VZCZCXYZ0029
PP RUEHWEB

DE RUEHC #0530/01 0631252
ZNR UUUUU ZZH
P 031252Z MAR 08
FM SECSTATE WASHINGTON DC
TO RHMCSUU/DIA WASHINGTON DC
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 3097
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0613
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHNY/AMEMBASSY OSLO 0556
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS KABUL 000530 
 
SIPDIS 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A (DEUTSCH) 
DEPT PASS AID/ANE, OPIC 
DEPT PASS USTR FOR LILIENFELD AND KLEIN 
DEPT PASS OPIC FOR ZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
CENTCOM FOR CG CFC-A, CG CJTF-76, POLAD, JICENT 
NSC FOR JWOOD 
TREASURY FOR ABAUKOL, BDAHL, AND MNUGENT 
MANILA PLEASE PASS ADB/USED 
PARIS FOR USOECD/ENERGY ATTACHE 
OSD FOR SHIVERS, SHINN 
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH 
TOKYO ALSO FOR AID COUNSELOR AANENSON 
 
SENSITIVE 
SIPDIS 
 
REFTEL: KABUL 0108 
 
E.O. 12958 N/A 
TAGS: EMIN EPET EFIN ETRD ENRG KPWR EAID AF CH
SUBJECT: AF: UPDATE ON AYNAK COPPER MINE NEGOTIATIONS, PLANS TO 
TENDER HAJIGAK IRON ORE DEPOSIT. 
 
SENSITIVE BUT UNCLASSIFIED 
 
¶1. (SBU) SUMMARY: AFTER SEVERAL WEEKS THE AFGHAN MINISTRY OF MINES 
(MOM), CHINA METALLURGICAL GROUP (CMG) AND WORLD BANK-HIRED CONTRACT 
ADVISOR GUSTAFSON AND CO. FROM COLORADO, HAVE ARRIVED AT THE FINAL 
STAGE OF NEGOTIATIONS FOR THE USD 2.4 BILLION DEVELOPMENT OF THE 
AYNAK COPPER DEPOSIT.  ALTHOUGH SOME TAXATION ISSUES REMAIN, THE 
MINISTRY OF MINES PLANS TO AWARD THE MINERAL LICENSE TO CMG IN MAY 
2008, WITH PROJECT EVALUATION AND DEVELOPMENT PLANNED FOR THE NEXT 5 
YEARS.  THE AYNAK COPPER MINE IS EXPECTED TO OPERATE FOR 40 YEARS 
AND BRING IN ANNUAL REVENUES OF APPROXIMATELY USD 450 MILLION PER 
YEAR.  SEPARATE NEGOTIATIONS TO OUTLINE DEVELOPMENT OF A CO-LOCATED 
400 MW COAL-FIRED POWER PLANT AND CROSS-COUNTRY RAILROAD LINK WILL 
NOT BEGIN UNTIL AFTER MAY.  WITH NEGOTIATIONS BEHIND HIM, MINISTER 
OF MINES ADEL IS EAGER TO BEGIN THE TENDER PROCESS FOR THE 
EXPLOITATION OF THE HAJIGAK IRON ORE DEPOSIT.  END SUMMARY. 
 
¶2. (SBU) ON THE EVE OF MINISTER ADEL'S DEPARTURE FOR THE PROSPECTOR 
AND DEVELOPERS ASSOCIATION OF CANADA (PDAC) CONFERENCE IN TORONTO, 
CANADA (MARCH 2 - 5) ECONOFF MET WITH WORLD BANK ADVISORS TO THE 
AYNAK NEGOTIATION PROCESS TO BETTER UNDERSTAND THE CURRENT STATE OF 
PLAY.  NEGOTIATIONS ARE ALMOST COMPLETE, HOWEVER ISSUES ON TAXATION 
REMAIN.  THE ADVISORS ALSO BELIEVE THE FAST-PACED TIMELINE ADEL IS 
INSISTING UPON IS UNREALISTIC. 
 
--------------------- 
AYNAK CONCERNS REMAIN 
--------------------- 
 
¶3. (SBU) THE MOM IS INSISTING ON TAXING ANY PROFITS REPATRIATED BY 
CMG TO CHINA.  SINCE THESE FUNDS ARE EXPECTED TO BE TAXED AGAIN IN 
CHINA, THE RESULTING DOUBLE-TAXATION IS NOT ACCEPTABLE TO CMG (NOR 
IS IT IN LINE WITH INTERNATIONAL NORMS.)  DESPITE SEVERAL 
PRESENTATIONS/MEETINGS ON STANDARD TAXATION PRACTICES IN THE MINING 
INDUSTRY, MINISTER ADEL HAS YET TO BE MOVED FROM THIS POSITION. 
HOWEVER, EVENTUAL COMPROMISE IS EXPECTED SINCE, ACCORDING TO THE 
ORIGINAL TENDER DOCUMENTS NEGOTIATIONS MUST BE CONCLUDED WITHIN 90 
DAYS OR THE PROJECT IS AWARDED TO THE RESERVE BIDDER, CANADIAN FIRM 
HUNTER DICKINSON.  IF ALL PROCEEDS AS PLANNED, A 30-YEAR MINERAL 
LICENSE (WITH OPTIONAL RENEWALS FOR 5 YEAR PERIODS) FOR THE AYNAK 
DEPOSIT WILL BE AWARDED TO CMG IN MAY 2008. 
 
