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TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 6, May 2008 
 
PRETORIA 00001387  001.2 OF 006 
 
 
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 
-------- 
 
--------------------------------------- 
NERSA Approves Limited Power Price Hike 
--------------------------------------- 
 
¶2. (SBU) The National Energy Regulator of SA (NERSA) granted Eskom 
an additional 13.3% average increase in electricity tariffs in 
addition to the 14.2% already approved in December 2007.  NERSA 
chairman Collin Matjila said NERSA decided to allow Eskom to recover 
additional primary energy costs of $353 million through its 
electricity tariff.  The increase is well below the 53% (real) or 
60% (nominal) increase that Eskom had asked for.  Two weeks ago 
NERSA hearings showed households would face a 76% increase in their 
municipal bills, and many industrial and commercial customers would 
be ruined, if the full 53% was granted.  Municipalities had also 
expressed concern that the high prices would cause payment levels to 
drop and cases of illegal connections and tampering to escalate. 
However, NERSA's decision to not approve a higher rate could cause 
international credit rating agencies to downgrade Eskom's credit 
rating, increasing the future cost of Eskom's massive capital 
expenditure program estimated to be more than $40 billion over the 
next five years.  Another key factor in this decision will be 
whether the SAG decides to increase or bring forward its capital 
support for Eskom. 
 
---------------------------------------- 
Embassy's Visit to DRC-Zambia Copperbelt 
---------------------------------------- 
 
¶3. (SBU) Minerals/Energy Officer and Specialist completed an 
extensive two week mission May 12-23 to assess developments in the 
DRC-Zambia copperbelt, visiting six mines in DRC and four mines in 
Zambia, some of which are new mega-projects under development.  A 
number of American, Canadian, and Australian companies have made 
substantial investments to bring extensive copper reserves into 
production, despite challenges associated with government 
intervention, logistics, power, and skills development.  DRC and 
Zambia are competing to see which government can interfere more, 
with Zambia's new onerous tax regime slightly trumping the 
uncertainty associated with the DRC mining license review.  These 
A-list companies are committed to social development, but Chinese 
and Indian investors are much less committed to social development 
Qand Indian investors are much less committed to social development 
and safety standards. 
 
------ 
MINING 
------ 
 
--------------------------- 
Old SA Gold Mines Never Die 
--------------------------- 
 
¶4. (SBU) The Central Witswatersrand Rand, on which the city of 
Johannesburg was established, once hosted many of the world's 
biggest and richest gold mines.  These included well-known names 
such as City Deep, Village Main, Robinson Deep, Crown Mines and 
Consolidated Main Reef (CMR).  All have closed, but they still have 
a visible presence denoted by old shaft head-gears and waste dumps 
that characterized Johannesburg in the past, but are rapidly giving 
way to city expansion and dump reworking.  Economic factors such as 
 
PRETORIA 00001387  002.2 OF 006 
 
 
depth, water, gold price, and old technology were responsible for 
closure of the mines, rather than their running out of gold ore. 
Most of the mines produced from above 2,500 meter depth, which is 
relatively shallow compared to mines on the West Rand that are 
producing from depths approaching 4,000 meters.  The new Central 
Rand Gold Company (CRG) was established to prospect the area between 
City Deep in the east to CMR in the west, initially in search of 
unmined and accessible close-to-surface ore that was left behind by 
the old miners. 
 
¶5. (SBU) CRG executives stated at the company's annual general 
meeting that exploration results indicated that the "mine" could 
comfortably produce 100,000 ounces of gold per month from ore left 
in old mine workings.   The company's updated work program, 
environmental management, and social and labor plans have been 
submitted to the Department of Minerals and Energy, along with its 
application for mining rights, and the new order mining right is 
expected to be granted by July or August.  CRG CEO Greg James said 
the company had completed its metallurgical feasibility study, its 
base-line mine design, as well as the mining plant.  He said that 
once the required licenses were granted, CRG expected to start trial 
mining by October.  The plant is capable of processing 12,000 tons 
of ore per month and full-scale gold production is planned for the 
first quarter of 2009.  Gold production targets are: 100,000 ounces 
in 2009, 250,000 ounces by 2010, and one-million ounces by 2012. 
 
