Biti confident Zimbabwe and South Africa will conclude BIPA

Finance Minister Tendai Biti said he was confident that negotiations on the long-awaited Bilateral Investment Protection Agreement between Zimbabwe and South Africa would be concluded soon.

The agreement had been in limbo since 2004. Zimbabwe had unilaterally taken over land, mine, and business assets of local and foreign investors, including those of South Africans.

Full cable:

Viewing cable 09PRETORIA1707, South Africa: Minerals and Energy Newsletter “THE ASSAY” –

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SUBJECT: South Africa: Minerals and Energy Newsletter “THE ASSAY” –

Issue 7, July 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

Energy Projects on Hold

SA-Zimbabwe Investment Security Deal

Coal, Gold, and Power Settle

Strikes – Investors Shaken but not Deterred

Westcor to Drop DRC Inga 3 Hydro Project

ENERGY

Airport Jet Fuel Shortage

SAG Supports Nuclear Development

Uganda Finds More Oil

Malawi, the New Uranium Producer

Power Boost for Southern African Region

MINING

All Eyes on Xstrata and Anglo

Job Losses as Platinum Projects put on Hold

Are Diamonds Still a Girl’s Best Friend?

Namibia Rates High for Mineral Investment

Zimbabwe Mining Investment Reality

China Scrambles for African Resources

——–

HOT NEWS

——–

———————–

Energy Projects on Hold

———————–

¶3. (SBU) State-owned power utility Eskom has put five projects,

worth some $7 billion and 2,900 megawatts, on hold as a result of a

funding shortfall.  Media reports raise the threat of future power

shortages and quote a Frost & Sullivan energy analyst, saying the

project halts would reduce Eskom’s spending, deepen South Africa’s

recession, cut opportunities in employment creation, and affect

suppliers of cement, steel and other commodities.  The reduction in

spending is aimed at helping Eskom focus on its three priority

projects, namely, two coal thermal stations, Medupi and Kusile, and

a pump-storage station, Ingula, which together will cost about $30

billion and produce 10,900 megawatts of power.  Dropped from the

current spend are a 1,500 megawatt pump-storage project, a 100

megawatt solar plant, a 100 megawatt wind farm, CIC Energy’s 1,200

megawatt Mmamabula coal thermal project in Botswana, and an

80-kilometer rail link to the Majuba thermal station.  According to

Eskom figures, the respective build costs per megawatt for the coal

thermal, pump-storage, solar and wind stations are: $2.6-$3.1

million; $1.6 million; $2.5-$7.5 million; and $3.75 million.

————————————

SA-Zimbabwe Investment Security Deal

————————————

¶4. (SBU) The long-awaited Bilateral Investment Protection Agreement

(BIPA) between Zimbabwe and South Africa may soon be concluded.  The

agreement has remained in limbo since 2004, while the Zimbabwean

Qagreement has remained in limbo since 2004, while the Zimbabwean

PRETORIA 00001707  002 OF 007

government unilaterally took over land, mine, and business assets of

local and foreign investors, including those of South African

nationals.  Zimbabwe’s Finance Minister Tendai Biti said

negotiations should be concluded soon.  South Africans interested in

investing in Zimbabwe have insisted that a BIPA be signed before

they invest.  Details of the treaty are still being negotiated.

—————————-

Coal, Gold, and Power Settle

—————————-

¶5. (SBU) South African labor unions signed a two-year wage agreement

with the Chamber of Mines at the end of July, thus avoiding costly

strikes.  The agreement covers the coal and gold mining sectors.  In

general, higher wage earners such as miners, artisans, and officials

will receive a 9% increase for the first year of the agreement,

while lower paid employees will receive a 10% increase.  Salaries

and “living out” allowances for entry level employees will be

increased by 11%.  In the second year of the wage agreements, an

average of consumer price inflation plus one percent — at a minimum

of 7.5 percent — was agreed for both sectors.

