Analysis: Afghan mine sector sparkles but problems abound

WASHINGTON Mon Jun 14, 2010 2:58pm EDT

A man walks with his cow along a road during a dust storm in Ghazni province, southwest of Kabul, in this April 7, 2005 file photo. REUTERS/Stringer

A man walks with his cow along a road during a dust storm in Ghazni province, southwest of Kabul, in this April 7, 2005 file photo.

Credit: Reuters/Stringer

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WASHINGTON (Reuters) - Afghanistan has rich mineral deposits, from iron ore and copper to precious stones, but their potential is stifled by war, bad infrastructure and deep investor caution.

Experts say revenues could amount to hundreds of billions of dollars -- a statistic U.S. officials are honing in on given the cost of the nine-year war and Afghanistan's paltry economy -- but such a bounty is years, even decades away.

"Rather than being a wasteland, Afghanistan is a motherlode of mineral resources. The challenge is how to extract it and make sure it benefits all Afghans," said James Bever, director of the task force for Afghanistan and Pakistan at the U.S. Agency for International Development.

"Seven or eight or 10 years from now we may look back and say this was the big thing," said Bever.

Mining analysts say while Afghanistan's mineral potential is enticing, the risks are too big for most companies who worry their investments will be attacked by the Taliban or affected by the Afghan government's reputation for corruption.

"An established company would not want to go to its shareholders and say we want to invest in it," said Anthony Young of Dahlman Rose & Co, an investment bank in New York.

A giant copper contract was handed out in 2007 to a Chinese consortium for a deposit in the Aynak region south of Kabul.

The Afghan mining ministry is doing an international roadshow later this month to revive an iron ore tender scrapped in February, partly due to lack of interest and market instability at that time.

Chinese and Russian companies are expected to be among bidders for the iron ore tender for the Hajigak deposit west of Kabul, but many North American mining houses are likely to stay away and point to problems with the first copper contract.

CAUTIOUS

The Canadian mining company Hunter Dickinson lost a bid for the copper deposit to China's top producer, Jiangxi Copper Co, and China Metallurgical Group Corp.

"Given the escalation of violence in the country, it turned out alright for us," said Robert Schafer, executive vice president of business at the Canadian firm.

Schafer said it would take a long time before the industry showed profits, pointing out that from the moment a discovery was made it usually took seven to 10 years before it could be seen as profitable and could take as long as two decades.

Other mining firms are also cautious, citing basic infrastructure issues, power and other problems.

"From our standpoint, power plants had to be built and there were lots of other things. Their expectations were a lot higher than the reality," said one mining industry source whose company looked into the copper bid. He declined to be named.

The World Bank has been working to improve Afghanistan's nascent mining sector and points to many gaps in the "value chain", including transforming the mines ministry.

"It has to be changed from a Soviet-style operating body to a regulatory apparatus or ministry as we would have in most countries," said Gary McMahon, a senior mining specialist at the World Bank.

"You are not going to see the majors (big mining firms) going into Afghanistan ... but there are mining companies which will say it is worth the risk," said McMahon, who was in Kabul last week to see Afghan officials.

There are also concerns over the mining law and whether the finder of a deposit has the right to exploit it.

"The government has the intent to make 'the right to mine' more in line with international practice," McMahon said.

MAPPING OUT RICHES

The Pentagon believes Afghanistan's untapped mineral deposits may be worth more than $1 trillion and could help the country's economy and help U.S. efforts to bolster its war-battered government, a Pentagon spokesman said on Monday.

"It's certainly potentially good news, especially for Afghanistan," said Pentagon spokesman Colonel David Lapan.

Including the two well-known, world-class deposits of copper and iron ore, the U.S. Geological Survey (USGS) has pinpointed 24 areas across Afghanistan which it says show most mineral potential, including magnesium, chromium, gold, nickel, mercury and lithium and other rare minerals used for mobile phones and other technology.

"Unfortunately it (rare minerals) is right in the middle of what the military call the kinetic (war) zone," said USGS expert Jack Medlin.

Air surveys have also shown oil and gas deposits which earlier Soviet studies highlighted. However, one in the Helmand basin that was expected to yield great potential may not be all it was cracked up to be, Medlin said.

There have also been enormous problems gathering accurate soil and rock samples because of the war and much data has not been verified, particularly in the Helmand area, he added.

(Writing by Sue Pleming, editing by Anthony Boadle)

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