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SUBJECT: South Africa: Minerals and Energy Newsletter "THE ASSAY" -
Issue 10, November 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
Eskom's funding conundrum
South Africa could have new nuclear power station by 2020
ENERGY
Loan for Eskom's Medupi plant
Eskom road repairs: $1.3 billion
High coal demand raising prices
Eskom's World Bank loan application
MINING
Multinationals team up to explore Karoo basin for shale gas
Gold Fields 'catching the future' as it unlocks South Deep's
treasure chest
Cullinan diamond fetches US$6 million
Gold hits record highs on firm investor sentiment
--------
HOT NEWS
--------
-------------------------
Eskom's funding conundrum
-------------------------
3. (SBU) As power utility Eskom emerges from a bruising leader-ship
battle, in which both CEO Jacob Maroga and Chairman Bobby Godsell
stepped down, it faces a bigger, more urgent battle: how to crack
its funding crisis. Eskom has still not resolved its capacity
shortfall, which led to sustained load-shedding in early 2008. The
power utility has delayed construction of its second new power
station, Kusile (in Mpumalanga), which is expected to provide 10
percent of SA's electricity demand. According to a senior Eskom
manager, Eskom will decide at a December board meeting how long to
delay the project. University of Cape Town's Prof Anton Eberhard
says: "The Kusile power station will almost certainly have to be
delayed as Eskom will not be able to pay the contractors." Pushing
it back by two to three years from its originally targeted
commissioning date of 2014 will free up a lot of cash flow, he says.
Eskom draws its cash from four main sources: government support,
bond issues, utility payments from customers and borrowing. It has
received R232 billion ($31 billion) from government in loans and
guarantees; tapped the bond market for R21 billion ($2.8 billion)
over the past two years; secured $2 billion in loans from the
African Development Bank; and increased its rates by 31 percent in
2009. Eskom estimates it can raise a maximum of R40 billion ($5.3
billion) a year in debt over the next three years, and a total of
R232 billion ($31 billion) by 2015. But it needs substantially more
to cover its R385 billion ($51 billion) expansion plan and rising
Qto cover its R385 billion ($51 billion) expansion plan and rising
operating costs.
4. (SBU) The National Treasury has confirmed that Eskom cannot look
to government for any more money or loan guarantees, so tariff
increases and partial privatization are the only remaining options.
Eskom has asked for 45 percent tariff hikes each year over the next
PRETORIA 00002474 002 OF 004
three years, but this would treble the country's electricity costs.
After much outrage from every quarter, the utility is re-examining
its final tariff submission to the National Energy Regulator of
South Africa (Nersa). Even if Eskom is granted the 45 percent a
year increases for three years, it would still be left with a
significant R30 billion ($4 billion) shortfall in its balance sheet
by the end of that period. Raising bonds and loans will help, but
these will mainly be stopgap or supplementary measures. The utility
has approached the World Bank for a $3.75 billion loan ($3 billion
for the Medupi coal-fired power station; $260 million for renewable
wind and solar energy; and $490 million for low-carbon energy
efficiency components).
-----------------------------------------
South Africa could have new nuclear power
station by 2020
-----------------------------------------
5. (SBU) Energy Minister Dipuo Peters said on November 20 that South
Africa could have a new nuclear power station operational by 2020
and has an aspiration to add some 20,000 MW of nuclear capacity over
the coming decades. However, a specific date for the building of
the second nuclear power generator would only be set after the
finalization of an integrated resource plan (IRP), she told
journalists on the sidelines of a seminar on nuclear energy. Peters
noted that the IRP would be finalized after the United Nations
Framework Convention on Climate Change conference taking place in
Copenhagen next month. "We will be releasing the IRP immediately
after Copenhagen, we will then be finalizing our IRP, and within the
IRP, you would then have the exact indicator of when South Africa
would want to see the nuclear plant kicking in." She added that the
IRP would be placed before Cabinet in February. Eskom terminated
the procurement process for the multibillion rand "Nuclear 1"
project late last year, after the company's board decided that it
could not make an investment decision to proceed, owing to financial
pressures. Eskom operates South Africa's only nuclear plant, the
1,800 MW Koeberg station, in the Western Cape.
------
ENERGY
------
-----------------------------
Loan for Eskom's Medupi plant
-----------------------------
6. (SBU) The African Development Bank (AfDB) said on November 26
that it had loaned South African State-owned utility Eskom 1,86
billion ($2.85 billion) to finance the construction of the Medupi
power project. The bank said the 4,800 MW Medupi power plant,
Eskom's first new base-load power plant in more than two decades,
will significantly boost the energy capacity of South Africa and the
southern African region. AfDB president Donald Kaberuka said "South
Africa's energy problem has been a major impediment to Africa's
leading economy. This operation should be seen in the context of
the bank's ongoing efforts to help Africa bridge the infrastructure
gap." Medupi is in South Africa's northern Limpopo Province, and is
Qgap." Medupi is in South Africa's northern Limpopo Province, and is
expected to be commissioned by February 2012.
--------------------------------
Eskom road repairs: $1.3 billion
--------------------------------
7. (SBU) Power utility Eskom will have to fork out at least R10
billion ($1.3 billion) for road repairs and construction on the
network servicing its power stations from now to 2015. The cost of
the road repairs is likely to be questioned when Eskom's tariff
increase application of 45 percent a year for three years is
considered because road repair is not its responsibility. In its
application, Eskom argued that the bad state of some roads was a
danger to security of supply. The Democratic Alliance said that a
PRETORIA 00002474 003 OF 004
R1 billion ($133 million) upgrade was needed for roads even before
construction began on Medupi. The roads bill is a significant cost
addition to Eskom's build program, for which it has to raise R385
billion ($51 billion).