¶6. (SBU) The Chamber’s coal negotiator Frans Barker said he was

pleased with the outcome, as employers and unions had approached the

negotiations in a constructive manner.  This was the first time wage

negotiations had been concluded without referral to the Council for

Conciliation, Mediation, and Arbitration (CCMA).  The two-year

agreements will reduce the likelihood of strikes during the 2010

soccer world cup competition.  State-owned power utility Eskom, in

turn, reached a settlement with its unions on May 13.  Unions

initially demanded a 14% increase, but finally accepted Eskom’s

offer of 10.5% and agreement to review housing allowances.

——————————————-

Strikes – Investors Shaken but not Deterred

——————————————-

¶7. (SBU) Labor union rhetoric, a few strikes and the odd unruly

protest in South Africa had foreign investors worried, but so far

the disputes and wage deals are in line with previous years and

economic output has not been affected.  The state-owned Industrial

Development Corporation’s (IDC) head of mining economics Abel

Malinga said mine output had not been affected by strikes and there

was no real indication of a major swing towards a labor-based policy

by the new government.  Andrew Levy’s labor analyst, Jackie Kelly,

said once the wage negotiation round is over there will again be

industrial peace.

—————————————-

Westcor to Drop DRC Inga 3 Hydro Project

—————————————-

¶8. (SBU) Western Power Corridor Company (Westcor) CEO Pat Naidoo

said the consortium plans to withdraw from the Inga 3 5,000 megawatt

hydro-electric power project on the Congo River in the Democratic

Republic of the Congo (DRC).  Westcor attributed its decision to

withdraw on the mounting political risk in the country and the DRC

Qwithdraw on the mounting political risk in the country and the DRC

government’s decision to go it alone on the project, in partnership

with BHP-Billiton, the world’s biggest mining company.  BHP is

planning to build a $3 billion, 800,000 ton per year aluminum

smelter in the DRC.  Inga 3 and Grand Inga, the proposed giant hydro

plant close to Inga 3 that has been on the table for the past decade

and more, would have a combined estimated capacity of some 100

gigawatts and are seen by many as the long-term solution to Africa’s

power problems.

¶9. (SBU) To date, investors have held back due to political risk and

the estimated $5 to $7 billion cost of the Inga 3 project.  Naidoo

said he would recommend to the Westcor Board not to proceed with the

project and instead to look at developing smaller projects in Angola

and Namibia, even though the joint venture between five Southern

African utilities had completed the pre-feasibility study.  He noted

PRETORIA 00001707  003 OF 007

that about 3,000 megawatts of Inga 3 power would have gone to South

Africa and 1,000 megawatts each to the DRC and other project

members.  Westcor was established in 2003 as a joint venture between

utilities of the DRC, South Africa, Namibia, Angola, and Botswana to

study the power-generating potential of the Congo River and other

hydro projects in the region.  Doubts have been expressed by Westcor

as to BHP-Billiton’s willingness to pay the full cost of the

project.

——

ENERGY

——

————————-

Airport Jet Fuel Shortage

————————-

¶10. (SBU) Media reports portrayed the jet fuel shortage at Africa’s

largest airport, OR Tambo International in Johannesburg, as posing a

threat to tourism and eventually to the 2010 soccer world cup event.

 Jet fuel stocks were at one stage purported to hold two days of

supply, while the internationally accepted norm is five-and-a-half

days.  Energy Minister Dipuo Peters met with key players in the

liquid fuels industry to ensure that the current shortages do not

reoccur and that adequate fuel will be available during the 2010

soccer competition.  She established a task team to investigate the

problem and the airport asked airlines to temporarily cut back fuel

usage by 30%.  At no time have flights been delayed due to the lack

of jet fuel.

¶11. (SBU) The jointly owned Sasol/Total’s Natref Refinery at

Sasolburg provides 70% of the airport’s jet fuel and the balance is

moved by Transnet Freight Rail (TFR) from coastal refineries in bulk

rail tankers.  Fuel shortages appear to have been caused by a

combination of temporary shutdowns of refinery and pipeline capacity

and a disruption to rail shipments.  Reports indicate that all

facilities are again running normally.  The supply of liquid fuels

to the interior has been identified as a potential vulnerability and

private suppliers have increased road tanker traffic in response.

