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Viewing cable 09PRETORIA596, South Africa: Minerals and Energy Newsletter "THE ASSAY" -
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09PRETORIA596 | 2009-03-27 11:52 | 2011-08-24 01:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Pretoria |
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TAGS: EPET ENRG EMIN EINV EIND ETRD ELAB KHIV SF
SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 2, February, 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.
--------------------------------
CORRECTION Re Zambian Mining Tax
--------------------------------
¶2. (SBU) In the last issue of The Assay, Issue 1, January 2009, the
article "Zambia Abolishes Windfall Tax" stated that mining taxes
accounted for 63% of government revenues. This was a regrettable
over-statement, based on an inaccurate press report, as the actual
contribution from mining was less than 6% in 2008, split fairly
evenly between normal company tax and the now-abolished windfall
tax. These figures were obtained from the Budget Speech in the
Zambian Parliament and confirmed by colleagues at the U.S. and
Norwegian Embassies in Lusaka. We apologize for this error.
--------
HOT NEWS
--------
--------------------------------------
SA Minerals Act - is it Expropriation?
--------------------------------------
¶3. (SBU) The SAG could face claims worth billions of rands after a
court ruling in favor of a farmers' representative body, Agri-SA,
which had coal rights taken by the Department of Minerals and Energy
(DME) under the Mineral and Petroleum Resources Development Act
(MPRDA) of 2002. Deprivation of old-order mineral rights could
constitute expropriation, a Pretoria High Court has found. Judge
Willie Hartzenberg on March 6 ruled in favor of the arguments of
Agri-SA, which claimed amounts of $75, 000 and $60,000 from the
Minister of Minerals and Energy for the expropriation of their
old-order mineral rights. The Minister argued that the MPRDA did
not constitute an expropriation and that the Act makes provision for
compensation, provided the claimant can prove their property was
expropriated in terms of any provision of this Act. This was the
first court case to challenge the legality of the MPRDA. Most
companies have preferred not to lose favor with the DME by "muddying
the waters". This ruling opens the door for other claimants to
pursue compensation for expropriation of mineral rights.
¶4. (SBU) The enactment of South Africa's controversial MPRDA was
bound to be challenged in court. The Act, as implemented in 2004,
vests all mineral rights in the state. Further, a time period was
set in which any mineral properties not worked would revert to the
Qset in which any mineral properties not worked would revert to the
state on the basis of "use it or lose it". Privately-held mineral
rights (termed old-order rights) have to be converted to new-order
prospecting and mining rights. This is not a simple rubber stamp
conversion of old-order to new-order rights as was originally
envisaged by holders of mineral rights, but applicants are
effectively required to meet a host of obligations to have their
rights converted. The Act was designed to transform the racial
makeup of the sector and bring more previously disadvantaged South
Africans into formal mine ownership and operations. Law firm Webber
Wentzel claims that the judgement is a major victory for holders of
old-order rights, but Bell Dewar (another law firm) has cautioned
against too optimistic a view as compensation will be determined on
a strictly factual approach having regard to the circumstances of
each case.
PRETORIA 00000596 002 OF 008
------------------------------------------
Department of Minerals and Energy to Split
------------------------------------------
¶5. (SBU) South Africa's Minister of Minerals and Energy Buyelwa
Sonjica expects her department to be split into two separate
ministries if the ruling African National Congress wins the April 22
election. Sonjica said both energy and minerals were vital to the
country's economy and having two separate ministries would allow
more time and energy to be devoted to each. Mining experts expect
the new Energy Ministry to be responsible for implementing a clear
energy strategy, while the Mines Ministry would have more scope to
tackle issues still unresolved. Such issues would include ensuring
a genuine and broad-based transfer of more control of the mining
industry to black management and ownership.
-------------------------------
Cape Town African Mining Indaba
-------------------------------
¶6. (SBU) Review: A cloud of gloom due to the steep downturn in
commodity prices pervaded the 14th African Mining Indaba, which took
place in Cape Town February 9-12. This contrasted starkly with last
year's celebration of the commodity boom. Last year's concern about
regional power shortages was all but forgotten, but regulatory
uncertainty remained a significant issue for South Africa and the
region. Although investment in and credit for mining are scarce on
the continent, observers saw signs of some recovery in China, whose
demand has been the key driver for mining investment.
