AF: UPDATE ON AYNAK COPPER MINE NEGOTIATIONS, PLANS TO

UNCLAS KABUL 000530

SIPDIS

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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.

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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.

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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