector, with a treasure trove of 
largely unexploited concessions, saw its output of copper, cobalt 
and diamonds decrease and its infrastructure crumble during years of 
conflict, corruption and neglect.  The old Congo produced around 
500,000 tons of copper per year in the 1980s, but just 17,000 tons 
in 2005.  Since the confirmation of Joseph Kabila as President, some 
stability has returned to the DRC and mining is again booming.  The 
huge province of Katanga has seen large investments from 
international mining companies such as Freeport McMoran, De Beers, 
BHP Billiton, and from a large number of medium and junior 
exploration and mining companies such as First Quantum (Australian) 
and Metorex Mining (South African).  Many mineral contracts were 
issued during the years of turmoil, which the Kabila government 
considers to be one-sided in the favor of companies.  The government 
therefore set up a Review Panel in 2007 to re-evaluate (and 
renegotiate) all mineral contracts to ensure that the DRC receives a 
larger slice of the benefits from its mineral resources. 
 
¶2. (SBU) The DRC government released its Mining Contract Review 
Report in mid-March.  The review panel recommended steps to overhaul 
the country's minerals sector including renegotiating several major 
mining contracts and cancelling others.  The report stated that the 
government intended to ensure efficient management and adequate 
control of the mining sector so that Congolese mines benefited the 
Congolese nation.  The report recommends: 
-- renegotiation of the contract between state mining 
   company Gecamines and Freeport-McMoran for the 
   development of the Tenke Fungurume project 
-- renegotiation of contracts between state diamond 
   miner MIBA and BHP-Billiton and De Beers 
-- increasing state mining company OKIMO's stake in the 
   Kilo Gold joint venture with AngloGold Ashanti from 
   13.8 percent to 45 percent 
 
 
-- increasing the annual fee paid to OKIMO by 
   AngloGold 
-- cancelling contracts awarded to some smaller 
   companies. 
Q   companies. 
No mention was made as to how or who would pay for the increased 
stakes for state and local companies. 
 
---- 
GOLD 
---- 
 
---------------------------------- 
Re-Opening Central Rand Gold Mines 
---------------------------------- 
 
¶3. (SBU) Central Rand Gold (CRG) was formed to mine gold ore and 
reefs left behind in SA's central rand gold district where mining 
ceased in the 1970's.  CEO Greg James recently announced an increase 
 
PRETORIA 00000724  002 OF 006 
 
 
of 1.76 million ounces in the company's gold resources, bringing the 
total resource to 35.5 million ounces.  The company has identified 
three probable targets for shallow mining of the Kimberley Reef 
group and the Main Reef group at their property west of 
Johannesburg.  CRG plans to begin production at a rate of 100,000 
ounces per annum by the end of 2009, 250,000 ounces in 2010, and 1 
million ounces by 2012.  CRG expects to receive its mining license 
in August, clearing the way to begin mining over a 40-kilometer 
deposit strike length. 
 
¶4. (SBU) The land CRG has applied for was mined by a number of 
companies for decades leading up to the 1970s. Those companies 
targeted the high-grade Main Reef, whereas CRG plans to mine the 
lower grade Kimberley and Bird Reefs, which have become economic at 
the increased gold price.  Waste dumps that previously covered 
shallower parts of the reefs have largely been retreated, opening 
the way for renewed mining operations.  CRG has also been approached 
by groups interested in potential uranium byproducts, but James said 
talks have been put on hold so that the company can focus on 
bringing the project to fruition and on completing legislated social 
and labor plans and the environmental impact assessment (EIA).  Five 
existing shafts have been re-opened to allow for sampling between 
the 130 and 300-meter levels below the surface. 
 
