VZCZCXRO2329
RR RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #3574/01 3111254
ZNY CCCCC ZZH
R 071254Z NOV 09 ZDK
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 2911
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHRH/AMEMBASSY RIYADH 4315
C O N F I D E N T I A L SECTION 01 OF 02 KABUL 003574
C O R R E C T E D C O P Y (CHANGES IN PARA 11)
SIPDIS
E.O. 12958: DECL: 11/7/2019
TAGS: EMIN EINV ENRG PREL SENV AF
SUBJECT: Chinese Firm Again Frontrunner for Major Afghan Mining
Contract
REF: KABUL 3101
Classified By: Acting CDDEA Robert F. Cekuta for reasons 1.4 (b) and
(d)
1. (C) Summary: China Metallurgical Group (MCC), the Chinese
state-owned firm operating the Aynak copper mine, is a leading bidder
for the multi-billion dollar Hajigak iron ore mine in Bamyan. If MCC
wins the contract, it will have the two largest foreign investments
in Afghanistan as well as be running mines that could be among the
world´s largest. The MCC track record with Aynak, however, does not
suggest the Chinese company will create jobs as quickly as GIRoA
authorities would like. Moreover, the Ministry of Mines´ focus on
Aynak -- and Hajigak -- comes at the expense of attention to smaller
mining operations that could yield more immediate gains in terms of
revenues, jobs, and increased Afghan entrepreneurial activity. The
Hajigak case also underlines again the need for Afghanistan to reform
its mining law, something the IMF and others have long recommended,
including as one of the conditions for HIPC (highly indebted poor
country) debt relief. End summary.
Hajigak: A World-Class Iron Deposit
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2. (SBU) According to U.S. Geological Survey and Soviet-era data,
the Hajigak iron ore deposit in central Afghanistan´s Bamyan province
is the largest in Asia, with an estimated 1.8 billion tons of ore
containing 62 percent iron. Ministry of Mines officials estimate
Hajigak could produce for decades and potentially supply GIRoA with
USD 1 billion in royalties and tax receipts annually, depending on
the terms of the contract. Ministry estimates suggest the mine could
directly employ over two thousand employees once iron mining begins
and indirectly provide jobs to another ten thousand in steel
production, coal mining, and support industries.
3. (SBU) The mine´s development is likely to require USD 10 billion
in capital over the next decade, but that figure really depends on
the scope of the final bid, which has yet to be determined. The
Ministry of Mines has linked the Hajigak iron contract to development
of a nearby deposit of coking coal for use in domestic steel
production. The public tender envisions ambitious multiple
operations: a coking coal mine, iron mine, thermal coal mine, power
generation facility, ore processing, and steel manufacturing.
Bids Due in December
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4. (SBU) Seven companies are shortlisted for the Hajigak contract:
MCC (China), Tuwairqi Steel Mills (Pakistan/Saudi Arabia), and five
Indian firms: Essar Minerals, Ispat Industries, JSW Steel, Rashtriya
Ispat Nigam, and Sesa Goa. Rashtriya Ispat Nigam and MCC are both
state-owned companies. Final bids are due by late December. The
Ministry of Mines will have six weeks to analyze the bids, announce a
preferred and reserve bidder, and then begin contract negotiations.
(Note: The Ministry took five months to negotiate the Aynak copper
contract with MCC. End note.)
Questions on Transparency and Process
5. (C) Mining Minister Adel has personally fast-tracked the Hajigak
tender. World Bank officials report the Bank had preferred to see
how the Aynak project progressed before helping the Afghans move
ahead with their country´s second major mining tender. While the
locally-based NGO Integrity Watch International publicly said it is
satisfied with the transparency of the Aynak tender process, its
director told EconOff he wished the Ministry of Mines had waited to
learn more from the Aynak process before proceeding with Hajigak.
6. (C) Ministry of Mines and World Bank officials are also concerned
that if MCC wins the Hajigak tender, Afghanistan´s two largest
foreign investments will be awarded to the same state-owned Chinese
firm. Minister Adel acknowledged this concern, but said the tender
process does not allow for any consideration of issues beyond the
bids themselves.
7. (C) No U.S., Canadian, or Australian companies submitted
expressions of interest on Hajigak, according to [TEXT REMOVED BY AFTENPOSTEN],
who suggested the tender´s requirement for an associated
steel plant had deterred potential Western bidders.
[TEXT REMOVED BY AFTENPOSTEN] added
the Indian and Pakistani/Saudi company bids do not appear competitive
and that it might be best if none of the bids are accepted and the
Ministry of Mines is forced to re-advertize. If the tender were
advertized without the steel manufacturing component it might attract
the attention of big western mining companies,
[TEXT REMOVED BY AFTENPOSTEN] continued.
While noting he had not seen the final bids,
[TEXT REMOVED BY AFTENPOSTEN] said MCC seems
likely to win the contract.
Ministry of Mines: Eyes on the (BIG) Prize
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8. (C) Huge projects like Aynak and Hajigak have the potential to
bring in billions in revenue, but may not necessarily provide
significant near-term employment opportunities for Afghans. Aynak is
eighteen months behind schedule and Afghan officials worry MCC will
not create the numbers of jobs expected, either at the mine or in
building roads and other needed infrastructure (reftel). As a
result, Provincial Reconstruction Team and Embassy officers have
tried to focus the Ministry of Mines on smaller operations such as
marble and gem mines. Private sector experts repeatedly report
high-quality marble and Afghan gems hold great economic potential,
including for Afghan entrepreneurs, but Ministry of Mines officials
keep concentrating on big projects.
9. (C) Connected with this issue is the long-standing push,
including by international donors, to revise the mining law. Mining
law reform is one of the requirements for HIPC approval. Technical
advisors at the Ministry note several flaws in the current mining law
affecting small and medium-sized operations: (1) short contract terms
(sometimes as short as two years) that fail to attract investors, (2)
no set royalty scheme (necessitating bidding on each deposit,
including individual marble quarries), (3) limited legal ways to mine
gemstones, and (4) separate contracts needed to explore and exploit
deposits (i.e., without a pre-negotiated joint contract, an
exploration company does not have the right to develop any deposit it
might discover.) A new draft mining law, not yet made public, is
"more investor friendly", according to Ministry advisors, but still
fails to address the issues listed above.
Comment
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10. (C) Afghanistan´s minerals are a potential source of wealth and
income, with PRT officers reporting extensive local interest in small
mining operations, particularly in the North and East. However, the
Ministry of Mines is ignoring the potential of smaller operations and
is focusing instead on large operations, with their attendant
royalties, taxes, and up-front payments. (For example, MCC´s Aynak
contract included a USD 808 million signing bonus.) Four new
USAID-funded technical advisors (in international investment law,
natural resource economics, petroleum, and mining) will provide the
Ministry with greater expertise and capacity, thus helping the
Ministry develop a broader economic development focus. Many experts
have also said a more reform-minded Minister would also help
Afghanistan realize the full potential of its mining industry.
11. (C) As for MCC and its bid for Hajigak, the company´s
employment track record with Aynak (reftel) suggests it might better if
another company were to win the contract. End comment.
EIKENBERRY