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UNCLAS SECTION 01 OF 06 PRETORIA 002128 
 
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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 10, September 1-15, 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 
-------- 
 
---------------------- 
SA Mining Output Falls 
---------------------- 
 
¶2. (SBU) Statistics South Africa (StatsSA) reported that total 
mining production dropped by 12.6% in July as the production of gold 
and non-gold minerals fell by 16.4% and 12%, respectively, compared 
with July 2007.  The platinum group metals recorded the largest 
decrease of 32.8% compared with July 2007.  This decline was mainly 
due to smelter problems and deferred maintenance, which would 
normally have occurred in the first half of the year. 
 
 
---------------------------------- 
PetroSA's Coega Refinery May Treat 
Venezuelan Heavy Crude 
---------------------------------- 
 
¶3. (SBU) PetroSA Vice President of New Ventures Jorn Falbe said last 
week that PetroSA's proposed $11 billion Coega oil refinery project 
was the last opportunity for SA to build a refinery that would 
concentrate on handling heavy crude supplies from the Atlantic 
region to maximize economic returns.  Such a refinery would source 
its crude from Venezuela, Brazil and Angola, reducing SA's 
traditional reliance on light sweet crude from the Middle East. 
This statement follows Venezuelan President Chavez recent visit to 
SA on September 2-3, which sparked renewed interest in the project. 
Chavez is believed to have an interest in the project as a means of 
both increasing the market for Venezuelan heavy crude and reducing 
Venezuela's dependence on the U.S. market for the same crude.  Falbe 
said that, contrary to perceptions, the refinery would not be 
reliant on oil supplies promised by Chavez during his visit, since 
it could also count on potential supplies from Brazil and Angola, 
which have similar heavy crude deposits.  A mission from SA will 
visit Venezuela during the week of September 22 to look into the 
possibilities of crude oil exploration (most probably in the Orinoco 
Belt) while a Venezuelan team will visit SA during the same period 
to look into the details of the proposed refinery and the use of 
bulk state-owned storage facilities at Saldanha Bay on the west 
coast. 
 
¶4. (SBU) Falbe said the next six months would be critical for the 
refinery project as it moves into the front-end engineering and 
design (FEED) phase.  HSBC has been appointed as a financial advisor 
for the project and the pre-feasibility study has been completed by 
Qfor the project and the pre-feasibility study has been completed by 
the KBR global engineering, construction and services company.  The 
next step will be to select and engineering partner to complete the 
FEED study.  PetroSA began with 30 potential partners and has 
reduced this number to four unidentified "global players".  A final 
decision on the project will be made after the completion of the 
FEED study.  Falbe said PetroSA found itself in the same position 
that state power company Eskom did a few years ago when the SAG 
declined to commit to major investments in the electric power 
sector.  The implication is that if the SAG does not finance the 
project, SA will suffer refined product shortages or have to import 
these products.  Falbe said that the refinery would be strategically 
placed to serve the rapidly growing Chinese and Indian markets and 
that the opportunity to build the refinery was "now or never". 
Minister for Public Enterprises Alec Erwin was reportedly committed 
 
PRETORIA 00002128  002 OF 006 
 
 
to drive this refinery project forward, but he submitted his 
resignation on September 23, following the unexpected resignation of 
President Mbeki on September 20. 
 
------ 
ENERGY 
------ 
 
----------------------------------- 
Major Miners Resist Self-Generation 
----------------------------------- 
 
¶5. (SBU) Major South African deep-level miners want to stick to 
mining and avoid generating their own electricity, except for 
emergency power.  The Australian company Braemore has accused South 
African miners of being "spoilt" and pointed to Australia where many 
miners generate their own electricity.  Chamber of Mines official 
Dick Kruger said self generation was not economically feasible in 
South Africa.  Harmony Gold CEO Graham Briggs held a similar view, 
adding that the cheapest option for Harmony was to continue using 
Eskom's electricity, while assuring back-up for safety during power 
outages.  Outgoing Gold Fields COO Terence Goodlace agreed and said 
that Gold Fields was accelerating energy saving rather than power 
co-generation. 
 
¶6. (SBU) On the other side of the issue, emerging junior miners such 
as Wesizwe Platinum and Braemore Resources, with platinum properties 
on South Africa's Bushveld Complex, are taking self-generation in 
stride.  Wesizwe is planning to co-generate its own power on a large 
scale at its new 230,000 tons-of-ore-per-month platinum mine in the 
North West Province.  CEO Mike Solomon said this was an imperative 
because Eskom could not guarantee sufficient power for its new mine 
and they needed contingencies to prevent project and production 
delays.  Wesizwe intends to install heavy fuel generators for 
back-up power supply. 
 
