Mick Davis, CEO, Xstrata
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Xstrata still believes in South Africa
Allan Seccombe
Posted: Mon, 03 Mar 2008

[miningmx.com] -- XSTRATA remains a long-term player in South Africa, where it has ferrochrome, platinum and coal businesses, despite the power shortages there that will take time and risk to over come, said CEO Mick Davis.

Xstrata declared force majeure on its ferrochrome supplies from South Africa in early February after power utility Eskom declared its own force majeure in January, shutting down mines for a week. Since then, the mining sector and heavy industry have agreed to cut electricity consumption to 90% of their normal use.

There is a perception that the mining sector in particular is expected to make the cuts that will keep the country out of the dark. However, a number of mining companies have warned of job cuts, shaft closures and production declines if they continue to operate at 90% power usage.
we are in South Africa for the long term
“There is a concern by the industry that too much of the burden of capacity management is going to be borne by the mining industry. If that’s the case, the negative consequences for the economy will be significant,” Davis said.

Anglo American CEO Cynthia Carroll feels the same way.

"We should not single out mining as a target, given its significance today and in the future. It is massive in projects and investments and capital spending," she is quoted in Business Day as saying.

There were "some discussions" about taking the mining sector up to 95% of its normal power consumption but this could mean other sectors have to do with less, she is reported as saying.

Xstrata and its joint venture partner Merafe Resources have suspended going ahead with the second phase, 360,000 tonne expansion of its Lion Ferrochrome project because of the uncertainty around the sustainability of power supply.

Xstrata, on a practical level, can make Eskom offers of coal to supply power stations and build up stockpiles, one of the factors that led to the current crisis.

“While South Africa is an important region for South Africa it is a relatively small contributor to our EBITDA so our concerns are more broadbased than simply trying to protect our bottom line,” Davis said.

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Eskom has outlined a plan up to 2012 whereby it will build capacity, but constructing new power plants and de-mothballing others. However, a key part of the existing problem arises from unplanned maintenance that has substantially impacted on Eskom’s ability to provide power.

“I think there has to be some level of risk attached to that. It’s do-able but we mustn’t be blind that there are potential risks,” Davis said. “In the short term this is not good news for us as operators, us as potential investors and it is not good news for the South African economy.”

“Hopefully it will not change the view that South Africa is a good place to do business because that’s important for the maintenance of growth in the country,” he said. “We remain committed to our investments in South Africa and we think once these issues are resolved it will be a place we’ll be more than happy to continue doing investments.”

Xstrata has growth plans for both ferrochrome and its recently acquired platinum projects, he said.

“There’s no doubt we are in South Africa for the long term. This, hopefully, will be a little blip on the horizon when one looks back over the years in terms of the value contributed by those operations to the Xstrata bottom line.”