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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 8, July 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 
-------- 
 
--------------------------- 
Moody's Downgrade for Eskom 
--------------------------- 
 
¶2. (SBU) State utility Eskom has had its investment credit rating 
downgraded from A1 to Baa2 by Moody's rating agency.  Moody's also 
lowered Eskom's baseline credit assessment from 8 to 13, 1 being the 
highest.  This will make borrowing money on the capital markets more 
expensive, a cost that will inevitably be passed on to consumers. 
Eskom is in the middle of a $45 billion electricity upgrade and 
expansion program and believes it can raise $20 billion on local and 
global capital markets.  Director General of the Treasury Department 
stated that the department was disappointed by the downgrade and was 
prepared to guarantee Eskom's existing debt and any new debt so as 
to ensure their access to money markets.  Eskom said in a press 
statement that if the current economic climate continued and its 
capital expenditure program remained unchanged, annual tariff 
increases of between 20 - 25% would be needed over next three years. 
 It should be noted that Eskom's downgrading does not affect South 
Africa's credit rating. 
 
¶3. (SBU) Moody's downgrade occurred despite Eskom's generally 
improved situation.  The SAG has advanced the disbursement of its $8 
billion loan from five to three years; the National Energy Regulator 
has approved a tariff increase of 27.5% for 2008 and further 
increases determined by the costs of coal and diesel; and generation 
plants have performed well during the winter months with no 
significant unplanned outages.  Eskom has cited the spike in coal 
and diesel costs over the past year as putting a dent in their 
bottom line for the fiscal year ending March 31, 2008.  Primary 
energy input costs accounted for 46% of running costs and rose by 
$700 million to $2.4 billion.  Eskom has also appointed ex-CEO of 
AngloGold Ashanti Bobby Godsell as its new chairman, and Kumba Iron 
Ore CEO Ras Myburgh has been seconded to Eskom to help manage coal 
supply logistics, which were a major contributor to nationwide load 
shedding earlier this year.  The appointment of the new executives 
is intended to help Eskom restore investor and public confidence. 
Eskom still has problems with coal availability and high prices, and 
also had to temporarily shut down one of the two units at its 
Qalso had to temporarily shut down one of the two units at its 
Koeberg nuclear power station because of technical problems in a 
generator.  Latest developments are that the Koeberg unit is back on 
line, and Eskom is discussing borrowing up to $1 billion a year from 
the World Bank over five years, as it adjusts its funding strategy 
to cope with difficult global markets and ratings downgrades.  These 
loans would be backed by government guarantees and be the largest 
yet extended by the World Bank to South Africa.  The SAG has been 
reluctant in the past to accept World Bank funding. 
 
------ 
MINING 
------ 
 
---------------------------------------- 
Mining Output Up Again in Second Quarter 
---------------------------------------- 
 
¶4. (SBU) Total mining production for the second quarter of 2008 
increased by 7.7% compared with the first quarter.  The increase was 
due to quarterly increases of 8.2% in the production of non-gold 
 
PRETORIA 00001856  002 OF 006 
 
 
minerals and 4.2% in the production of gold.  The production of 
platinum group metals (PGMs) contributed 4.4% and diamonds 
contributed 1.5% to the 7.7% increase.  Nickel was the only 
significant negative contributor (-0.1%) to the quarterly change in 
total mining production.  Total seasonally adjusted value of mineral 
sales at current prices for the three months ended May 2008 reflect 
an increase of 23.8% compared with the previous three months.  This 
increase of 23.8% (R15,272 million) can be attributed to an increase 
of 26.1% (R2,469 million) in the sale of gold and 23.5% (R12,803 
million) in the sale of non-gold minerals.  During the first quarter 
of the year, mining output fell by 22% due to power outages and mine 
closures for safety reasons and strikes. 
 
