March/April 2012

Redefining “hot spot” in Afghanistan

Abundant prospects attract investment to troubled, mineral-rich country

By Anna Reitman

US geology society - geophysical surveying 

Kilo Goldmines is both the first Canadian and the first publicly listed company preparing to tap into Afghanistan’s rich mineral resources. At the end of November 2011, the Afghan Ministry of Mines (MoM) awarded the miner one of four concession blocks comprising the Hajigak iron ore deposit. It is located in the mountainous Bamiyan province, 130 kilometres west of Kabul, and is one of several iron ore deposits in the region and the largest located to date.

U.K.-based financier David Buckle – majority owner of Kilo DRC Iron, an affiliate of Kilo Goldmines – is leading the project. The partnership, said Kilo Goldmines president and CEO Alex van Hoeken, was a “natural fit” because of David Buckle’s existing relationship with the company and knowledge of the region.

The miner has been allocated the preferential right to negotiate on the northeast block, a sizeable resource estimated to contain 450 million tonnes with an average 62 per cent grade iron, while a government-backed Indian consortium clinched the bid for the remaining three blocks. Production is expected within several years.

When news broke that Kilo had been given preferred status, van Hoeken reckoned he would be getting plenty of feedback with the word “crazy” sprinkled in the conversation. The reality was quite the opposite, however. “I have had offers of financing and I keep getting emails from Afghans looking for jobs, so I have been pleasantly surprised by the reaction,” van Hoeken said. “It was much more positive than what I was thinking and that shows there is a waiting list to look at these kinds of jurisdictions.”

The company must begin by confirming the resource. Meanwhile, negotiations are ongoing with the ministry. Van Hoeken hesitated to divulge any details until negotiations are finalized, which he expects will be some time this year. However, such agreements generally focus on ensuring that contracts reflect international best practices and may include building infrastructures, such as roads, hospitals and schools, or guarantees to hire local workers or source from local suppliers, explained Atiq Sediqi, environmental advisor at MoM. In addition, royalty rates and/or bonus payments could be discussed at this stage.

A great deal of international attention has been paid to the Afghan mineral sector. Foreign Affairs and International Trade Canada called the successful bid “a major step forward in Afghanistan’s extractive industry development [that] will help generate much-needed revenues and jobs, contributing to Afghan livelihoods and to the sustainability of the country’s economy.”

That contribution could be some US$5 billion to GDP by 2016, according to Afghan government estimates, which peg total mineral wealth at US$3 trillion, making it possible for the government to fund development and avoid a possible economic crash after the withdrawal of international troops in 2014. It is little wonder that MoM is pushing to change the perception of the country as a “hot spot” of conflict to one of mineral resource wealth.

But there have been troubles right from the start. The first major concession, and largest ongoing infrastructure project, is the Aynak copper mine, which is secured by China Metallurgical Group (MCC). It is located in the relatively stable Logar province, 65 kilometres south of Kabul. According to global risk research firm Maplecroft, MCC was awarded the contract in 2008 after an auction process that sources close to MoM described as “lacking transparency and biased against other bidders.” And although Afghanistan has signed on to the Extractive Industries Transparencies Initiative, a source with knowledge of the situation explained that this global standard for transparency, in Afghanistan at least, is merely window dressing.

MoM has denied these allegations and has published a comparison of several Aynak bids in response – MCC clearly had the most competitive offer in terms of maximum tax rates the company was willing to pay, additional bonus payments the company was willing to make to the government, and promises to develop infrastructure.

But the project, originally planned to begin last year, has had a series of setbacks, and production is now expected in 2014. Demining the area took considerably longer than anticipated and the discovery of a fifth century Buddhist monastery has caused delays.

Meanwhile, leaked diplomatic cables from Wikileaks show that there has been disappointment from both the U.S. and Afghan governments as to the degree to which MCC has complied with its contractual obligations. “So far, very few local people have been employed, and the surrounding villages have complained that they have seen no benefits,” Maplecroft reported. “MCC has also imported most of its supplies from China, rather than sourcing locally as had been agreed.” In addition, logistical challenges have plagued railroad construction, a contractual obligation on the part of MCC.

The Asian Development Bank, however, has succeeded in expanding the country’s rail network. Last summer, a year after the first track was laid, Afghanistan ran its first test train from Mazar-e-Sharif, some 400 kilometres northwest of the capital Kabul, to the Uzbek border town of Hairatan. This 75-kilometre stretch of railroad marks the first phase of a national rail system which, it is hoped, will transport the country’s mineral reserves. Still, the logistical challenges are anathema to Western investors at a time when more tenders are being announced amid fierce competition between India, China and Iran.

Aside from Hajigak and Aynak, Afghan officials have also signed a US$700 million oil and gas deal with the China National Petroleum Corporation in the country’s northern Sari Pul and Faryab provinces. Local watchdog Integrity Watch Afghanistan reported that public and private companies have signed more than 100 small, medium and large mine agreements so far. Current tenders are up for gold and copper deposits in Ghazni, Sari Pul, Balkh, Herat and Badakhshan provinces.

Located in mountainous terrain in northern Afghanistan, Badakhshan has the advantage of access to markets in Tajikistan to its north and China to its east. Of the current tenders, a representative of an Afghan mining supply company said it was the most attractive for this reason. More iron ore and oil and gas concessions are set to be announced this spring.

Some mineral deposits are in less secure provinces, which tend to be in the southern and southwest regions. With safety being a key issue, in 2008, MoM established a virtual army to protect mining operations in the form of the 7,000-strong Mines Protection Unit. However, Maplecroft reported concerns that after the NATO-led security mission withdrawal, conditions are likely to deteriorate and the country may struggle to support an army and police force without foreign assistance.

In other words, the risks faced by investors in Afghanistan’s mineral sector cannot be underestimated. But van Hoeken of Kilo Goldmines explained that globally and historically, mining has been a driving force for development – not just in direct employment, but also as a catalyst to boost local economies. “We have to be careful not to say that it is the be all and end all,” he said, “but it is fair to say that once you initiate a mine, others are likely to follow, and that will generate its own momentum. There will be others coming in our footsteps. In this day and age, and certainly for publicly listed companies, mining operations are expected to abide by international rules and regulations and environmental protocols.”

Whether or not international firms will become less wary of investing in the Afghan mining sector remains to be seen, but the progress of the Hajigak deposit is sure to be watched closely as a test case.

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