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PP RUEHDBU RUEHIK RUEHPW RUEHYG
DE RUEHBUL #1468/01 1210627
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P 010627Z MAY 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7797
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0440
RUCNAFG/AFGHANISTAN COLLECTIVE
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UNCLAS SECTION 01 OF 03 KABUL 001468 
 
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E.O. 12958 N/A 
TAGS: EMIN ECON ENRG EINV BEXP ELTN PGOV AF
SUBJECT: Afghanistan: Aynak Copper Deposit -- Phelps Dodge Considers 
Bid 
 
REF: A) Kabul 1173 B) Kabul 1172. 
 
This message contains SENSITIVE BUT UNCLASSIFIED information. 
Please protect accordingly. 
 
This is an action request - see para 2. 
 
¶1.  (SBU) Summary and Action Request.  The competitive bidding 
process for the Aynak copper deposit is moving forward.  Over the 
last two weeks, the GOA hosted all nine short-listed prospective 
bidders, including the US natural resources company Phelps Dodge, to 
do rounds of GOA Ministries, review the data and visit the site. 
Company representatives told the Embassy that the data shows that 
Aynak is indeed a world class deposit in quality and size.  Whether 
Phelps Dodge submits a bid will be a decision made by the company's 
top management.  The visiting team confirmed that the bidding 
process has been fair and transparent to date, but Phelps Dodge 
feels a bit out of its element competing against regionally active 
Chinese, Russian, and Kazak companies.  In Phelps Dodge meeting with 
Embassy staff (ECON, AID and ARG) on April 10, DCM requested that 
Embassy be informed immediately if there was any hint of 
non-transparent actions; we would raise it with the GOA at high 
levels.  In spite of the GOA stated preference for bids to include 
an on-site smelter operation, Phelps Dodge will not offer a smelter 
operation, because there is excess world smelter capacity. 
 
¶2. (SBU) We underscored the importance of the Aynak project for 
Afghanistan's economic development, and offered full support, 
including appropriate advocacy assistance.  Together with other 
donors we will also continue to monitor the process. Ref A action 
request sought Washington support in urging World Bank management to 
extend its existing technical assistance on the Aynak project to 
include services of a recognized international legal firm familiar 
with mining transactions. Given the importance to Afghanistan of the 
Aynak project as a precedent for foreign investment and future 
development of its natural resources, post reiterates this request. 
End Summary and Action request. 
 
¶3. (U) Representatives from Phoenix-based natural resource company 
Phelps Dodge briefed DCM and Embassy staff from ECON, AID and Afghan 
Reconstruction Group on April 10 regarding the company's interest in 
bidding for the large Aynak copper deposit near Kabul.  The Phelps 
Dodge team was in Afghanistan at the invitation of the Ministry of 
Mines (MOM), which invited all nine short-listed international 
companies during a two-week period to meet with GOA officials, visit 
the site and review the available data.  We underscored the 
importance of the Aynak project for Afghanistan as a direct and 
indirect boost to the economy as well as a precedent for future 
large and long term projects. 
 
Due Diligence 
------------- 
 
¶4. (U) The Phelps Dodge team's goals for its Afghanistan visit were 
to conduct due diligence on the deposit and to sell itself to the 
GOA.  They confirmed that the available data -- much of it compiled 
by the Soviets during the 1970s and 1980s -- established that the 
Aynak is a world class deposit, both in its size and in its ore 
concentration.  Aynak's 2.3-2.5 percent concentration is a number of 
times higher than the 0.4 percent average of Phelps Dodge's 
world-wide copper reserves. 
 
Marketing 
--------- 
 
¶5. (U) To champion its own credentials for the bid, Phelps Dodge met 
or were scheduled to meet a wide spectrum of GOA officials, 
including Minister/Deputy Minister level officials in the Ministries 
of Mines, Finance, Justice, Interior, Energy, Foreign Affairs, 
 
KABUL 00001468  002 OF 003 
 
 
Economy, Commerce and Industry and the National Environmental 
Protection Agency.  The meetings, arranged by MOM, were fruitful and 
positive, according to the Phelps Dodge officials. 
 
Transparency 
------------ 
 
¶6. (U) The Phelps Dodge team said it believes the bidding process 
had been transparent so far.  The World Bank-funded American 
consultant Gustavson Associates is guiding the bidding process with 
heavy emphasis on fair and transparent procedures.  Underscoring the 
importance of transparency not just for the Aynak project but also 
for Afghanistan's investment climate and investor confidence, the 
DCM requested that Embassy be informed immediately if there was any 
hint of non-transparent actions; we would raise it with the GOA at 
high levels. 
 