¶7. (SBU) The Indaba is one of the world's largest mining investment
conventions, attended by ambassadors, ministers and company CEOs
from all parts of the world. This year's Indaba consensus was that
Chinese interest in resource deals in Africa will be sustained,
despite its economic slow-down. Attendance at the Indaba was down
one-fifth from the record attendance last year (from 5000 to 4000).
Conference Director Tim Wood told delegates that companies
represented at the Indaba last year had a total market value of $1.3
trillion, but this year their value had fallen to $560 billion.
Keynote speakers detailed the extent of weak global growth,
particularly in the U.S. and Europe. The global slowdown had
reduced demand for basic commodities, with the exceptions of coal
and gold, which still draws investors seeking safe havens in
turbulent times. Some speakers pointed to signs of a turn-around,
particularly in China, and observed that the mining industry had
overcome cyclical downturns many times before.
¶8. (SBU) Minister's Presentation: Energy Minister Buyelwa Sonjica
offered help to the South African mining industry in her opening
address at the Indaba. She stressed that her Department aimed to
provide an enabling environment for industry to overcome the global
economic slowdown, which she characterized as a "still unfolding
process". Sonjica said South Africa had to manage the current
Qprocess". Sonjica said South Africa had to manage the current
slowdown and be prepared for the next commodity boom. The Minister
cited government's huge infrastructure spending and the Department
of Minerals and Energy (DME) task force that is considering measures
to reduce job losses, as examples of government assistance. Sonjica
called on industry to use all means possible to avoid retrenchments
and to engage with labor and government to look for innovative
alternatives. She said she was committed to reviewing the Mining
Charter to assure that efforts to transform the industry were making
progress. She admitted that Broad-Based Black Economic Empowerment
provisions did not always yield real broad-based transformation
(that is, reaching beyond the usual BEE players.) Sonjica warned
mining companies that they must submit applications for conversions
of mining licenses under the Minerals and Petroleum Resource
Development Act by April 30. She emphasized government's commitment
to improving mine safety and securing greater downstream minerals
beneficiation in South Africa. Finally, Sonjica said South Africa
had postponed - but not abandoned - its plans to build new nuclear
power plants.
PRETORIA 00000596 003.2 OF 008
¶9. (SBU) Mining Woes: The fall in commodity demand has raised the
specter of job losses and unemployment in mining. Estimates of the
number of potential job losses in the South African industry were as
high as 30-40,000 (Note: The industry created some 60,000 jobs in
the industry during the boom years, according to the Chief Economist
of the Chamber of Mines Roger Baxter. End Note.) Mining
consultancy Behre Dolbear showed a recent ranking of the investment
climate for 20 mining countries, which placed South Africa
nineteenth, largely because of uncertainties over security of mining
rights. An investment banker warned that a number of black
empowerment deals required under the Mining Charter were in
financial trouble after deterioration in company earnings and share
prices. (Note: Most BEE deals rely on dividend streams to pay
interest on loans used to buy shares in companies. End Note.) The
Minister of Finance Trevor Manuel provided a life-line of sorts to
struggling mining companies when he decided to delay by a year the
implementation of mining royalties, which would have imposed an
additional burden on them.
¶10. (SBU) Gold a Safe Haven in Troubled Times: Gold surged to its
highest level in seven months on February 17 as global equity
markets continued falling, raising the metal's appeal as a safe
investment haven. Speakers at the Indaba pointed out that gold was
holding its value compared to all other commodities. A weakening
rand caused gold to hit an all-time high in rand terms of R9,958 per
ounce, which has benefited South African company earnings and share
prices. Platinum at below $1,100 per ounce is less than half of its
March 2008 high of $2,300 per ounce due to its reliance on the U.S.
car market, which is in the doldrums. Similarly, rough diamond
prices have fallen 50-60% because of the weak U.S. luxury goods
market and sales are at their lowest in decades. Quantitative
Commodity Research company said the uncertainties in the economy
were driving investors into gold and precious metals. Stanlib
Economist Kevin Libbs said although gold's contribution to South
African exports had shrunk from 50% in the early 1980s to 10-12%
today, the rise in gold price would be beneficial for South Africa's
current account deficit and could help gold companies avoid
retrenchments.