¶4. (SBU) ADVISORS ARE ALSO CONCERNED ABOUT THE TIMELINE MINISTER 
ADEL HAS PUSHED FOR.  ACCORDING TO THE CONTRACT, CMG HAS ONLY 16 
MONTHS TO EVALUATE (CREATE A BANKABLE FEASIBILITY STUDY) FOR THE 
COPPER MINE.  THIS PROCESS CONSISTS OF ADDITIONAL ON-SITE DRILLING 
TO CONFIRM THE GEOLOGY, ENGINEERING, AN ECONOMIC VIABILITY STUDY AND 
AN ENVIRONMENTAL/SOCIAL ASSESSMENT OF THE PROPOSED PROJECT AND 
NORMALLY TAKES 2 TO 3 YEARS TO COMPLETE.  AFTER THIS IS DONE, THE 
MINISTRY HAS ALLOCATED ONLY 2 MONTHS FOR A REVIEW OF THE FEASIBILITY 
STUDY.  EXPERTS BELIEVE THE PROCESS WILL LIKELY REQUIRE AN 
ADDITIONAL 6 MONTHS IF IT IS TO BE DONE TO INTERNATIONAL STANDARD. 
ANY COSTS/PENALTIES OR OTHER BURDENS ARISING FROM DELAYS TO THIS 
PROCESS WILL BE THE RESPONSIBILITY OF THE MANAGEMENT COMPANY HIRED 
TO OVERSEE THE IMPLEMENTATION OF THE NEGOTIATED CONTRACT.  THE WORLD 
BANK HAS TENTATIVELY AGREED TO FUND A FIVE-YEAR "CONTRACT 
IMPLEMENTATION" CONTRACT FOR AYNAK AT A COST OF USD 10 MILLION. 
 
¶5. (SBU) ONCE THE FEASIBILITY STUDY IS REVIEWED, THEN DESIGN, 
PROCUREMENT AND CONSTRUCTION OF THE MINE SITE IS PROJECTED TO TAKE 
ANOTHER 2-3 YEARS.  IF ALL PIECES OF THE PROCESS REMAIN ON TRACK, 
THE AYNAK COPPER MINE COULD BEGIN PRODUCTION SOME TIME IN 2012.  AT 
 
FULL CAPACITY THE COPPER MINE IS EXPECTED TO PRODUCE 200 THOUSAND 
TONS OF PURE REFINED COPPER PER YEAR, EARNING AFGHANISTAN 
APPROXIMATELY USD 450 MILLION PER YEAR AND CREATING 5,000 NEW JOBS. 
 
------------------------ 
RAILROAD AND POWER PLANT 
------------------------ 
 
¶6. (SBU) THE NEXT SET OF NEGOTIATIONS, EXPECTED TO BEGIN SOME TIME 
IN LATE MAY 2008, WILL CENTER ON THE CONSTRUCTION OF A RAILWAY LINE 
TO FACILITATE THE EXPORT OF ORE CONCENTRATES OR FINAL METAL PRODUCTS 
AS WELL AS THE CONSTRUCTION OF A 400 MW COAL-FIRED POWER PLANT FOR 
THE MINE.  POWER PLANT CONSTRUCTION AND OPERATIONS ARE EXPECTED TO 
CREATE 4,000 JOBS.  THE MOM ENVISAGES EXCESS POWER FROM THE PLANT 
BEING SOLD INTO THE NATIONAL POWER GRID. 
 
¶7. (SBU) KEY TO THE CONSTRUCTION OF THE POWER PLANT IS THE 
AVAILABILITY OF COAL IN THE IMMEDIATE VICINITY.  ALTHOUGH THERE ARE 
COAL DEPOSITS TO THE NORTH AND LIGNITE DEPOSITS TO THE EAST OF THE 
AYNAK SITE, NO TESTING HAS BEEN DONE TO DETERMINE IF THE COAL AND/OR 
LIGNITE IS OF SUFFICIENT QUANTITY AND QUALITY TO POWER A PLANT OF 
THE SIZE ENVISAGED.  THE MOM, AND MINISTER ADEL IN PARTICULAR, ARE 
CONFIDENT THE COAL DEPOSIT WILL PROVE TO BE OF THE NECESSARY 
QUANTITY AND QUALITY LEADING TO THE DEVELOPMENT OF A COAL MINE OR 
MINES PRODUCING 5 MILLION TONS PER YEAR AND EMPLOYING SOME 15,000 
AFGHANS.  SHOULD COAL NEED TO BE BROUGHT IN FROM AS YET UNIDENTIFIED 
DEPOSITS IN AFGHANISTAN PROJECT DEVELOPMENT IS LIKELY TO BE 
SIGNIFICANTLY DELAYED. 
 
