September 27, 2012 / 1:52 PM / 5 years ago

Exclusive: Chinese halt at flagship mine imperils Afghan future

KABUL (Reuters) - Afghan officials are battling to convince nervous Chinese investors to restart work at a landmark $3 billion mine project and not to worry unduly about insurgent rocket attacks to salvage one of the country’s big hopes of economic independence.

Western donors have focused on Aynak, the largest foreign investment project in its history which could help the country, now reliant on development aid, find its feet after most foreign combat troops leave in 2014.

But the giant Aynak copper deposit, among the world’s largest, is situated in Logar province, one of the country’s most dangerous, southeast of Kabul and insurgents aiming to wreck the government’s flagship project have stepped up attacks.

After decades of war, many Afghans are resigned to the daily threat of roadside bombs and crossfire between NATO and insurgents. Civilian casualties hit a three-year high in August.

Most Chinese staff at the site, however, appear to have been spooked by Taliban attacks and left the country, with only a skeleton crew remaining to watch over equipment.

Afghan officials point out that the insurgents have not yet killed any Chinese workers.

“We had meetings with them (the Chinese investors) and assured them these rocket attacks happen anywhere and they are not the direct targets. We had repeatedly meetings with them but could not make them confident,” Sardar Mohammad Sultani, acting deputy Minister of the Interior, told Reuters in his office.

“They left before any harm (was done to them). This was their own idea... It’s up to them if want to return or not,” said Sultani, in charge of the security force protecting the mine.

A spokesman for the consortium running Aynak, China Metallurgical Group (MCC) CNMET.UL and Jiangxi Copper JXPROM.UL (600362.SS), confirmed some workers had been sent home indefinitely. It said unspecified “conditions” promised by the Afghan government in their contract had not been met.

He declined to link their departure to attacks, but said the government was working to improve security as the Afghan-NATO coalition targets insurgent strongholds in the east.

“The timing of those workers returning to Afghanistan will depend on conditions,” the MCC spokesman told Reuters.

The project has been underway since 2007, with the Chinese companies overseeing the project about to start the final stage of construction, expected to take at least three years.

Even if work resumed tomorrow, it would be almost 2016 before any copper is extracted. Once fully operational, the mine could generate annual income of close to half a billion dollars, based on current copper prices.

International aid is already expected to fall short of the $6 billion a year required to promote economic growth, and a further $4.1 billion a year needed to secure pay the bill for the 350,000-strong security forces as NATO draws down.

So far, $4 billion a year through to 2015 has been promised.

TALIBAN THREAT

The Taliban say blocking the Aynak project has become one of their priorities, even as NATO claims a nine percent reduction in militant attacks.

“All government offices are corrupt and we don’t believe that the money will benefit our nation, but will all be looted,” Taliban spokesman Zabihullah Mujahid said by telephone.

“If they (the Chinese operators) get permission from us, their lives may be spared,” he said, although the Taliban frequently exaggerate their reach and abilities.

The government-run Afghan force created this year to protect oil and mining assets -- when President Hamid Karzai banned private security firms -- is having difficulty protecting Aynak.

Despite increasing to more than 2,000 the number of security personnel at the site and installing extra checkpoints and wider security perimeters, rockets attacks have continued.

Afghan officials say they are doing all they can.

“We launched many operations. We detained a number of insurgents and killed a lot more. But our efforts haven’t reached any conclusion,” deputy minister Sultani said.

In a rare visit to Kabul this month by a top Chinese leader, bilateral deals on security were signed, including an agreement for police to be trained, funded and equipped with help from Beijing.

The government did not say whether the Chinese program was aimed at boosting security around China’s oil and mining assets.

“This problem (insurgent attacks) exists all over the country. We are trying our best to clean the Aynak copper area from insurgents,” Sultani added.

The threat is so severe that villages have warned the Afghan rights and anti-corruption monitor Integrity Watch Afghanistan (IWA) to stay away as they can no longer guarantee their safety.

IWA reported there are four armed groups operating in the Aynak area, some aiming to stop the project.

And the attacks are becoming more deadly. At the start of September, an assault on the protection unit killed 15 Afghan policemen, spreading fear among local and visiting workers.

“There are new groups who are more brutal and make it difficult for us to go. There is one new group in particular that is quite opposed to the development of the mine,” said the IWA’s mining expert Javed Noorani.

    Noorani said that most Chinese workers had been repatriated.

    CHINESE SLUMP

    Safety may not be the only reason.

    Beijing officials may intend to delay the project amid China’s worst economic slowdown in years, which has caused global copper prices to tumble and hit Aynak’s investors hard.

    Metallurgical Corp of China, which has a majority share in the mine, swung into the red in first six months of 2012. Net losses stood at 186.13 million yuan ($29 million), compared to net profits of 1,969.03 million yuan in the first half of 2011.

    Jiangxi Copper performed slightly better, but profits in the first half of 2012 slid by 38 percent, compared to a 12 percent decline in global copper prices over the past year.

    Social, environmental and economic concerns linked to the development of the mine also remain, Noorani added, including disruptions to water supply and displacement of villagers.

    Some officials at the Ministry of Mines say China may be waiting for new mining laws to be passed by parliament to renegotiate the terms of the deal.

    Proposals to draft new legislation have been backed by Western donors and the World Bank. But some cabinet members blocked proposed legislation in July, saying it failed to protect national interests from foreign exploitation.

    A new proposal has been redrafted and is expected to be discussed in parliament within weeks.

    Wrangling over the legislation is already holding up progress finalizing an investment deal with an India-led consortium at the Hajigak iron ore deposit in central Bamiyan province, worth up to $11 billion.

    The government said last year oil and mining could contribute up $1.5 billion in revenue by 2016, but there is little prospect of achieving such figures while the legal framework is in limbo.

    Ministry of Mines senior geologist and adviser Atiq Sediqi said the future of the industry depended on the legislation.

    “If the mining law is not approved, no one will come to invest in the mining sector in Afghanistan and the revenue forecast by the government from the development of the country’s mineral resources will become a myth,” Sediqi said last week.

    ($=6.3459 yuan)

    Additional reporting by Polly Yam in HONG KONG; Editing by Rob Taylor and Ron Popeski

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