VZCZCXRO5207
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #1959/01 2481234
ZNR UUUUU ZZH
R 041234Z SEP 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5574
INFO RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHBJ/AMEMBASSY BEIJING 0836
RUEHBY/AMEMBASSY CANBERRA 0712
RUEHLO/AMEMBASSY LONDON 1585
RUEHMO/AMEMBASSY MOSCOW 0841
RUEHFR/AMEMBASSY PARIS 1421
RUEHOT/AMEMBASSY OTTAWA 0680
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 07 PRETORIA 001959 
 
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 ZI
SUBJECT: Platinum Group Metals - Rising Star at Risk 
 
REF: A) 07 Johannesburg 0214 
B) Pretoria 585 
C) Pretoria 565 
 
------- 
Summary 
------- 
 
¶1. (SBU) Platinum has been the star performer in the South African 
mining industry for a number of years.  South Africa is the world's 
number one producer of the platinum group metals (PGMs): platinum, 
rhodium, ruthenium and iridium, while Russia supplies the bulk of 
the world's palladium.  The country hosts more than 85 percent of 
the world's PGM reserves, and South Africa's PGM revenues exceeded 
the combined income from coal and gold in 2007.  PGMs accounted for 
35 percent of total mineral revenues, 41 percent of mineral exports, 
and 12.3 percent of the country's merchandised exports.  Output of 
newly mined PGMs declined marginally (except for rhodium) in 
2007-2008 due to labor disputes, power outages, temporary closure of 
shafts for safety reasons, and smelter problems.  The industry has 
thus not been able to fully capitalize on the prevailing record 
prices of early 2008.  Prospects for PGMs looked good for 2008 and 
beyond, but this has changed since the end of June as falling prices 
and escalating costs threaten to reduce cash flows and squeeze 
profit margins in the months ahead.  Some project delays have been 
announced, but so far most mine and plant expansions and new mine 
developments are proceeding.  Recent price falls and cost escalation 
are causes for particular concern to junior miners, many of which 
are developing lower grade deposits and are dependent on a sustained 
high rhodium price.  Industry consolidation is highly likely, 
possibly at lower prices, reminiscent of consolidation in the South 
African gold industry eighty years ago.  End Summary. 
 
¶2. (SBU) Minerals/Energy Officer and Specialist visited senior 
officials in a number of platinum mining companies, toured Impala 
Platinum's underground mine in Rustenburg and Xstrata's new 
Elandsfontein open pit mine outside Pretoria, and attended a number 
of mining conferences including South Africa's premier mining 
convention, the Mining Indaba 2008 in February, as preparation for 
this comprehensive PGM cable.  The organizations visited include the 
Chamber of Mines and the Council for Science and Industry Research 
(CSIR) - Miningtek and Embassy officers also met with Senior 
Executives of Anglo Platinum, Impala Platinum, Aquarius Platinum and 
Mintek (the government mineral processing research arm). 
 
--------------------------------------------- ---------- 
The Bushveld Complex - the World's Great Treasure House 
--------------------------------------------- ---------- 
 
¶3. (SBU) The Bushveld Complex is the world's most valuable orebody. 
All its minerals have industrial, oil refinery, chemical and 
electronic uses (and jewelry for platinum and palladium) and demand 
for them is likely to continue to grow, absent a significant global 
economic slowdown or substitution by other commodities.  The 
Bushveld Complex is an east-west trending, oval-shaped, layered 
igneous intrusion that covers an area of more than 65,000 square 
kilometers.  It has known under-explored extensions off the main 
Qkilometers.  It has known under-explored extensions off the main 
body to the north, south and west.  The complex contains the world's 
greatest accumulation of PGMs (platinum, palladium, rhodium, 
ruthenium, iridium and osmium), chromium, vanadium, titanium, iron 
ore in the form of magnetite, fluorspar, alumino-silicates such as 
andalusite, and feldspar.  It also hosts smaller but valuable 
concentrations of copper, nickel, gold, tin, cobalt, selenium, 
tellurium and other minerals. 
 
