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AFGHANISTAN: Copper project tests Afghanistan’s resources

by Jon BooneFinancial Times
January 8th, 2008

The debris left over from previous attempts to extract some of Afghanistan’s colossal mineral wealth can be found just 35km south-east of Kabul.

All that remains from Soviet attempts in the 1970s to assess one of the world’s biggest copper reserves is exploratory drill holes.

But in five years, if all goes to plan, the landscape in the Aynak exploration area will finally be changed into one of the world’s largest opencast mines, thanks to a $3bn (£1.5bn) investment by the China Metallurgical Group Corporation (MCC).

In November, the Chinese state-owned company beat eight other leading mining groups, including Phelps Dodge of the US, Hunter Dickinson of Canada and London-based Kazakhmys, to become the government’s preferred bidder.

If contract negotiations are successfully concluded, MCC will have access to a reserve that, with copper prices running high, could be worth $42bn, according to one estimate.

By international standards, it is a huge project, involving the second-largest unexploited deposit in the world. By Afghan standards, it is gargantuan.

And therein lies both the potential reward and risk for a war-battered country that desperately needs the money such a deal could bring but which experts say is unprepared for regulating the sort of mega-projects that have caused social, political and economic catastrophes in other developing nations.

Lorenzo Delesgues, executive director of Integrity Watch Afghanistan, an independent research organisation that last month published a report on Aynak, says Afghanistan is not evenly matched with the company. “This is a multi-national company that is far bigger financially than Afghanistan. It’s like David and Goliath, only David doesn’t have any laws or regulatory framework to help him.”

Copper mining can be destructive to the environment. Acid waste, for example, needs to be controlled to stop it polluting drinking water supplies and the run-off from Aynak could spill into Kabul’s water supply, experts have warned.

But the rewards for getting the project right could be huge for Afghanistan.

The investment in the project is equal to 35 per cent of all the international development money spent on Afghanistan since 2002.

Analysts say annual royalties will be about $400m – or 40 per cent of the 2006 Afghan state budget. The cash will be vital for a country that struggles to collect taxes and knows it has to wean itself off international aid money.

Huge quantities of precious minerals remain untapped

Alexander the Great made history’s first recorded oil strike in what is now northern Afghanistan when in the course of digging wells his soldiers found not water but a flammable yellow liquid.

Hydrocarbons are just some of the precious minerals to be found in a country whose geology is almost as complicated as its politics. Sitting on the intersection of three tectonic plates, it has huge quantities of copper, iron ore, gold, marble and gems. While the partial extraction of gem stones in the Panjshir valley in the 1990s helped to keep the anti-Taliban Northern Alliance financially afloat, more than 2,300 years after Alexander, much of the country’s natural wealth remains under the surface.

Last March, research by the US Geological Survey dramatically increased estimates of the country’s mineral wealth. There was an 18-fold increase in the country’s potential oil and a tripling of estimated natural gas resources.

This could have a profound impact on the country’s future. Already some Kabul analysts believe that the decision to select a Chinese company for the first significant mining project will help the country in its fraught relationship with Pakistan, a traditional ally of China.

The project will also bring infrastructure development for which the country would otherwise have to wait decades, including a first railway line, which would link Afghanistan to Tajikistan and Pakistan.

Mahmoud Saikal, an economic adviser to the government, says Afghanistan should look to the example of post-independence India, which focused on developing its mineral wealth.

“The MCC deal only ­covers one quarter of the exploration area and the country’s other resources could be a lot more than we currently understand,” he says. “There will be opportunities for similar deals.”

Those other minerals include iron ore, gold, marble, emeralds, lapis lazuli and hydrocarbons.

But if the Aynak deal, which is seen as a test of how the country handles big foreign investment projects, goes sour, then much of that potential will remain untapped.

In the summer, concerns were raised about the tendering process by James Yeager, a consultant who worked with the ministry of mines. He warned that legal requirements for an inter-ministerial council to consider the rival bidders were simply being ignored. Other sources close to the deal have warned that the process lacked transparency.

The World Bank, which is bankrolling efforts to sharpen the ministry’s capacity to handle mega-deals, said it was satisfied with the tendering process.

Analysts warn, however, that the contract negotiations and a yet-to-be-done feasibility study still offer potential pitfalls.

One westerner with intimate knowledge of the country’s embryonic mineral extraction regime described it as a “Soviet-era structure that simply does not have the capacity to do the job”.

“The risk will be that without the lawyers and accountants in place to monitor all of this, they won’t be able to stop problems before it’s too late,” he said.

But Ibrahim Adel, Afghanistan’s mining minister, said his ministry was being well advised by international experts and the country still had plenty of time.

“Extraction will not start for five years, so there will be sufficient time to get our experts and environmental inspectors trained,” he said.

If those challenges cannot be tackled, however, the landscape around Aynak will be disfigured by more than a few Soviet-era holes.



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