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TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" - 
Issue 6, June, 2009 
 
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. 
 
¶2. (SBU) CONTENTS: 
 
HOT NEWS 
Mining Production Down in May 
 
ENERGY 
Sasol-Uzbekistan Gas-to-Liquids Venture 
GTL Plant Looking for New Gas 
Anglo Platinum Fuel Cell Power 
Eskom Gets 31.3% Tariff Increase 
Eskom Coal Gasification Plant 
Eskom Build Plan 
 
MINING 
Tata Eyes Coal Production in Mozambique 
Mine Hostages Freed 
Mine Labor Negotiations and Wage Gaps 
Free Market or Nationalized Mining 
Travails of Anglo American 
 
-------- 
HOT NEWS 
-------- 
 
----------------------------- 
Mining Production Down in May 
----------------------------- 
 
¶3. (SBU) South African mining output fell by 14.5% in May 
year-on-year as major companies, including Anglo Platinum and 
Xstrata, cut production after slowing global economic growth reduced 
the demand for commodities.  Mineral output other than gold fell by 
15.1%, while gold production declined by 10.5% and local diamond 
production by 62.4%, according to Statistics South Africa.  Anglo 
Platinum and Lonmin, the world's first and third biggest platinum 
producers, shut mines in South Africa on slumping demand for the 
metal, which is used mainly in jewelry and anti-pollution devices 
for cars.  Xstrata and Samancor, the world's biggest ferrochrome 
producers, also closed furnaces.  April's mineral sales dropped by 
19.4%, to about $2.5 billion, and non-gold minerals dropped by 
23.8%.  Diamond production in May fell 1% compared to April and rose 
by 1.9% for the three months ending 31 May, compared to the previous 
quarter. 
 
------ 
ENERGY 
------ 
 
 
--------------------------------------- 
Sasol-Uzbekistan Gas-to-Liquids Venture 
--------------------------------------- 
 
¶4. (SBU) Sasol, South Africa's coal-to-liquid fuels and 
petrochemical producer, announced on July 15 that it has signed a 
Joint Venture Agreement with Uzbekneftegaz (the National Oil and Gas 
Company of Uzbekistan) and Petronas of Malaysia for the development 
and implementation of a gas-to-liquids (GTL) project in Uzbekistan. 
 
PRETORIA 00001615  002 OF 007 
 
 
Sasol's Group General Manager, Petronas' Vice President, and 
Uzbekneftegaz's Chairman of the Board of Governors met with the 
Deputy Prime-Minister of the Republic of Uzbekistan for the signing 
ceremony in the country's capital of Tashkent.  The GTL facility 
will employ Sasol's proprietary Slurry Phase Distillate (SPD) 
process to annually produce some 1.3 million tons of superior 
quality products such as diesel, kerosene, naphtha and liquefied 
petroleum gas (LPG).  According to Sasol, its SPD is sought after 
worldwide as the process produces a clean-burning, high-performance 
fuel for diesel engines.  The project now moves into the feasibility 
phase, which will be overseen by a joint venture company to be 
formed between the three partners. 
 
------------------------- 
GTL Plant Looking for Gas 
------------------------- 
 
¶5. (SBU) State-owned oil company PetroSA's Mossel Bay gas-to-liquid 
(GTL) plant is expected to run out of natural gas supply by 2011. 
The company is currently in talks to import 500,000-700,000 tons of 
liquefied natural gas (LNG) a year to help extend the life of its 
refinery to beyond 2015, according to PetroSA's vice president for 
new upstream ventures, Everton September.  The process converts 
natural gas into high quality, zero sulfur, diesel, petrol and 
kerosene and the products are sold into local markets through major 
company retail outlets.  PetroSA is currently looking for 
close-to-shore sites for an LNG offloading facility to minimize 
costs and transmission risks, but is meeting with resistance from 
wealthy home-owners who want the facility further away.  The 
estimated cost of the offloading facility is $250 million and the 
company is also planning to spend $650 million to explore for new 
gas reserves.  September said PetroSA was also in discussions with 
U.S. company Forest Oil regarding the development and supply of gas 
from their off-shore Ibhubesi gasfield. 
 