¶4. (SBU) The Bushveld's numerous chromite layers are generally 
continuous throughout the complex.  They host PGMs in varying 
concentrations and relative proportions, but only the Merensky and 
UG2 (Upper Group 2 chromite seam) reefs in the main body and the 
Plat reef in the northern extension have been economic to mine to 
date.  Ores from the western Bushveld generally contain a higher 
proportion of platinum.  The eastern and northern limbs are 
generally of lower grade, have a lower platinum/palladium ratio, and 
have a higher content of palladium, rhodium and base metals.  The 
PGM orebodies outcrop on surface and extend to depths greater than 
2,200 meters.  Compared to the Merensky reef, the UG2 is generally 
 
PRETORIA 00001959  002 OF 007 
 
 
of lower grade, but has higher percentages of palladium, rhodium and 
base metals. 
 
---------------------------- 
South Africa's Platinum Boom 
---------------------------- 
 
¶5. (SBU) South Africa supplied 77 percent of the world's platinum, 
85 percent of the rhodium, 32 percent of the palladium, and nearly 
all of the ruthenium and iridium in 2007.  Its export earnings from 
PGMs were nearly $1 billion more than the combined revenues for gold 
and coal in 2007.  PGMs in South Africa accounted for: 
-- 35 percent of the value of mineral production; 
-- 41 percent of mineral exports; 
-- more than 12 percent of merchandised exports; and 
-- nearly 3 percent of GDP. 
The economy was further boosted by the manufacture and export of 
16.2 million auto-catalytic converter units (15 percent of global 
production), valued at more than $3 billion, and local beneficiation 
of PGMs to refined metal worth $1.3 billion.  Output of newly mined 
PGMs declined marginally (except for rhodium) in 2007-2008 due to 
labor disputes, power outages, temporary closure of shafts for 
safety reasons, and smelter problems.  The industry was, thus, not 
able to fully capitalize on the record prices prevailing during the 
period.  Prospects for 2008 and beyond looked rosy for PGMs until 
the July fall in platinum and rhodium prices.  Most announced mine 
expansion and development projects are proceeding, but a few 
longer-term projects are being delayed, supposedly because of power 
concerns. 
 
¶6. (SBU) Major beneficiaries of the PGM industry growth have been 
the wealth created for the local Bafokeng Nation of 300,000 people 
and employment on PGM mines, which continues to increase.  The 
Bafokeng have exchanged their royalties for 13.4 percent equity in 
Impala Platinum mine, which makes them Impala's single biggest 
shareholder.  They also share ownership in the Bafokeng Rasimone 
50/50 JV (platinum mine) with Anglo Platinum.  Estimates show 
Bafokeng assets to be $4 to $5 billion and annual dividends of the 
order of $200,000 to $300,000.  The PGM industry employs 
170,000-180,000 people, each of whom support (statistically) some 
ten family and extended family members, most of whom live in poor 
rural communities in and outside the country. 
 
----------------- 
PGMs Eclipse Gold 
----------------- 
 
¶7. (SBU) During the 10-year period from 1998 to 2007, PGM production 
increased by some 52 percent compared to gold, which declined by 46 
percent (Ref C).  Over the past 7-years employment in PGM mines 
increased by 60 percent, accounting for about 38 percent of the 
total mining industry workforce, whereas employment on gold mines 
declined by 25 percent and now accounts for 32 percent of the 
workforce.  The value of PGM production over the past 10-years 
increased by 560 percent in rand terms and 460 percent in US dollar 
terms compared to gold, which increased by 56 percent and 26 
percent, respectively. 
 
