Hope For Afghanistan: Minerals and Economics

As Washington discusses the dismissal of General Stanley McChrystalas the top military commander in Afghanistan and his replacement by General David Petraeus, one investor said there is at last hope for the war-torn country.

Douglas Hansen-Luke, the CEO of Robeco Middle East, just returned from Kabul where he met with members of Afghanistan’s mining and banking industries and said there is now a genuine alternative to war and the potential for a legitimate income.

“Opium is currently the major industry in the country and worth about $5 billion a year," Hansen-Luke said. "The violence in Helmand province is a battle between those in control of the opium trade, the Taliban, and the US led forces. What is needed is an alternative, legitimate income and mining offers that hope.”

There were reports earlier in June that the US government believes there is $1 trillion worth of mineral wealth in the mountains of Afghanistan. The Afghan government believes the figure could be three-times as high as that, while others put the figure well below even the US estimate.

His Excellency Wahidullah Shahrani, the Minister of Mines in Afghanistan, told CNBC that while mining capacity is currently very small, his government hopes to see significant production of copper within three years and of iron ore within five years.

“We are upgrading our knowledge of the mineral wealth of our country and tenders will be undertaken to the highest international standards,” Shahrani said.

The key to getting these resources out of the ground and onto international markets are threefold, Hansen-Luke said.

“Firstly soft infrastructure like the rule of law is needed," he said. "The chance of a legitimate income for Afghanistan could help end the violence. The country needs a credible alternative to violence and any investment needs to be seen to benefit Afghanistan, not the West or US.”

Follow Ghana?

“There are examples of mineral wealth taking a poor country and leading it towards prosperity," he added. "Take Ghana versus Nigeria. Ghana has huge hopes for its oil and gas wealth and the government plans to use the revenue to invest in the infrastructure and park some money oversees. In Nigeria the people see their oil wealth being wasted and believe the Western oil companies are benefiting at the expense of the people.”

What Afghanistan needs is to try and follow Ghana’s example but the challenges are immense.

The Afghan government is focusing on reverse corridors to get the resources out of the country, Shahrani said.

“We aim to make any contracts benefit the Afghan people via higher tax revenues and jobs and plan to make those tendering for contracts invest in road and rail infrastructure,” he said.

- Watch Douglas Hansen-Luke interviewed above.

Hansen-Luke says the two other factors are needed to help the Afghan people exploit its mineral wealth.

“Afghanistan needs investment in infrastructure," he said. "We have seen recent tenders for a $3 billion mining concession alongside a tender for a $3 billion rail link. One option for the link is to take it to Tajikistan from where minerals could be sent to Russia and western China. The other option is to Southern Pakistan and the port of Garada in Pakistan."

"Then you need to find the investment which is not easy," he added. "Putting money into the Afghanistan is for long-term strategic investors, not retail or even institutional investors.”

“The situation in Afghanistan is in many ways similar to that of Western Europe after the Second World War," he said. "The Marshall Plan worked for Europe and was about private investment. Whilst there are different challenges in Afghanistan and no tradition of law and order something on the same scale as the marshal plan could work”

Shahrani said his government has a long-term relationship with US and NATO forces and is confident about creating security for the Afghan people and international investors.

Hansen-Luke said investors wanting to play the Afghanistan story need to focus on the mega-trend stories and get into miners (screen for miners here) and commodities but cannot yet play Afghanistan directly.