------ 
ENERGY 
------ 
 
----------------------------------- 
Costs May Delay Power from Botswana 
----------------------------------- 
 
¶6. (SBU) Plans by Canadian company CIC Energy to build a new 
coal-based energy complex in Botswana have already been delayed by a 
year and further delays are pending.  Any further delay in the power 
project could mean an extension of South Africa's power problems. 
The Mmamabula power station was expected to come on stream from 
2013, with full output in 2014.  The first phase of the Mmamabula 
Complex was to consist of a 2,500 megawatt power station fed by a 
ten million-ton-per-year coal mine.  Cost escalation, increased 
project scale, and tightness in the market for power generating 
equipment has meant the coal-fired facility can not be completed as 
planned. 
 
¶7. (SBU) Moody's rating agency said the Mmamabula energy project was 
in danger of being scrapped or down-sized after costs soared to 
almost triple the initial estimate of $6bn to $16 billion.  CIC's 
COO reported that the principal electricity off-takers, South 
Africa's utility Eskom, which plans to take 75% of the power 
generated, and the Botswana Power Corporation, were approached to 
cover the additional cost and risk.  They have not come to an 
agreement as yet and this could present problems when seeking 
finance for the project. 
 
---------------------------------------- 
Mining Code Facilitates Coking Coal Mine 
---------------------------------------- 
 
¶8. (SBU) South Africa is well endowed with steam coal, but has 
limited quantities of coking coal, which is essential in the 
Qlimited quantities of coking coal, which is essential in the 
steel-making process.  Some coking coal is produced in the northern 
part of the country -- about one-fifth of what South Africa's steel 
works require -- but most is imported from Australia at a cost of 
some $700 million per year.  All types of coals have escalated in 
price over the past year, but steel makers have seen the price of 
hard coking coal triple to $300 per ton.  Significant deposits of 
coking coal have been discovered by Rio Tinto and a few junior 
companies in the under-explored Soutpansberg coalfield in Limpopo 
Province.  If these deposits prove viable, South Africa could be 
transformed from a net importer to a net exporter of coking coal and 
save some $700 million in foreign exchange, reduce the cost of coal 
to current importers such as ArcelorMittal, and create needed 
employment, social services and infrastructure in the region. 
 
 
PRETORIA 00001387  003.2 OF 006 
 
 
¶9. (SBU) Previous lack of rail infrastructure in the northern 
province meant that it was cheaper to import coal, but the 
Soutpansberg coalfield is now served by Transnet rail which links 
with Richards Bay Coal Terminal via the Vanderbijlpark steelworks, 
with an optional link to the Maputo port in Mozambique.  One of the 
new coal juniors, Coal of Africa (CoAL), is reported to have two 
projects under way in the Soutpansberg that will produce a total of 
6.65 million tons per year of hard coking coal.  Global steel giant 
ArcelorMittal is South Africa's biggest steel producer and has 
entered into an off-take agreement with CoAL, which will secure a 
minimum 2.5 million tons per annum of coal for its South African 
operations, with the option to increase this to 5 million tons in 
the future.  ArcelorMittal also concluded a $130 million deal to 
acquire 17.8% of CoAL, guaranteeing it a secure supply and some 
influence on CoAL's Board.  The agreement will take effect from 
commencement of mining operations at both mines, which is expected 
by the end of 2009, with full production by 2011.  CoAL Managing 
Director Simon Farrell said the company was drawn to South Africa by 
the "use it or lose it" mineral rights system, which opened 
opportunities for junior mining companies to get projects previously 
sat on by the local majors. 
 
--------------------------- 
New Cape Gas Well Discovery 
--------------------------- 
 
¶10. (SBU) State-owned PetroSA has announced the discovery of a new 
gas well off the southern Cape coast.  The well is 95 kilometers 
south of Mossel Bay and was found through PetroSA's $625-million 
"Project Jabulani" initiative, which is focused on drilling around 
existing gas and oil fields in the area.  Upstream New Ventures 
company's Vice President Everton September said the successful well 
was started in March about 1.7 kilometers southwest of the known 
limits of the E-M producing field.  It was drilled to a total depth 
of 2,856 meters.  The gas-yielding formation is 28.4 meters thick 
and represents a new previously untapped deposit of natural gas. 
September said that the drilling program would shift to the Oryx 
field to test for oil near the existing producing wells in that 
field. 
 