¶6. (SBU) Limited gas resources off the west and south coasts of 
South Africa and Namibia have been known for decades.  The south 
coast reserves have been exploited since 1992 to supply the world's 
biggest commercially operating gas-to-liquids (GTL) plant at Mossel 
Bay.  The Ibhubesi gasfield off South Africa's west coast is 
70%-owned by U.S. company Forest Oil.  Ibhubesi's resource has not 
been fully defined, but is large enough to move ahead, according to 
Forest Exploration International commercial director John Langhus. 
The company is awaiting production rights from the Department of 
Minerals, and if granted, could start production in 2012.  The gas 
is likely to be used for electricity generation, with an initial 
production of 100 million cubic feet per day, rising to about 225 
million cubic feet per day in the future.  Langhus said the initial 
supply would be sufficient to power a base-load 700 megawatt 
combined-cycle gas turbine (CCGT) or a 400 megawatt peaking power 
open-cycle gas turbine (OCGT).  The Kudu gasfield off the Namibian 
Qopen-cycle gas turbine (OCGT).  The Kudu gasfield off the Namibian 
west coast, when operational, is expected to provide the bulk of its 
gas to the Cape.  The South African company Gigajoule has announced 
a $300 million investment in infrastructure to transport the gas to 
industries in the Western Cape.  It has applied to the National 
Energy Regulator (Nersa) for a license for this purpose and has 
signed a MOU with Tullow Oil, 70% owner of Kudu, for the supply of 
gas. 
 
------------------------------ 
Anglo Platinum Fuel Cell Power 
------------------------------ 
 
¶7. (SBU) Anglo Platinum (Angloplats) has unveiled a fuel cell power 
plant at sister company Anglo Coal's coalbed methane exploration 
site in the Waterberg coal field in Limpopo Province.  The plant has 
begun converting methane gas to electricity.  The demonstration unit 
was purchased from the U.S. company United Technologies UTC Power 
and can produce up to 200 kilowatts of electricity, sufficient to 
power the operations at Lephalale.  An arrangement with Eskom will 
feed excess power back into the grid.  The fuel cell also has the 
capacity to stand alone in the event of grid failure.  It is said to 
 
PRETORIA 00001615  003 OF 007 
 
 
use about a third of the methane gas that Anglo Coal is producing at 
the site; the rest is being flared because carbon dioxide is a less 
harmful greenhouse gas than methane.  While fuel cells are generally 
considered a clean energy technology, they have a small carbon 
dioxide footprint.  Angloplats says it is considering applying for 
carbon credits for the project as the carbon dioxide produced by the 
fuel cell is about half that of a thermal power plant.  About 270 of 
UTC's fuel cells have been installed around the world, but this will 
a first for Africa. 
 
¶8. (SBU) Angloplats' interest in fuel cells lies in its use of 
platinum as a catalyst to generate the hydrogen that powers the 
cells.  Angloplats has a 17.5% stake in Johnson Matthey Fuel Cells 
in the belief that fuel cells will drive long-term demand for 
platinum.  Angloplats' head of market development and research, 
Anthea Bath, sees the Lephalale fuel cell as an important 
demonstration project that offers South Africa a "unique solution" 
for clean energy.  Angloplats is partnering with the Department of 
Science and Technology to examine the application of fuel cells in 
Africa.  Bath said the total installed cost of the Lephalale fuel 
cell was about $1.25 million, but she expected costs would 
eventually come down.  The UTC fuel cell also produces heat that 
could be used in commercial building applications, such as space and 
water heating. 
 
-------------------------------- 
Eskom Gets 31.3% Tariff Increase 
-------------------------------- 
 
¶9. (SBU) The National Energy Regulator of South Africa (Nersa) has 
granted state-owned electricity utility Eskom a 31.3% power tariff 
increase, which includes an environmental levy.  Eskom had asked for 
a 34% hike.  The increase granted will run from July 1, 2009 to 
March 31, 2010, and will raise the average standard electricity 
tariff from the current SA 25.24 cents to SA 33.14 cents per 
kilowatt hour (about US 3.1 and US 4.1 cents per kilowatt hour, 
respectively).  The increase will result in tariff revenues of 
between R62 billion and R64.7 billion ($7.75 billion and $8.09 
billion, respectively).  Nersa Chairperson Collin Matjila said the 
sustainability of Eskom, the security of electricity supply, and the 
affordability of electricity were the key considerations in Nersa's 
decision.  He said low-income customers would receive an interim 
price hike of 15% until the implementation of special tariffs for 
the protection of the poor.  Nersa said there would be further 
above-inflation tariff increases in the future, but could not give 
an exact projection -- increases of 25% per year for the next few 
years have been mooted by Eskom. 
 