------------ 
POWER CRUNCH 
------------ 
 
--------------------------------------- 
BHP-Billiton to Cut Aluminum Production 
--------------------------------------- 
 
¶5. (SBU) Aluminum smelting is the most energy intensive of all 
mineral processing operations.  About 1MW of electricity is needed 
to produce 500 tons of aluminum metal.  BHP-Billiton's three plants, 
two in KwaZulu/Natal Province and one near Maputo in Mozambique, 
produce some 1.2 million tons of aluminum metal per year and require 
a total of about 2,400MW of power.  This is equivalent to the power 
needed for the rest of the KwaZulu/Natal Province.  Eskom is 
searching to save every megawatt it can and the "buy-back" of power 
from aluminum smelters is high on its list of priorities.  Aluminum 
smelters also require a virtually uninterrupted supply of power and 
any cut lasting more than four hours has the potential to cause the 
metal to freeze in the smelter pots, which would cause massive and 
costly damage to the plant.  (Comment. BHP Billiton's spokesperson 
confirmed to media publication Mining Weekly Online that the company 
has taken a corporate decision to phase out its business links with 
Standard Bank, after the Standard Bank's Chairman suggested at a 
Business Leadership meeting with government that BHP-B shut down its 
power-heavy Richards Bay Hillside aluminum smelter because it added 
little value to the economy.  End Comment.). 
 
¶6. (SBU) Eskom's announced 10 percent power cut to BHP-B's aluminum 
smelters is insufficient to sustain full production.  The company 
has thus decided to close 120,000 tons of output, which will allow 
the remaining facilities to operate at full power.  This will allow 
Qthe remaining facilities to operate at full power.  This will allow 
Eskom to recover 240MW of power, but is likely to cause BHP-B and SA 
to lose nearly $340 million in annual revenues and foreign exchange 
respectively, place an estimated 800 jobs in jeopardy, damage SA's 
reputation as an investment destination, and postpone Rio 
Tinto-Alcan's decision to go ahead with a new $2.7 billion 
720,000-ton aluminum smelter at Coega, at least until Eskom can 
guarantee an adequate and reliable power supply.  Rio Tinto, the 
SAG, and Eskom are currently reviewing the terms of the Coega 
smelter project in order to align its timing with the availability 
of future generation capacity.  Rio Tinto-Alcan has said that it 
would work with the SAG to minimize the impact of the potential 
rescheduling on regional economic development. 
 
----------- 
ENVIRONMENT 
----------- 
 
------------------------------------------ 
Fertilizer Company Gets Credit for Carbons 
------------------------------------------ 
 
PRETORIA 00000724  003 OF 006 
 
 
 
¶7. (SBU) Diversified chemical and fertilizer company Omnia announced 
on March 17 its 15-million Euro agreement with the International 
Finance Corporation (IFC) for the purchase of up to one million 
carbon credits from Omnia over the next five years.  The Omnia Clean 
Development Mechanism (CDM) project Envinox could generate 420,000 
Certified Emission Reduction (CER) credits per year from the nitrous 
oxide destruction facility installed at their nitric acid plant at 
Sasolburg (nitrous oxide is a green-house gas).  Omnia has indicated 
that carbon credits generated by the plant could add about $7.5 
million per year to the company's revenues.  This is the first 
carbon delivery guarantee agreement of its kind in sub-Saharan 
Africa, and only the second in the world, whereby the IFC mitigates 
the country and project risk, making the carbon credits accessible 
to a wider range of international buyers.  According to the IFC 
Southern Africa Region Manager, the IFC has committed to purchase a 
minimum of 50 percent of Omnia's CERs for the next five years and 
guarantees delivery of the credits to buyers under the Kyoto 
Protocol. 
 
--------------------------------- 
Green Light for New Power Station 
--------------------------------- 
 
¶8. (SBU) South Africa's Environmental Affairs and Tourism Minister 
dismissed appeals against construction of Eskom's new 5,400MW 
coal-fired power station Project Bravo, planned for Witbank in 
Mpumalanga Province.  The plant is part of Eskom's plans to boost 
generation capacity to alleviate the country's current serious 
capacity shortfall.  The plant is to be fitted with the most 
advanced air pollution abatement equipment installed in a South 
African power station, including flue-gas desulphurization 
technology to remove 90 percent of the sulfur dioxide (SO2) from the 
emissions.  The Minister also said Bravo should be 
carbon-capture-ready and would have to submit a report detailing 
preferred capture technology options before proceeding with 
construction. 
 
