Emerging Afghanistan: Spotting the Opportunity

Although not highly publicized until recently, Afghanistan’s rich mineral reserves have been known about since the 1980’s, when the occupying Soviets began collecting geological data. Although some believe that the data was “forgotten”, it is hard to believe that U.S. intelligence knew nothing about it prior to our occupation of a country best known for its rugged terrain and opium production.


Now that the proverbial cat is out of the bag, what are some of the economic implications for the region, the United States and investors? The potential for Chinese business to capitalize on Afghanistan’s “newfound” wealth is tremendous for several reasons. The first is that India’s need for natural resources will increase, due to the growth of their manufacturing sector, particularly that of Lithium batteries.

Second, half of India's workforce is employed by agriculture, leaving ample room for continued growth of infrastructure, industries and urban areas. Although India has substantial mineral reserves of its own, it currently lacks infrastructure to exploit them to the degree required for high sustained growth.

Lastly, India has a barrier to obtaining raw materials from Afghanistan, namely Pakistan. India conceivably could transport these through Iran, but this would create severe tensions that could damage their relationship with the United States. Although India has made some progress building ties to Afghanistan, implementation will be a challenge, leaving China as one of India’s best possible sources of Afghani raw materials. 

Another factor that will allow Chinese businesses to profitably exploit Afghanistan’s mineral wealth is their model of allowing other nations to locate deposits and provide the Afghans with administrative support, while buying the deposits themselves. An excellent example of this model at work was their winning bid for rights to the Aynak Copper Mine. Although China has been accused of bribing Afghan officials to win the mine’s mineral rights, Colorado-based Gustavson Associates LLC was, at least for a time, a retained transaction advisor to the Afghani Ministry of Mines. Interestingly, Gustavson’s relationship with Afghanistan’s Ministry of Mines, dates back as early as 2004.

How might one identify a profitable investment in this convoluted situation? First, keep an eye on the Chinese supply chain to India, and second watch the mineral rights contract flow in Afghanistan. If you see a series of deals that can potentially link India and Afghanistan via China then there likely is an embedded investment opportunity.