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Cablegate: Minerals Abound in Afghanistan, an Update On the Sector

VZCZCXRO3995
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #2827/01 2960850
ZNR UUUUU ZZH
P 220850Z OCT 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 5930
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
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 SECTION 01 OF 04 KABUL 002827

DEPT FOR SCA/RA, SCA/A, EEB, EEB/ESC/IEC (GRIFFIN)
DEPT PASS AID/MARK WARD, 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, JCASAL, AND MNUGENT
MANILA PLEASE PASS ADB/USED
PARIS FOR USOECD/ENERGY ATTACHE
OSD FOR SHIVERS, SHINN
COMMERCE FOR DEES, HAMROCK, AND FONOVICH

SIPDIS

E.O. 12958 N/A
TAGS: ENRG EFIN ETRD KPWR EAID EINV PGOV AF
SUBJECT: MINERALS ABOUND IN AFGHANISTAN, AN UPDATE ON THE SECTOR

KABUL 00002827 001.2 OF 004


1. (SBU) Summary. A viable engine of economic growth, the mineral
sector in Afghanistan is striving for advancement step by step. At
times, Afghanistan's steps are firm, promoting modernization, other
times they are wobbly or haphazard, resulting in retraction. In
recent months, Afghanistan received its first major mineral-derived
payment, and the World Bank reaffirmed its commitment and goal of
transforming Afghanistan into the mineral equivalent of Argentina in
South Asia. A first step in this transformation, the implementation
of a mining cadastre is underway. Progress in transparency and
accountability is being pushed, and large tenders in the iron-ore,
oil and gas sectors beckon. Nevertheless, the lack of cohesion and
delays in the revision and passage of laws and regulations governing
the hydrocarbon and gemstone sectors frustrate and retard the
supreme goals of creating employment and increasing government
revenues. A proposed "road show" by the Ministry of Mines will no
doubt showcase the exasperating yet alluring dichotomy that is
Afghanistan's mineral sector. End Summary.


AYNAK COPPER PROJECT - RECENT NEWS
----------------------------------

2. (SBU) The winning contractor, China Metallurgical Group Corp.
(MCC), a Chinese state-owned company, has made its first payment in
the amount of USD 81 million to the Government of the Islamic
Republic of Afghanistan (GIRoA). This payment represents 10% of the
total USD 810 million the company will pay the GIRoA in order to
develop the world-class mine deposit. An additional 20% is due upon
the completion of a feasibility study (approximately 12-18 months
from now), and the final 70% is due when MCC begins copper ore
extraction (approximately 5 to 6 years).

3. (SBU) According to sources at the Ministry of Mines (MOM), the
Ministry of Interior has begun recruiting up to 1500 security
personnel to de-mine, clear, and guard the Aynak Copper Project
site. Furthermore, the World Bank's Project Management Unit (PMU)
embedded within the MOM has indicated that templates for Memoranda
of Agreement (MoA) for Water and Security are being drawn up by the
tendering transaction advisor, Gustavson and Associates of Boulder,
CO. MoA's regarding construction of a 700 km railroad and an 800 MW
(formerly 400 MW) coal-fired power plant have yet to be addressed.
According to Minister of Economy Shams, a group from MCC will brief
the Inter-ministerial Committee on Energy (ICE) during its November
meeting.

MINISTRY OF MINES CADASTRE PROGRAM -
TRANSPARENCY COMING
----------------------------------

4. (U) In modern mining, the term cadastre refers to a comprehensive
computerized geo-scientific database that registers land titles,
includes advanced geographic information, administrative boundaries,
and integrates environmentally sensitive areas which can be fully
visualized, queried and printed in the form of maps. The
establishment of a Mining Cadastre aims to improve governance in the
mining sector, ensuring that proper surface rents, fees, and
royalties are administered and collected as well introducing a
transparent system to grant, manage and cancel permits.

5. (SBU) The efficient and reliable management of mining titles
forms the basis of any effort to increase private investment and
growth in the mining sector. It will address the current lack of
transparency at MOM, which could impede future private investment.
The Mining Cadastre is part of the World Bank's International
Development Association (IDA) $30 million grant program that funds
the PMU, and will be executed by GAF AG of Germany. GAF AG has
completed similar Mining Cadastre projects in many other developing

KABUL 00002827 002.2 OF 004


countries with significant mineral potential, some of which have
subsequently and successfully attracted substantial foreign direct
investment in their mining industries. Typical project timelines
are 24-36 months, with the latter portion concentrating on training
and capacity building within the host country's regulatory
ministry.


WORLD BANK REAFFIRMS COMMITMENT
TO MOM AND AFGHANISTAN
-------------------------------

6. (SBU) In a recent meeting with the World Bank's Senior Regional
Oil, Gas, & Mining Specialist, ECON OFF learned of the ongoing
commitment of the World Bank to development of Afghanistan's natural
resource sector. A second World Bank IDA package is being drawn up
now and will continue initiatives begun in creating a modern legal
and regulatory framework, improving sector governance and
transparency, adoption of an internationally competitive fiscal and
mining taxation package, capacity building, and improvement of
Afghan geo-science.

