VZCZCXRO7314
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0478/01 0710944
ZNR UUUUU ZZH
R 120944Z MAR 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 7665
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 0221
RUEHBY/AMEMBASSY CANBERRA 0814
RUEHLO/AMEMBASSY LONDON 1711
RUEHMO/AMEMBASSY MOSCOW 0962
RUEHOT/AMEMBASSY OTTAWA 0772
RUEHFR/AMEMBASSY PARIS 1546
RUEHSG/AMEMBASSY SANTIAGO 0237
RUCPDC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 04 PRETORIA 000478 
 
SENSITIVE 
SIPDIS 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
STATE FOR AF/S, EEB/ESC, EEB/CBA 
DOE FOR SPERL, PERSON 
DOC FOR ITA/DIEMOND 
 
E.O. 12958: N/A 
TAGS: EMIN ENRG EINV ETRD EPET KHIV ZI SF
SUBJECT: SOUTH AFRICAN MINING EXECUTIVES DISCUSS GLOBAL AND 
DOMESTIC CHALLENGES 
 
REF: 08 PRETORIA 2732 
 
¶1.  (SBU) SUMMARY: A group of South African mining executives 
expressed concern about the effects of the global commodity 
downturn on the mining sector and associated social 
transformation in South Africa.  They highlighted a number of 
challenges of doing mining business in South Africa, many 
directly related to the heavy hand of the state on the sector 
and key services like power, transport, telecom, and health. 
They saw signs of an upturn in Chinese demand for iron ore as 
a glimmer of hope.  They cited the mining sector as a leader 
for black economic empowerment and combating HIV/AIDS, where 
workforce prevalence rates have flattened.  A platinum 
executive with interests in Zimbabwe expressed pessimism 
about the unity government there.  End Summary. 
 
¶2.  (U) Charge hosted four South African mining executives 
for a lunch at her residence on March 5 for a tour d'horizon 
on the troubled mining sector.  Attendees were: 
 
Charge Helen La Lime 
Economic Counselor Perry Ball 
Commercial Counselor Craig Allen 
Minerals/Energy Officer David Young (note-taker) 
 
Chamber of Mines Economist Roger Baxter 
Consultant Con Fauconnier (former Kumba Resources CEO) 
Aquarius Platinum CEO Stuart Murray 
Anglo American Manager: Engineering Keith Prakke 
 
-------------------- 
Importance of Mining 
-------------------- 
 
¶3.  (SBU) Chamber of Mines Economist Roger Baxter provided 
his analysis on the importance of mining to the South African 
economy.  According to Baxter, mining: 
 
-- Contributes directly 6-8 percent of GDP. 
-- Contributes indirectly/induced 17-18 percent of GDP. 
-- Represents an even greater percentage of GDP in Northwest, 
Mpumalanga, Limpopo, and Free State Provinces. 
-- Provides over 500,000 direct jobs and another 500,000 
indirect jobs. 
-- Supports extended families of 10 million people. 
-- Supports the domestic economy.  Of R310 billion ($30 
billion) in mining revenues, R302 billion are captured 
locally through procurement, wages, capital expenditures, 
taxes, dividends, and bank interest.  Only a portion of 
dividends depart the country to pay back foreign investors. 
-- Expands initial investment with a multiplier effect of 2.5 
times. 
 
------------------------------------- 
Global Markets - How Bad Will It Get? 
------------------------------------- 
 
¶4.  (SBU) The consensus of the group was that the global 
commodity slowdown was generating dire effects on the South 
African economy.  Baxter said 30,000 mining jobs were at 
risk, but also pointed out that the industry had created 
60,000 over the last two years.  He noted that retrenchment 
in South Africa was not easy, requiring three months of 
consultation and justification with a variety of government 
and union entities.  Fauconnier said 17 of 20 ferrochrome 
furnaces at Merafe Resources had been closed because of 
global over-stocking, but he said the company was still 
trying to keep its skilled labor force.  The miners perceived 
Qtrying to keep its skilled labor force.  The miners perceived 
a welcome up-tick in iron demand, notably from China, an 
early indicator of a potential turn-around in the global 
steel market.  Former Kumba Resources (iron) CEO Con 
Fauconnier said iron ore sales were increasing from South 
 
PRETORIA 00000478  002 OF 004 
 
 
Africa's major mine, Sishen in the Northern Cape (Reftel). 
The guests agreed that China's growth would not likely sink 
below 8 percent, because of sustained domestic demand from 
rapid urbanization and government spending on infrastructure. 
 They believed that the global commodity market "will turn -- 
and when it turns, it will turn fast," because of the 
depletion of stocks and new projects.  Fauconnier said China 
will purchase 80 percent of sea-borne traded iron by 2025. 
 