------------------ 
MINING LEGISLATION 
------------------ 
 
------------------------------------------ 
SAG to Review Latest Draft of Royalty Bill 
------------------------------------------ 
 
¶9. (SBU) The first draft of SA's Royalty Bill was issued in 2003, 
following the 2002 approval of the Mineral and Petroleum Resources 
Development Bill (MPRDA), which legislated that all mineral rights 
must revert to the custodianship of the SAG.  The Royalty Bill will 
govern the way mining companies are taxed on their production. 
Initial reaction from industry to the first draft was negative 
because rates were based on gross mineral revenues and were also 
considered to be too high.  Since then, the Department of Finance 
(which is ultimately responsible for the bill), Industry and the 
Department of Minerals and Energy (DME) have been in negotiation and 
a number of revised drafts have been issued for comment.  The third 
and supposedly final draft was released for public comment in 
December 2007.  This draft uses a formula to calculate royalty rates 
payable for each mine.  The mining industry has accepted this 
Qpayable for each mine.  The mining industry has accepted this 
formula in principle, but calculations have shown some unintended 
consequences.  Namely, the bill has not taken into consideration the 
huge increases in commodity prices nor the escalating capital costs 
of new mines and mine expansions, and this has resulted in 
calculated rates being higher than those proposed in the 2003 draft. 
 
 
¶10. (SBU) The mining industry and labor have raised concerns over 
the effect the latest draft would have on production and employment 
in the country's mining sector, which is already struggling with 
reduced and uncertain power supply, rising production costs and a 
shortage of skilled workers.  Minerals and Energy Minister Buyelwa 
Sonjica said that the SAG had taken note of mining industry concerns 
and her department would hold talks with the Department of Finance 
on the issue.  She also said she did not expect the bill to be 
promulgated in its current form.  She said there was a fine line 
 
PRETORIA 00000724  004 OF 006 
 
 
between ensuring that locals derive economic benefit from mining 
without deterring valuable foreign investment. 
------ 
ENERGY 
------ 
 
------------------------------------------ 
Eskom's Massive Price Hike Sparks Reaction 
------------------------------------------ 
 
¶11. (SBU) Power utility Eskom's call for a 53 percent electricity 
tariff increase (on top of the 14.2 percent increase already 
granted) has met with concern by analysts, economists, trade Unions, 
and the ruling ANC Party, all expressing anxiety over the impact on 
inflation and on the economy, industry and South African consumers. 
A leading economist said that the increase would take $4.5 billion 
out of the economy, and equates to a 1.8 percent increase in the 
interest rate, already at 14.5 percent for borrowers. 
 
------------------------------------- 
Westinghouse Included as PBMR Partner 
------------------------------------- 
 
¶12. (SBU) South Africa's advanced nuclear reactor program PBMR 
(Pebble Bed Modular Reactor) has announced that it has finalized a 
new shareholders agreement with U.S. company Westinghouse Electric 
making it a partner in the project.  Westinghouse already held a 15 
percent share in PBMR, but legislation required the implementation 
of a new shareholder agreement, which offered Westinghouse an 
important opportunity to highlight its commitment to South African 
nuclear technology as it competes head-to-head with Areva of France 
for up to 20,000 megawatts of new nuclear power build through 2025. 
The SAG aims to include PBMR as part of its new nuclear build mix. 
Other partners in PBMR include state-owned Eskom and the Industrial 
Development Corporation.  The high-temperature, helium-cooled PBMR 
technology aims to improve safety and efficiency by employing 165MW 
modules and nuclear fuel sealed in tennis ball-sized graphite 
"pebbles". 
 