-------- 
DIAMONDS 
-------- 
 
-------------------------------------- 
SAG Intervention Loses Jobs in Jewelry 
-------------------------------------- 
 
¶7. (SBU) "The introduction of the State Diamond Trader (SDT) has 
destroyed the local small diamond-cutting and polishing industry and 
has resulted in the loss of about 1,500 jobs (out of 2,500) due to 
its inability to supply gem-stones to the industry."  So said United 
Diamond Association (Udasa) Chairman Ernest Malakoane at an 
association meeting in mid-September.  Udasa's Deputy Chairman Derek 
Thema said the SDT Chief Executive Abbey Chikane had been dismissed. 
 In addition, Udasa had decided to sue the Minister of Minerals and 
Energy and the SDT for losses suffered by its 200 members because of 
its failure to supply adequate diamonds.  Before the introduction of 
the SDT, small cutters bought diamonds from De Beers' Diamdel (small 
diamond marketing) unit.  Diamdel's role (and staff) has since been 
transferred to the SDT, a move that Malakoane called "a disaster". 
Malakoane blamed the state-owned Industrial Development Corporation 
(IDC) and Treasury for not providing SDT with sufficient funding to 
buy the gems required and noted that the downstream diamond industry 
was in chaos due to the new Diamond Amendment Act.  The SDT began 
trading in January and can by law acquire up to 10% of locally 
diamond production from the mining industry's annual run-of-mine 
Qdiamond production from the mining industry's annual run-of-mine 
(ROM) output. 
 
¶8. (SBU) (Comment.  SDT's fumbling appears to be an unintended 
consequence of the skills shortage and inexperienced government 
officials getting involved in technically sophisticated commercial 
activities.  For years the local diamond cutting industry pressed 
for legislation to force De Beers to sell locally, as opposed to 
getting an allocation of their composite global production.  Cutters 
complained that De Beers' rough diamond pricing and marketing system 
discriminated against them and that they were capable of cutting any 
and all locally produced stones economically.  De Beers' response 
has been that because of SA's relatively high wage structure, only 
stones above a certain quality and size can be cut locally.  Cutters 
 
PRETORIA 00002128  003 OF 006 
 
 
are currently receiving only 40% to 60% of required stones from the 
SDT and have been forced to shed staff.  Problems facing the cutters 
and the SDT include: 
-- the SDT is purchasing less than the legislated 10% and only from 
De Beers, pending the determination of  "fair market value" (FMV) 
for stones from other producers; 
-- stones from other producers are mainly alluvial and have a higher 
FMV; 
-- funding from Treasury, which regards the SDT as a pilot project, 
is inadequate; 
-- less than 50% of ROM stones can be economically cut in SA.  End 
Comment.) 
 
¶9. (SBU) The Jewellery Council of SA has confirmed that the South 
African Diamond and Precious Metals Regulator requires all 
white-owned micro-jewelers to submit plans to achieve 15% black 
ownership in five years as part of the country's Black Economic 
Empowerment (BEE) regulations.  A goldsmith who works from home said 
she had been told that this applied to her one-person business, 
which she said was "totally impractical".  A member of the Jewellery 
Council added that the regulation would also affect dentists and 
artists who work with gold and precious metals.  Small jewelers 
claim they will lose their businesses if the BEE regulations are 
strictly applied.  Spokesperson for the Department of Minerals and 
Energy Bheki Khumalo said the department was sympathetic and had 
communicated as much to the regulator.  The regulator has an 
independent board that will have to rule on the matter. 
 
------------------------------------------ 
Petra Takes Over the Cullinan Diamond Mine 
------------------------------------------ 
 