------ 
ENERGY 
------ 
 
--------------------------------------- 
Next Energy Crisis - Power Distribution 
--------------------------------------- 
 
¶5. (SBU) The majority of South Africa's 187 electricity distributing 
municipalities have failed to maintain and upgrade their power 
distribution networks, preferring to use the electricity revenues to 
cross-subsidize other services and pay ample salaries to managers. 
In fact, the smaller independent municipalities lack financial, 
managerial and technical capacity to do their job efficiently.  With 
the possible exception of major metropolitan centers, the country's 
distribution network is old (30-40 years), out-dated and in a poor 
state of repair.  The SAG has been aware of this situation for more 
than a decade but has been unable to rectify the situation.  This is 
mainly because of constitutional constraints and the unwillingness 
of municipalities and Eskom to voluntarily cede their power 
distribution function, assets, revenues, and staff to the proposed 
six Regional Electricity Distributors or REDS.  In general, the SA 
Constitution grants municipalities the right to distribute 
electricity, and municipalities are not willing to give up their 
right to do so or the revenues generated therefrom. 
 
¶6. (SBU) Government attempts to establish six country-wide REDs that 
would pool technical, financial and management capabilities and 
services, and harmonize electricity tariffs have met resistance from 
many municipalities.  Attempts to woo municipalities to voluntarily 
merge with the proposed REDs have failed mainly because government 
has not satisfactorily addressed municipal (and Eskom's) concerns 
regarding ownership structure of the REDs, compensation for assets 
incorporated in REDs, and the sharing of revenues generated by REDs. 
 The six REDs were meant to be operational by end-June 2007, but 
none exist at present.  Restructuring is extremely complex as it 
cuts across all spheres of government and needs constant 
consultations and persuasion.  Unless there is a constitutional 
amendment to give national government power over electricity 
distribution, municipalities are likely to cling to their right to 
distribute power because it is their largest single source of 
income.  Many municipal finances are in a mess and the lack of 
investment in electricity distribution could worsen and cause the 
Qinvestment in electricity distribution could worsen and cause the 
next power crisis. 
 
--------------------------- 
SAG Promotes Nuclear Energy 
--------------------------- 
 
¶7. (SBU) The SAG has approved a nuclear energy policy that promotes 
nuclear energy as a primary source of power generation.  The cabinet 
statement indicated that the policy would also reduce the country's 
over-reliance on coal, which contributes to SA being a significant 
emitter of greenhouse gases.  The Department of Minerals and Energy 
has been tasked to flesh out the practical details of the policy and 
oversee its implementation.  Adoption of the policy will require the 
recapitalization of the National Nuclear Regulator (NNR) and the 
Nuclear Energy Corporation of SA (NECSA).  NECSA's research and 
development budget will also need to be bolstered. 
 
¶8. (SBU) Three new agencies are proposed under the policy: the 
National Nuclear Security Agency (to integrate the existing nuclear 
safety responsibilities into a single agency); the National Nuclear 
 
PRETORIA 00001856  003 OF 006 
 
 
Architectural Capability (to oversee the development of a national 
supplier network of nuclear equipment and nuclear reactors); and the 
National Radioactive Waste Management Agency (to manage radioactive 
waste).  NECSA has been designated the lead agency in the 
implementation of this policy, while Eskom is the only power company 
allowed to build nuclear energy stations.  According to the 
timelines provided in the policy, SAG hopes to encourage the 
establishment of local manufacturing capacity for nuclear equipment 
and components by 2015.  It has also indicated potential interest in 
the reprocessing of spent fuel to manufacture additional feed for 
reactors. 
 
----------- 
ENVIRONMENT 
----------- 
 
-------------------------------------- 
SA Companies to Disclose GHG Emissions 
-------------------------------------- 
 