------------------------------------- 
Sasol Looks at CTL to Cut Oil Imports 
------------------------------------- 
 
¶13. (SBU) The Sasol board announced its commitment to the proposed 
new 80,000 barrel-per-day coal-to-liquids plant project dubbed 
"Mafutha", by deciding to spend $40 million on feasibility studies 
for the project, whose location is yet to be determined.  Sasol CEO 
Pat Davies stated that the plant would be built so as to be 
carbon-capture-ready, with the disposal of the CO2 to be determined 
as part of the feasibility study.  Davies also said that Sasol was 
working with Eskom and the government "to see what else we can bring 
to bear using our technology and our feed-stocks to alleviate South 
Africa's electricity shortage", but stressed that Sasol's primary 
function was to keep the country "wet as far as fuels are 
concerned".  Sasol earlier announced a joint venture with Mozambique 
to construct a $157-million gas compression station at the border to 
facilitate a 20 percent expansion of natural gas delivery.  Sasol 
clarified that the additional gas from Mozambique would be for its 
own needs to reduce reliance on the Eskom grid, and not available 
for other companies' cogeneration projects.  Sasol separately 
Qfor other companies' cogeneration projects.  Sasol separately 
announced a 15 percent increase in operating profits for second half 
2007 due to high oil prices, but offset somewhat by the stronger 
rand in 2007 and losses on an oil hedge.  Sasol also unveiled final 
terms for its $3 billion BEE transaction aimed at addressing skills 
development in science and technology. 
 
--------------------------------------- 
Sasol Confident on China Business Risks 
--------------------------------------- 
 
 
¶14. (SBU) Sasol is the world's leading producer of liquid fuel from 
coal (CTL) and is busy with the second phase of a bankable 
feasibility study for two CTL plants in China.  General Manager for 
International Energy Leon Strauss said Sasol had secured favorable 
participation for itself in the project.  Studies undertaken between 
 
PRETORIA 00000724  005 OF 006 
 
 
2002 and 2005 in Shaanxi Province and the Ningxia Hui region 
indicated that two CTL liquid fuels plants, together with dedicated 
coal mines, were feasible.  Each plant would have a production 
capacity of 84,000 barrels per day.  If the go-ahead is given, the 
plants will likely come on stream around 2017.  However, Sasol CEO 
Pat Davies pointed out that there is a massive demand for skilled 
people in the energy sector, making the completion of projects on 
time and on budget very difficult. 
 
¶15. (SBU) Because of Sasol's concerns about the protection of 
intellectual property rights (IP) in China, the first phase of the 
bankable study put in place economic enablers, including securing 
Sasol's participation in the CTL project.  Strauss declined to say 
what the ownership structure would be, but stressed that Sasol would 
not embark on multi-billion dollar projects in China without a 
sizeable stake of around 50 percent in the projects.  He said Sasol 
only looked at commercial opportunities that gave appropriate reward 
for the risk of taking their IP to China, but he said Sasol was 
confident with both projects.  Strauss said the way was clear for 
Sasol to go into a full-blown feasibility study and the Sasol Board 
had approved this phase in December 2007.  A tender went out in 
January for international contractors to assist in the process and 
the preferred bidder is to be decided in May.  The end of 2009 
should see completion of the feasibility study for the two Chinese 
projects. 
 
----------------------------- 
New Biodiesel Plant for Coega 
----------------------------- 
 
 
¶16. (SBU) Coega is SA's new deep-water port and economic development 
zone (EDZ), which is under construction on the south coast of the 
Eastern Cape Province.  The SAG decided to build the port to boost 
economic development in one of the country's poorest provinces, and 
the EDZ authority has sought to encourage key industries to 
establish operations in the zone.  A new client is Australian-owned 
firm Rainbow Nation Renewable Fuels (RNRF), which has applied for a 
license to produce 288 million liters of biodiesel a year from a 
$2-billion plant being built at Coega.  The plant will be the 
biggest in Africa, using one million tons of soybeans to produce 
250,000 tons of soybean oil and 800,000 tons of animal feed.  A 
portion of the oil will be used to produce biodiesel.  RNRF MD Geoff 
Mordt said that the plant would be commissioned in late 2009 and the 
company had secured a 48MW power supply. 
 
