[DEBATE] : (Fwd) Minerals tyranny in SA, Africa

[Patrick Bond]

http://www.theglobeandmail.com/servlet/story/LAC.20070208.RYAKA08/TPStory/Business 


POSTED ON 08/02/07

There's no loss of power in Alcan's deals

KONRAD YAKABUSKI

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 
interruptions.

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 
energy crunch.

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 
million.

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 
shareholders.

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.

***

http://www.northernminer.com/article.asp?id=65144&issue=02062007&ref=rss

African Mining Conference draws masses
2/6/2007

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 
producer.

Cockerill went on further outlining the idea of "managing risk rather 
than risk aversion" as the seniors watch the rapid decay curves in their 
reserve base.

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 
being advanced.

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.