7. (SBU) The new IDA package will also introduce schemes primarily
aimed at environmental, social, and contractual monitoring of the
mineral sector. Besides helping to fund an environmental and social
group within the MOM and the National Environmental Protection
Authority, the second IDA package will also require Afghanistan to
join the Extractive Industries Transparency Initiative (EITI), a
coalition of governments, companies, civil society groups, and
investors that aim at improving transparency and accountability in
this sector. Its main pillar is verification and full publication
of company payments and government revenues from oil, gas, and
mining.


GEMSTONES - MOM LACKS COHERENT
POLICY TO ADVANCE INDUSTRY
------------------------------

8. (U) Gemstone mining began in Afghanistan 7000 years ago. The
British Crown Jewels, Royal Crown Jewels in Russia and the Taj Mahal
all contain examples of Afghan emeralds, rubies, and sapphires. The
rubies and emeralds mined in Afghanistan are among the highest
quality in the world, and the lack of a cohesive, fair and
executable gemstone mining policy represents a significant lost
opportunity in nationwide revenue collection.

9. (SBU) The "13th Century" mining techniques currently employed in
Afghanistan use very antiquated tools and equipment with little or
no health, safety, or environmental considerations. Currently, the
Afghan gem industry operates in a legal and regulatory vacuum.
Although a Minerals Law was enacted in 2005, the lack of capacity
and understanding among both government officials and mine operators
contributes to an ineffectual and inconsistent application of legal
terms. Fiscal arrangements with respect to actual license and
authorization amounts as well as ranges for royalty amounts are not
addressed, leaving room for back-room and hand-shake deals.
Furthermore, the lack of processing operations in Afghanistan and
the unpredictable and excessive fees and royalty schemes (from 24 to
40%) presently implemented result in 95% of gemstone production
being transported raw to Pakistan and sold at drastically below
market prices. Thus, little or no social infrastructure,
employment, or revenues are derived from gemstones.

10. (SBU) ECON OFF has met with a variety of actors who aim to
improve the "playing field" for the gemstone industry. The World
Bank's PMU embedded within the MOM is trying to formulate specific
regulations and/or ministerial policies that would clarify the
Minerals Law as directed towards small and mid-size gemstone mining.

KABUL 00002827 003.2 OF 004


In addition, individuals within the NGO sector have established a
gem cutting, polishing and jewelry setting program that aims at
building capacity and laying the foundation for value-added
operations in Afghanistan. Post will continue to engage with a
variety of actors, including those interested in export promotion
and investment, such as the Export Promotion Agency of Afghanistan
(EPAA) and the Afghanistan Investment Support Agency (AISA), with
the goal of incremental regulatory and commercial advancement
simultaneously.


HYDROCARBON LAW STILL IN DEVELOPMENT
------------------------------------

11. (SBU) According to the World Bank PMU Mining Advisor, the yet to
be finalized Hydrocarbon Law is a source of contention between the
MOM hierarchy and external advisors. The World Bank's PMU Oil and
Gas Advisors contract will not be renewed. Apparently revisions the
PMU advisor proposed to the law were not popular with Minister Adel
and personalities clashed. Rather than exacerbate tensions, the
World Bank has allowed the Norwegian Agency for Development
Cooperation (NORAD) advisors assigned to the MOM to take the lead in
reviewing and revising the law. Their suggestions/modifications are
currently being considered by the lower house of parliament and have
stalled Minister Adel's plan to ram the law through the approval
process.

12. (SBU) The World Bank and others maintain that the law should be
modeled on other hydrocarbon laws passed in the Middle East that
take into account Islamic/Sharia law, in which surface rights belong
to land owners, while underground rights belong to the state.
Furthermore, the revisions aim to address vague language, and the
ability for landowners to become party to a contract for hydrocarbon
operations without going through the formal tendering process. The
latter loophole is tailor made for payoffs and other substantial
graft.


HAJI-GAK IRON ORE PROJECT -
EVEN BIGGER THAN AYNAK
-------------------------

13. (SBU) Our World Bank PMU source indicates Gustavson and
Associates of Boulder, CO has been retained to develop and issue
tender documents for this project. World Bank PMU was initially
reluctant to retain Gustavson for tendering, instead preferring an
open bid process. However, Minister of Mines Adel strongly pushed
for their hiring based on their experience/knowledge of Afghanistan
and the positive results obtained from previous tendering with
Aynak. World Bank PMU eventually acquiesced and reports tendering
documents will be released by the end of this year. Among the
companies rumored to be interested are Anglo-Australian producers
BHP Billiton and Rio Tinto, the Brazilian company Vale, and Chinese
MCC (winner of Aynak Copper Tender). Post is not aware of any
interest to date by American firms.


MINISTRY OF MINES ROAD SHOW -
PROMOTE NORTHERN PROSPECTS
---------------------------

14. (SBU) Minister Adel plans to embark on an Afghanistan
Hydrocarbon "road show" in the coming months (probably in January)
to promote the country's untapped potential in the natural gas and
oil sectors. The proposed road show is being organized by NORAD and
would include stops in London, Singapore, Dubai, Oslo, Calgary, and
Houston. Up for discussion are three oil and gas blocks in northern
Afghanistan (Kashkari, Jangalikolon and Juma-Bashikurd), adjacent to
a USAID-funded gas field exploration and testing project

KABUL 00002827 004.2 OF 004


(Sheberghan), across from the Turkmenistan border. The oil and gas
blocks lie within the same basin that straddles both countries and
which produce capably on the Turkmenistan side of the border. For
this reason, the Minister is confident these blocks will be
successful and will draw interest from international companies.

WOOD

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