¶17. (SBU) A major concern for all biofuel projects is the likely 
impact on local food supply and prices.  Initially, the bulk of 
RNRF's soybean feedstock will be imported.  South Africa's current 
production is about 300,000 tons per year and Mordt said that the 
plant would support local commercial and small-scale farmers to 
increase the country's production from currently unused land.  In 
this way, South Africa could source nearly 100 percent of the 
required soybean feedstock within five years.  RNRF must comply with 
BEE Charter requirements by selling a stake in the company to 
QBEE Charter requirements by selling a stake in the company to 
black-owned companies.  Mordt said that the operation would create 
350 new direct permanent jobs and 725 indirect jobs. 
 
--------------- 
AFRICA IN BRIEF 
--------------- 
 
----------------------------------- 
Electricity Expansion in Mozambique 
----------------------------------- 
 
¶18. (SBU) For years Mozambique has relied on its Cahora Bassa 
hydro-electric plant on the Zambezi River and the South African 
transmission network for its power supply.  Its growing economy and 
the regional demand growth of 1,000MW per annum have necessitated 
planning for additional power.  The Mozambican Finance Minister 
stated in mid-2007 that investments would be made to expand the 
country's electricity sector to connect more than one million people 
to the national grid.  New power projects include: 
-- 750MW gas-fired station in Inhambane Province 
-- 2,000MW coal-fired station on the Moatize coalfield 
 
PRETORIA 00000724  006 OF 006 
 
 
   in Tete Province 
-- 1,200MW hydro-electric plant (Mpenda Nkua) in 
   Tete Province at an estimated cost of $2.3 billion 
-- $383 million expansion of the Cahora Bassa power 
    plant from 2,000MW to 14,000MW. 
Expansions to the power sector reflect the government's support for 
industrialization and its desire to attract foreign direct 
investment though the availability of cheap power, as it did to 
attract BHP-B's Mozal Aluminum Smelter.  SA offers a ready market 
for this power. 
 
------------------------------------- 
Botswana's World-Class Diamond Centre 
------------------------------------- 
 
¶19. (SBU) The world's largest and most advanced diamond sorting 
facility has been opened in Gaborone.  The Diamond Trading Company 
Botswana (DTCB), will sort and value all the rough diamonds produced 
by Debswana, and for the first time conduct local sales and 
marketing activities for rough diamonds - DTCB and Debswana are 
50/50 partnerships jointly owned by De Beers and the Government of 
Botswana.  De Beers said the initiative is expected to create a 
sustainable downstream industry, with approximately 3,000 new jobs 
in the cutting, polishing, sales, and marketing areas.  DTC 
International will aggregate the majority of De Beers' global 
production in Botswana by 2009 instead of London. 
 
------------------------- 
Eskom Spurns Namibian Gas 
------------------------- 
 
¶20. (SBU) The medium-sized Kudu gas-field owned by NamPower and 
Tullow Oil (Irish) and operated by Tullow lies 170 kilometers off 
the Namibian coast.  It was discovered by Chevron in 1973 and later 
jointly developed by Shell and Chevron-Texaco after numerous delays. 
 Both companies decided to withdraw in 2003 and sold their Kudu 
stakes to Tullow Oil in 2004.  The project has since been looking 
for a market for its gas.  One option considered was to build a 
400MW to 800MW gas turbine power station at Oranjemund, the 
diamond-mining town at the mouth of the Orange River, and sell 400MW 
of power to Eskom.  Eskom has so far rejected any deal apparently 
because of price and foreign currency exposure.  Until an agreement 
can be struck, Tullow intends to continue to investigate other 
options for the gas, including producing compressed and liquefied 
natural gas, and building a smaller power station to meet Namibia's 
needs. 
 
----------------------------- 
Zambia Increases Mining Taxes 
----------------------------- 
 
¶21. (SBU) Zambia's parliament approved an amendment to the Mines and 
Minerals Act on March 26 that will increase taxes and abolish 
existing agreements between the government and mining companies, 
according to the Zambian Chamber of Mines.  The bill raises the 
effective tax rate on mining from 31 percent to 47 percent and will 
be signed into law by the President on April 1.  The new 
dispensation will increase royalties on sales five-fold to 3 
percent.  Zambia is Africa's biggest copper producer and expects to 
earn an additional $450 million this year from the higher mining 
taxes. 
 
BOST