¶10. (SBU) The electricity tariff increase will assist Eskom to cover 
its operating costs and has been positively received by the 
government.  The government agreed that Eskom tariff revenues should 
reflect the full costs of supplying electricity, including a 
reasonable risk-adjusted margin or return to ensure the industry 
Qreasonable risk-adjusted margin or return to ensure the industry 
remains economically viable, stable, and fundable in the short, 
medium and long term.  Labor, consumers, and business, on the other 
hand, are not as happy and say that, while the increase was in line 
with what had been expected, it would have negative effects in the 
medium term.  They believe that the increase will affect input costs 
for business and generate a 'ripple' effect that will increase the 
price of most goods and services to consumers.  This, in turn, would 
have a negatively impact on inflation, and cause a further slowdown 
in economic activity.  Some accuse Eskom and government of poor 
management, poor planning, and underinvestment, which caused the 
energy crisis in the first place.  Some trade unions opine that the 
increase is merely an attempt by government to shift the burden of 
Eskom's capital costs to consumers. 
 
----------------------------- 
Eskom Coal Gasification Plant 
----------------------------- 
 
¶11. (SBU) State-owned power utility Eskom's Majuba thermal power 
 
PRETORIA 00001615  004 OF 007 
 
 
station in Mpumalanga Province has been plagued by an inadequate 
supply of coal from its feeder mine.  Coal has had to be transported 
by road from distant mines, and plans are to build an 80-kilometer 
rail link from the mines to the power plant for this purpose.  The 
coal mine at Majuba hosts a 3.5 meter thick coal seam, 300 meters 
below ground.  However, the nature of the geology prevents efficient 
bulk mining.  Eskom embarked on a project to test the viability of 
utilizing the energy contained in the coal some three years ago. 
They employed a technique known as in-situ underground coal 
gasification (UCG), which has been successfully demonstrated in the 
U.S., Russia, and Australia. 
 
¶12. (SBU) Under the UCG technique, boreholes are drilled into the 
coal seam, which is then ignited using oxygen injection to control 
the heat and the expansion of the "fire".  The heat drives off the 
coalbed methane and gases generated by the partial combustion of 
coal, which are then run through gas turbines to generate 
electricity.  Eskom's corporate consultant, Dr. Mark van der Riet, 
says that an efficient and cost-effective way to generate 
electricity using UCG is through integrated gasification combined 
cycle (IGCC) technology.  The Council for Scientific and Industrial 
Research (CSIR) is currently developing a 6-megawatt demonstration 
plant and computer model to generate data for use in a feasibility 
study for the commercialization of a 2,100 megawatt plant. 
 
---------------- 
Eskom Build Plan 
---------------- 
 
¶13. (SBU) South Africa's overall electricity demand is running at an 
annualized 2.7% lower than the same time in 2008 due to the global 
economic crisis, according to Eskom Enterprises division MD Braam 
Conradie.  This presented opportunities to significantly reduce the 
capital costs of projects underway he said.  To date, 13 gigawatts 
of power are under construction, some 4,440 megawatts of capacity 
have been installed, 2,062 kilometers of transmission lines laid, 
and 10 by 100 megavolt-amp transformers completed.  Eskom has put 
some projects on hold, namely the Tubatse pump-storage scheme and 
the Majuba rail line, but other projects will go ahead in 
preparation for the economic upturn.  The "big two" thermal 
stations, Medupi and Kusile, and the pump-storage station Ingula, 
have a combined capacity of about 12 gigawatts (see above).  Reports 
indicate the plants should be commercially ready between 2012 and 
2017, will have greater input from the government, and are 
progressing on schedule.  Although Eskom has decided not to proceed 
with the Nuclear-1 investment for the time being, it claims to 
support nuclear power as the way forward and would continue 
developing its nuclear program, but with a partner and with greater 
involvement from the government. 
 
------ 
MINING 
------ 
 
--------------------------------------- 
Tata Eyes Coal Production in Mozambique 
--------------------------------------- 
Q--------------------------------------- 
 
¶14. (SBU) Tata Steel, the sixth biggest steel producer in the world, 
and its joint venture partner, Australia-based Riversdale, plan to 
start full production at the Benga coking coal project in Mozambique 
by 2014.  Production should begin in 2011 and Benga is likely to 
yield over 20 million tons of coal per year.  Tata Steel has a 35% 
stake in the JV and a secured right for 40% of the coal to feed its 
Corus facilities in the UK and Europe.  Riversdale said it has 
completed the feasibility study, which envisages three stages of 
development of which it has obtained 65% ($169 million) of the 
funding for stage 1.  The Mozambique government awarded a mining 
contract for Benga to the Tata Steel JV in May 2009. 
 