¶9. (SBU) Over fifty SA companies are expected to disclose 
information about their carbon emissions, which will be incorporated 
into the world's largest databank of greenhouse gases (GHG) later 
this year.  The exercise known as the Carbon Disclosure Project 
(CDP) was launched in 2007 with an initial target of 40 SA 
companies.  The CDP project entails GHG emissions accounting, 
management, reduction and costing.  Of the 40 companies targeted in 
2007, only 15 provided quantitative data on emissions.  Local CDP 
operators Incite Sustainability and National Business Institute 
observed that many companies now acknowledge that the carbon 
footprint issue affects business.  SA firms in the agriculture 
sector and wine production are already feeling external pressure 
from importers and retailers, who demand to know the size of the 
exporters' carbon footprint.  Targeted corporations include Sasol, 
BHP Billiton and Anglo-American. 
----------------------------------------- 
Eskom to Implement Air Quality Safeguards 
----------------------------------------- 
 
¶10. (SBU) Currently, state power utility Eskom only captures 
particulate emissions in its combustion stacks.  Under pressure to 
also capture gaseous emissions, Eskom is finalizing tenders for a 
$700-million project to include flue gas desulphurization (FGD) 
technology in its Kusile (previously Bravo) power station, currently 
under construction near Witbank in Mpumalanga Province.  This will 
be the first deployment of FGD technology in South Africa to remove 
sulfur from exhaust flue gases.  Eskom CEO Jacob Maroga announced at 
a sod turning ceremony held at the site in August that Eskom was 
fitting FGD to Kusile to ensure compliance with air quality 
standards.  The 4,800 megawatt coal-fired power station is to be 
ramped up in six 800-megawatt phases between 2013 and 2017, and will 
significantly reduce South Africa's power problems as it reaches 
completion. 
 
¶11. (SBU) FGD technology is water-intensive, but was chosen as the 
preferred option in a trade-off between additional water usage and 
reduced atmospheric emissions in an area that already suffers from 
high levels of air pollution from coal-fired power stations.  Eskom 
has signed a letter of intent with Anglo Coal to supply the plant 
Qhas signed a letter of intent with Anglo Coal to supply the plant 
with 17-million tons of coal per year over Kusile's 47-year life. 
The coal is to be supplied by Anglo's empowerment subsidiary Anglo 
Inyosi Coal, with first coal deliveries expected in 2011 to build a 
stockpile before start-up of the first unit in 2013.  Coal is likely 
be transported by a dedicated conveyor system, which will relieve 
pressure on the area's deteriorating road network. 
 
---- 
GOLD 
---- 
 
---------------------------------------- 
Power Rationing no Problem for AngloGold 
---------------------------------------- 
 
¶12. (SBU) Eskom has followed through on its agreement to supply 
South Africa's deep level mines with 95% of their normal power 
 
PRETORIA 00001856  004 OF 006 
 
 
demand.  This level was negotiated as the minimum necessary for 
mines to maintain production levels in a situation where 50% of the 
power is needed to supply essential services of ventilation, cooling 
and pumping water from underground.  AngloGold Ashanti's Quarterly 
Report to Shareholders for the end of June 2008, stated that Eskom 
had maintained a steady power supply of 96.5% during the second 
quarter and that the company had successfully operated at full 
production using less than 94% of the power supplied.  This means 
Anglo has reduced its normal power requirements by 10.3%. 
 
¶13. (SBU) At a meeting with Anglo in January, on the eve of Eskom's 
force majeure to the mining industry, Anglo management stated that 
their aim was to cut power consumption by as much as 17% over time 
and still maintain full output.  They appear to be moving quickly 
toward that goal.  Cuts by the mining industry have been good for 
the country as a whole and this winter has not seen any power 
outages of significance.  Eskom may have achieved their goal of 
providing consistent power throughout the winter months, which in SA 
is mid-April to mid-September. 
 
------------------------- 
Gold Fields in Safety Fix 
------------------------- 
 
¶14. (SBU) The world's fourth biggest gold producer Gold Fields will 
lose about 12% of its South African production in the current 
financial year after a safety check revealed that it needed to make 
substantial repairs to the main shaft at its nearly 4000-meter deep 
Kloof Mine.  Safety is a top priority for mining groups in South 
Africa after a spate of mining deaths in the past year, and 
government's response of closing mines for days following 
fatalities.  One of the worst accidents happened in May, when a lift 
cable snapped at Gold Fields' South Deep Mine, killing nine miners. 
New CEO Nick Holland said at the year-end results presentation that 
a review of infrastructure at the entire group's South African mines 
showed that the steelwork in the main shaft of the 40-year old Kloof 
Mine had deteriorated and needed repair. 
 