------------------------ 
Production and Producers 
------------------------ 
 
¶8. (SBU) PGM mining generally takes place from surface to some 1,600 
meters, but the Northam platinum mine is already probing depths of 
Qmeters, but the Northam platinum mine is already probing depths of 
2,200 meters.  Mines will have to go deeper as the shallow ore is 
depleted and will require costly cooling ventilation (at 1,300 meter 
depth the ambient rock temperature is about 43 degrees Celsius). 
The Merensky and UG2 reefs are thin and working stopes are seldom 
higher than 1 to 1.2 meters (similar to gold reefs).  Conventional 
opencast and underground narrow reef and mechanized bulk mining 
methods are in use.  Underground mining is generally labor-intensive 
but low-profile mechanized units are being introduced to increase 
productivity.  The Plat reef measures up to 100 meters thick in 
places, and lends itself to bulk open-pit mechanized mining methods. 
 South African PGM production in 2007 comprised: 
-- Anglo Platinum 48 percent; 
 
PRETORIA 00001959  003 OF 007 
 
 
-- Impala Platinum 22 percent; 
-- Lonhro Platinum 17 percent; 
-- the rest (including ARM, Aquarius and Northam) 13 percent. 
 
¶9. (SBU) Conventional processing methods are used for PGM mineral 
extraction, concentration and smelting.  Refining is a more costly 
and complex process only affordable by the big companies that 
produce more than 1-million ounces of platinum per year.  South 
Africa has six PGM smelters and four refineries, each of different 
design, and a total annual refinery capacity of 6-million ounces of 
platinum.  These facilities process their own mine concentrates as 
well as those bought from other producers.  They also offer a 
toll-smelting and refining service to small producers.  State-owned 
research organization Mintek and Australian company Braemore are 
jointly developing a low-cost smelter that will allow great 
flexibility in ore types, will tolerate high chromite ores, and will 
not limit the quantities of base metals or sulfur contained in the 
concentrates.  This will enable junior mining companies to afford 
their own smelters.  The final refined PGM products are 99.95 
percent pure metal ingots, granular powders, and sponge.  These are 
very valuable so security around the plants is tight and PGM 
products are transported by air under heavy guard. 
 
-------------------- 
PGM Price Volatility 
-------------------- 
 
¶10. (SBU) The commodity boom took off in about 2002 and PGM prices 
climbed steadily.  During the 6-months to the end of June 2008, 
platinum, palladium, and rhodium prices were volatile and increased 
by 29, 20, and 39 percent, respectively.  The average price fell in 
July by 16 percent and August has seen further declines and high 
volatility.  These extreme price movements are variously blamed on 
the current economic slowdown, speculators, and mismanagement and 
offloading of excess PGM stocks by automakers.  High prices for 
platinum and rhodium have resulted in: 
-- metal thrifting (less metal for the same purpose); 
-- substitution (up to 25 percent) of platinum by cheaper 
   palladium in catalytic converters for diesel engines; 
-- reworking of PGM tailings dumps; 
-- increased recycling of PGM scrap; and 
-- increasing use of palladium in jewelry. 
 
-------------------- 
Missing the PGM Boom 
-------------------- 
 
¶11. (SBU) South Africa has to some extent missed out on the PGM boom 
(Ref A) because of the normal time-lag between new demand and 
gearing up to deliver new supply, which can take many years.  This 
has been exacerbated by: 
-- uncertainty in the implementation of the SAG's new 
   minerals and labor policies and legislation; 
-- lack of experience and capacity within the 
   Department of Minerals and Energy (DME); 
-- skills shortage, much of it through emigration; and 
-- production cut-backs due to power outages and 
   rationing, labor strikes, and forced mine closures 
   following fatal accidents. 
 
