VZCZCXRO2304
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #1145/01 1591031
ZNR UUUUU ZZH
R 081031Z JUN 09 //ZDK PER UR 4147//
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8737
INFO RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHAK/AMEMBASSY ANKARA 0229
RUEHBJ/AMEMBASSY BEIJING 0990
RUEHBY/AMEMBASSY CANBERRA 0849
RUEHLO/AMEMBASSY LONDON 1755
RUEHMO/AMEMBASSY MOSCOW 0998
RUEHNE/AMEMBASSY NEW DELHI 0590
RUEHOT/AMEMBASSY OTTAWA 0807
RUEHFR/AMEMBASSY PARIS 1590
RUEHSG/AMEMBASSY SANTIAGO 0266
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 02 PRETORIA 001145 
 
SIPDIS 
SENSITIVE 
 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DEPT FOR AF/S, EEB/ESC AND CBA 
DOE FOR SPERL AND PERSON 
DOC FOR ITA/DIEMOND 
 
E.O.   12958: N/A 
TAGS: EMIN ELAB ENRG KHIV SF
SUBJECT: FREE STATE STRUGGLES WITH GOLD GEOLOGY AND ILLEGAL MINERS 
 
REF: A) Pretoria 842 
B) 08 Pretoria 565 
 
PRETORIA 00001145  001.5 OF 002 
 
 
This cable is not for Internet distribution. 
 
¶1.  (SBU) Summary: Gold-mining in the Free State Province is 
emblematic of broad challenges in profitably mining gold in South 
Africa.  Controlling costs, managing labor, assuring safety and 
power, and exploiting remaining low-grade deposits are difficulties 
that have caused South Africa's production and ranking to slip over 
time (Reftels).  The Free State was once a significant contributor 
to South Africa's ample production, but gold-mining there is in 
decline as high-grade deposits have been depleted.  Harmony Gold is 
selectively developing and operating brown- and green-field 
production around the Welkom area, but illegal mining is an 
incessant problem given abundant abandoned, interconnected shafts, 
nagging unemployment, and relatively high gold prices.  The bodies 
of 81 illegal miners were recently recovered from a derelict Harmony 
shaft, apparently afflicted by an underground fire.  End Summary. 
 
¶2.  (SBU) Minerals/Energy Officer and Specialist went underground at 
two of Harmony Gold's Welkom, Free State mines - Target and Phakisa 
- on May 27-28.  The Embassy team visited with Harmony Free State 
Chief Operations Officer Tom Smith in Welkom and earlier in the 
month at the Johannesburg offices of Harmony's BEE partner African 
Rainbow Minerals (ARM). 
 
---------------------------------- 
Harmony Targets Low-Grade Deposits 
---------------------------------- 
 
¶3.  (SBU) Harmony Gold is one of the largest gold producers in South 
Africa, accounting for about one-third of the gold produced in the 
country.  Harmony specializes in reinvigorating mature gold mines of 
marginal profitability by applying low-cost methods of extraction 
and refining for low-grade gold deposits in the Free State and 
Northwest Provinces.  COO Tom Smith told Minerals/Energy Officer 
that 43 percent of Harmony's shareholders are in the U.S.  The 
largest shareholder at 16 percent is the BEE company ARM, thereby 
allowing the company to comply with BEE and Mining Charter 
requirements for black ownership.  The company is also developing 
gold mines in Papua New Guinea and Australia. 
 
¶4.  (SBU) Target Gold Mine encompasses a number of legacy mines 
north of Welkom around the site of the first discovery of gold in 
the then Orange Free State in the 1940s.  The deep-level mining 
currently occurs around 2,500 meters underground, targeting the El 
Dorado reef mineralization.  The Harmony Target Mine employs a 
unique "massive" mining approach to exploit areas where a number of 
economic gold-bearing reefs have been compressed and up-turned.  The 
company uses remote loaders in 15-25-meter dimensioned underground 
chambers to assure safety from rock falls and fragmentation.  (Note: 
most deep South African mines use hand hydraulic drills to mine 
narrow reefs.  End Note.)  The Target mine mined and processed 
622,000 tons of ore to produce 2,644 kilograms of gold in 2008.  The 
Embassy team also witnessed the pouring of the final gold product 
QEmbassy team also witnessed the pouring of the final gold product 
into 23-kilogram, 90-percent gold bars, which are sent to the 
company's refinery in Johannesburg. 
 
