VZCZCXRO9287
PP RUEHDBU RUEHIK RUEHPW RUEHYG
DE RUEHBUL #1172/01 1000721
ZNR UUUUU ZZH
P 100721Z APR 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7390
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0420
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RUCNDT/USMISSION USUN NEW YORK 3928

UNCLAS SECTION 01 OF 05 KABUL 001172 
 
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E.O. 12958 N/A 
TAGS: EMIN ECON ENRG EFIN ETRD ELTN PGOV AF
SUBJECT: SUBJECT: Afghanistan: Aynak Copper Deposit: A Test Case for 
Afghanistan 
 
This message contains SENSITIVE BUT UNCLASSIFIED information. 
Please protect accordingly. 
 
SUMMARY 
------- 
 
¶1. (SBU)  The large Aynak copper deposit has the potential to 
generate the first significant, long-term international investment 
in Afghanistan.  Nine companies, including the American firm Phelps 
Dodge, are in the fray in a competitive bidding process.  The bids 
are due on May 15 and will be followed by an evaluation process, 
selection and negotiations with the winner for a long term 
concession.  In addition to a possible $300-400 million annual 
revenue stream for the GOA and significant direct and indirect 
employment and infrastructure and services benefits, a successful 
Aynak deal could boost investor confidence.  It is important for 
Afghanistan's economic development that the GOA gets this process 
right.  If the process stalls, there is hint of non-transparent 
dealings, or either side is seen to have received an unfair bargain, 
the experience could have a chilling impact on an already difficult 
investment climate. 
 
¶2.  (SBU) The Aynak privatization process has proceeded well to date 
but faces a number of potential pitfalls which we will need to watch 
closely.  The most pressing concern is whether the Ministry of Mines 
can successfully manage the next steps.  To structure a credible 
deal, MOM will need the services of a recognized international legal 
firm to assist in upcoming negotiations with the selected winner 
(see septel action request).  A complicated, multi-year 
international project such as Aynak will inevitably generate varying 
expectations, differing interpretations, disagreements and disputes 
among the parties.  Close Embassy and donor monitoring will be 
required to promote transparency and fairness.  END SUMMARY. 
 
Aynak: Crucial Investment For Afghanistan 
----------------------------------------- 
 
¶3.  (U) The copper deposit at Aynak, 35 kilometers south east of 
Kabul, has the potential to generate the first large-scale, 
long-term international mining investment in Afghanistan. The 
competitive bid process, which has been moving forward steadily, is 
now at a critical juncture.  Success or failure of the process is 
likely to have a wide-ranging impact on the nascent relationship 
between Afghanistan and the international investment community.  If 
the concession award process is seen to be transparent, both the GOA 
and the successful bidder are seen to get a fair deal, and it leads 
to a successful extraction venture, this project could assist in 
"re-branding" Afghanistan as a place where international 
corporations can do business. 
 
World Class Deposit 
------------------- 
 
¶4. (U) The Aynak deposit has been described by most experts as a 
"world-class" copper resource.  The copper occurrence is a 
sedimentary hosted deposit similar to copper deposits in Zambia. 
Located in northern Loghar province, the deposit is estimated to 
contain 185 million metric tons of ore at a grade of 2.37 percent 
copper. At unusually high current world copper prices ($2.50 per 
pound), the gross value of this resource is estimated at $25 
billion.  Using a more realistic projection of copper prices of 
$1.50 per pound, the gross value would be closer to $15 billion. 
The initial capital expenditure required for mine development 
(excluding cost for a potential smelting operation) is estimated at 
$600-900 million.  If focused exploration were to begin in 2008, the 
project could be expected to commence operation in 2012-2014.  This 
5-7 year development period would include feasibility analysis, 
environmental assessment, design and construction.  Mining is 
expected to include both open-pit and underground extraction.  The 
 
KABUL 00001172  002 OF 005 
 
 
mine life is estimated at 30 years. 
 
Economic Impact 
--------------- 
 
¶5.  (U) In addition to a possible $300-400 million annual revenue 
stream for the GOA and a boost in investor confidence, a successful 
Aynak will generate significant direct and indirect benefits.  It 
should create hundreds of jobs during construction as well as 
hundreds of permanent jobs during operations.  It should also create 
significant indirect employment in the backward and forward services 
linkages and ancillary businesses that emerge to support the 
operation.  Second, the mine should help develop local 
infrastructure, including both physical infrastructure (e.g. energy) 
and services infrastructure (e.g. transport and other related 
businesses).  It may also help in forcing improvements in the 
customs and transit operations.  If the winning proposal includes a 
smelting operation, the benefits could be much greater. 
 