------------------------- 
Intervention by the State 
------------------------- 
 
¶5.  (SBU) The mining guests were critical of the heavy hand 
of the state imposed on the domestic economy, particularly by 
the monopoly or dominant position of state power utility 
Eskom, state rail company Transnet Freight, and state 
controlled telecommunications company Telkom.  Baxter said 
the associated regulatory, infrastructure, power, and telecom 
constraints blocked South Africa from sustaining its growth 
potential of 4 percent.  Baxter noted that there had been 
some 3,000 changes to mining legislation and 4,000 changes to 
mining regulation since the ANC government took power.  He 
asserted that a new Zuma-led ANC government would not bring 
dramatic economic policy changes, but that there is a wide 
perception that the government has failed in service delivery 
to its citizens.  Baxter said privatization would have a 
pejorative meaning to the ANC struggle veterans, but the 
granting of private concessions would be a practical way to 
unblock constraints on growth. 
 
---------------- 
Power Challenges 
---------------- 
 
¶6.  (SBU) Power supply uncertainty has been a worry in the 
mining sector in South Africa and the region since the South 
African power crisis temporarily shut down mines in January 
¶2008.  State power utility Eskom has gained a respite from 
the global slowdown and resulting furnace closures, but South 
Africa's reserve margin remains only eight percent (versus an 
acceptable target of 15-20 percent).  Baxter said there were 
duplicative and redundant crisis task teams meeting last 
year, but he saw the government finally asserting greater 
clarity this year with the National Emergency Response team, 
representing diverse stakeholders.  Baxter and Fauconnier 
said financing for Eskom's R350 billion ($33 billion) 
five-year capital expenditure program for new supply was 
daunting.  The government has pledged direct equity support 
of R60 billion ($6 billion) and guarantees of R170 billion 
($17 billion), leaving a significant gap.  The group was 
frustrated that the government has been unable to create a 
transparent and attractive regulatory environment for gaining 
private investment in power.  Eskom's dominant position and 
artificially low pricing were persistent obstacles. 
 
¶7.  (SBU) Fauconnier was disappointed about the government's 
recent postponement of the Eskom nuclear power contract, but 
he saw eventual establishment of new nuclear power plants as 
Qhe saw eventual establishment of new nuclear power plants as 
a greater share in the energy mix as inevitable.  He said 
South Africa's next two mega-power stations (Medupi in 
Limpopo Province and Kusile in Mpumalanga Province - each 
almost 5,000 MW) were coal stations under construction.  The 
third would likely also be coal, but he predicted the fourth 
or fifth would have to be nuclear, alternating with another 
mega-coal facility.  Fauconnier said Medupi's cost had 
ballooned from R55 billion to over R100 billion from 
escalating input costs.  The mining executives were surprised 
at the Minister of Energy's recent announcement that the 
electricity distribution system was in crisis and required 
R27 billion ($2.5 billion) in deferred capital investment to 
keep it in working order. 
 
PRETORIA 00000478  003 OF 004 
 
 
 
-------------------- 
Transport Challenges 
-------------------- 
 
¶8.  (SBU) State railroad company Transnet Freight was a 
general target of frustration of the mining executives, 
because of the rail firm's uncertain and inefficient service 
delivery.  Baxter said Transnet's cost for shipping steel 
from the port of Durban to Johannesburg was greater than the 
cost of shipping steel from Shanghai to Durban.  He said 80 
percent of containers from Durban to Johannesburg were now 
shipped twelve hours by road, versus three weeks and the 
uncertainty of potential loss by rail.  Fauconnier said Kumba 
had made an offer for a private concession to fund expansion 
of the iron ore line from Sishen to Saldanha port, but 
Transnet refused.  A comparable private offer for augmenting 
coal transport to Richards Bay port has also been refused by 
Transnet.  Fauconnier said Transnet and the government 
appeared philosophically opposed to such a private 
undertaking and they were loath to lose or share the Sishen 
and Richards Bay rail lines, as they are the most lucrative 
of the six rail lines that lead to the major ports from the 
mineral-rich interior. 
 
------------------ 
Telecom Challenges 
------------------ 
 
¶9.  (SBU) The mining interlocutors voiced similar frustration 
with Telkom, the state-controlled, dominant 
telecommunications company.  South African consumers face 
high prices, even in mobile communication, where there is 
growing competition.  Murray noted that South African mobile 
service is expensive, but the service and coverage is 
excellent, compared to even developed countries like the U.S. 
and the U.K. 
 
