Understand the many challenges before entering the mining business in Afghanistan

Many business and individuals in Afghanistan try to get a mining license and get rich. However, mining bears many challenges that newcomers do not even know about. Many of those newcomers are likely to fail. This article discusses the many challenges of the mining business explains what is necessary to succeed.

Many challenges related to Mining:

What/ how much is really in the Afghan’s mountains and where exactly?

Most people agree that Afghanistan is very rich in minerals, precious gems, high-use and rare earth metals. Geological/ special studies have been conducted by different American, Russian and European organizations & individuals. However, most of those studies are rather high-level and/ or estimate the mining potential over large areas. Not everything in the mountain can be extracted in an economically feasible way. It is often necessary to do many more detailed studies for individual areas. At present the estimated value ranges widely between USD 3 to 15 trillion!

Wrong foreign news, misleading local rumors, and difficulty to establish the facts

Foreign news on mining is often politically biased, deliberately misleading, or may simply extrapolate some local view and data points that may vary much in accuracy – oftentimes outdated, exaggerated, communicated out of context, and misleading. Fully accurate, detailed reports on the Afghan mining industry may not exist or are not publicly available. Data collection and verification takes time and cost.

Many rumors circulate across local Afghans and foreigners add to the confusion. For example: Some local people tell that the Americans took a lot of Lithium out of Afghanistan for two decades. However, when asking the same people to show the evidence where those Americans took out of the alleged mines, they cannot physically show or provide other compelling evidence. Same with rumors that allege the British have taken out much Uranium. Or other rumors that the Chinese are shipping out Copper worth millions of USD per month. All the above generates confusion, false hype, unrealistic expectation that does not support sober investment decisions.

“Non-traditional/ less transparent” ways of obtaining mining concessions

Afghanistan is a developing country. The government has limited means. The current Afghan way is to award mining concessions to companies that commit to some needed infrastructure project such was build a road, power generation, transmission line, etc. Companies are said to gain very lucrative mines for a relatively small infrastructure project. Much seems to be result of individual, non-public negotiation between companies and local/ national authorities.

It starts with many assumptions. But the reality is often different…

Companies & investors cannot have necessary information about a mine at the outset. The deal with an unknown mountain or underground space. ?They may have some geological/ special information about a larger geography. However, they do not have the details. The exploration phase will later reveal the true situation. Therefore, investors will have to make numerous assumptions, which may turn out later to be very different or wrong.

Mining concessions are preliminary and based on conditions.

Companies & investors apply for mining conditions with proposals based on assumptions. Government authorities grant mining concessions based on applications. Agreements are based many conditions. If the situation turns out different to the preliminary assumptions, companies may have to update their initial proposals and even resubmit new applications.

Many unknowns create risks

The many unknows create notable risks:

• A preliminary mining concession is based on conditions that could become costly or even impossible to comply with.
• While there are clear international mining standards and pricing guidelines for specific materials & grades exit, the interpretation and enforcement may be notable different in Afghanistan.
• Stipulations may not always be in the best company’s interest. Examples: When and how the company must begin/ proceed in its mining exploration & exploitation. Methods of extractions. Overall operations. Engagement in the community. Environmental protection, etc.
• Future, new appointments in the Ministry of Mining & Petroleum, may also lead to new guidelines, new interpretation, and enforcement.
• Changes in any or several of those items may notably change cost, revenue and profit projections.

High risks determine high risk premiums - and drive high profit expectations of investors

Mining is a very high-risk business with potential high profit returns long-term. Investors want to be rewarded for all the risks they assume. Profit target = Expected risk-free return rate + Risk premium.

Mines may turn out to be disappointments (not the enough potential, not economic to extract, unforeseen circumstances cause notable/ costly delays), changes in regulations/ interpretations, changes in prices, difficulties in transporting, difficulties in processing, difficulties in shipping & selling. All such risks define a very high-risk premium!

Inexperienced companies & individuals in mining

Many mining-inexperienced companies & individuals enter the mining industry and cause much damage

Many companies – often without sufficient experience –are trying to enter the mining business. However, many lack the necessary knowledge and skills to succeed: Proper planning, long-term financing & investment, needed scientific and technical skills, handling complex ecosystem, and a well-thought strategy to make profits in a sustainable. Many “newcomers” trying to exploit “their” mining areas quickly for money often take an improper approach: They are not willing/ unable to recruit mining experts to properly explore the mining areas, poorly design the mining operations and use inadequate methods.

Many shun the costs of mining underground, just doing surface operation, and thus forfeit up to 80 percent of what they could get out of the mine. In their path they often destroy the environment and make it difficult for any further proper exploration & exploitation by serious investors and experience miners.

Those newcomers are “raping” the mines and the surroundings in make “quick” money on their investments. They often do not care much the community where they are operating in and generate bad sentiments. Overall, they give mining a bad reputation and make future professional mining efforts much more difficult. The Afghan people will bear the damage…

Most new entrants underestimate that the mining business requires long-term effort & investment

Mining is not a short-term business. Mining requires many years of investment and commitment before earning profits: 1) Explore the mine properly (2-5 years), 2) Exploit the mine (1-3 years). 3) Ongoing extraction and processing of the raw materials (1-15 years) 4) Transport processed materials to end customers.

