The Road to Gold or the Golden Route: Tug of Warlords in Afghanistan

We have previously written that, during the current recession, precious metals, particularly gold, will fare well due to the following dollar.  We also wrote of increased M&A activity.  Three days ago, Canada’s Goldcorp Inc. announced it had agreed to buy Andean Resources Ltd. for about 3.6 billion Canadian dollars (US$3.42 billion).  Goldcorp, the world’s second-largest gold producer by market capitalization, stands to gain access to Andean’s Cerro Negro gold project in Argentina, with this acquisition, which is said to have a significant amount of gold and silver.  Andean’s Cerro Negro gold project has indicated resources of 2.54 million ounces of gold and 23.56 million ounces of silver. 

Copper, silver, aluminum, lead, and zinc remain strong.  Today, copper prices rose near to four-month highs.  Silver is trading at 2 ½ year highs.  Aluminum, which is used in transport and packaging, hit a one month high earlier, as did lead, and zinc hit a four-year high.

With this as background information, in June, the United States reported that it had discovered nearly US$1 trillion in untapped mineral deposits in Afghanistan, including enormous veins of iron, copper, cobalt, gold, and lithium.  The deposits are substantial enough to make Afghanistan one of the most important mining centers in the world. 

With the resources to transform itself from a third world country into a leading mining center and provider of valuable minerals to world markets, what would keep Afghanistan from charging forward toward this goal post haste?  Issues include the following:

• Afghan government’s well-known corruption – just last year, Afghanistan’s minister of mines was accused of accepting a $30 million bribe to award China the rights to develop its copper mine.
• Infighting could occur between the central government, in Kabul, and provincial and tribal leaders in mineral-rich districts.
• China – resource-hungry China may try to dominate the development of Afghanistan’s mineral wealth.  The U.S. may be in a position to have paid for, with its blood and treasure, resources that China will profit from.
• Little experience in heavy industry.
• No trained resources.
• No infrastructure for delivering product.

These issues are significant indeed, however, the biggest barrier to Afghan success in the road to gold is what is known as the “golden route.”  It is the route whereby Afghanistan’s opium, estimated to be 87% of the world’s supply, is delivered to Western markets.

The general route for smuggling Afghan-produced opiates from Pakistan goes overland from Pakistan’s Balochistan province across the border into Iran, then passes through the northwestern region, which is inhabited by Kurds, and finally into laboratories in Turkey, where the opium is processed.

The route funds the Taliban resistance in Afghanistan, and enriches Afghan tribal leaders/warlords, those same leaders who would have to work with the central government to exploit the mineral riches. Political officials turn a blind eye to the drug trafficking activity and receive huge commissions all along the way.

It may be that the tribal leaders/warlords will find it easier to allow their palms to be greased through the opium trade, rather than getting their hands dirty, with the people of Afghanistan, as they develop and build a mining delivery infrastructure, and then literally dig in to recover the valuable mineral deposits.