——————————–

SAG Supports Nuclear Development

——————————–

¶12. (SBU) The SAG remains committed to conventional nuclear energy

and to the development of South Africa’s pebble-bed modular reactor

(PBMR) program, according to Public Enterprises Minister Barbara

Hogan.  The PBMR is a fourth generation, high temperature, helium

gas-cooled nuclear reactor.  In her address to delegates at the PBMR

workshop in Johannesburg on localization opportunities in the

uranium industry, she said the SAG’s priorities for economic

development were skills development and product “localization” to

increase the percentage of locally manufacture products using local

skills and labor.  Further, according to Hogan, the redesigned PBMR

would boost the economy through job creation and its ability to

provide electricity, process heat, steam, and hydrogen.  Hogan

pointed out that the PBMR company represented the largest cluster of

nuclear engineering and design skills in Africa, which is a

Qnuclear engineering and design skills in Africa, which is a

prerequisite for establishing South Africa as a center of nuclear

expertise and component manufacturing.  She identified likely

applications for the PBMR’s process steam and heat as being seawater

desalination; mobilization of heavy oils; recovery of oil from tar

sands, oil shales, and coal; and high temperature production of

hydrogen.

¶13. (SBU) PBMR’s CEO Jaco Kriek said, at the same workshop, that

cost and budget overruns were mainly due to the repositioning of the

PBMR in terms of market opportunities.  Instead of using

super-heated helium to directly drive gas turbines, the new design

will transfer heat from the helium to generate steam, which will

PRETORIA 00001707  004 OF 007

indirectly drive the turbines and deliver process heat and steam.

This will also enhance safety, because the radioactive helium will

be in a closed circuit with the reactor pebbles and have no contact

with the steam.  PBMR has signed a MOU of cooperation with the

Chinese, who are also developing PBMR-type technology and have had a

10 megawatt research unit in operation since 2003.  Kriek said the

planned demonstration PBMR reactor will generate 200 megawatts of

heat and 80 megawatts of electricity and is expected to start

operating by 2018.  Eskom and the Industrial Development Corporation

(IDC) hold an 85% stake in PBMR and the remainder is held by

U.S.-based Westinghouse.  The plant has yet to receive environmental

clearance, which has previously held up construction.

———————

Uganda Finds More Oil

———————

¶14. (SBU) British Tullow Oil has announced the discovery of a small

new oil field in Uganda, which is estimated to hold up to 50 million

barrels of crude.  The Uganda site is located in the Victoria Nile

Delta, off the northeastern shore of Lake Albert.  The discovery

would add to the 700 million confirmed barrels in Tullow’s Ngara-1

block, which surrounds the northern tip of Lake Albert and borders

the Democratic Republic of Congo (DRC).  Tullow has drilled 10 wells

on the site and industry analysts believe total reserves in the

field could reach 2 billion barrels.  Tullow also has a 70% stake in

the Kudu gasfield off the coast of Namibia.

——————————–

Malawi, the New Uranium Producer

——————————–

¶15. (SBU) The $200 million Kayelekera uranium mine in northern

Malawi started production in April 2009 and is expected to produce

about 3.3 million pounds of uranium oxide per year.  This will make

uranium the country’s top foreign currency earner in coming years,

said Malawi President Bingu Wa Mutharika at the official launch of

the mine.  Malawi is expected to earn over $100 million per year in

export earnings, royalties, and taxes and provide 300 direct and

1,000 indirect jobs.  The mine will add about 10% to Malawi’s GDP of

$2.2 billion over an estimated 12-year life.  The orebody is a

high-grade sandstone replacement deposit, and the mine is 85% owned

by Australia’s Paladin Uranium and 15% by the government of Malawi.

Langer Heinrich in Namibia is Paladin’s other uranium mine in

Africa.

—————————————

Power Boost for Southern African Region

—————————————

¶16. (SBU) Four Southern African countries have agreed to develop a

$225-million power line that would allow an extra 600 megawatts to

be transmitted around the region.  Zimbabwe, Zambia, Botswana and

Namibia have signed a memorandum of understanding (MOU) to develop

an electricity transmission interconnector that will facilitate

power trading among the participating utilities, collectively known

as Zizabona, via the Southern African Power Pool (SAPP).  The

Qas Zizabona, via the Southern African Power Pool (SAPP).  The

Zizabona project will provide an alternative transmission route to

help decongest the existing central transmission corridor to South

Africa, which is battling to meet local and regional demand.  It

will also facilitate transmission of hydropower from the Democratic

Republic of Congo (DRC) to South Africa and the rest of the region.

