Wednesday, April 24, 2013

The Ghost of Mes-e-Aynak

By Javed Noorani

The lease of Aynak copper mine to China Metallurgical Group Corporation and Jiangxi Copper Co. Ltd (MCC) in 2008 puzzled as many as it surprised in the mining community across the world. The copper deposit at Aynak was explored during the Soviet occupation of Afghanistan and it is estimated to have 11.3 million tons of pure metal. The government of Afghanistan selected Gustavson Associates, LLC  to be the Aynak Transaction Advisor to the Ministry of Mines. Afghanistan lacked the capacity to negotiate a contract than and  it therefore needed advisor for negotiation.Gustavson also negotiated with the company on behalf of the Afghanistan government they drafted the final contract as well. The contract for the mine is shrouded away from public domain till date and there have been allegations of bribery against  the former Minister of Mines Ibrahim Adel [1].

A summary of the contract is available on the website of the Minister of Mines and it has good terms such as 3.5-19.5% royalty on copper to the state, US$808 million as bonus, 400 Mega Watt power plant, a railway network connecting the North of the country to East and production of copper cathodes in Afghanistan[2]. According to an official of the Ministry of Mines who was part of the évaluation of the proposal,“the commitment of the company (MCC) to build railways and US$ 808 million bonus gave  the company unbeatable edge to vis-à-visKazakhmys Corporation, LLC”[3].

The MCC proposed 2.9 billion as investment in the project and committed to start production by early 2013[4]. However, today, on the 24th of April 2013 which marks the 5th year after the contract was signed, there is little semblance of even pre-mining activities. A blog by Integrity Watch Afghanistan 6 months back interpreted the tone of the officials from Ministry of Mines and the sudden withdrawal of Chinese workers from the site after a small projectile landed inside the complex, as stage setter for re-negotiation.Finally procrastination of the company in executing the project was purposeful !

Officially the MCC has sought re-negotiation of the contract with the government of Afghanistan. The re-negotiation request is for all the major elements of the contract which helped the company outsmart the other companies bidding for the same mine. The Minister of Mines, H.E.WahidullahShahrani during the Extractive Industries Transparency Initiative (EITI) Multi Stakeholders meetings (April 17th 2013) said that the MCC has submitted application for re-negotiation and it will go to Cabinet of Ministers for further direction [5]. Mr. Shahrani lined up the parameters for re-negotiation proposed by the MCC as follow.

The MCC does not want to build the railway road to which  it committed in the contract. However, the Kazak Company which was next to MCC in terms of offering good proposal, wanted to build rail road unconditionally.

The MCC delayed the  second installment of the bonus payments to the government by 2 years. Now the company says that it does not want to pay the bonus at all.

The Kazak Company in their bid had proposed 18.1% fixed royalty  on prices of copper  in London Metal Exchange (LME) [6]. While MCC surprisingly agreed to pay 3.5% royalty when the prices of the copper in LME is low and it pays 19.5% when the prices cross a normal level. The MCC has sought reduction of the royalty from 19.5% to 10 %[7].

According to the officials of the Ministry of Mines, the MCC, says that Afghanistan does not have a signifiant deposit of Phosphate and it therefore can’t produce copper in the country. The officials of Ministry of Mines echo the absence of phosphate as well and thus strengthen MCC’ position on not producing copper in Afghanistan.If copper is not refined in Afghanistan, then making a 400 Mega Watt power plant does not make so much sense commercially. MCC has said that it cant build a power plant. While Kazakhmys wanted to build 350 Mw power plants and produce pure copper in Afghanistan [8]. A five years delay in execution of the Aynak Project is the last among the big wish list the MCC submitted to the Ministry of Mines.

The delay in the contract execution till now has been a breach of the contract. It has implication for the Afghans and Aynak Authority which has been created to oversee the progress of Aynak Copper Project and raises some serious questions. Why did Ayank Authority not report the delay on time to the Ministry of Mines? Why did the Ministry of Mines not remind the MCC of its contractual commitment? Why was/is the Cabinet of Ministers silent about the progress of the project?

The genie of US$ 30 million dollars bribe to the former Minister of Mines is gracefully out of the bottle. The contract is concealed from public and the Ministry of Mines did not report the delay in the project. Did the MCC pay the bribe to win the contract than and leave it until the time for renegotiation was right ? Why did Gustavson Associates draft the contract in a manner that prompted its negotiation before any copper produced in Afghanistan? What role did Gustavson play behind the scene? It is a puzzle why does MCC need five more years for extraction and transportation of ore from Afghanistan?

The re-negotiation of the contract will certainly reduce revenue to Afghanistan from the project besides delaying cash flow into government for ten years. Other companies may also follow the way to ask for renegotiation of contract.

Mr.Shahrani elegantly threw the ball into the Cabinet of Ministers’ court to deflect the responsibility . He is awaiting the decision of the gouvernent on the issue. 

Afghanistan is tossed into confusion over the deal and now theapplication forre-negotiation. The Cabinet of Ministers must take note of the fact that the Chinese company does not want to produce copper here and they are requesting transportation of the copper ore. Afghanistan has the capacity and man power to dig the copper ore and sell it to international buyers rather than seeking royalty from the investor. The only way to get rid of the ghost of Mes-e-Aynak is to bury it for good and retender the mine to fresh rounds of bids.The Cabinet needs to consult civil society before it makes any décision on the contract.

[1]:PartlowJashua, 2009, Afghan minister accused of taking bribe, Washington Post, ( accessed on April 20th, 2013)
[2] Ministry of Mines of Afghanistan, 2012, Aynak Tender Process History, Online version accessed on the 20th of April 2013 (
[3] Ibid
[4] Ibid
[5] Minister of Mines WahidullahShahrani, during the Multi-stakeholders group meeting at the Ministry of Finance dated April 17th,2013.
[6] Op-cit.Aynak Tender Process History.
[7] Op-citShahrani Multi stakeholders group meeting.
[8] Op-cit.Aynak Tender Process History.

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