------
ENERGY
------
-------------------------------
Government Guarantees for Eskom
-------------------------------
¶11. (SBU) State-owned power utility's Eskom's credit ratings have
dipped dramatically since the beginning of the power crisis in
January 2008. This has made it difficult and expensive for it to
secure funding for its projects. The SAG has thrown Eskom a life
line by approving guarantees totalling $17.6 billion over 5 years to
support the Eskom capital-expansion programme. This is in addition
to a $6 billion equity injection already approved. Government rights
Qto a $6 billion equity injection already approved. Government rights
will be subordinate to other un-guaranteed lenders and commercial
creditors. The hope is that Eskom's credit rating will improve.
Government has committed to repaying the debt, if necessary, in its
entirety or to continue making payments on Eskom's behalf. An
annual limit has been set for borrowings in any one year based on
Eskom's cash-flow requirements.
--------------------------
Namibia's Huge Gas Project
--------------------------
¶12. (SBU) Namibian power utility NamPower plans to proceed with its
$1 billion Kudu gas-to-power project despite the credit crisis,
according to NamPower General Manager of Power Systems Reiner Jagau.
Jagau said he expected commercial agreements, which have delayed
the project for a number of years, to be finalized before year-end
and for first gas to be piped within three years of a final
investment decision. Namibia is investing in the Kudu gas-to-power
PRETORIA 00000596 004.2 OF 008
project to help overcome power shortages affecting its key mining
industry and to lessen dependence on South Africa for imported
electricity. The Kudu gas project is a joint venture between Tullow
Oil of Ireland and NamPower. It involves pumping natural gas from
the Kudu gas field to an 800 megawatt combined cycle gas power
station near Oranjemund, on the coast in southern Namibia. The
field is located about 170 kilometers offshore, in about 200 meters
of water, and with a well depth exceeding 4,500 meters. The project
is expected to generate electricity for 22 years and be connected to
both the Namibian and South African power grids. The gas will be
expensive and setting a competitive price is the outstanding
challenge.
------------------------------------
South Africa's Oil and Gas Potential
------------------------------------
¶13. (SBU) South Africa produces limited amounts of natural gas and
crude oil from a number of small offshore deposits along the
southern coast of the Western Cape Province. Reserves are modest
and will be depleted by about 2011-2012, pending further discoveries
(January 2008 estimates of gas reserves were 318 billion cubic
feet). Limited hydrocarbon exploration, particularly using
state-of-the-art technology, has been carried out in to date for a
variety of reasons and the possibility of new discoveries exist,
particularly in deep waters. Natural gas produced is used to supply
state oil company PetroSA's gas-to-liquid (GTL) plant at Mossel Bay,
which produces liquid fuels and chemicals. In particular, the plant
produces a zero-sulfur diesel that is exported or sold to local
markets for blending with higher sulfur diesels, according to
PetroSA Manager Faizel Mulla. PetroSA is looking to secure other
gas supplies, including imports of LNG, to maintain production at
its GTL plant. South Africa's synthetic gas-to-liquids producer
Sasol imports some 4.25 billion cubic feet per year of natural gas
from Mozambique to feed its petrochemical plant at Sasolburg and to
supplement feed to its coal-to-liquid (CTL) facility at Secunda.