To Bid or Not to Bid 
-------------------- 
 
¶7. (SBU) Whether Phelps Dodge submits a bid will be a decision made 
by the company's top management, based on the recommendation the 
visiting team is preparing.  The team reiterated that its assessment 
is in the early stages and it is by no means a given that it would 
recommend a bid.  That said, the team implied that the size and 
quality of the deposit is such that it would be hard to walk away 
from it despite the very real infrastructure (transportation, power) 
and security concerns.  (Note:  Phelps Dodge noted that it is in the 
process of being acquired by Freeport-McMoran and it is difficult to 
predict whether this would impact their bid. End Note.) 
 
Timeline 
-------- 
 
¶8. (SBU) Bids, originally due by 14 May 2007, are now due at the end 
of May.  An inter-ministerial assessment team will then select the 
winning bidder and commence negotiations.  The bid procedures call 
for a two-month negotiation period.  Econ Counselor underscored the 
importance of both sides feeling they received a fair deal.  In 
particular, if there is a perception among the Afghan people that a 
multinational company has hoodwinked the Afghan Government and 
stolen their national assets, it would significantly damage the 
prospects for future projects involving foreign investment.  (Note: 
In Ref A, Embassy requested Washington agencies to approach the 
World Bank to support funding for services of a recognized 
international legal firm familiar with mining transactions to advise 
MOM in its negotiations with the winning bidders.)  Once the 
contract is signed, the winner can begin site work, including 
feasibility studies.  If Phelps Dodge emerges as the winner, it 
would make a final corporate decision on whether to move forward 
with the project in 2009, based on two years of in depth analysis 
and feasibility study.  GoA would like to see production begin as 
early as 2012, a timeline characterized as overly ambitious by 
Phelps Dodge; the company estimated 2014 or later to be a more 
reasonable timeframe for production. 
 
Sizing up the Competition 
------------------------- 
 
¶9. (SBU) While satisfied with the transparency of the process, the 
team conceded that Phelps Dodge feels a bit out of its element.  The 
cast of bidders on this project involves Chinese, Russian, and Kazak 
companies against whom Dodge not used to competing.  One concern is 
that these companies may be willing to make their bid more 
attractive by including promises and commitments they cannot 
realistically keep, e.g., a 2-3 year production timeline.  Phelps 
Dodge, which must meet western business practices and protect an 
internationally recognized name, vows only to promise what it knows 
it can deliver.  The Phelps Dodge officials also noted that there is 
 
KABUL 00001468  003 OF 003 
 
 
a measure of subjectivity innate to the assessment of bids such as 
Aynak.  It is hard to predict how the selection committee would 
assess the economic and social benefits accruing from each bid. 
 
¶10. (SBU) An issue of particular concern is a provision in the model 
contract that allows the terms to be re-opened every five years. 
This practice, according to the company, is not consistent with 
international standards.  This is not, however, in its view an issue 
of immediate concern, because it will only arise in the negotiations 
stage with the winning bidder.  A possibly more significant Phelps 
Dodge concern is the GOA preference for bids to include an on-site 
smelter operation.  Phelps Dodge's bid will not include a smelter 
operation because there is excess smelter capacity world wide and 
international companies have been shutting down some smelter 
operations. 
 
Synergy of Efforts 
------------------ 
 
¶11. (U) The Phelps Dodge team asked about the prospects of donor 
funds being directed into infrastructure that could benefit the 
project.  The DCM indicated that roads and power are high priorities 
for the USG, the GOA and other donors.  The huge ongoing effort to 
build the power systems and road networks should directly or 
indirectly benefit the Aynak project, no matter which company won 
the bid. 
 
Advocacy 
-------- 
 
¶12. (U) The Phelps Dodge team appreciated the DCM's offer of the US 
Mission's full support to Phelps Dodge, including advocacy 
assistance as necessary.  Econ Counselor outlined the established 
Washington advocacy procedures and documentation requirements, 
notifying that with just one American company in the fray, the USG 
can launch a more aggressive advocacy campaign for Phelps Dodge. 
 
Comment 
------- 
 
¶13. (SBU) Embassy is encouraged that the competitive bidding process 
for Aynak is going forward smoothly and transparently.  The project 
is important to Afghanistan from many angles.  It will generate 
significant revenues for the GOA, direct and indirect employment and 
income for Afghans.  It will be the first large, long-term 
international mining project in Afghanistan.  If it goes well, it 
would boost investor confidence and be a positive precedent.  It is 
crucial, therefore, that the GOA get this right.  Together with 
other donors we will continue to monitor the process and try to 
ensure it remains on track.  We are pleased that Phelps Dodge is 
seriously considering a bid, not only because it is an American 
company but also because it would be comforting to see a project of 
this significance for Afghanistan run by one of the world's leading 
and most reputable natural resource companies. 
 
WOOD