¶5.  (SBU) The Embassy team also visited the newly developed Phakisa 
mine where management has devised some innovative projects, 
including a "rail-veyor" for shipping the gold ore underground to 
the hoisting shaft and a specialized ice plant for cooling of the 
mine working areas.  Harmony management at both mines described the 
company's demonstrable commitment to worker safety and the company's 
commitment to manage mine development and operations to control 
costs.  They were frustrated with the combativeness of the National 
Union of Mineworkers (NUM) and the high cost of labor in the mining 
sector (about 60 percent of operating costs).  Both mines' deposits 
exhibit unique challenges in profitably developing and exploiting 
the mines.  The neighboring mines of the Pamodzi Mining Company are 
 
PRETORIA 00001145  002.3 OF 002 
 
 
suffering a painful liquidation affecting thousands of workers, 
showing that management has little room for error in controlling 
costs and financing.  Harmony is considering bidding on the 
liquidated assets.  Both mines' management said that HIV/AIDS was a 
dire problem, estimating prevalence at 20 percent.  They said that 
some locals were "denialist" in their approach to the risks 
associated with HIV/AIDS, as well as to the risks associated with 
illegal mining. 
 
--------------------------------------------- -- 
Illegal Mining Highlighted by Rising Death Toll 
--------------------------------------------- -- 
 
¶6.  (SBU) Harmony officials complained about the growing and 
difficult problem of illegal or - as they label it - criminal 
mining.  The Free State is particularly susceptible to this threat, 
because of the presence of interconnected, derelict and current 
mine-shafts and high-carbonized gold reefs.  Harmony claims it is 
difficult to keep the illegals out of the shafts because they are 
abetted and fed by legal workers.  Over the past week, 81 dead 
illegal miners have been brought to the surface and 294 illegals 
have been criminally charged, in a sensational incident reportedly 
related to an underground fire in an abandoned Harmony shaft. 
Harmony has already been adopting measures to combat this problem, 
such as tightened security, improved access control, and daily 
search operations underground.  Harmony has made clear that the 
safety of its workers is its top consideration and it has refused to 
send its workers into risky areas to search for illegals - alive or 
dead.  New Mining Minister Susan Shabangu visited Welkom and she and 
labor unions called for a probe and a multi-stakeholder task force 
to address this incident and the long-term problem.  Smith told 
Minerals/Energy Officer that rising unemployment and high gold 
prices have fed illegal mining by both locals and foreigners from 
Lesotho and Mozambique.  A Lesotho official said one-third of the 
dead illegal miners were from Lesotho.  Mine employees are tempted 
to profit by abetting the activities.  He said it was difficult to 
quantify, but as much as 100 tons of gold per year is reportedly 
exploited by organized criminal syndicates.  He complained that the 
unions often are more concerned about protecting the rights and 
interests of criminal miners than legitimate mining.  Most recently, 
Harmony announced the suspension of 57 of its permanent staff for 
illegally processing gold. 
 
¶7.  (SBU) Comment: The Free State's historic mines show-case two 
huge challenges, both with great public relations risks - illegal 
mining and legacy tailings with environmental consequences.  Harmony 
appears to be working hard to manage these issues, but they add to 
the existing threats of rising costs, labor complaints, and volatile 
gold prices.  Huge capital investment and operating costs are 
evidenced by Harmony's average yield of 4-6 grams of gold per ton of 
processed ore.  This is an immense rock-moving (from deep in the 
Qprocessed ore.  This is an immense rock-moving (from deep in the 
earth), milling, and processing business and margins are at risk 
from both ends - rising costs and volatile prices.  The Free State 
faces declining production and employment, but Harmony intends to 
keep extending the life of its mines, so there will remain some 
gold-mining for the foreseeable future. 
 
La Lime