¶15. (SBU) Analysts were generally positive about Gold Field's 
decision, but noted that closures due to maintenance backlogs could 
become industry-wide and impact on both costs and production in an 
industry with shrinking margins.  Gold Fields also announced that it 
had switched to fully mechanized mining at its 3,000-meter deep 
South Deep Mine, necessitating a voluntary lay-off scheme for 1,885 
workers.  The company offered miners relocation to its other mines, 
but a National Union of Mineworkers spokeswoman said the workers 
refused to be redeployed to Kloof and Beatrix mines because of their 
"poor safety records."  She said that miners would rather go home 
than risk their lives in those mines. 
 
----------------------------------- 
Hope Flickers for the Gold Industry 
----------------------------------- 
 
¶16. (SBU) The South African gold industry, which accounted for 80% 
of world production as recently as 1970, could decline gracefully 
over the next 40 years, if challenges are managed well.  This 
statement was made in The Fortis Yellow Book, a publication by 
Qstatement was made in The Fortis Yellow Book, a publication by 
Virtual Metals on gold supply and demand.  It says South Africa 
still has a large amount of technically accessible gold underground, 
of which 8,000-10,000 tons can be profitable at current prices.  The 
prospect of a consistently high gold price in rand terms might 
encourage long-term development (decades instead of years), despite 
the fact that it is difficult and costly to access the deep 
resources.  Further, the book states that new industry leaders face 
a number of challenges, including an unreliable power supply, rising 
costs, labor strikes, lack of skills, demanding shareholders, 
government intervention, political leadership, and the challenging 
issue of safety, but with hard work and co-operation the challenges 
are manageable. 
 
¶17. (SBU) On the negative side, the publication said that increased 
capex investment of $1.08 billion in 2007 and $811 million in 2006 
was not sufficient to ensure the long-term expansion of the gold 
industry.  These investments would only slow the pace of decline in 
production over the next three to five years.  South Africa has 
 
PRETORIA 00001856  005 OF 006 
 
 
world-class gold deposits, but they are extremely deep and require 
mining as deep as four kilometers to exploit them. The deep 
underground environment involves ambient rock temperatures of 55 
degrees Celsius, and a higher risk of seismic activity. Huge costs 
are incurred in mining these deposits and require an investment 
horizon measured in decades, as opposed to the short-term horizon of 
current shareholders who wanted to see monthly or quarterly results. 
 The risk to the country's gold mining sector is rising costs and 
not the lack of gold resources in the ground. 
 
------------------------------------------ 
Party Over for Precious Metals and Miners? 
------------------------------------------ 
 
¶18. (SBU) JPMorgan has reduced its price forecast for platinum group 
metals (PGMs) due to the worsening economic situation.  The gold 
price has also fallen, said to be due to the strengthening U.S. 
dollar.  Johannesburg-based analysts have said that despite the wide 
range of uncertainties, they would not alter their positive 
longer-term view on platinum.  Since July 1 the price of PGM metals 
has fallen precipitously - platinum and rhodium by 28%, and 
palladium by 32%.  Gold has also slipped by 13%.  A combination of 
clean-air legislation, restricted supply of PGMs, and lack of 
alternatives for the control of auto exhaust emissions, makes it 
virtually certain that demand and prices for PGMs will increase when 
the global "recession" eases.  The question is, when will this 
happen, and for South Africa, what impact will the lower prices have 
on the large number of new PGM projects being development?  The 
concern is that junior miners developing relatively low-grade 
platinum mines may not have sufficient financial backing to see them 
through a sustained (or even a short) downturn in PGM prices. 
 
