July 5, 2011 / 2:43 PM / 7 years ago

Afghan mine development seen costly, risky and slow

KABUL, Jul 5 (Reuters) - Afghanistan has grand plans for a vast rail network to attract mining investors, but experts say the project would simply be a new target for insurgents and warn that sovereign risk and high production costs are also deterring companies.

With an impoverished economy ravaged by more than three decades of war and corruption and now bank rolled by foreign aid, Afghanistan’s government has pinned its hopes of rebuilding on untapped mineral resources of mainly iron ore and copper, which it has said could be worth up to $3 trillion.

Afghanistan Mines Minister Wahidullah Shahrani said on Monday that the government plans to form a railway authority to oversee the construction of a rail network to attract mining investors, despite an ongoing war against a Taliban-led insurgency.

“Looking at the very volatile security situation in many parts of the country, I find it unrealistic to expect that Afghanistan will have quick (mining) returns,” said Thomas Ruttig, co-director of the Afghanistan Analysts Network.

“It will take many years before infrastructure is in place, including a railway system. In the current state, the insurgents will be quite happy to get a new attractive target,” he said. “The discussions of Afghanistan’s mineral wealth look like a straw one is trying to clutch in a desperate situation.”

Ruttig also said that corruption meant that there was a high risk that very little of any mineral wealth earned would trickle down to the population.

Mainly Chinese and Indian companies have so far shown interest in mining Afghanistan’s resources.

Resource analysts said the country was unlikely to attract top global miners such as Rio Tinto and BHP Billiton for many years to come.

“From a sovereign risk perspective, Rio, BHP and most of the big guys would probably steer clear of that country,” said Troy Flannery, senior resource analyst at DJ Carmichael in Australia.

China’s top copper producer, Jiangxi Copper Co , together with China Metallurgical Group Corp, in 2007 won the contract to develop the Aynak Copper Mine south of Kabul -- which is due to start production in 2014.

CNPC International China appeared to be the front-runner in bidding for several oil blocks in the north of the country.


Mainly Indian companies have shown interest in the Hajigak iron ore project, the government has said, which has deposits of about 2 billion tonnes. Bids are due on Aug. 3 for what the government describes as Asia’s largest unmined iron deposit.

Henry Liu, regional head of commodity research at Mirae Asset Securities in Hong Kong, said security problems were not the only deterrent for investors.

“There is also the problem of infrastructure and potentially high cost of shipping out iron ore because Afghanistan is a landlocked country,” he said. “If we consider all these conditions, Afghanistan might not be a good choice.”

Even in politically stable resource-rich countries like Australia, Chinese miners are also reconsidering investment decisions because of concerns about high production costs.    Sinosteel suspended work on its $2 billion Weld Range iron ore mining project -- one of the largest Chinese investments in Australian mining -- due to setbacks in developing port and rail infrastructure. [ID: nL3E7HN0HU]

And the Philippines, which also boasts of $3 trillion in mineral assets from copper to nickel and gold, has been slow to attract big miners because many projects have stalled amid opposition from the Roman Catholic church and an insurgency in the south of the country.

In Afghanistan -- where the annual average wage according to the World Bank is $370 -- possible mineral riches valued at up to $3 trillion are beyond belief.

During a recent rural development meeting, President Hamid Karzai gave a basic math lesson to highlight the importance of resources, explaining to farmers that one thousand million makes a billion and one thousand billion makes a trillion.

Gareth Price, a senior research fellow at Chatham House, a London-based think-tank on international affairs, said Afghanistan’s mineral resources had emerged as the only solution for rebuilding the country’s economy.

“No one has satisfactorily answered the question ‘What’s the Afghan economy going to look like? If there was peace how is the country going to support itself?'” Price said.

But the presence of the reserves, and the need for income sources, was leading to some wishful thinking, he said.

“The only magic bullet that seems to have been come up with is the fact that it does have lots of mining reserves...Quite frankly until the fighting stops nothing’s going to happen.” (Additional reporting by Hamid Shalizi in KABUL and Manolo Serapio Jr in SINGAPORE; Editing by Emma Graham-Harrison)

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