Zizabona will finance the project.

¶17. (SBU) Apart from the Zizabona link, Zimbabwe’s power utility

ZESA has proposed the construction of a 160 kilometer Central

Transmission Corridor (CTC) to increase the north-south power

transfer capacity to South Africa to 600 megawatts, compared to the

current 200 megawatts.  This project will be jointly developed by

ZESA, with a 20% share and the private investors with 80%.  ZESA

said the project will cost $100 million and CTC had reached a

long-term off-take agreement with South Africa’s power utility

PRETORIA 00001707  005 OF 007

Eskom.  CTC expects the project to be completed by December 2012.

——

MINING

——

—————————–

All Eyes on Xstrata and Anglo

—————————–

¶18. (SBU) The global mining industry is watching CEO Mick Davis for

an update on Xstrata’s proposed “merger of equals” with Anglo

American.  The interest is whether Xstrata will provide a

“sweetener” to its proposed $68 billion deal, which would create a

rival to the larger players such as BHP-Billiton, Rio Tinto, and

Vale.  Despite Xstrata’s 77% decline in first-half year profits,

announced at the beginning of August, there is speculation that

Xstrata is preparing a $5 billion rights issue that will provide a

cash sweetener for a renewed bid for Anglo.  Anglo’s shareholders

have so far backed their board’s refusal to accept the merger,

arguing that a deal would require a premium to be paid.  Industry

analysts believe that if Xstrata does not launch a bid soon, Anglo

may invoke the ”put up or shut up” rule, which would force Xstrata

to make a formal bid within a defined period or walk away for at

least a year.  Xstrata so far shows no signs of giving up its quest

for Anglo, which has long been Davis’ takeover target.

——————————————-

Job Losses as Platinum Projects put on Hold

——————————————-

¶19. (SBU) Some $5.5 billion worth of capital projects are on hold

across South Africa’s platinum sector.  The world’s biggest platinum

producer, Anglo Platinum (Angloplats), has been forced to defer five

projects, valued at $4 billion, by between one and four years due to

the economic crisis and the company’s poor financial performance.

The group reported a 95% fall in operating earnings during the first

half of the year compared to the previous period, with five of its

18 operations registering operating losses.  Angloplats has

attributed these poor results to the 51% fall in the dollar price of

the basket of platinum group metals (PGM – platinum, palladium,

rhodium and other minor metals) sold.  There is no estimate of job

losses, but the capital investment postponements mean that thousands

of jobs will not be created and platinum metal exports worth

billions of dollars will not take place over the next few years.

¶20. (SBU) Angloplats chief executive Neville Nicolau said the

company had shed nearly 12,000 jobs since September 2008, and

expected another 1,100 jobs to be cut by the end of the year.

However, Angloplats is continuing to develop six projects to the

value of $1.225 billion and is expected to maintain capital

expenditure at about $1.25 billion a year for the foreseeable

future.  South Africa’s second biggest platinum producer, Impala

Platinum, has halted capital expenditures worth $725 million and new

entrant Wesizwe, has curtailed work on its $712-million platinum

mine.

—————————————-

Are diamonds still a girl’s best friend?

QAre diamonds still a girl’s best friend?

—————————————-

¶21. (SBU) Half-year profits plunged 99%, from $316 million to $3

million, for the world’s top diamond miner, De Beers.  Polished

diamond sales have experienced the fastest decline since 1974, and

rough diamond sales are down by 57%, as a consequence of the

recession in markets in the U.S., Europe, and Japan.  Prices for

rough stones fell by 50% between October 2008 and mid-March 2009,

but have since regained some ground.  De Beers slashed its

production levels over this period by 73%, to 6.6 million carats,

and anticipates carat production for the full year to be half that

of 2008.  De Beers has retrenched 23% (4,700 people) from its global

workforce, which includes some 1,415 jobs, or 40% of its South

PRETORIA 00001707  006 OF 007

African workforce of 3,500.  The company closed much of its

production in Botswana, Namibia, South Africa, and Canada during the

first half of this year, but limited production has since resumed at

some mines.  Diamond sales will exceed new supply for many years,

according to De Beers, based on the premise that no major new

diamond discoveries have been made in more than a decade, worldwide

mine reserves are at an all-time low, and demand is growing from

emerging markets.