¶14. (SBU) U.S. firm Forest Oil is developing the Ibhubesi gas field,
which lies some 70-80 kilometers off the Western Cape coast, 300
kilometers north of Cape Town. The field is estimated to contain
reserves of about one trillion cubic feet of gas, based on an
initial four exploration well drilling program. Five additional
wells were subsequently drilled, partially funded by South African
partner PetroSA, but these yielded disappointing results and did not
add to the reserve base. The field is not in production as majority
shareholder and operator Forest Oil has been waiting for a
production license and finalization of the fiscal and regulatory
regime from the local authority for a number of years. Forest
recently posted Director John Langhus to Cape Town to procure the
licenses, negotiate markets for the gas onshore, and generate a
Qlicenses, negotiate markets for the gas onshore, and generate a
return on the $100 million total investment in the project ($57
million by Forest). Prime candidates to take Ibhubesi gas are state
power utility Eskom and west coast industrial companies at Saldanha
Bay. (Note. It was hoped that Ibhubesi might have sufficient gas
to feed PetroSA's GTL plant, but it appears that the reserve is too
small to justify the costs of a 400-600 kilometer pipeline to the
plant at Mossel Bay. End Note.)
------------------------------------------
BHP-Billiton Exploration May be the Answer
------------------------------------------
¶15. (SBU) Diversified miner BHP-Billiton's aspiration to drill a
$50-$70 million exploration oil well in deep water (2,000 meters)
off South Africa's west coast has been stymied by the lack of fiscal
and regulatory certainty caused by changes to the new minerals
legislation. The company and the South African government are
progressing in their discussions on the fiscal framework under which
drilling for oil offshore could proceed, according to new BHP
Billiton Southern Africa Chairperson Dr Xolani Mkhwanazi. BHP has
two oil exploration concessions, covering an area of 21,630 square
kilometers, in water depths ranging from 300-2,500 meters, and
PRETORIA 00000596 005.2 OF 008
situated 175 kilometers northwest of Cape Town. The company is
understood to have spent $20-$30 million on its west coast surveys
and studies so far and has been negotiating with various branches of
the South African government for some time on exploration
concessions. Mkhwanazi said the proposed project would be mutually
beneficial for both South Africa and BHP and that the company was
seeking long-term stability for itself beyond the exploration phase.
He said BHP needed a long-term financial regime that is consistent
over time and government needs BHP to provide a long-term guarantee
of investment.
-------------------------------
GE Upgrade Sasol Steam Turbines
-------------------------------
¶16. (SBU) U.S. company GE Energy and oil-from-coal company Sasol
have entered into a multi-million-dollar agreement to upgrade the
reliability and efficiency of Sasol's steam turbines at their
Secunda synfuels facility. The upgrade using modern materials,
design, and components will significantly reduce the probability of
unplanned outages, result in significant turbine life extension, and
reduced future maintenance expense, according to GE Energy Africa
Region Executive Mark Digby. The upgrade will improve the overall
efficiency of Sasol's steam use and, thereby, increase its on-site
power-generation capacity and reduce electricity demand on Eskom.
------------------------
PBMR Re-Engineers Itself
------------------------
¶17. (SBU) South Africa's home-grown nuclear power company, the
Pebble Bed Modular Reactor (PBMR) company faces budget constraints
and is in the process of redefining its near-term market strategy.
This was prompted by its major shareholder's (state-owned Eskom)
difficulty obtaining funding due to its risk downgrading, coupled
with the global financial crisis, and the growing demand for
process-heat and hydrogen generation. Modification of the design
planned for the demonstration power plant at Koeberg near Cape Town
is under consideration to enable it to service potential customers
such as Canadian synthetic oil producers and petrochemical company
Sasol. Both need large quantities of high-temperature steam to
extract bitumen from oil sands and to convert coal to liquid fuels
and chemicals, respectively. A potential application, vital to
water-constrained South Africa, is the use of PBMR's waste heat for
desalination. According to PBMR CEO Jaco Kriek, certain contracts
are likely to be put on hold to prevent unnecessary spending, but he
emphasised that no contracts had been cancelled.
------
MINING
------
----------------------
Beer Better than Anglo
----------------------
¶18. (SBU) Diversified South Africa-rooted miner Anglo American has
dropped to third place on the South African stock market behind
beer-brewer giant SABMiller. SABMiller is valued at R234 billion
verses Anglo's R210 billion. Anglo's shares took a pounding on the
Qverses Anglo's R210 billion. Anglo's shares took a pounding on the
market when it decided to suspend dividend payments indefinitely to
conserve cash, for the first time since the start of World War II.