Status of Bidding Process 
------------------------- 
 
¶6. (U) The competitive bidding for mineral rights at Aynak is 
currently underway.  After collecting and disseminating preliminary 
data with help from the British Geological Survey, the Ministry of 
Mines (MOM) in November 2006 solicited and received 13 expressions 
of interest from major international mining companies.  These were 
narrowed down to a "short list" of nine (see para 14), including 
U.S. firm Phelps Dodge, to which the GOA sent bid information 
packages.  The bids are due by May 14, 2007, which allows a period 
for "due diligence" visits by the prospective bidders.  The World 
Bank selected international natural resources appraisal firm 
Gustavson Associates to act as the transaction advisor for the 
tendering process. Gustavson has prepared to international standards 
the tender documents which include instructions for bidders, rules 
for negotiation, and a model contract.  The Minister of Mines has 
been closely involved in the process, and although he has 
occasionally had differing views, he has generally accepted the 
guidance of Gustavson and MOM's international advisors.  In general, 
the process to date has been transparent and successful.  Perhaps 
the key factor in this success is that key decisions are made by an 
inter-ministerial committee of GOA officials, including the Finance 
Minster and the Minister of Economy and closely counseled by 
international advisors. 
 
Next Steps Planned in the Bidding Process 
----------------------------------------- 
 
¶7.  (U) After receiving bids on May 14, the GOA plans to evaluate 
them thoroughly to select the preferred bidder about mid-June.  The 
GOA would open negotiations with the winner on or around June 26, 
¶2007.  Upon the conclusion of negotiations (expected to take around 
60 days) and signing of the contract, the chosen bidder would be 
required to begin work on the project.  This initial work will 
consist of confirmation drilling and the development of an 
environmental impact assessment.  This process is designed to bring 
the project to the pre-feasibility stage.  Should the negotiations 
with the winning bidder fail, the GOA can open negotiations with the 
runner-up.  Terms of the model contract, drafted by Gustavson 
Associates, conform to international best practice with regard to 
royalties, social and environmental impact, and other critical 
factors.  The model contract also reflects international best 
practice (including the IMF "Equator Principles") in requiring that 
the venture generate a positive economic and social impact on the 
region.  Two licenses will be awarded to the successful bidder: an 
exploitation license to develop the known copper occurrence at Aynak 
as well as an exploration concession for at least three other known 
copper occurrences nearby.  Embassy has been told that these copper 
deposits are very promising and that the keen interest in bidding 
 
KABUL 00001172  003 OF 005 
 
 
for Aynak is driven in part by the eagerness of companies to win the 
rights to these other deposits. 
 
Potential Pitfalls 
------------------ 
 
¶8.  (SBU) The Aynak privatization process faces a number of 
potential pitfalls, which will have to be closely monitored by the 
Embassy and the donor community.  The most pressing concern is 
whether MOM can successfully manage the next steps.  Minister of 
Mines Ibrahim Adel has been inclined to micromanage the process 
despite limited familiarity with a commercial extraction project of 
this type and magnitude.  Although the World Bank has provided 
technical assistance and has funded the American firm Gustavson to 
assist MOM and prepare the tender documents, we understand that the 
World Bank assistance does not include resources to hire the 
services of a recognized legal firm to assist the MOM in upcoming 
negotiations.  The selected bidder will undoubtedly bring a team of 
heavy-hitting international attorneys to the negotiating table.  MOM 
will need the services of similarly competent international legal 
expertise to assist in upcoming negotiations and to provide 
practical training to one or more Afghan attorneys.  This is 
critical for ensuring that the GOA gets a fair bargain and is able 
to navigate the complex commercial, technical, and financial issues 
that bear on success. (Septel will provide action request for 
Washington on this issue.) 
 
¶9.  (SBU) The Minister of Mines appears to have quite firm ideas on 
what the deal should bring to the GOA.  This may lead him to 
centralize decision-making authority away from the current broad 
committee of stakeholders.  It may also lead to the MOM simply 
stating its preferred terms and refusing to negotiate in good faith. 
 We will need, therefore, to work with others in the donor community 
and with the international advisors to manage GOA expectations.  The 
Embassy's Afghanistan Reconstruction Group is taking the lead role 
in monitoring this process. 
 
¶10. (SBU) There is a suspicion among MOM's international advisors 
that some bidders (i.e., the Russian and Chinese firms) would offer 
an accelerated development schedule with commencement of operation 
within 3-5 years instead of the more realistic 5-7 years.  The GOA 
may find such an offer very tempting and give less weight to other 
elements of the bid criteria.  Given the high likelihood that these 
firms would slip on such a tight schedule, the GOA could end up with 
a sub-par bid as well as a longer commencement schedule. 
 
¶11. (U) Aynak's substantial energy requirements pose an onerous 
challenge for the bidders.  While simple extraction will require 
40-50 MW of power, the addition of a smelting operation would raise 
the requirement to 80-100 MW.  Although the selected company will be 
responsible for putting in place its own power needs, the GOA can 
help support this process by integrating Aynak's power needs into 
its nation-wide energy sector strategy.  If smelting becomes a 
serious part of the planning, further exploration of water resources 
may also be necessary. 
 
¶12. (SBU) Another area that the GOA and the donor community should 
pay attention to is the handling and ultimate use of GOA revenues 
that are expected to accrue from extraction at Aynak.  International 
experience has demonstrated that large revenues resulting from 
natural resource extraction, when managed poorly, can lead to a 
variety of economic ills, including corruption, overdependence on 
one resource, susceptibility to price fluctuations, and stifling of 
other industries. 
 