—————————————–

Namibia Rates High for Mineral Investment

—————————————–

¶22. (SBU) Namibia is already one of the top four uranium producers

in the world.  This rating received a further boost when exploration

company West Australian Metals acquired 80% of the Marenica uranium

project.  Marenica has an inferred resource of about 34 million

pounds of uranium oxide and is located north of Areva’s Trekkopje

uranium mine in the Erongo Region.  Production is expected to begin

in 2012.  CEO John Young attributes the company’s interest in

Namibian uranium to the country’s stable regulatory and political

environment and high prospects for further discoveries.

———————————-

Zimbabwe Mining Investment Reality

———————————-

¶23. (SBU) Zimbabwe is planning investor-friendly legislation,

according to Mines and Mining Development Minister Obert Mpofu.  He

was speaking at an OMEGA investment group conference in Johannesburg

on August 5, organized to review mining investment opportunities in

Zimbabwe since the formation of the country’s coalition government

of national unity in February 2009.  He said the GOZ was reviewing

the Indigenization Bill, which in its present form would force

foreign companies to sell 51% of their mine assets to Zimbabweans.

A number of speakers from the Zimbabwean government, mining

industry, and investment houses provided insight into potential

developments and remaining concerns in the country.  While the

consensus view was that little had changed in Zimbabwe mining since

February, much was made of hopes for the future in a country that

has great mineral potential.

¶24. (SBU) Both positives and negatives for Zimbabwean mining were

aired at the conference:

POSITIVES:

  — a legacy of skilled labor force and good infrastructure;

  — favorable geology for platinum diamonds, gold, coal,

     nickel, and industrial minerals;

  — gold production could reach 50 tons a year by 2015 from 3.5

     tons in 2008;

  — platinum output could reach 1 million ounces a year in 15

     years, from 170,000 ounces in 2008;

  — two operating platinum mines, one developing mine, and five

     exploration projects;

  — legal diamonds could earn the country an estimated $600

     million a year;

  — mines are able to sell output directly to the market;

  — mines no longer have to surrender part of their foreign

Q  — mines no longer have to surrender part of their foreign

     currency earnings to the Reserve Bank;

  — the inflation rate is down to single digits;

  — the local currency has been scrapped in favor of a multi-

     currency monitory system

NEGATIVES:

  — maintenance/development of labor force skills and

     infrastructure has been at a standstill;

  — no guarantee of security of tenure;

  –  pending indigenization legislation (black economic

     empowerment) has upset investors;

  — possible suspension from global diamond trading;

  — plans to review mining contracts and introduce a “use it or

     lose it” policy.

PRETORIA 00001707  007 OF 007

——————————————— —

China and Russia Scramble for African Resources

——————————————— —

¶25. (SBU) China has overtaken the United States as Africa’s top

trading partner, according to a report in South Africa’s weekly

Engineering News publication.    While U.S. trade with sub-Saharan

Africa increased by 28% to a value of $104 billion in 2008, the

increase was mainly due to high oil prices, which accounted for more

than 80% of imports from Africa.  By contrast, trade with China in

2008 amounted to $107 billion and has grown tenfold over the past

decade.  Frontier Advisory’s regional investment consultant Martyn

Davies argues that the economic crisis is accelerating the

geo-economic shift of Africa towards Asia, centered largely on

China.

¶26. (SBU) Chinese companies have strong interest in Africa’s mineral

wealth, estimated at a third of the world’s mineral resources.  The

Zonghui Mining Group signed a $3.6 billion copper agreement with

Zambia in July, and the Industrial and Commercial Bank of China

(ICBC) is working on some 60 deals with South Africa’s Standard

Bank, a number in the mining sector, in which it bought a 20% stake

for $5.6-billion in 2008.  In another example of outside competition

for resources, Russian President Dmitry Medvedev visited Egypt,

Namibia, Angola and Nigeria in June to secure oil and uranium

rights.

GIPS

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