--------------- 
PRECIOUS METALS 
--------------- 
 
--------------------------------- 
SA Platinum May Have a Competitor 
--------------------------------- 
 
¶11. (SBU) Mitsui Mining and Smelting Company official said the 
company plans to start commercial production of its new, 
less-costly, silver auto-catalyst that they believe will replace 
expensive platinum in 2011/12.  The use of silver would enable the 
company to cut metal costs by more than 90%, which was the primary 
aim of the five-year-old project.  Senior Mitsui Sales Department 
official Kentaro Kato said that after testing several metals, silver 
showed the most promise, was much cheaper, and had a comparable 
ability (to platinum) to remove sulfur particulate emissions from 
diesel exhausts.  Kato said the company planned to begin commercial 
production for application in construction machinery diesel engines 
Qproduction for application in construction machinery diesel engines 
and other industrial equipment to meet stricter emission standards 
planned for 2012.  The new technology will be used to manufacture 
diesel particulate filters (DPFs).  He could not say how much silver 
would be needed for each catalyst as this depended on the particular 
engine characteristics. 
 
¶12. (SBU) South Africa produces more than 80% of the world's 
platinum.  Development of the new silver-based catalyst could have 
wide implications for the platinum mining industry and the auto 
industry, which is struggling under cost pressures from higher metal 
prices for platinum, steel and aluminum.  The major industrial use 
of platinum is in catalysts, particularly for diesel vehicles. 
Platinum's much cheaper sister metal palladium is also used to 
filter out carbon monoxide and particulate emissions, and is 
particularly effective as a catalyst for gasoline engines.  The 
world's top platinum refiner and distributor Johnson Matthey said in 
a mid-May report that the metal could spike at a record high of 
 
PRETORIA 00001387  004.2 OF 006 
 
 
$2,500 an ounce this year.  Platinum has already jumped 50% from the 
beginning of the year and hit a record high $2,290 per ounce on 
March 4.  Silver is currently trading at around $18-19 per ounce. 
Silver, copper and nickel all have catalytic properties but because 
of their short working lives require frequent replacement; platinum 
group metals are never used up and are recyclable. 
 
 
------------------------------------------- 
Refrigeration Key to Future Platinum Supply 
------------------------------------------- 
 
¶13. (SBU) Witwatersrand gold mines require refrigeration at depths 
below 2,500 meters.  However, platinum mines in the Bushveld 
Complex, which has a much higher thermal gradient, need 
refrigeration below 1,000 meters.  As platinum mines get deeper they 
need to cool intake air to maintain reasonable working conditions. 
Without refrigeration, working conditions become too hot for miners 
to maintain concentration over a full shift and there is the 
attendant risk of death from heatstroke.  Refrigeration will require 
a big increase in power consumption (and costs), which may not be 
available in the short to medium-term as power utility Eskom battles 
to meet burgeoning demand.  As an example of the amount of power 
needed, Northam Platinum, which is already deep enough to require 
intake air refrigeration, uses around 40% of its power allocation 
just to keep the cooling systems running. 
 
¶14. (SBU) South Africa supplies some 80% of the world's platinum, 
mined mostly above 1,000 meters.  Nevertheless, the Anglo Platinum 
(Angloplats) and Impala Platinum (Implats), world's two largest 
producers, are both approaching mining depths where refrigeration 
will be vital to maintain safe working conditions and productivity. 
If power to the mines remains at 95% of normal levels for the 
foreseeable future, both Angloplats and Implats may be unable to run 
refrigeration plants on grid power and will require some form of 
additional power to mine the deeper levels.  This would have a 
serious impact on production costs and platinum prices.  Current 
platinum prices, if maintained, could probably cover these costs. 
On the brighter side, platinum is not lost in usage and the 
recycling of catalytic converters is likely to supply increasing 
quantities of platinum group metals in the future. 
 
-------- 
DIAMONDS 
-------- 
 
-------------------------------------- 
De Beers Denies Breaching Export Rules 
-------------------------------------- 
 
¶15. (SBU) Diamond giant De Beers has again rejected repeated 
allegations by the SAG that it irregularly exported large quantities 
of diamonds to London during the 1990s, prior to the 1994 elections 
that brought the ANC-lead government to power.  Reuters reported 
that the SA Parliament had decided to form a new task team to 
investigate De Beers' records, despite claims by De Beers and a 
senior South African government official that the dispute was 
settled last year.  The SAG alleged that an amount of up to $125 
million in outstanding taxes might arise should De Beers' records 
indicate a breach.  A De Beers spokesman said that when the 
Qindicate a breach.  A De Beers spokesman said that when the 
allegations were first raised in 2005, its Managing Director at the 
time had strongly denied the insinuation that the company had 
exported diamonds unlawfully; had improperly obtained an exemption 
from export duties (15%); had exported 19 million carats of diamonds 
in 1994; and owed the State billions in taxes.  The De Beers 
spokesman said the company's position remained the same and that De 
Beers always complied with the regulations of the 1986 Diamond Act, 
helped maintain a globally competitive South African diamond-cutting 
industry, and continued to supply both clients and the secondary 
market. 
 