-------------------------------
High coal demand raising prices
-------------------------------
8. (SBU) Exxaro Resources, South Africa's largest black-controlled,
diversified mining company, said on November 26 that coal prices
were likely to rise to between $70 and $75 per ton in 2010 from
around $65 per ton this year on the back of rising global demand.
Exxaro's executive general manager for business growth Ernst Venter
said demand for coal had started to rise on the world market with
India becoming a major market for steam coal.
-----------------------------------
Eskom's World Bank loan application
-----------------------------------
9. (SBU) South Africa's power utility Eskom expects the World Bank
to make a decision on a loan program of up to $5 billion in the
first half of next year. In early November, the World Bank said on
its website Eskom had applied for the initial three tranches of the
loan, amounting to $3.75 billion, to fund projects at its Medupi
power station as well as renewable energy and low-carbon energy
efficiency program.
------
MINING
------
---------------------------------------
Multinationals team up to explore Karoo
basin for shale gas
---------------------------------------
10. (SBU) A multinational gas exploration joint venture (JV)
submitted an "exploration right application" to the Petroleum Agency
South Africa (Pasa) on November 25 for an onshore shale-gas resource
in the Karoo Basin, situated in the central region of South Africa.
The participants in the JV include Sasol Petroleum International, a
subsidiary of JSE-listed Sasol, Statoil ASA of Norway, and
Chesapeake Energy Corporation of the US. It is anticipated that the
application will take 12 months to process. Pasa, South Africa's
agency for the promotion of onshore and offshore petroleum
exploration, is empowered to issue exploration rights for an initial
period of three years, which are renewable for a maximum of three
additional two-year periods. Should exploration prove successful,
the JV could move to secure a production right for a period of 30
years, also renewable. The Karoo basin program would focus on the
natural gas produced from shale, a type of sedimentary rock formed
from clay. Shale gas has become an increasingly important source of
natural gas in the US and other countries, and interest has also
grown in Canada and Europe. The partners noted in a joint statement
that the Karoo basin has unproven shale gas potential and
significant exploration efforts will be necessary to assess the
resource.
---------------------------------------
Gold Fields 'catching the future' as it
unlocks South Deep's treasure chest
---------------------------------------
Q---------------------------------------
11. (SBU) Gold Fields executive vice president and operational head
Vishnu Pillay says South Deep mine is "unlike any other operation in
South Africa. It's fundamentally going to change the way South
Africans mine at depth." Gold Fields acquired the mine from Western
Areas in December 2006 and South Deep's next key milestone date is
December 2014. South Deep, less than an hour's drive from the
centre of Johannesburg, has the world's deepest single hoisting
PRETORIA 00002474 004 OF 004
shaft that descends to a depth of 3,000 m. Out are the hand-held
drills that have characterized South Africa's deep-level gold mining
for more than 100 years, and in are big jumbo drills to provide high
tonnage. While a conventional South African mine of its size may
employ 10,000 people or more to do the South Deep job, the fully
mechanized operation is able to make do with 4,500. All efforts at
South Deep dovetail with the firm stand that Gold Fields CEO Nick
Holland has taken: "If we can't mine safely, we won't mine at all."
Pillay says "What South Deep does is prove that we can run
deep-level mining operations without having fatal accidents."
-------------------------------------
Cullinan diamond fetches US$6 million
-------------------------------------
12. (SBU) Petra Diamonds reported that a 168 carat white Cullinan
diamond had sold for $6.28 million. The diamond, regarded as being
of exceptional color and quality, fetched about $37,380 a carat when
it was sold to an undisclosed buyer on November 26. It was
recovered in the same production series as three other special
diamonds: a 507.55 carat white diamond, which has not been offered
for sale yet, as the company considers the best route to market in
order to maximize value; and two diamonds of 58.50 and 53.30 carats,
which were sold in November for a total of $2.8 million. Cullinan
mine has produced more than 300 diamonds of over 100 carats and a
quarter of all the world's diamonds over 400 carats.
13. (SBU) Petra Diamonds announced on November 26 that it plans to
increase its ownership in Cullinan diamond mine from 37 percent to
74 percent, saying that it has entered into an option agreement with
Al Rajhi Holdings that would allow it to acquire Al Rajhi's 37
percent interest in the mine. Petra also confirmed its intention to
undertake an equity fundraising.
---------------------------------------
Gold hits record highs on firm investor
sentiment
---------------------------------------
14. (SBU) Gold rose to a record high, above $1,175 per ounce, on
November 25, based on solid investor sentiment and expectations of
more gold buying by the public sector. A recent purchase of 200
tons of gold by India's central bank sparked a rally that lifted the
precious metal's value to successive record highs with it gaining
about 12 percent in the month of November alone. The purchase was
part of a planned sale of 403 tons by the International Monetary
Fund. Russia, Sri Lanka and Mauritius have also announced gold
acquisitions. Chief analyst at Fujitomi Co Ltd in Tokyo Kazuhiko
Saito said investors continue to believe that other central banks
will buy gold. "Gold is being bought even when the euro falls
against the dollar, and what we are seeing is an active flow of
funds," Saito said. He added that gold could face a correction,
given the rapid pace at which its price has climbed. Traders say
investors are also attracted to gold, seen as a hedge against
Qinvestors are also attracted to gold, seen as a hedge against
inflation, which erodes the value of paper assets.
GIPS