¶10. (SBU) The Petra Diamonds Cullinan Consortium (PDCC), led by a 
relatively minor BEE diamond miner Petra Diamonds, finalized the 
purchase of the famous 100-year old De Beers Cullinan diamond mine 
for $140 million in cash in July.  The Cullinan kimberlite pipe 
hosts the world's second largest diamond resource by value and will 
transform Petra into a major diamond-producer.  Cullinan's total 
underground resources consist of the B-Cut with an estimated 58 
million carats, and the C-Cut with 133 million carats.  Surface dump 
resources accumulated over more than 100 years of mining are an 
undetermined quantity, but are currently estimated at 17 million 
carats.  Petra has estimated a mine production of 700,000 to 850,000 
carats in 2008/09 and full production of 1 million carats per year 
from 2009-10, with annual revenues of around $100 million.  Petra's 
acquisition of mines from De Beers continues with the latest 
transaction being the purchase of a 75% stake in the Williamson 
Diamond Mine in Tanzania for $10 million cash in August 2008.  The 
mine made a $29 million loss in 2007.  Petra also purchased De 
Beers' Koffiefontein diamond mine in July 2007 and has agreed to buy 
its Kimberley underground mines.  De Beers' strategy is to sell its 
marginal South African diamond assets.  Its last big transaction is 
likely to be the sale of its Namaqualand alluvial diamond mine on 
the west coast to mid-tier company Trans Hex. 
 
¶11. (SBU) The Cullinan mine is renowned for producing some of the 
Q11. (SBU) The Cullinan mine is renowned for producing some of the 
world's most spectacular diamonds, including the famous Cullinan 
Diamond, which is the largest rough gem-quality diamond ever found, 
and more than 300 stones of over 100 carats each.  The Cullinan 
diamond was found shortly after the end of the Anglo-Boer War in 
1905 and weighed 3106-carats (621 grams or 1.37 pounds).  It was cut 
into 105 stones including the 530-carat Cullinan 1 (the Great Star 
of Africa), and the 317-carat Cullinan 2 (the Lesser Star of 
Africa).  Both the Great Star of Africa and the Lesser Star of 
Africa are in the British crown jewels.  The share holders of PDCC 
comprise Petra and Al Rajhi Holdings, each with a 37% initial 
interest, and PDCC's Black Economic Empowerment (BEE) partners 
(26%), which meets the requirements of South Africa's Mining 
Charter.  (Pictures of the original rough Cullinan and the cut 
Cullinan 1 were included in the e-mailed version of the Assay.) 
 
------ 
MINING 
------ 
 
-------------------------------------------- 
 
PRETORIA 00002128  004 OF 006 
 
 
Union Calls for a State-Owned Mining Company 
-------------------------------------------- 
 
¶12. (SBU) The new ANC-administration is likely to push for more 
government involvement in and control of (stopping short of outright 
nationalization) the country's strategic mining industry.  As a 
first step, National Union of Mineworkers (NUM) President Senzeni 
Zokwana has called for the creation of a state-owned mining company. 
 Speaking to delegates at the September Mining Summit in 
Johannesburg, he said that this would "create a new-culture mining 
company that cares - not only for shareholders, but also for 
workers".  He said human resource development needed a lot of work 
and adult basic education and training should be encouraged, so as 
to fast track the development and promotion of those already in the 
industry. 
 
¶13. (SBU) This idea was first mooted earlier this year by ANC 
Secretary-General Gwede Mantashe, who spoke about the creation of 
more State-owned enterprises, especially in the mining sector, and 
asserted that plans would move ahead when the new (post-Mbeki) 
government came to power.  The NUM had also called for 
nationalization of coal mines following the power crisis in January, 
when insufficient coal stocks at power stations were said to play a 
role in the crisis.  Zokwana softened this view by saying that 
establishing a state-owned mining company did not mean nationalizing 
existing operations, but that such a company would exploit the many 
greenfield projects that were still available, particularly in 
platinum, in partnership with private companies.  He cited Norway, 
Botswana, Namibia, and Ghana, where the State holds interests in 
mining operations, and questioned why this could not be done in 
South Africa. 
 
--------------------------------------------- - 
Zambian Windfall Tax Deferred (Contribution by 
Vedruna Santana, U.S. Embassy in Lusaka) 
--------------------------------------------- - 
 
¶14. (SBU) The Zambian Government (GRZ) introduced a new minerals tax 
regime in April 2008, which entailed a higher minerals royalty and 
corporate tax rate as well as a windfall tax ranging from 25% to 
75%.  Several international mining companies threatened to take 
legal action against the GRZ for introducing tax rates that violate 
the terms of their development agreements.  According to recent 
reports, some of these companies have been reassessing whether they 
will continue operating in Zambia.  These companies have expressed 
no difficulties with the mineral royalty and corporate tax 
adjustments, but describe the windfall tax as particularly onerous. 
The Zambia Chamber of Mines has re-opened a dialogue with the 
government to discuss the mining regime. 
 
