Black firms move into manganese: some of the world's biggest mining companies have signed deals with empowerment firms to further develop the South African manganese sector. But, as Neil Ford argues, the country's critical shortage of power could undermine the deals.

As in most other industries, mining sector investors are required to allocate equity to black empowerment enterprises (BEE) in order to share the economic benefits of their projects more widely among South Africans.

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Aside from promoting empowerment and greatly increasing national manganese production capacity, the recent agreements should provide a boost for the new manganese smelter that is planned for the Coega industrial zone in the Eastern Cape. Both of the manganese deals concern reserves near Hotazel in the Kalagadi Manganese Basin in the Northern Cape.

Samancor Manganese has signed a deal with empowerment firm Ntsimbintle Mining to form a new mining company, Hotazel Manganese Mines, to develop the Mamatwan and Wessels mines in the Basin. The empowerment company will take a 9% stake in the venture in exchange for its mining rights in the area, although Samancor eventually aims to transfer a 26% stake in the venture to empowerment interests.

Samancor Manganese is owned by two of the world's biggest mining concerns, Anglo American (40%) and BHP Billiton (60%). BHP Billiton's president for manganese, Peter Beaven, said: "The transaction provides Ntsimbintle immediate ownership of strongly profitable assets and their associated cash flow, whilst Samancor gains access to further resources and reserves, some of which can be immediately accessed from existing Samancor mine operations. This is undoubtedly the most sensible commercial arrangement for the development of the two sets of rights."

Ntsimbintle Mining is a consortium of empowerment interests, many of which are based in and represent the people of the sparsely populated Northern Cape where the mines are located. The consortium comprises: Safika Resources; the Natural Resources Empowerment Fund; the Retrenched Workers Association; Nkonjane; Wiphold; Northern Cape Women in Mining; the Kgalagadi Development Trust; the Hotazel Women's Association; and the Northern Cape Community Business Men.

By including such a range of organisations rather than a single well-connected black empowerment company, it appears to be an excellent example of what the empowerment process can achieve.

The chairman of BHP Billiton, Vincent Maphai, commented: "This transaction will facilitate the advancement of black economic empowerment in the Northern Cape. BHP Billiton is committed to the transformation and growth of the South African economy and we believe that transactions such as this, which include ownership, will enable us to contribute to that transformation." Ntsimbintle spokesperson Saki Macozoma added: "We welcome this partnership with Samancor, which is the leading manganese producer in the world. This is a mutually beneficial relationship which will hopefully, ultimately see South Africa play a bigger role in the world manganese market." In the second agreement, Arcelor Mittal and partner Kalagadi Manganese plan to invest R4.2bn in a mine project near Hotazel to produce 2.4m tons of ore a year for at least 20 years, beginning in 2010.

The two companies will each take a 50% stake in the venture. Kalahari Resources, which is owned by black female South Africans, holds an 80% stake in Kalagadi, with the state owned Industrial Development Corporation (IDC) taking the remaining equity, as in many other empowerment companies. Aside from the mine, beneficiation and sinter plants will be constructed in Hotazel in order to supply the new Coega smelter. The two projects should further highlight South African domination of the global manganese industry, as the Kalagadi Manganese Basin is believed to contain about 80% of the world's proven manganese reserves. Between 1m and 2m tons of South African manganese ore is currently exported from Port Elizabeth every year.

However, larger and more modern handling and processing facilities are planned for the new port of Coega and it is expected that Port Elizabeth will give up its role in the manganese industry, although a dispute over who should pay for the clean-up operation at Port Elizabeth ore dump has so far held up a final decision.

Power cuts hit mining

After many years of doubt and discussion, an aluminium smelter is being developed as Coega's anchor tenant, but a new manganese smelter is also planned that will have production capacity of 320,000 tonnes of ferromanganese alloy a year. Ferromanganese is used in the production of steel. Arcelor Mittal and Kalagadi Manganese are to develop the project to process ore from their Northern Cape mines. Indian firm Mittal expects the smelter to provide at least 50% of its requirements.

However, it is vital that the new mine operations secure access to sufficient electricity supplies. The well-publicised power rationing in South Africa has already hit the mining sector and BHP Billiton was forced to halt activity at its existing Hotazel mines at the end of January.

Even when supplies resumed, the firm had to gradually increase production over several days to about 90% of capacity, the figure agreed with Eskom. The South African coal mining sector does not appear to have been affected but this could be because most of Eskom's generating capacity is provided by the coal-fired power plants that are located next to the main coal mining area in Mpumalanga Province. Transmission losses over short distances are very low but a substantial amount of electricity is lost in transferring power to the Northern Cape. The government has conceded that the impact of power rationing on the mining industry could be great. The minister of public enterprise, Alec Erwin, commented: "The unprecedented, unplanned power outages must now be treated as a national electricity emergency situation that has to be addressed with urgent, vigorous and coordinated actions. We are viewing the next two years as being critical."

AngloGold Ashanti, De Beers, Harmony Gold Mining and Gold Fields Ltd have suspended all gold mining for a time because of fears that miners could be trapped underground during power cuts. South Africa already possesses one of the world's most important mining industries but it is vital that plentiful generation capacity is installed as soon as possible if the sector is to prosper.

RELATED ARTICLE: Coega alu smelter

Power shortfalls cause concern

The current power supply crisis that is affecting South Africa could have severe implications for the Coega aluminium smelter. A power purchase agreement (PPA) had been signed by Alcan with Eskom but the power utility's commitment has been put in some doubt following comments by company officials.

Eskom finance director, Bongani Nqwababa, was quoted by the South African press as saying: "Eskom needs to review supply to Coega. You don't sell what you don't have."

Exporting aluminium is often equated with exporting electricity given the importance of power supplies to total production costs. Eskom has traditionally offered some of the lowest power tariffs in the world--a factor that has been widely promoted to potential investors by the South African government--but the failure to install new generating capacity over the past decade has left the country with insufficient supplies.

Three mothballed coal-fired plants are currently being brought back on stream, another is being developed, while up to four gas fired plants are planned, but Eskom expects to face supply problems until 2013.

Anglo-Australian Rio Tinto has taken over Alcan but remains committed to the project and so the smelter is expected to be developed as planned. The terms of the 25-year PPA, which was signed in November 2006, requires either party to pay a penalty if it is unable to live up to its commitments.

BHP Billiton has already complained that production at its existing aluminium smelters has been hit because of power supply shortages. Some large electricity users have agreed to voluntarily reduce their consumption during times of shortage, while a 14.2% average increase in power tariffs planned for this year may also help to contain demand.

However, a possible solution to the crisis has come from British power company Ipsa, which specialises in developing generating capacity quickly.

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In late January, the company reached an agreement with the Central Energy Fund to install gas turbines in the Coega Industrial Development Zone in various phases. Generating capacity of 521MW should be in place within 15 months, with a further 500MW three months later and another 600MW by 2011. The smelter will require 1,350MW, so the Ipsa project should eventually supply more than enough electricity.

The electricity will be produced by Ipsa and then sold to Eskom to supply to Rio Tinto Alcan, but this will certainly push up Eskom's generating costs, at least in the short term.

Diesel, which is an expensive option, will be used as feedstock in the first instance, although liquefied natural gas (LNG) will be imported in the longer term.

Investment bank JP Morgan cast some doubt over the wisdom of developing the smelter in a statement which read: "Questions could be asked about the wisdom of allocating the equivalent of almost half a new power station to provide subsidised electricity to a new aluminium smelter that creates limited numbers of jobs and where the profits are exported." Nevertheless, about R700m has already been spent on developing the smelter and engineering work is due to begin in the first half of this year.