¶8. (SBU) ALTHOUGH MINISTER ADEL HAS PREVIOUSLY DESCRIBED THE ROUTE 
HE ENVISAGES FOR THE NEW RAILROAD (REFTEL), WE HAVE BEEN UNABLE TO 
CONFIRM IF THIS WILL BE THE OPENING PROPOSAL IN NEGOTIATIONS WITH 
THE CHINESE.  HOWEVER, ANY RAILROAD ROUTE WILL CERTAINLY BE REQUIRED 
TO NOT ONLY RUN PAST AYNAK (SOME 35 KM SOUTHEAST OF KABUL), AS WELL 
AS PAST VIABLE COAL DEPOSITS TO ENABLE POWER PLANT(S) AND POSSIBLY 
COAKING COAL DEPOSITS THAT WOULD ENABLE A STEEL SMELTING OPERATION, 
BUT ALSO PAST THE HAJIGAK IRON ORE DEPOSIT TO THE NORTHWEST OF THE 
CAPITAL.  ENSURING THE RAIL LINE CAN EASILY FACILITATE EXPORTS BOTH 
NORTH AND SOUTH IS A MINISTRY PRIORITY.  ACCORDING TO NEGOTIATORS, 
THE CHINESE ARE EXPECTED TO COMMIT TO A TOTAL EXPENDITURE OF SOME 
USD 4.3 BILLION FOR THE CONSTRUCTION OF THE RAIL LINE.  NO PROJECTED 
EXPENDITURE NUMBERS EXIST FOR THE POWER PLANT PROJECT AS FINAL COSTS 
WILL DEPEND GREATLY ON PLANT DESIGN AND COAL AVAILABILITY. 
 
----------------------------------- 
HAJIGAK IRON - THE NEXT BIG PROJECT 
----------------------------------- 
 
¶9. (SBU) TRUE TO HIS STATED 2008 GOALS (REFTEL) MINISTER ADEL IS 
TRAVELING TO THE PROSPECTOR AND DEVELOPERS ASSOCIATION OF CANADA 
(PDAC) CONFERENCE IN TORONTO, CANADA (MARCH 2 - 5) TO GENERATE 
INTEREST IN THE HAJIGAK IRON ORE DEPOSIT AS THE NEXT "BIG TICKET" 
INVESTMENT OPPORTUNITY IN AFGHANISTAN.  ACCORDING TO SOVIET-ERA 
DATA, HAJIGAK CONTAINS HIGHLY PURE IRON ORE (79%) AND IS CAPABLE OF 
PRODUCING UP TO 1 BILLION TONS PER YEAR.  THE SIZE OF THE DEPOSIT IS 
ESTIMATED AT 180 BILLION TONS.  FULL MINE PRODUCTION (ESTIMATED AT 
180 YEARS) IS EXPECTED TO CREATE 10,000 JOBS. 
 
¶10. (SBU) THE WORLD BANK HAS TENTATIVELY ALLOCATED USD 15 MILLION 
FOR THE PREPARATION OF A HAJIGAK TENDER.  MINISTER ADEL EXPECTS TO 
BEGIN TENDER PREPARATION IN LATE 2008 AND TO AGAIN FAST-TRACK THE 
PROJECT TO AWARD A MINERAL LICENSE IN LATE 2009.  AS WITH AYNAK THEY 
 
ARE PROJECTING A 6-YEAR EVALUATION AND DEVELOPMENT PERIOD BEFORE 
FULL PRODUCTION CAN COMMENCE. 
 
¶11. (SBU) COMMENT:  AS WITH AYNAK, THE TIMELINE TO FULL PRODUCTION 
AT HAJIGAK IS OVERLY AMBITIOUS AND WE EXPECT TO SEE DELAYS BEFORE 
EITHER PROJECT IS FULLY REALIZED.  ENSURING AYNAK EVALUATION AND 
DEVELOPMENT IS UNDERTAKEN AT AN INTERNATIONALLY ACCEPTABLE LEVEL 
APPEARS TO BE NEAR-IMPOSSIBLE IF MOM TIMELINES ARE TO BE MET.  WE 
ARE WORKING CLOSELY WITH THE WB, ITS ADVISORS AND THE MINISTRY TO 
ENCOURAGE PROPER EVALUATION AND IMPLEMENTATION TO ENSURE THAT CMG 
FULFILLS ALL OF ITS OBLIGATIONS TO THE PROJECT.  MANY QUESTIONS 
ABOUT THE AYNAK TENDER PROCESS REMAIN.  AS A RESULT, WE WILL MONITOR 
THE HAJIGAK PROCESS AS IT EMERGES AND ENCOURAGE THE MINISTRY, WORLD 
BANK AND THE TENDER ADVISORS TO MAKE IT EVEN MORE TRANSPARENT THAN 
ITS PREDECESSOR.  END COMMENT. 
 
WOOD