¶15. (SBU) The Zambia Daily Mail reported on September 10 that 
Secretary to the Treasury Evans Chibiliti, who appeared before a 
parliamentary committee on estimates, said that the GRZ had deferred 
its collection of windfall tax until discussions between the two 
parties are completed.  He said the mining companies had appealed 
the windfall taxes to the late President Mwanawasa, who had asked 
Qthe windfall taxes to the late President Mwanawasa, who had asked 
the Minister of Finance to review it.  He said government would 
defer the tax until it had concluded a proper assessment with the 
Zambia Revenue Authority.  The parliamentary committee was informed 
that only two companies had paid the windfall tax so far.  It is 
hoped that a compromise will be struck between the mining companies 
and GRZ for the benefit of the Zambian economy.  Zambia's copper 
output for the six months rose to 286,750 tons, an increase of 20% 
over the same period last year, and is on course to reach 600,000 
tons for 2008 versus 535,000 tons in 2007.  Cobalt production rose 
2,230 tons, an increase of 2% over the 2,188 produced in the first 
half of last year. 
 
--------------------------------------- 
Slow Mining Right Conversions Worry SAG 
--------------------------------------- 
 
¶16. (SBU) South African Minister of Minerals and Energy Buyelwa 
Sonjica expressed her concern about the slow pace of mining rights 
conversions at a Mining Summit in Johannesburg on September 9.  The 
Summit was convened to discuss transformation issues in preparation 
 
PRETORIA 00002128  005 OF 006 
 
 
for review of the Mining Charter in 2009.  She said less than 30% of 
old-order mining rights applications had been submitted for 
conversion and submissions close to the deadline of April 30, 2009 
would create unnecessary bottlenecks in processing.  On the issue of 
black economic empowerment (BEE), Sonjica stated that although there 
had been a number of large transactions in the sector, the issue of 
historically disadvantaged individuals fronting as legitimate BEE 
partners remained a challenge.  She said that few of the empowerment 
transactions embraced the true spirit of broad-based BEE, which is 
to introduce effective participation of the historically 
disadvantaged into the SA mining industry. 
 
¶17. (SBU) The Minister also urged mining houses to find more 
meaningful ways of working with local communities, and expressed 
worries about tensions between these communities and the mining 
companies.  In this context, unions are planning to protest the 
mining sector's failure to provide power and infrastructure to rural 
communities from which they source labor.  Sonjica said that 
communities would not oppose mining if they were meaningful 
beneficiaries and were consulted on mine development plans.  She 
criticized comments by local analysts about disinvestment in South 
Africa and said the DME had constituted a task team to investigate 
such reports.  She cited the South African Reserve Bank figures 
indicating progressive growth of fixed-capital formation in the 
mining sector from approximately $3 billion in 2004 to $5 billion in 
¶2007.  (Comment.  The Minister made no mention of the much larger 
capital inflows into mining countries such as Australia and Canada 
during the same period, or the dearth of investment between 2000 and 
2004, when mining companies were waiting for the new Act to be 
announced.  End Comment.).  Analysts cite the following as 
impediments to investment: lack of infrastructure and skills; power 
disruptions and shortages; distance to new markets, typically the 
Far East; the new mining and BEE legislation that have created 
investor uncertainty; and currency fluctuations.  The minister 
claimed, without being specific, that the government had taken many 
steps to address these challenges. 
 
-------------------------------- 
Mine Fatalities Down But Not Out 
-------------------------------- 
 
¶18. (SBU) The National Union of Mineworkers (NUM) has launched a 
series of one-day protests against on-going fatalities in mining 
(and other industries), despite an annualized 18% reduction in fatal 
accidents in 2008 compared to 2007 (132 deaths to September 23, 2008 
compared to 221 for the whole of 2007).  The NUM has proposed heavy 
fines and jail sentences for mine managers who fail to observe the 
tenets of the South African Mine Health and Safety Act (1996).  NUM 
also blames government for a lack of qualified and experienced 
inspectors able to carry out routine mine inspections.  Minister 
Sonjica said mine safety audits ordered by President Mbeki earlier 
this year had been completed and would be released after being 
presented to the President.  A mining industry expert said the audit 
Qpresented to the President.  A mining industry expert said the audit 
was not credible, due to skills shortages at the ministry. 
Official figures for deaths in other industries are not available, 
but a number of fatal accidents on construction sites and in 
factories have been reported.  The mining industry has placed blame 
at the door of the SAG's black economic empowerment (BEE) policies 
because they claim it pushes inexperienced and unqualified people 
into positions of authority and leadership for which they are not 
yet ready. 
 