------------------------------- 
Grappling with the Power Crunch 
------------------------------- 
 
¶12. (SBU) Most mines and plants in South Africa were shut down 
between January 25 and 31 when state power utility Eskom announced a 
Qbetween January 25 and 31 when state power utility Eskom announced a 
force majeure on power supply to mines.   Estimated production 
losses by the PGM mines exceeded $40 million per day and the 
National Energy Regulator (NERSA) also estimates that load-shedding 
cost the country $7 billion.  Heavy power users agreed at the time 
to a 10 percent power reduction to prevent total system failure. 
This was later decreased to 5 percent on a case by case basis to 
minimize potential job losses in deep mines and mines with large 
labor complements.  Most mines have shown that they can maintain 
near-capacity output by employing energy-efficient practices, and 
that over time they will be able to resume full production at 
 
PRETORIA 00001959  004 OF 007 
 
 
reduced power levels. 
 
¶13. (SBU) There are more than 30 new and expansion PGM projects 
underway, mostly in the eastern and northern sections of the 
Bushveld Complex.  So far, few significant project delays or 
cancellations have been acknowledged by either major or junior 
companies.  One notable exception is Impala's announcement that 
plans to produce 2.5 million ounces of platinum by 2012 have been 
delayed to 2015.  It is not clear whether this is the result of the 
energy situation or the economic down-turn.  The big-three PGM 
producers, Anglo, Impala and Lonrho, are going ahead with mining and 
plant expansions and juniors with mine development.  Eskom has 
warned that its power safety margin is razor-thin at less than 5 
percent, and that this could further decline and possibly become 
negative in 2011, if consumer savings of 5-10 percent are not 
achieved.  It would be five to six years before new capacity can 
provide a satisfactory margin of 10 to 15 percent.  Eskom's ability 
to provide nearly uninterrupted power during the recent local winter 
months is attributed to: 
-- industry power savings of 5 to 10 percent; 
-- production cut-backs and delayed expansions by 
   aluminum and ferro-alloy smelters; 
-- new megawatts (2,000 to 3,000) from rehabilitated 
   coal-fired units and new (very costly) dieselGQKQN]ng 
fatal accidents (for up to a week in some instances).  Continuation 
of this practice is likely to cause further production losses as the 
inspectorate is understaffed, has little experience in accident 
investigation, and must rely on and be taught by industry.  Industry 
representatives argue that mine closures increase the risk of 
accidents when work resumes, due to rapid deterioration of roof 
conditions and equipment integrity when unattended.  President Mbeki 
ordered that safety audits be conducted on all mines during 2008. 
The report has been completed, but is not yet been made available. 
 
 
------------------------------------ 
Q------------------------------------ 
Long-Term Increase in PGM Production 
------------------------------------ 
 
¶16. (SBU) South Africa, Russia and Zimbabwe together host more than 
90 percent of the world's known reserves and resources of platinum, 
palladium and rhodium.  These metals are essential catalysts for 
neutralizing nitrate and sulfate emissions from motor exhausts and 
are also essential inputs to the electronics, chemical, oil, and 
glass industries.  Continuing global pressure for a cleaner 
environment ensures that demand for PGMs will increase with time, 
unless cleaner engines and fuels, metal thrifting, or cheaper 
substitute metals and technologies are developed.  Recycling of PGM 
scrap is likely to increase in the future, which will contribute to 
satisfying global demand, but could also pose a threat to new 
production.  Platinum is the dominant PGM metal mined in South 
 
PRETORIA 00001959  005 OF 007 
 
 
Africa and all other metals are produced as by-products and 
dependent on platinum production.  At current prices rhodium 
contributes significantly to company gross revenues, while 
representing less than 10 percent of the PGM mix. 
 
¶17. (SBU) Future PGM production growth in South Africa depends on 
the implementation of expansion plans by Anglo, Impala and Lonrho, 
and on new production from the many active junior miners.  These 
estimates include: 
-- 2-million PGM ounces (1.2-million platinum ounces) 
   from the big-three producers; 
-- 460,000 PGM ounces from three mines scheduled for 
   production during 2008; 
-- 1.9 million PGM ounces from six projects scheduled for 
   production in the next 3-5 years; and 
-- unknown output from some 16 projects, at various 
   stages of evaluation, with a production horizon beyond 
   5-years. 
Environmental challenges to PGM mining and expansions have to date 
been sporadic and limited because of the thoroughness of pre-mining 
studies.  Social challenges mainly relate to the movement of 
communities off land to be mined, but in most cases companies have 
proved they have adequately compensated the communities. 
 