--------------------------------------------- 
Transformation Challenges - BEE and Education 
--------------------------------------------- 
 
¶10.  (SBU) Mining managers accept Black Economic Empowerment 
(BEE) as a part of necessary social transformation to redress 
past injustices and see BEE as a reasonable cost of doing 
business in South Africa.  Under the mining charter, BEE 
equity must total 14 percent of total equity this year and 26 
percent by 2014.  Baxter said mining has provided leadership 
and the largest industry role in implementing BEE deals.  He 
said mining BEE deals total R150 billion ($14.5 billion) or 
35 percent of total BEE deals.  Fauconnier said he worked 
with one of the first big BEE deals wherein BEE firm Exxaro 
was created at a 3 percent cost to share-holders.  He noted 
the problem is that only a few black South Africans have 
benefited from BEE provisions.  Fauconnier said the current 
downturn was negatively impacting BEE deals, but mining 
companies were committed to making sure the deals remained 
viable.  The mining executives recognized that there was a 
risk that the government could increase the BEE requirements, 
but they said there was a practical limit for sustaining 
business.  Fauconnier expressed concern that a future ANC 
government could raise the 26 percent requirement.  He hoped 
Qgovernment could raise the 26 percent requirement.  He hoped 
that BEE could reach a self-sustaining basis, where all 
equity holders could practice normal business practices and 
share trading.  Prakke said an equally vexing challenge for 
South Africa is education, where performance was abysmal, 
notwithstanding education claiming a relatively high 6-7 
percent of GDP.  He said it was difficult for black 
university students to study engineering if they had failed 
or not been offered high school math and science courses. 
One solution would be to extend university studies by one 
year to provide remedial instruction in these areas. 
 
PRETORIA 00000478  004 OF 004 
 
 
 
------------------- 
HIV/AIDS Challenges 
------------------- 
 
¶11.  (SBU) The group was optimistic that the government role 
in health would continue to improve under new Minister of 
Health Barbara Hogan.  They pointed out that the mining 
sector has played a leadership role in addressing HIV/AIDS in 
its workforce since 1986.  Fauconnier said overall HIV 
prevalence in the workforce was 22-25 percent.  This is much 
lower than the commonly held belief that the rate is 35 
percent.  The good news is that the rate is now flat, they 
said, rather than increasing.  Baxter said there would be 
some variance between sectors, with gold higher because of 
its traditionally greater reliance on migrant foreign workers 
from neighboring SADC countries.  They said mining companies 
were gaining greater compliance on voluntary consultation 
testing programs.  Mining companies are also providing 
comprehensive treatment to families and communities, not just 
workers.  Baxter said the economics of "doing something, 
rather than doing nothing" on HIV/AIDS were compelling for 
mining companies.  This is why a lot of efforts are being 
taken to both treat HIV/AIDS and to prevent new infections. 
 
 
-------------------------------------- 
Doubts about Zimbabwe's New Government 
-------------------------------------- 
 
¶12.  (SBU) Aquarius Platinum Stuart Murray told Energy 
Officer after the lunch that he lacked any confidence in the 
unity government in Zimbabwe.  His company has significant 
platinum interests there.  He believed that until President 
Mugabe was really gone, the donor countries should maintain a 
hard position.  Murray thought it was not the right time to 
respond to Prime Minister Tsvangarai's appeal for funds.  He 
said ironically the dollarization of the economy was hurting 
his company.  Whereas there was no longer any forced 
conversion of some revenues into Zimbabwe dollars, the 
company now had to pay import duties in U.S. dollars, rather 
than Zimbabwe dollars.  Murray feared that there would be a 
resulting margin squeeze on platinum companies operating in 
Zimbabwe. 
 
¶13.  (SBU) Comment: The participants discussed the fact that 
many South African executives are forced to spend much of 
their time on power, transport, transformation, and health, 
rather than on traditional challenges such as mining, 
processing, and marketing minerals and finished products, 
which would be the primary focus of executives in Australia 
and Canada, for example.  He then noted that there seemed to 
be a relatively high rate of turnover for South African 
mining executives, perhaps because of burn-out.  Fauconnier 
agreed and said because of South Africa's complex set of 
circumstances, South African managers gain responsibility and 
complex skills at a young age and tend to be successful in 
Australia and other countries.  He said that six years was a 
good target for the useful term of a South African mining CEO 
(regretting that he hung on for eight years).  The mining 
Q(regretting that he hung on for eight years).  The mining 
executives were cautiously optimistic about the global market 
and South Africa's relative position in the global industry, 
but feared the possibility of greater government intervention 
on the part of future governments. 
 
 
LA LIME