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Canadian firms guide Afghan efforts to unlock mining 'treasure trove'

Afghan Minister of Mines Wahidullah Shahrani at the Prospectors and Developers Association of Canada conference in Toronto, March 5, 2012.

Fred Lum/The Globe and Mail/Fred Lum/The Globe and Mail

As Afghanistan seeks to attract investors and rebuild its economy after decades of war, its government is looking to Canada to help bring its mining sector to life.

The Eurasian country is counting on its vast deposits of iron ore, copper, gold, lithium and other minerals to lure capital and technology from around the world and form the cornerstone of its economic expansion. The government forecasts mining will represent 25 per cent of gross domestic product by 2016 and 45 per cent to 50 per cent by 2024.

Afghanistan's mineral reserves could eventually be worth as much as $1-trillion, according to estimates by the Pentagon and U.S. geologists, though the amount remains far from proven.

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A crucial test for Afghanistan is Friday's deadline for companies to express their interest in bidding for licences to explore and develop four key gold and copper mining properties.

Canadian companies are taking on leading roles advising Afghanistan's Ministry of Mines on the process: Vancouver-based Canaccord Financial Inc. on financing, SRK Consulting of Vancouver for geological matters and Toronto's Heenan Blaikie LLP for legal issues. Afghanistan is also emulating Canadian standards for reporting mineral reserves.

"Canada has been one of the most successful and largest mining countries," Afghan Minister of Mines Wahidullah Shahrani said in an interview this week in Toronto, where he attended the annual convention of the Prospectors and Developers Association of Canada, a major gathering for the global mining industry.

Mr. Shahrani acknowledged that a big part of his job is to show foreign investors that business is even possible in Afghanistan. Roadside bombs and suicide attacks continue to plague parts of the country, which ranks among the poorest and most corrupt in the world. Afghanistan is the largest recipient of Canadian foreign aid.

"The biggest challenge we have been facing is the international perception of Afghanistan," Mr. Shahrani said. "We're paying a heavy price."

That could be changing. A London-based metals-and-mining team of Canaccord that is advising his ministry has estimated five or 10 groups would be interested in this round of licences. On Monday, estimates were in the mid-20s, and by Tuesday it was looking more like 30 groups would be interested.

"The best pickings come to those who come first," said Alexander van Hoeken, president and chief executive officer of Toronto-listed Kilo Goldmines Ltd. "A pleasant surprise to me is how much interest there is."

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Kilo, whose main gold operation is in the Democratic Republic of the Congo, is considering whether to bid for a new tender in Afghanistan as part of a group, said Mr. Hoeken.

Kilo was part of an Indian-led consortium that won last year's tender for the Hajigak iron-ore deposit west of Kabul. It was one of 21 initial expressions of interest. Mr. Shahrani estimates Hajigak could be the largest iron-ore reserve in Asia.

The minister expects spending on Hajigak to exceed $14-billion (U.S.), and investment at the Aynak copper mine southeast of Kabul to reach $4.4-billion, in a country whose GDP was less than $18-billion last year. The rights to develop Aynak were awarded to a Chinese group in 2007, and he expects copper production to begin in 2014.

Mining companies considering investing in Afghanistan need to be patient. Development takes a long time, and local infrastructure is uneven. And though the identified mineral reserves are promising, it's been years since many were studied.

"Afghanistan is a treasure trove waiting to be discovered, but you have to discover it," said James Abson, a geologist and exploration manager for Afghan Gold & Minerals Co., owned by a consortium led by JPMorgan Chase & Co. Afghan Gold is working on a gold property and is reviewing data from soil samples and drilling.

Afghanistan, about the size of Saskatchewan, began systematic land surveys in 1955 with German, Italian, French and Russian geologists. Even though the U.S. Geological Survey has been operating there for a decade, companies are retesting their deposits with the latest techniques to confirm potential profitability.

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"There's low-hanging fruit there for someone who's prepared to go in early and take risks that might be perceived as higher than in other countries," said Damien Hackett, who helps to oversee the Canaccord team. "I don't know of any other project like this." The company was brought on last summer. SRK and Heenan Blaikie were hired a year ago by the U.S. Defence Department's task force for business and stability operations in Afghanistan to advise the mining ministry.

"There's been a very good response from the Afghan government, I would almost say red-carpet treatment," Mr. Hoeken said. "The Canadian government is very supportive. When we were there last time, they were offering us help."

The four tenders up for grabs this week and those already awarded are in some of the safest parts of the country, according to geologists and engineers involved in the projects. More licences will be on offer starting next year, the minister said.

"Developing our potentially rich mineral sector can be a key instrument to sustain growth in the long term," Mr. Shahrani said. "No country can depend on international aid forever."

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About the Author
Investment Reporter

Nicolas Johnson has covered global finance, markets and investing since 1998. He joined The Globe and Mail in 2011. He has worked as a reporter and editor with Bloomberg News in Paris and Tokyo, and also worked briefly in emerging-market debt at Société Générale. More

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