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Why Afghanistan's Mineral Deposits Will Do More Harm Than Good


The "new" discovery was actually discovered by the Soviets in the 1980s and will likely be a destabilizing force for an already unstable nation.

The New York Times has fallen all over itself in reporting "newly discovered mineral deposits" that will supposedly "become the backbone of the Afghan economy," in the words of Jalil Jumriany, an adviser to Wahidullah Shahrani, Afghanistan's Minister of Mines.

General David Petraeus, commander of the United States Central Command, says there's "stunning potential here" but adds the caveat that there are "a lot of ifs."

Let's start with the first "if."

Shawn Hackett, founder and president of Hackett Financial Advisors, a money management firm with a specialization in commodities, tells Minyanville:

"It takes years to adequately scope a mine's potential. Even if the numbers turn out to be true, it will be five to 10 years before such mines reach production. In such a highly unstable country like Afghanistan I can easily see wars over who gets to keep the money. Long term there might be a bearish impact. Short term impact is zero in my opinion."

This thesis is backed up by Jack Medlin, a geologist with the United States Geological Survey's international affairs program.

"This is a country that has no mining culture," he says. "They've had some small artisanal mines, but now there could be some very, very large mines that will require more than just a gold pan."

Hackett says the whole thing "reminds [him] of the oil discovery in Brazil by Petrobras (PZE). They say all kinds of oil are miles down in the ocean. But deepwater drilling is very raky and that discovery is 10 years away from production at least. Impact to oil prices -- zero."

Moving on to the second "if":

The New York Times points out that, in 2004, "American geologists, sent to Afghanistan as part of a broader reconstruction effort, stumbled across an intriguing series of old charts and data at the library of the Afghan Geological Survey in Kabul that hinted at major mineral deposits in the country. They soon learned that the data had been collected by Soviet mining experts during the Soviet occupation of Afghanistan in the 1980s, but cast aside when the Soviets withdrew in 1989."

Using the old Soviet charts, the USGS delved deeper, conducting a series of fact-finding missions in 2006, with follow-up studies performed in 2007.

That was three years ago. The initial reports from the USSR were put together some 30 years ago. Why no excitement until today?

"There were maps, but the development did not take place, because you had 30 to 35 years of war," an Afghan engineer named Ahmad Hujabre, who worked for the Ministry of Mines in the 1970s, told the paper.

Lisa Reisman of MetalMiner, an outfit that provides "sourcing and trading intelligence for global metals markets," writes, "The Russians walked from Afghanistan in 1989 and they knew about these deposits back then! What in the world makes us think that this mineral discovery will ever result in a transformation of this inter-tribal warfare plagued nation?"

Well, the country is still at war, but at least there are US troops there to protect the first ones in to benefit from Afghanistan's natural resources: China.

The China Metallurgical Group is developing the world's "largest untapped copper deposit" 30 miles south of Kabul, with security provided to CMG's 300 employees by US troops from the 10th mountain division and 1,500 Afghan troops, so China can further strengthen its economy on America's dime.

It would be folly, as well, to believe China will be satisfied with merely cornering the Afghani copper market, when there are also immense deposits of iron, niobium, rare earth elements (95% of the world's rare earth production is controlled by China, as it is), cobalt, gold, and enough lithium to, as is being reported, transform Afghanistan into the "Saudi Arabia of lithium."

The third "if":

The Afghan Mines Ministry "has long been considered among Afghanistan's most corrupt government departments, and Western officials have repeatedly expressed reservations about the Afghan government awarding concessions for the country's major mineral deposits, fearful that corrupt officials would hand contracts to bidders who pay the biggest bribes -- not who are best suited to actually do the work," said the Wall Street Journal back in January.

A survey by the United Nations Office on Drugs and Crime shows that, in 2009, "Afghan citizens had to pay approximately US$ 2.5 billion in bribes, which is equivalent to 23% of the country's gross domestic product." UNODC Executive Director Antonio Maria Costa said, "Drugs and bribes are the two largest income generators in Afghanistan: Together they correspond to about half the country's (licit) GDP."

One detail is particularly disturbing. During the survey period, "one Afghan out of two had to pay at least one kickback to a public official. In more than half the cases (56%), the request for illicit payment was an explicit demand by the service provider. In three-quarters of the cases, baksheesh (bribes) were paid in cash. The average bribe is $160, in a country where GDP per capita is a mere $425 per year."

Oh, but surveys are infamous for sampling errors and so forth, right?

Sure, but one must consider why Wahidullah Shahrani is Afghanistan's current Minister of Mines. Last year, his predecessor was accused of accepting a $30 million bribe from China for the rights to develop that copper mine the US military is keeping safe for them.

"If" number four:

Hamid Karzai is getting progressively more hostile toward the West.

Earlier this year, Karzai told a group of supporters that he might join the Taliban.

Is any more detail regarding this fact really necessary?

Exactly. On to the fifth "if".

Independent trader Jeff Macke asks Minyanville, "If the US could ever get to those resources, why in the world wouldn't Afghanistan nationalize them the second we dig them out?" offers further insight:

The judicial branch [in Afghanistan] is quite weak and regarded as corrupt. Property rights are a major constraint on business expansion. Land ownership is required as collateral for bank loans, and many people do not have title to the land they have occupied for generations. Other land has been appropriated by the military, police, or government. Popular perception is that property rights are for sale by the government to insiders with influence. Thus acquiring land or the rights to use land for business purposes is regarded as a bureaucratic ordeal fraught with many risks, including that the government might grant title to land but then re-appropriate it after investments have been made. Whether this is actually a prevalent practice or not, the perception that it is seems to be a strong hindrance to new investments.

Of Afghanistan's new national mining law, Paul Brinkley, deputy undersecretary of defense and director of the Task Force for Business and Stability Operations at the DOD says, "No one has tested that law; no one knows how it will stand up in a fight between the central government and the provinces."

"If" number six is posed, again, by Brinkley:

"The big question is, can this be developed in a responsible way, in a way that is environmentally and socially responsible?"

MetalMiner's Lisa Reisman scoffs at this, arguing, "We can't even get junior mining operations up and running in the US where we have the ability to implement and run 'sustainable' mines."

Before mining companies like Freeport-McMoRan (FCX), Rio Tinto (RTP), BHP Billiton (BHP), Arcelor Mittal (MT), or Newmont Mining (NEM) get any ideas about heading to Afghanistan, a country that holds the dubious distinction of being named the "Most Dangerous Country in the World" by Forbes, in conjunction with risk-assessment firms iJet and Control Risks, handily beating out other contenders such as Somalia, Yemen, and the Russian Caucasus, it's important to remember one very important thing:

The six "ifs" listed above don't even come close to scratching the surface of the hundreds of thousands, if not millions, of other "ifs" involved.

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