 
---------------------------- 
International PGM Production 
---------------------------- 
 
¶18. (SBU) South African and Zimbabwean PGM deposits are unique in 
that they are mined primarily for platinum.  The Stillwater Complex 
in Montana (U.S.), has geological similarities with the Bushveld 
Complex, but palladium is the dominant metal.  Other PGM production 
outside Africa is a by-product of copper-nickel mining and contains 
a high proportion of palladium and minor platinum, rhodium.  Most of 
this production comes from the Russian Norilsk deposits in the Ural 
Mountains, and Canada's Sudbury Basin in Ontario.  Small Russian 
platinum alluvial deposits are the exception, but are said to be 
depleted pending further discoveries.  Africa's other major platinum 
deposit is Zimbabwe's Great Dyke (Ref B).  It is a layer igneous 
intrusion, similar to the Bushveld Complex, and is approximately 550 
kilometers long and averages 3 kilometers in width and 500 meters in 
depth.  Total PGM production is less than 600,000 ounces per year. 
Impala Platinum has a major stake in the Dyke and says potential 
production is as much as 4 million ounces of platinum per year, but 
this is unlikely to be realized until political stability is 
restored to that country. 
 
--------------------------------------------- 
Rising Costs and Declining Prospects for PGMs 
--------------------------------------------- 
 
¶19. (SBU) PGM producers face secular increase in costs and a 
potential "bubble burst" in PGM prices, particularly platinum and 
rhodium.  A recent analysis by Royal Bank of Canada Capital Markets 
(RBCCM) investment analysts found that at the current PGM blended 
"basket price" of about $1,300 per ounce and total costs of $1,000 
to $1,200 per ounce, at least one-third of South Africa's PGM 
production now generates negative cashflows.  Additionally, 
according to these analysts the sector could see further cashflow 
declines of between 30 and 50 percent in the near-term.  They 
Qdeclines of between 30 and 50 percent in the near-term.  They 
identified the two main culprits as runaway input costs and longer 
term power shortages.  Capital costs have more than doubled in the 
last two years and operating costs are increasing annually by 20 to 
25 percent.  Input from Impala Platinum's Marketing Executive 
generally confirmed the RBCCM findings.  However, he also pointed 
out that PGM mines generate some 10 to 20 percent of revenues from 
by-products such as nickel, copper, gold and cobalt, and these are 
credits against PGM costs.  He also said that major negative 
influences are declining car sales in the OECD, which he expects 
will be slow to turn around, and substantial declines in production 
efficiency.  Impala attributes the latter to high labor turnover, 
labor strikes, loss of skills to emigration, and mine closures by 
the Department of Minerals and Energy for safety inspections 
following fatal accidents. 
 
 
PRETORIA 00001959  006 OF 007 
 
 
------- 
Comment 
------- 
 
¶20. (SBU) PGM resources of the South African Bushveld are huge by 
any measure, but if existing prices (fallen off by about 25 to 35 
percent from early 2008 highs) and escalating costs prevail for any 
length of time, a number of projects are likely to be merged, taken 
over, curtailed or abandoned.  Some new projects are relatively 
low-grade and depend on the recent high prices of rhodium and 
platinum for economic viability.  Some are being developed by junior 
companies, which lack sufficient resources to see them through an 
extended economic downturn.  Issues of safety, health, skills and 
black economic empowerment will need to be addressed as these have 
the potential to negatively affect the strategic value of PGMs as an 
employer of unskilled and skilled labor, a generator of foreign 
exchange, and an initiator of technology and research innovation. 
Water should not be a problem, however, because of the number of 
dams being built in the eastern Bushveld, where much of the new PGM 
development is taking place. 
 
