RBC Capital Markets notes that South Africa has been plagued by a power shortage since early 2008. “Over the past two years, the situation improved only because the economic environment slowed dramatically, reducing electricity demand. At the same time industry, mining specifically, reduced power consumption by at least 10% – partly due to lower output, but also due to taking steps to be more power-efficient.“The risk of facing another big power shortage has, however, surfaced again as the mining industry in particular gears up for some expansion (after several years of contraction) and the economy starts growing again following the market collapse in late 2008.

“This risk has increased significantly on continued indications of delays to the build program of two very important coal-fired power stations that are due to come on line. Most recently, the South African government published two reports that clearly indicate the problems and look at how these challenges plan to be met.”

• These Government reports – essentially still indicate the very real possibility of the country’s running short of power for the most part of the next five years
• That is significant, both because the two new coal-fired stations were previously thought to be enough to lift the supply squeeze, but also because the success of “keeping the lights on” is now clearly shown to be crucially dependent on “mitigation measures”. These measures essentially point to the fact that even with two new power stations coming on line, power consumption will have to be cut if the country is to stay “switched on”.

RBC says “the conclusion is pretty clear. We believe this points to four things that are crucial to mining, but particularly to PGM mining in South Africa.

1. Current expansion plans from the majors should really be questioned

2. Significant cost increases are now a given – as result of higher power costs, but also on possible disruptions

3. Higher metal prices should result – particularly as ETF investment is driven off the premise that supply from South Africa will not match demand once the world starts growing again

4. Juniors with good, shallow resources should continue to attract attention as possible takeout targets. This would include, but not be limited to Wesizwe, Eastern Platinum and the soon to be listed Royal Bafokeng Platinum (IPO expected on the JSE in November 2010).”