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

African Business, March, 2008 by Neil Ford

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."