Additionally, operating results were worse than anticipated due to
the fall in commodity prices in the second half of 2008 and its
share price has fallen by nearly 70% since September 2008. These
factors also caused CEO Cynthia Carroll to announce the company's
intention to shed some 19,000 jobs -- 10,000 from Anglo Platinum in
which Anglo holds an 80% interest -- and the rest across geographies
and business units. Carroll blamed the company's poor performance
on the world economic crisis, falling commodity prices, the
unprecedented level of uncertainty, and the poor near-term outlook
for commodities. One ray of light was the increased demand for
PRETORIA 00000596 006.2 OF 008
iron-ore from China in the first months of 2009. Iron ore
production at Kumba's Sishen Iron Ore mine, Anglo's 65%-owned
subsidiary, increased 13% to 36.7 million tons per annum.
---------------------------
Ignore Africa at Your Peril
---------------------------
¶19. (SBU) It doesn't make sense for a mining company to be serious
about growth, without looking at possibilities in Africa. So said
AngloGold Ashanti CEO Mark Cutifani at a BMO Capital Markets mining
conference in Florida. He said he is becoming increasingly
optimistic about Africa, which hosts an estimated 30% of the world's
mineral resources. Besides its South African assets,
Johannesburg-based AngloGold has mines in Ghana, Guinea, Mali,
Namibia and Tanzania, as well as exploration property in the
north-east of the Democratic Republic of Congo. Despite ongoing
uncertainty because of the mining contract review under way in the
DRC, the firm plans to hold onto its assets there. Cutifani said
AngloGold had "a great piece of ground" in the DRC and was still in
talks with the government about potential changes to its mineral
lease agreements, but was optimistic about a positive outcome. He
said the country needed more time, perseverance, and support from
significant players in the region and AngloGold is watching the
progress made by Phoenix-based Freeport-McMoRan at its Tenke
Fungurume copper/cobalt project with great interest.
--------------------------------------------
Asia - Key to South Africa's Mineral Exports
--------------------------------------------
¶20. (SBU) South Africa's growth outlook is increasingly dependent on
trade with Asia. Nearly 30% of its exports go to Asia, according to
the Standard Bank and these fell 10.5% year on year in December.
Total exports to the region for the first 11 months of 2008 were
worth about $18 billion, with minerals accounting for 73% of that
figure. Base metals contributed $4.5 billion, coal $4.4 billion,
and precious stones and metals $4.2 billion, according to the latest
available SA Revenue Service figures. The fall in Asian demand is
due to the region's own export performance, according to UK-based
think-tank Chatham House, where declines of some 30%-40% since
November have been recorded by countries such as South Korea,
Taiwan, and Japan. Emerging Asia was still expected to grow at
2%-3% in 2009, Chatham House said, but their forecast was dependent
on a relatively robust growth for China and, to some extent, India.
Should these fail, Asia's average growth rate may be close to zero.
Given the size of Asia and its imports, such a decline would create
major negative impacts on South Africa's commodity exports.
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Power Shifts in African Mining
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¶21. (SBU) Governments in both the developed and developing countries
tend to become dissatisfied when mining companies earn most of the
additional (windfall) revenues from inflated commodity prices during
Qadditional (windfall) revenues from inflated commodity prices during
boom times. This may give rise to "resource nationalism", which can
take the form of government intervention and renegotiation of
fiscal, tax, royalty, and ownership agreements aimed at increasing
government revenues or even total nationalization of mineral assets.
These actions may be taken, with or without consultation with
affected companies. In most cases, governments have the upper hand
as sunk costs and immovable assets prevent companies from taking
significant retaliatory measures. Cases in point include South
Africa's new mineral legislation, Zambia's proposed windfall taxes,
and the DRC's review of mineral leases and mine ownership shares.
However, the current global financial crisis has seen commodity
prices and trade halved and the negotiation table turned somewhat in
favor of mining companies.