------------------------- 
AFRICAN MINING and ENERGY 
------------------------- 
 
------------------------------ 
 
PRETORIA 00001387  005.2 OF 006 
 
 
China's Engagement in Zimbabwe 
------------------------------ 
 
¶16. (SBU) Chinese firms have made few investments in Zimbabwe, 
despite the publicity surrounding the signing of numerous Memoranda 
of Understanding.  State-owned China Aerotechnology Import and 
Export Corporation (CATIC) entered into an investment understanding 
with the Zimbabwe Electricity Supply Authority (ZESA) valued at 
US$400 million for the refurbishment of power plants in 2005, but 
never put any funds in the project.  Chinese construction companies 
entered the Zimbabwe market in the 1980s with the building of the 
National Sports Stadium in Harare by the Gansu Province Construction 
Company, but financing shortfalls on the part of the GOZ have 
derailed subsequent construction projects. 
 
¶17. (SBU) Chinese International Water and Electrical (CWE) was 
awarded a tender in 2007 to construct the Gwayi-Shangani dam and lay 
a 32-kilometer pipeline linking the Mtshabezi and Mzingwane dams in 
drought-prone Matabeleland province.  Construction came to a halt 
when the GOZ failed to meet the "cash-upfront" demand from the 
Chinese company.  The GOZ also failed to raise funds to purchase 
300,000 tons of cement required for the project.  The Jiang Su 
Province Construction Company also stopped refurbishment work on the 
National Sports Stadium due to non-payment for work done and lack of 
cement.  The Zimbabwean Chamber of Mines stated that although the 
Chinese have explored platinum deposits in Zimbabwe, they have not 
developed any mines.  On the contrary, they appear to have on-sold 
some claims obtained in barter deals with the GOZ.  Similarly, the 
press reported in 2007 that Sino-Steel had bought a 67% stake in 
chrome manufacturer Zimasco.  Price and payment terms were not 
disclosed. 
 
----------------------------------------- 
DRC Restricts Unprocessed Mineral Exports 
----------------------------------------- 
 
¶18. (SBU) The DRC's mineral-rich Katanga Province has threatened to 
extend restrictions on mineral exports to include a ban on copper 
concentrates if mining companies did not move to increase local 
processing.  Katanga Governor Moise Katumbi said only companies that 
had already begun to build smelters would be allowed to restart 
exports, after being inspected by a team of engineers.  He had 
previously halted exports of cobalt concentrate in May saying mining 
companies were flouting a year-old ban on the export of ore.  Mines 
Minister Bartelemy Mumba Gama said the team would also be checking 
on the progress of construction of copper processing plants and that 
copper concentrate exports might be stopped if mining companies had 
not begun to build smelters.  DRC closed facilities belonging to 
Congo Dongfang International Mining, a subsidiary of China's 
Zhejiang Huayou Cobalt Co., at the end of May, accusing it of 
breaking the ban on ore exports. 
 
--------------------------------------- 
Zambian Power Plant Study by World Bank 
--------------------------------------- 
 
¶19. (SBU) World Bank official Javier Calvio said the bank had 
launched a feasibility study for the construction of a 700-megawatt 
Qlaunched a feasibility study for the construction of a 700-megawatt 
hydro-electricity generation plant in Zambia, which would ease power 
shortages across southern Africa.  The project is to be known as the 
Kafue Gorge Lower Hydroelectric Project and will be the largest in 
Africa to be financed under a public-private sector arrangement. 
The study will cost $6 million and be completed during 2008.  If 
viable, physical construction of the power station should start in 
the next three years, cost $1 billion and be financed by the Zambian 
Government, the International Finance Corp (IFC), the Africa 
Development Bank and the Development Bank of South Africa.  Most 
countries in southern Africa, including Zambia and South Africa, 
have experienced power shortages over the past year that has led to 
electricity rationing and blackouts.  Zambia's electricity deficit 
is some 400 megawatts and the new station will fill the gap and 
allow for exports to the region and South Africa.  The Kafue Gorge 
is located in central Zambia and the power generated would be fed 
into the Southern Africa Power Pool grid that serves more than a 
dozen countries in the region. 
 
 
PRETORIA 00001387  006.2 OF 006 
 
 
TEITELBAUM