Comment 
------- 
 
¶13.  (SBU) The size and visibility of the Aynak project raises the 
 
KABUL 00001172  004 OF 005 
 
 
possibility that its success would attract increasing positive 
foreign investor attention to Afghanistan as well as foster 
improvements to the investment climate.  If, on the other hand, the 
project reaches an impasse, there is any hint of non-transparent 
dealings, or either side is seen to have received an unfair bargain, 
the experience is likely to have a long-term chilling impact on an 
already difficult investment climate.  In particular, if there is a 
perception among the Afghan people that a multinational company has 
swindled them out of their national asset -- stolen the crown jewels 
-- it will damage significantly the prospects for future foreign 
investment projects.  The harm would be difficult to reverse.  Thus, 
close donor monitoring will be required throughout the bidding and 
negotiating processes to promote transparency and fairness.  The 
World Bank consultant's efforts to steer the GOA towards a 
transparent and market driven process based on international best 
practices are key to this effort.  Identifying donor assistance to 
fund legal advice for the GOA in the upcoming negotiations with the 
winning bidder will also be critical. 
 
¶14.  (SBU) We should be prepared for long term engagement on Aynak. 
A successful concession award will be followed by a relationship 
between the GOA and the winning bidder which will no doubt encounter 
many challenges.  A complicated, multi-year international project 
such as Aynak will inevitably generate varying expectations, 
differing interpretations, disagreements and disputes among the 
parties; the international community may be called upon at some 
point by one side or both to intercede.  End Comment. 
 
Short-Listed Companies 
---------------------- 
 
¶15.  (U) Short list of prospective bidders, with profiles compiled 
by MOM's advisors: 
 
-- Hunter Dickinson Inc. (HDI), Canada (www.hdgold.com):  Based in 
Vancouver, HDI is a diversified mining company with interests around 
the globe. HDI currently manages eight companies in North America, 
Africa and Asia and has interests in gold, PGE and base metals. To 
date the company has raised over $500M to invest in its projects. 
 
-- MCC China Metallurgical Group (MCC), China 
www.cec-ceda.org.cn/english_version/): MCC is a state-owned 
conglomerate of 70 companies with a reported combined asset value of 
32 billion yuan. The group has diverse interests including 
construction, iron and steel making as well as geotechnical 
surveying and scientific research, and is ranked in the top 50 
companies in China. 
 
-- Tyazhpromexport, Russia (http://enc.ex.ru/cgi-bin/): 
Tyazhpromexport is a state-owned enterprise specializing in the 
export and import of complete plant and equipment for facilities 
producing ferrous and non-ferrous metals. It was responsible for the 
feasibility study of the Aynak deposit and, therefore, should have a 
good knowledge of the techniques used and resources. 
 
-- Zijin Mining Group Co. Ltd, China (http://english. zjky.cn/): 
Zijin is a leading Chinese gold and base metal producer listed on 
the Hong Kong Stock Exchange. The group is principally engaged in 
the exploration of gold, copper and other non-ferrous metals. 
 
-- Hindalco Industries Ltd, India (www.hindalco.com): 
Hindalco is ranked in the top ten companies in India and has core 
businesses in aluminium and copper.  It imports copper concentrate 
from Indonesia and South America and operates two copper mines in 
Australia. Hindalco also owns the largest copper refining and 
smelting operation in India, and it is registered on the London 
Metal Exchange as a grade "A" producer. 
 
-- Kazakhmys Consortium LLC, Kazahkstan (www.kazakhmys.com): 
 
KABUL 00001172  005 OF 005 
 
 
Kazakhmys is a copper mining company headquartered in Dzhezkazgan. 
Its principal business is the mining, processing, smelting, refining 
and sale of copper and copper products, including cathodes and rods. 
In October 2005, it listed on the London Stock Exchange with an 
opening market capitalization of #5 billion. 
 
-- Phelps Dodge Corporation, USA (www.phelpsdodge.com): 
Phelps Dodge Corp. is one of the world's leading producers of copper 
with operations in North and South America, Europe, Africa and 
China. The company is a world leader in the production of 
molybdenum, and the largest producer of molybdenum-based chemicals 
and continuous-cast copper rod. The company's two divisions, Phelps 
Dodge Mining Co. and Phelps Dodge Industries, employ 15,000 people 
worldwide. 
 
-- Bahar Consortium, Australia (www.sallymalay.co and 
www.intec.com.au): This is a consortium between three Australian 
companies, Sally Malay Mining Ltd., Intec Ltd. and Pearl Mining and 
Metals.  Sally Malay owns and operates the Sally Malay nickel-copper 
mine and the Lafranchi nickel mine in Western Australia.  Intec is 
the world's leader in chloride hydrometallurgy and is currently 
developing the Hellyer Metals Project in north western Tasmania. 
Pearl Mining is an Australian group of that arranges funding for 
mining projects in developing countries. 
 
-- Strikeforce Ltd, Russia (Souzmetallresourc), Russia: 
Souzmetallresourc (SMR) manages the mining and exploration assets of 
Basic Element Group, one of the largest investment groups in Russia. 
 The core assets of the Group are in energy, machinery, resources, 
financial services, and construction and development. 
 
Norland