[DEBATE] : (Fwd) Minerals tyranny in SA, Africa
pbond at mail.ngo.za
Fri Feb 9 04:38:20 GMT 2007
POSTED ON 08/02/07
There's no loss of power in Alcan's deals
MONTREAL -- Before you can even access the website of Eskom, the
state-owned utility that produces 95 per cent of South Africa's
electricity, a disclaimer pops up warning customers to expect supply
Development in post-apartheid South Africa has put such a strain on the
country's transmission grid and aging coal-fired power generators that
blackouts are a fact of life. More than a quarter of the country's
generators were down last month and resource-rich South Africa --
ironically, the world's second-biggest exporter of coal -- is facing an
You might think this is the kind of country an electricity-intensive
aluminum producer would want to avoid. Not Alcan. The Montreal-based
multinational recently signed a 25-year deal with Eskom to supply its
proposed $2.7-billion (U.S.) Coega aluminum smelter with 1,350 megawatts
of cheap electricity. That's enough to light up a city of about half a
Just how little Alcan will pay for the power is secret. Suffice it to
say that the deal is part of the government's "developmental electricity
pricing" program, which is a nifty name for subsidies. "This is designed
to give potential major investors (most importantly Alcan . . .)
whatever electricity price is necessary to make it profitable to invest
in [South Africa]," note Matthew Stern and Frank Flatters, two African
economists who publish a newsletter called Geekonomics.
To feed the smelter, in which Alcan is to be the main private partner
with an expected 40-per-cent stake, Eskom is spending $1.5-billion to
build new coal-fired generators and transmission lines. The development
will further mar the unenviable environmental record of a country that
already uses coal to produce 98 per cent of its electricity.
At the very least, this calls into question the usefulness -- for
anything other than public relations purposes -- of the Global 100 list
of the "world's most sustainable corporations." Alcan and U.S. rival
Alcoa are both part of the annual ranking published by Corporate
Knights. They're also partners in a bauxite mine with the government of
Guinea -- which is No. 4 on Transparency International's ranking of the
world's most corrupt countries and where the military recently mowed
down striking workers. But we digress.
The point is that wherever Alcan buys power to feed its smelters it
insists on paying below-market prices -- or else it walks, as it has
pretty much done in Europe where the smelters it inherited in its
takeovers of Alusuisse and Pechiney are mostly history.
Elsewhere, from South Africa to Iceland to Quebec, Alcan demands and
gets cheap power in exchange for investment and jobs. Since almost
everywhere it operates Alcan buys power from state-owned electrical
utilities, that amounts to a direct transfer from taxpayers to Alcan
In British Columbia, where Alcan is a net seller of electricity, it has
turned this profit-spinning equation around. There it demands prices for
the power it sells to government-owned B.C. Hydro that meet or even
exceed market rates -- or else it threatens to pull out of a proposed
$1.8-billion modernization of its smelter in Kitimat.
No one can fault a corporation for doing what it's supposed do -- that
is, maximize profits. But to hear Alcan executives warn that the company
"needs" to sell power at 14 times its cost of production in order to
invest in the Kitimat upgrade is a bit rich. Either producing aluminum
at Kitimat is profitable or it's not -- and with power at $5 (Canadian)
per megawatt-hour, you'd have to be fairly lousy at making aluminum for
it not to be.
Asserting that an upgrade of the Kitimat smelter would not be profitable
without the ability to sell a minimum of 105 MW (170 MW during the
construction phase) of surplus power at $71 per MW/h is tantamount to
confirming suspicions that without its various electricity deals --
below cost where it's a buyer, at a premium where it's a seller -- Alcan
might be firmly in the red. Alcan chief executive officer Dick Evans
might want to think about whether that's the message he should be
sending to shareholders.
If anything, the more Alcan gets from selling surplus power to B.C.
Hydro, the less it has an incentive to invest in its 53-year-old Kitimat
smelter. It all comes down to Alcan's opportunity costs. The British
Columbia Utilities Commission, which just rejected the $71 MW/h price as
contrary to the public interest, faulted B.C. Hydro for failing to take
Alcan's options into account. Alcan could not net anywhere near $71 if
it tried to export the power itself, since it would have to pay hundreds
of millions of dollars to improve its transmission grid and fork over
$16 per MW/h in "wheeling" fees to British Columbia Transmission to
carry the power to the border.
