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Cablegate: Af: Aynak Copper: Details of Winning Chinese Bid Remain

VZCZCXRO6440
PP RUEHDBU RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #3933/01 3310809
ZNR UUUUU ZZH
P 270809Z NOV 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 1565
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0562
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
RUCNDT/USMISSION USUN NEW YORK 4290

UNCLAS SECTION 01 OF 03 KABUL 003933

SIPDIS

DEPT FOR SCA/FO, SCA/RA, AND SCA/A (A/S BOUCHER, GASTRIGHT,DEUTSCH)
DEPT PASS AID/ANE, OPIC
DEPT PASS USTR FOR GERBER AND KLEIN
DEPT PASS OPIC FORZAHNISER
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 OECD/ENERGY ATTACHE
OSD FOR SHIVERS, SHINN
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH
TOKYO ALSO FOR AID COUNSELOR AANENSON

SENSITIVE
SIPDIS

REF: KABUL 3087

E.O. 12958 N/A
TAGS: EMIN EFIN ETRD KPWR EAID PGOV AF CH
SUBJECT: AF: Aynak Copper: Details of winning Chinese bid remain
elusive.

Sensitive but Unclassified

1. (SBU) Summary: After a prolonged tender and evaluation process,
on October 20, 2007, the state-owned China Metallurgical Group (CMG)
was awarded the right to start negotiatinQdetailed contract for
the Aynak Copper Mine project. By some accounts, the Chinese are
expected to invest approximately USD 3 billion to develop
Afghanistan's large copper deposit in Loghar Province, south of
Kabul. Despite accusations of irregularities in the bid tendering
and evaluation process, the World Bank - the process underwriter and
overseer - has said the evaluation of the bids appears to have
proceeded according to the process spelled out in tender documents,
and in accordance with the law (reftel). Although exact details are
currently unavailable, meetings with Chinese Embassy officials in
Kabul and other sources yielded additional information regarding the
project. End Summary.

2. (SBU) According to our U.K. colleagues, project development is
expected to take five years with the mine employing some 10,000
workers. Once mining operations are underway, the IRoA will receive
royalties equal to 15 percent of the mine's income, estimated to be
worth some USD 400 million per year. (Note: We have no indication
if this will be net or gross income. End Note.) The award
announcement clearly states that no bid or evaluation details will
be released until a mining contract has been signed. World Bank
advisors to the Ministry of Mines told us that construction of a
railroad, as well as an on-site power plant, are the key elements of
the Chinese bid. These, if realized, will be important to the
overall development of Afghanistan's infrastructure.

------------------------
..and the Chinese say..
------------------------

3. (SBU) On November 26 EconCouns met with Mr. Hu Yuanteng, Chinese
Commercial Counselor, who explained that many of the project details
will be worked out in contract negotiations, due to start in
December and run 120 days until about late March/early April 2008.
Even then, feasibility studies need to be completed before many of
the details and costs will be known. For example, during the second
round of bidding, the Afghan Government asked that the Chinese match
the railroad that the Kazakhs had included in their bid. The
Chinese Government agreed to fund the estimated $5 billion cost of
building the railroad from the Hairatan railhead with Uzbekistan
through Kabul and Aynak to the Torkham border with Pakistan. But
the IRoA has not yet decided on the gauge of the railroad. (Note:
Uzbekistan uses Russian broad gauge track, Pakistan uses standard
gauge, and Iran, which is building a rail link to Herat, has its own
gauge. China uses standard gauge and Afghanistan has no track. End
Note.)

4. (SBU) The Chinese Government is funding the railroad because it
views this aspect of the Aynak bid as not part of a normal
commercial bid. Hu explained that while CMG is state-owned, CMG is
now operating in China's market economy as a profit-making
enterprise, and as such is different from the former "centrally
planned economy's" state-owned enterprises. Also, having just
completed the Qinghai to Lhasa railroad, the Chinese government has
available construction teams with experience working in rugged,
mountainous conditions.

5. (SBU) Hu confirmed that, in addition to the railroad, the CMG

KABUL 00003933 002 OF 003


bid includes construction of: a power plant, an associated coal mine
to fuel the power plant, and a cement mill to aid in mine
construction. While the plant will likely be 400 MW, it is unclear
if there will be any excess power available to be sold to power
Kabul or Jalalabad. He declined to put a price on the entire
construction project, saying that until detailed feasibility studies
are completed, anything would be a "guesstimate."

6. (SUB) Hu did express concern, however, about the implications of
the security situation in Afghanistan for management of the project.
He noted that in an incident several years ago, about 10 to 15
Chinese workers were murdered in their tents the evening of their
arrival in Afghanistan. He said the Chinese Government sees the
Aynak bid and its associated construction projects, such as the
railroad, which will facilitate greater regional economic
cooperation, in the context of its support for a politically stable
and economically prosperous Afghanistan. For the Chinese, this
support is an important way to prevent the re-emergence of a safe
operating base in Afghanistan for the so-called East Turkistan
Liberation Front in neighboring Xinjiang Province of China.

----------
Background
----------

7. (SBU) The Aynak copper deposit in not a new find. It was mapped
and prospected at various times by Soviet geologists between 1974
and 1989. They estimated the site contained between 11 and 13
million tons of copper ore, ranking it among the largest copper
deposits in the world. Minister of Mines Adel has repeatedly
claimed the estimates were "low balled" by the Soviets and expects
estimates of ore deposits will increase once the site has been fully
surveyed.

8. (SBU) Among the companies out-bid by CMG were U.S. company Phelps
Dodge, a subsidiary of Freeport-McMoran, Strikeforce, a part of
Russia's Basic Element Group, the Kazakhmys Consortium (London-based
but with mostly Kazakh assets) and Canadian firm Hunter Dickinson.
Hunter Dickinson (HD) was selected as the reserve bidder. If the
IRoA is unable to conclude mining contract negotiations with CMG in
120 days, they are obliged to begin negotiating with HD. Upon being
notified their bid was unsuccessful, the Kazakh consortium issued an
official complaint and went to the media complaining of
irregularities in the bid tendering and evaluation process. To
date, neither the IRoA nor the World Bank, which funded assistance
for the tender process (reftel), have commented on these
accusations.

-------
Comment
-------

8. (SBU) Comment: It comes as no surprise that Minister Adel has
warmly welcomed this investment. Current and former advisors to the
Ministry confirm he advocated for the Chinese bid fQhe start of
the evaluation process. Although the expected revenues, promised
rail road links, power plant and 10,000 jobs appear to be a win-win
for the IRoA, it remains to be seen if all of them will materialize.
In particular, it is not yet clear how many of the 10,000 jobs to
be created will go to Afghans. In addition to following the
project's progress, Post will encourage the IRoA to create some sort
of mechanism to ensure CMG fully lives up to its contractual

KABUL 00003933 003 OF 003


commitments. End Comment.

Dell

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