------------------- 
Mine Hostages Freed 
 
PRETORIA 00001615  005 OF 007 
 
 
------------------- 
 
¶15. (SBU) Eastern Platinum's Crocodile River Mine (CRM) in South 
Africa has terminated the mining services contract for companies 
whose employees participated in an illegal industrial action of 
hostage taking.  The mine spokesman said they would in the future 
use only permanent company employees to carry out core mining 
activities.  Further, he said that charges had been brought against 
those who were engaged in the illegal actions. 
 
¶16. (SBU) About 500 contract workers staged a sit-in on July 9, 
holding some nine supervisors underground to back their demands for 
permanent employment by the mine instead of by their respective 
contractors.  The workers voluntarily returned to the surface on the 
morning of Saturday July 11, following successful mediation between 
the parties, and were repatriated home.  Eastern Platinum CEO Ian 
Rozier said the sit-in had ended and the supervisors released 
unharmed.  CRM management has indicated that it remains committed to 
ongoing discussion on this issue, but only through the appropriate 
channels provided under the terms of South Africa's labor relations 
legislation. 
 
------------------------------------- 
Mine Labor Negotiations and Wage Gaps 
------------------------------------- 
 
¶17. (SBU) Winter is generally the time of discontent in the South 
African mining industry.  It is the time when annual wage 
negotiations get underway and everyone in the industry enters a 
stressful period until negotiations are concluded, generally by the 
end of July, if no strike action is taken.  The South African 
industry and unions have generally resisted multi-year contracts for 
various reasons and this ensures industry disruptions on an annual 
basis.  Wage negotiations for 2009 have been clouded by a year of 
high inflation and interest rates, a volatile currency, record high 
commodity prices followed by the financial crisis and record falls 
in commodity prices.  Many commodity prices declined by more than 
50%.  Gold has been the one exception and it has generally retained 
its value.  This situation has made it difficult for both labor and 
industry to put forward or respond to realistic wage demands, with 
labor generally looking backwards to the helicon days of 2007-2008 
and industry looking forward to a possible bleak future for 
direction.  Labor has demanded a 15% across-the-board increase in 
basic wages, a 21% increase of the entry level wage, and a number of 
other benefits, which the Chamber of Mines (COM) negotiator 
estimates would increase mine labor costs by 30% to 42%.  The COM 
has offered a 9.5% inclusive package increase and believes that the 
two sides are close to an agreement.  This package has, with a 
higher rate for lower-paid workers, has been accepted. 
 
¶18. (SBU) The wage gap between workers and top executives in the 
mining industry has increased during the past three years, despite 
the above-inflation wage increase awarded in 2008.  According to a 
Qthe above-inflation wage increase awarded in 2008.  According to a 
report by union-backed think-tank Labor Research Services (LRS), the 
ratio between workers' wages and chief executives' salaries 
increased from 401 in 2005 to 453 in 2008.  LRS Director Saliem 
Patel acknowledged that these estimates did not include executive 
remuneration in the form of share options and the actual gap was 
likely to be wider.  Research has shown that the wage of a general 
worker in July 2004 was R547 a week and R768 a week in 2009 ($89 and 
$90 at the respective dollar/rand exchange rates), an increase of 
40% in rand terms, but zero in dollar terms.  However, over the same 
period inflation was 29%, thus the real increase in wages was 
considerably less.  The report indicates that industry profits have 
increased on average by 71% in 2005, 114% in 2006, and 19% in 2007 
and 2008. 
---------------------------------- 
Free Market or Nationalized Mining 
---------------------------------- 
 
¶19. (SBU) The move in most African mining jurisdictions is towards a 
market economy and away from nationalization, according to the 
 
PRETORIA 00001615  006 OF 007 
 
 
International Bar Association mining law chairperson Peter Leon.  He 
said countries such as Ghana, Tanzania, Namibia, and Botswana had 
introduced reforms to the mineral laws to encourage foreign 
investment.  This contrasts with calls for the nationalization of 
South Africa's mining industry by the African National Congress and 
the South African Communist youth leagues and the Congress of South 
African Trade Unions.  Leon welcomed statements by President Zuma 
and Mineral Resources Minister Susan Shabangu that nationalization 
of the mining industry was not on the government's agenda, but that 
a debate on the issue is needed.  Leon said his concerns are that: 
-- the call was in the midst of a global financial crisis and was 
probably aimed at testing stakeholder reaction; 
-- the call coincided with the government's decision to revive the 
State-owned mining company; and 
-- the debate could have negative implications for mining 
investment. 
African Exploration Mining & Finance Corporation, the name of the 
proposed government mining company, was originally established in 
1944 by the then South African government to support the war effort, 
but was never operational. 
 