-------- 
DIAMONDS 
-------- 
 
---------------------------------------- 
Element 6 is not Diamond Science Fiction 
---------------------------------------- 
 
¶19. (SBU) Contrary to popular belief, diamonds have a much more 
important role to play than simply being "a girl's best friend". 
Diamonds have hardness, electrical and heat conductivity, and many 
other properties that make them indispensable to modern high-tech 
industries.  These are the so-called "industrial diamonds" or 
non-gem quality stones known as boart that generally make up the 
majority of stones produced by mines.  Boart is of inferior quality 
and mainly used for cutting and polishing gem diamonds and other 
hard materials.  Decades ago De Beers began research on making high 
quality synthetic stones for industrial use.  Research turned into 
production and now the majority of industrial stones are 
manufactured and not mined.  De Beers established manufacturing 
plants globally, but about eight years ago the company moved much of 
its production to its new, world-class research and manufacturing 
plant in Springs, some 45 kilometers east of Johannesburg.  The 
plant was called Element 6, the atomic number for Carbon, which is 
the chemical make-up of diamond.  It is jointly owned by De Beers 
Qthe chemical make-up of diamond.  It is jointly owned by De Beers 
(60%) and Belgian minerals group Umicore (40%).  Element 6 has a 
turnover of almost $500m a year and supplies synthetic diamonds and 
other super abrasives to the engineering industry, mainly for use in 
cutting tools. 
 
¶20. (SBU) Element 6 launched a $100 million private equity fund in 
March to invest in companies using artificial diamonds in innovative 
ways.  It has made four investments so far and is expected to close 
another four deals in the next few months, according to E6 Ventures 
head Brendon Grunewald.  He said the fund invested in companies 
doing innovative things with diamonds rather than new technologies. 
There has been much interest in using synthetic diamonds in a range 
of new applications, from electronics to medical devices.  One of 
the companies in which the fund has invested is Advanced Oxidation, 
a British company that uses artificial diamonds to generate 
electrical current to degrade chemical pollutants.  Element 6's 
website mentions its investments in the company Diamond Microwave 
Devices, which is developing diamond semiconductor materials and 
processing technology for civil and defense systems.  It also 
 
PRETORIA 00001856  006 OF 006 
 
 
mentions the company Diamond Detectors, which uses synthetic 
diamonds in sensors for high-energy physics, ionizing radiation and 
deep ultraviolet monitoring. 
 
---- 
COAL 
---- 
 
--------------------------------- 
Mozambique to Export Coal in 2010 
--------------------------------- 
 
¶21. (SBU) Mozambique plans to export coal in 2010 after completing 
the rehabilitation of the 665 kilometer Sena rail line from the 
Moatize coal fields in Tete Province to the port city of Beira.  The 
project began in 2002.  Repairs are being carried out by an Indian 
consortium, which has a 51% stake and Mozambique's Ports and 
Railways Company (CFM), which holds the remaining 49%.  The $475 
million project cost is being paid through a World Bank loan.  So 
far the Mozambican authorities have issued 125 licenses for coal 
exploration, mostly in western Tete Province and the northern-most 
province of Niassa.  The Sena line has been allocated 8 million tons 
of coal per year, which is below the combined estimated mine output 
of 40 million tons of coal per year.  The railway will also carry 18 
million tons of freight per year, consisting of various products 
including sugar and cement. 
 
¶22. (SBU) Three companies have committed to develop Mozambique's 
extensive coal resources.  Brazil's Vale, formerly Companhia Vale do 
Rio Doce (CVRD), is investing over $2 billion to build a mine on its 
25-year concession at Moatize, which has an estimated resource of 
2.4 billion tons of coal.  Australia's Riversdale Mining plans to 
invest $2.1 billion to mine its concession at Benga, near Moatize, 
which has an estimated resource of 1.9 billion tons of coal.  The 
third company is Changara Investments, a subsidiary of London-based 
CAMEC (Central African Mining and Exploration Company), which has an 
estimated resource of over 900 million tons of coal in its 
concession west of the Zambezi river.  Coal production is 
conditional on the opening of the Sena rail line to provide access 
to the port of Beira for export. 
 
BOST