--------------------------------------- 
Titanium Mining Go-Ahead for Wild Coast 
--------------------------------------- 
 
¶19. (SBU) A twelve-year-old turf battle between the Department of 
Minerals and Energy (DME) and the Department of Environmental 
Affairs and Tourism (DEAT) ended in July when DME approved titanium 
dune mining on the Transkei Wild Coast, located on the coast of the 
Eastern Cape Province.  The DME granted Australian mining company 
Mineral Commodities (MRC) rights to extract titanium from the 
Xolobeni Mineral Sands project.  The sand dunes are reported to 
contain over 346 million tons of titanium, with an estimated value 
of $1.46 billion, and in an area of high unemployment and rural 
poverty.  A DME spokesperson was adamant that decisions on mining 
 
PRETORIA 00002128  006 OF 006 
 
 
applications should not be driven "only by environmental issues", 
and must take into consideration the socio-economic circumstances of 
the communities in the area. 
¶20. (SBU) the Department of Environmental Affairs and Tourism (DEAT) 
and an environmental group called "Sustaining the Wild Coast" 
maintain that the mining project would cause irreparable harm to the 
ecosystem, which includes internationally recognized unique biomes. 
They also claim that the environment, land, and mineral rights of 
local inhabitants will be violated.  The DEAT minister nevertheless 
plans to streamline the processing of environmental applications so 
as not to hold up needed development.  Environmentalists also object 
to a proposed coastal extension of the N2 national highway (which 
would also serve the mine) from Port Edward in KwaZulu/Natal to Port 
Elizabeth in the Eastern Cape.  The existing highway goes inland and 
has little scenic attraction.  A coastal road from Port Edward to 
Port Elizabeth would extend the touristically attractive Garden 
Route from Port Elizabeth to Cape Town and open 800 kilometers of 
Eastern Cape coastline to tourism and employment. 
 
------- 
NUCLEAR 
------- 
 
-------------------------------------------- 
Nuclear Project Decision Process in Progress 
-------------------------------------------- 
 
¶21. (SBU) State-owned power utility Eskom said on September 16 that 
the procurement and investment decision process for the proposed 
Nuclear-1 pressurized water reactor (PWR) nuclear power stations is 
underway, noting that no decision had yet been taken.  Eskom 
appealed to the media "and other interested parties" to allow space 
for the process to unfold and be concluded.  One Eskom manager said 
the decision was imminent, but another spokesman said the decision 
would be finalized by year-end.  Eskom is evaluating bids for the 
proposed nuclear power stations from two suppliers of PWR 
technology: the N-Powerment Consortium led by Westinghouse of the 
U.S, and the EPR Consortium led by Areva of France.  The N-Powerment 
Consortium is offering three 1,140 MW AP1000 units for a total 
station capacity of 3,420 MW, while the EPR Consortium is offering 
two 1,650 MW EPR units for a total station capacity of 3,300 MW. 
The decision could be further delayed by President Mbeki's 
resignation on September 21 and the appointment of a new cabinet on 
the 25th. 
 
----------- 
ENVIRONMENT 
----------- 
 
-------------------------------------- 
Air Quality Monitors Measure Hot Spots 
-------------------------------------- 
 
¶22. (SBU) The Department of Environmental Affairs (DEAT) and the 
Mpumalanga Provincial Department of Agriculture and Land Affairs 
(DALA) installed new air quality monitoring stations over a 31,106 
square kilometer area encompassing a number of small towns in 
Mpumalanga Province.  The region is noted for its concentration of 
coal-fired power stations, heavy industries, residential coal 
burning, and veld fires, all of which contribute to its severe air 
pollution problems.  The DEAT Deputy Minister has stated that the 
new air quality monitoring stations will identify pollutants, 
Qnew air quality monitoring stations will identify pollutants, 
including benzene, carbon monoxide, lead, and sulfur dioxide, and 
the specific areas from which they come.  The data collected will be 
made available to the general public and to relevant stake holders 
such as the Air Quality Officers Forum, which includes 
representatives from other effected municipalities.  The deputy 
minister noted that DEAT would present identified polluters with 
proof of their pollution levels and would work with them to remedy 
the situation over a stipulated time frame.  Polluters could be 
subjected to fines or jail terms if they failed to comply with 
quality standards and/or time frames.  The monitoring stations were 
installed at a cost of $134,000 each, and were partly sponsored by 
the Royal Danish Embassy. 
 
BOST