Trying to rush through these main stages can considerably reduce the effectiveness and outcome. It may lead to forfeiting much of the possible extraction of materials and gains. ?

It may also violate regulations and could result in losing license to operate.

A major support industry is necessary to enable mining

Certified labs and grading facilities do not exist yet

Excavated materials need to be formally and professionally tested. Simply eye-ball assessment leads to conflicts, disputes and customer alienation. Unfortunately, mining research labs do not exist in Afghanistan and must be build. Who designs, builds, and pays for such efforts? Who attracts/ hires the expert resources, buys/ installs the sophisticated equipment, and controls quality?

Processing facilities do not exist yet

Government authorities (previous and present) have always advocated that processing must happen in Afghanistan. Thus, getting the natural resources out of the mountains is only have of the problem solved. Without processing, natural resources cannot be sold! Companies will just sit and incur costs on storing their excavated resources!

Problem there are no adequate processing facilities even built yet!

Processing requires energy powerplants

The solution seems simply: Just build processing facilities. But who builds those expansive plants?!

Furthermore, the processing plants are not enough. It requires plenty of energy, which is not readily available. Simultaneously powerplants need to be build. Who designs, builds and pays for those?

The support industry for mining requires a major effort, investment and time!

It requires major industry and infrastructure to enable the mining industry.

Ideally those facilities should not be built full scale, but designed as pilots, tested, improved, and ultimately scales. This is a large effort will require notable time, possibly years.

Also, this are major investments. Who will pay for it? Who will guarantee that such necessary facilities will be available when needed?

Other important considerations

Transportation and exportation

After processing, the natural resources need to be shipped and sold to international markets.

Afghanistan is landlocked. Transportation needs to be coordinated and agreed with neighboring countries that historically have delayed and opposed transportation of goods. While materials can be shipped now with limitations, the situation may be different and more challenging throughout the next years. Additional tariffs may may shipment economically not viable!

Mining requires much expertise and abilities

Much expertise required – hard to get and very expensive

Mining means so much more than drilling holes into the mountain, shuffling dirt and digging tunnels.

Every aspect of the entire process needs to be meticulously planned, designed, executed and maintained.

Modeling and designing the mine requires much expertise. Much of such required expertise does not exist locally in Afghanistan. International experts are required. Hiring those experts will be difficult. Afghanistan is under sanctions. Direct hire may be difficult. Attracting the experts to come may be very challenging.

In any case, those experts will be very expensive to attract, house, entertain, maintain, and pay.

Dealing with a challenging political environment

Mining is of highest national and international interest and by definition very political

Mining is arguably one of the most complex and challenging industries to operate in Afghanistan. Connections with the right people and decision makers are vital. Great engagement and negotiation skills are essential. Geopolitical understanding, long-term trends analysis, solid financial literacy, and global risk management are required.

Tricky partnership with the government

The government plan is to establish a 51/49 shareholder & profit-sharing arrangement with each mining company. The government is unlikely to contribute any capital or operational support, but still will expects to split all profits. This will halve shareholder profits!

Further, a notable conflict of interest may evolve. The government may have different plans to sell excavated natural resources to different clients and/ or at different price points. It may have notable influence on company decisions and act as “strong arm” in the relationship.

Conclusion

There are good reasons very experienced mining companies & individuals act very cautiously in Afghanistan’s mining industry. Instead, many inexperienced companies & individuals are rushing to get into mining despite of/ because of their ignorance of many mining challenges.

This article explained key aspects in Afghanistan mining and guides businesspeople & investors in make diligent decisions.

If you are currently working mining as investor, business owner, shareholder, expert, analyst or government advisor, please schedule a meeting to get to know each other and share expertise.

You can reach out to Alex Steinberg by connecting with him through LinkedIn, WhatsApp +966 531824178, or email at [email protected]

About the author

Alex Steinberg is an industry expert and business advisor who has helped develop and transform 30+ multinational companies and has guided governments to build their countries across key industry sectors.

Alex is currently in Afghanistan to help build the country focusing on key initiatives that positively impact the lives of millions of Afghans including Food & Agriculture, Telecommunications, Energy & Water, Mining, Manufacturing, Healthcare, Education, and other.

Alex’s life mission is to help and positively impact 700 million people using his business & technology expertise, methodologies of working with world-leading consulting firms, as well as insights into 230+ projects across all business functions, process, and value chains.

Legal Disclaimer

This article reflects the opinion of Alex Steinberg only. It does not claim to represent the viewpoints of any present/ former client, employer, or partner. The author acknowledges that there are often different viewpoints on a topic, which are equally valid. Constructive discussion rather than criticism can lead to better ideas and positive outcome & value to business and society.

If you are an expert, government advisor or business owner, you may reach out to Alex Steinberg through WhatsApp at +966531824178. (Alex is in Kabul, but continues to use his international number).