¶21. (SBU) Appendix (sourced primarily from Johnson Matthey Platinum 
2008) 
 
--------------------------------------- 
Tables of PGM Supply, Demand and Prices 
--------------------------------------- 
 
Platinum Supply (thousands of ounces) 
 
               2002   2003   2004   2005   2006   2007 
S Africa      4,450  4,630  5,010  5,115  5,295  5,035 
Russian         980  1,050    845    890    920    910 
N America       390    295    385    365    345    325 
Zimbabwe        150    225    250    270    270    280 
Total         5,970  6,200  6,490  6,640  6,830  6,550 
 
Platinum Demand (thousands of ounces) 
 
Autocats      2,590  3,270  3,490  3,795  3,905  4,225 
  Recycled     (565)  (645)  (690)  (770)  (860)  (890) 
Jewelry       2,820  2,510  2,160  1,965  1,640  1,585 
Rest          1,625  1,395  1,580  1,705  1,790  2,110 
Total         6,470  6,530  6,540  6,695  6,475  7,030 
 
Surplus        (500)  (330)   (50)   (55)   355   (480) 
Ave.Price$/oz   540    691    846    897  1,143  1,304 
 
Palladium Supply (thousands of ounces) 
 
S Africa      2,160  2,320  2,480  2,605  2,775  2,770 
Russia        1,930  2,950  4,800  4,620  3,920  4,540 
N America       990    935  1,035    910    985    990 
Zimbabwe        170    245    265    270    270    285 
Total         5,250  6,450  8,580  8,405  7,950  8,585 
 
Palladium Demand (thousands of ounces) 
 
Autocats      3,050  3,450  3,790  3,865  4,015  4,450 
  Recycled     (370)  (410)  (530)  (625)  (805)(1,000) 
Dental          785    825    850    815    620    635 
Electronics     760    900    920    970  1,205  1,285 
Jewelry         270    260    930  1,430    995    740 
Rest            345    405    600    900    575    725 
Total         4,840  5,430  6,560  7,355  6,605  6,835 
 
Surplus         410  1,020  2,020  1,050  1,345  1,750 
Ave.Price$/oz   337    201    230    201    320    355 
 
Rhodium Supply (thousands of ounces) 
 
S Africa        490    544    587    627    666    696 
Russia           90    140    100     90    100     90 
N America        25     26     17     20     17     17 
QN America        25     26     17     20     17     17 
Zimbabwe         10     14     16     17     19     19 
Total           615    724    720    754    802    822 
 
PRETORIA 00001959  007 OF 007 
 
 
 
Rhodium Demand (thousands of ounces) 
 
Autocats        599    660    758    829    863    879 
  Recycled      (99)  (124)  (140)  (137)  (171)  (183) 
Chemical         39     39     43     48     49     64 
Glass            37     26     46     57     65     64 
Rest             16     19     22     30     32     32 
Total           592    620    729    827    838    856 
 
Surplus          23    104     (9)   (73)   (36)   (34) 
Ave.Price$/oz   838    530    986  2,056  4,552  6,191 
 
Average Percentage Price Movements in 2008 
 
           January-June    July-August    January-August 
Platinum       +29%           -26%            -5% 
Palladium      +20%           -28%            -14% 
Rhodium        +39%           -34%            -9% 
Ruthenium      -25%           flat            -26% 
Iridium        flat           flat            flat 
 
Percentage Price Movements in July and August 2008 
 
              July           August 
Platinum      -15%            -13% 
Palladium     -18%            -20% 
Rhodium       -15%            -43% 
 
Estimated Average Profit Margins for Major Producers 
 
 
2002 2003  2004  2005  2006  2007  Mid-2008 
Margins      50%   35%   30%   30%   42%   44%   47% 
 
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