Why, then, would a buyer, supposedly representing taxpayers, not
consider a seller's options before making an offer? Maybe because
politics, more than economics, is at the root of all this? Just asking.
African Mining Conference draws masses
Cape Town, South Africa - On strong commodity prices and a sustained
bull market the 12th annual Mining Indaba conference attracted more than
4,000 delegates in its opening day to hear the on-goings of explorers
and miners active in Africa.
Official welcome came from South Africa's Minister of Mines Ms. Buyelwa
Sonjica just as the country's National Treasury's Tax Policy Unit
announced it is studying implementing a flow-through share concept to
stimulate further exploration activity. The department acknowledges has
been studying the Canadian model.
Next on the presenter's role came the majors with the African divisions
of Anglo American (AAUK-Q, AAL-L, AGL-J), Rio Tinto (RTP-N, RIO-L),
Barrick Gold (ABX-T, ABX-N), Newmont Mining (NMC-T, NEM-N), AngloGold
Ashanti (AU-N, AGD-L, ANG-J), Gold Fields (GFI-N, GOF-L, GFI-J), Harmony
Gold Mining (HMY-N, HRM-L, HAR-J) and Randgold Resources (GOLD-Q, RRS-L)
reviewing projects and exploration activity on the continent.
Barrick highlighted operations at its North Mara, Bulyanhulu and
Tulawaka gold mines in Tanzania and also touched on its Sedibelo
platinum project in South Africa's Bushveld complex.
Jeffrey Huspeni, Newmont's vice-president of worldwide explorations,
touched on the major's gold mines in Ghana (Ahafo and Akyem) calling
them "a cornerstone of growth" for the company. A common theme amongst
the group of senior gold producers was reserve replacement as mine
output is push at ever increasing rates.
AngloGold Ashanti's CEO Bobby Godsell touched on his company's base in
Africa with a majority of its 21 mines located on the continent as well
as about 90% of its workforce. He also discussed the challenges to
remain profitable as the company hunts for about 6 million oz. of gold
annually for reserve replacement.
Next came Ian Cockerill, Gold Fields' CEO, offering similar themes in
the senior philosophy of streamlining costs and hunting for ounces. "The
addition of South Deeps elevates Gold Fields to the top tier" commented
the company's top officer.
The South Deeps acquisition came at a cost of US$104 per gold oz. to add
about 30.7 million oz. of reserves and 67 million oz. of resource,
boosting the company's tally by 47% and 37% respectively. With advanced
development the mine is expected to contribute about 800,000 oz. of gold
annually in 6-to-7 year's time and is forecast to be a low cash cost
Cockerill went on further outlining the idea of "managing risk rather
than risk aversion" as the seniors watch the rapid decay curves in their
The presentation by Randgold's CEO Mark Bristow touched on whether
companies are "exploiting market opportunities or building profitable
businesses". He reviewed gold's price rise from the
US$252.80-per-oz.-level in 1999 to its current spot price around US$650,
albeit at much higher cash costs chipping away at the producers' margins.
Bristow bestowed Randgold's organic growth strategy, rather than jumping
on the mergers and acquisition train, as its path to deliver profit on a
longer term basis.
Rounding out the top tier club was Bernard Swanpoel, Harmony Gold's CEO,
reiterating the viewpoint of growing assets through an organic path of
exploration. While its South African mines are its "anchor producers",
it sees significant growth potential in four Papua New Guinea projects
As the first African head of state to address the Indaba conference,
Tanzanian President Jakaya Mrisho Kikwete's keynote presentation
reviewed the successes realized following changes in the country's
investment climate since the mid-1980s. President Kikwete talked on his
numerous past marketing missions to the world's key mining centres to
sell the virtues of mineral exploration in Tanzania.
The message was obviously well received with the country now Africa's
third largest gold producer with about 50 tonnes (1.6 million oz.)
annually along with significant amounts of coal, iron and industrial
minerals plus gemstones including diamonds and tanzanite.
Mining is now Tanzania's second largest employer after agriculture and
accounts for 42% of the country's exports and is rising.
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