¶22. (SBU) The balance of bargaining power between resource companies
and African governments is shifting in favor of investors in the
PRETORIA 00000596 007.2 OF 008
wake of collapsed commodity prices. Control Risks company's
sub-Saharan Africa analyst Christopher Melville advised companies at
a briefing in Johannesburg to exercise restraint when seeking to
push home this advantage, lest they run the risk of a backlash from
governments once economic conditions improve and prices started to
rise again. He said he expected emerging market demand,
particularly from China and India, to return as their fundamental
drive for economic development remained in place and would kick in
again sooner rather than later. He suggested that, given the
current depletion of stocks and the closing of a number of African
projects, there was a good possibility that commodity shortages
could re-emerge as early as 2010. He pointed to two significant
deals involving Chinese companies, namely state-owned Chinalco's
offer to nearly double its equity stake in Rio Tinto to 18% and
Australian company Oz Minerals' agreement to sell all its
outstanding shares to Chinese company Minmetals Nonferrous Metals in
a deal worth about $1.7 billion.
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Mintek to Footprint Diamonds
----------------------------
¶23. (SBU) The legitimate global diamond trade is worth some $60-$70
billion annually, but is currently being scorched by the economic
crisis, which has cut demand for rough stones by more than 60%.
This, in turn, has cause De Beers to close all its operations in
Botswana, which provides the bulk of its rough diamonds. The global
industry's debt peaked at $14-$15 billion in mid-2008, according to
banks and industry groups, but credit plays a crucial role in
financing the industry. The burden of this debt increases as
diamond sales and revenues decline. Currently, trade is about
one-tenth of usual levels. Trade in illicit diamonds, though small,
has an impact on the legitimate trade, especially in times of
crisis. Hence the South African Diamond and Precious Metals
Regulator (SADPMR) and state-owned research parastatal Mintek have
launched a project to study the possibility of determining the
origin of rough diamonds. According to Mintek, the study is aimed
at ascertaining whether trace element analysis can be used in
combination with physical characteristics to link diamonds to their
source, particularly in the case of illicitly traded stones.
¶24. (SBU) The heart of the project is a new laboratory facility in
Mintek's Mineralogy Division, which is funded by the SADPMR and
equipped with state-of-the-art equipment capable of analysing more
than 70 elements at sub-parts-per-billion and lower levels.
According to SADPMR Strategist Ashok Damarupurshad, if proven
successful, diamond fingerprinting would help to reduce theft and
illegal mining and assist in preventing conflict diamonds from
entering the legitimate trade. That is the objective of the
Kimberley Process Certification Scheme and the reason that the
SADPMR provided the initial funding to establish the laboratory at
QSADPMR provided the initial funding to establish the laboratory at
Mintek. The laboratory was completed in November 2008 and is the
first of its kind in Africa. Mintek has also launched a project to
study the origins of rough diamonds, which it says will focus on
diamond sources in southern Africa, particularly alluvial diamonds,
which are less easy to control than those from kimberlite
(hard-rock) mining operations.
--------------
Infrastructure
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Kumba Offers to Assist State Rail Services
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¶25. (SBU) There is a mismatch between South Africa's rail capacity
and that of mine production and port handling capacities. Iron ore
and coal producers want to mine and export greater tonnages, but
inadequate rail capacity, poor management, and inefficient
operations have put an effective cap on export expansion. Both the
coal and iron ore producers have volunteered to build new facilities
PRETORIA 00000596 008.2 OF 008
or lease and operate existing ones to assist government to implement
proposed expansions, but this has been turned down.
Government-owned parastatals seem ideologically opposed to private
ownership or involvement in state enterprises and unions have
vigorously opposed any such moves by government. Until recently,
the prospect of a public-private-partnership (PPP) has not been an
option available to iron-ore miner Kumba Iron Ore (KIO), 65% owned
by Anglo American. However, the company started discussions with
state-owned Transnet Freight Rail towards the end of 2008 on the
possible creation of a PPP. The door for such an engagement with
government seems to have slightly opened, according to KIO CEO Chris
Griffith.
La Lime