¶20. (SBU) Chamber of Mines Chief Executive Mzolisi Diliza said the 
South African government did not have the funds to nationalize the 
mining industry and pay market-related compensation.  He said the 
industry was worth almost $250 billion on the Johannesburg Stock 
Exchange (JSE) and had an income of $51 billion in 2008.  At the 
same time, expenditure was $51 billion and dividends paid amounted 
to only $3 billion.  The Department of Mines Director-General 
Sandile Nogxina warned the industry that transformation should be 
accelerated and he saw no problem with a policy debate on 
nationalization.  The mooted debate received a warmer reception from 
black investors, who expressed the belief that blanket 
nationalization will not work, but greater state involvement is 
required to achieve meaningful black economic transformation and the 
government's developmental goals.  An economist who runs a small 
mining firm said the mineral rights already belonged to the state 
and there was a case to be made for government becoming a major 
shareholder in all of the mining operations in the country.  He 
cited the success of joint ventures between diamond producer De 
Beers and the governments in Botswana (Debswana) and Namibia 
(Namdeb).  Black investors all expressed concerns about government's 
ability to actually run mines should the assets be nationalized. 
 
-------------------------- 
Travails of Anglo American 
-------------------------- 
 
¶21. (SBU) Anglo American, the world's fifth biggest multinational 
mining company by value (including Chinese companies), is under 
siege.  While it owns some of the best mineral and platinum assets 
in the world, Anglo has consistently underperformed its peers such 
as Australian-based BHP-Billiton, London-based Rio Tinto, and 
Qas Australian-based BHP-Billiton, London-based Rio Tinto, and 
Brazil-based Vale in acquiring quality assets, expanding production, 
and maintaining share price.  Analysts point to poor management, 
where the company has consistently missed production, financial, and 
budget targets, particularly with regard to platinum.  They also 
point to poor executive decision-making where peers have out-bid 
them for new assets, and iron ore assets and share buy-backs were 
bought at the height of the commodity boom.  This, together with the 
slump in commodity prices, the cutting of thousands of jobs, and the 
group's missed profit forecasts, has cost shareholders their final 
2008 dividend.  As a consequence, questions are being raised about 
the leadership abilities of a number of Anglo's top management, in 
particular the relatively new CEO Cynthia Carroll. 
 
¶22. (SBU) Anglo has been under pressure on a number of fronts.  The 
Department of Minerals wanted Anglo to appoint a black South African 
to replace their retiring Chairman Mark Moody-Stuart "in the 
interests of black economic empowerment and transformation".  Anglo 
resisted the pressure and appointed Englishman John Parker as 
chairman, but is still under pressure to appoint a black South 
African as Deputy Chairman.  Anglo has also become a takeover target 
 
PRETORIA 00001615  007 OF 007 
 
 
for its peers.  Xstrata, 35% owned by the world's biggest minerals 
and metals trading company Glencore, has made a bid for Anglo in "a 
merger of equals", which Anglo management rejected.  Xstrata was 
created from Glencore coal assets.  Its CEO, South African Mick 
Davis, has led Xstrata's growth by acquisition into the world's 
seventh biggest diversified metals and mining company by value.  The 
rationale for the merger with Anglo, according to Xstrata, is that 
the combined company would bring about operating synergies (valued 
at about $1 billion), an enhanced scale of operations, and provide 
financial flexibility to fund future growth.  A combined 
Xstrata-Anglo would be the world's biggest producer of thermal coal, 
platinum, zinc, and ferro-chrome; second largest copper producer; 
fourth in nickel; and among the top five in coking coal and iron 
ore.  Opposition to the merger may come from competition authorities 
in a number of countries and from the SAG, which fears the loss of 
jobs and its influence over Anglo American.  The battle continues. 
 
 
La Lime