Unlocking Resources In China And Afghanistan

Includes: CEO, PKOL, PTR, SNP, TRQ
by: Peter Pham

A consortium of investors led by City of London banker Ian Hannam, former BHP Billiton (NYSE:BHP) executive Chip Goodyear, and the Polish billionaire Jan Kulczyk has been among those shortlisted for exploration of a handful of major mineral mining tenders opened up for bid by the Afghan government. The three projects - mostly involving mobilizing copper deposits - are located in the northern portion of the country where the Karzai government has more control versus the south where the Taliban is essentially in charge and has made life difficult for exploration projects in the past.

The Latest Attempt to Unlock Afghan Minerals

This news comes after the granting of three of four available blocks to the Hajigak iron ore project to several Indian companies led by the government-owned Steel Authority of India Ltd. (SAIL) and NMDC Ltd., and the fourth Hajigak block to Toronto based Kilo Goldmines Ltd. The Hajigak deposit is estimated to have 1.8 billion tons of iron ore, making it one of the biggest in the world. The significant investment by India has multiplied the Indian influence in Afghanistan, making it the second biggest foreign investor in the country after China. The Indian negotiations are being led by SAIL and are reportedly in their final stage. A formal agreement is expected to be signed by early 2013.

The current round of bidding comes less than a week after the Afghan government awarded a $215 million contract to TPAO - a Turkish SOE- and its partners Dragon Oil, Kuwait Energy and Afghanistan's Ghazanfer group for oil exploration in the country.

Afghanistan is home to rich mineral deposits including rare earth minerals which, according to United States Geological Service survey carried out in 2007, are estimated to be valued at more than $1 trillion, but the ongoing war with the Taliban - which controls vast areas of the country - rampant corruption and lack of basic infrastructure are the main hurdles towards development. Very little work has actually been done on the previously awarded contracts. The security situation is not good anywhere in the country. The Aynak project, for example, has attracted $3 billion in investment from China, but since it is located in the Logar province, one of Taliban's strongholds, frequent attacks on the site has prompted the Chinese to suspend their operations.

Moreover, the early returns from Hajigak project may not be shipped back to India but throughout central Asia and China to help complete the rail lines connecting China and Afghanistan to the rest of the region via the rail lines that China is building to secure commodity flow eastward. One of those rail lines would connect Herat in the west near the Iranian border and Bamiyan.

Smaller Players Win Big in China Shale Gas

Meanwhile, China also held the second round of its much awaited shale gas auctions. The three leading Chinese oil and gas firms, PetroChina (NYSE:PTR), CNOOC (NYSE:CEO) and Sinopec (NYSE:SNP), were not heavily invested in this round of bidding. Since the big three oil companies are not big players in shale gas, they were not expected to compete for these assets. These blocks were opened up to foreign investment.

This is in direct contrast to the previous round which was aimed at only state-owned companies. PetroChina already owns most of the lucrative shale acreage across China and is working with Royal Dutch Shell (NYSE:RDS.A) to develop them - they have a $1 billion partnership in which Shell will exchange its advanced drilling techniques and technology in exchange for a cut of the gas produced by the project.

What is important to note is that the country's Ministry of Land and Resources gave very little geographic information about the blocks being put on auction. Without one of the three large Chinese firms as potential partners and the poor information, while invited, foreign firms did not put up competitive bids. In all, the bids of two private Chinese firms and fourteen state-owned firms were approved. This includes some non-oil-and-gas-sector firms such as Shenhua Group, China's coal giant, and Huadian Corp. (OTCPK:HPIFF), one of China's leading power generators. Shenhua (OTCPK:CUAEF), in particular, is interesting here as it has been selling petrol-from-coal in northwestern China for a few months now and is obviously looking to expand its supply of petrochemical feedstock.

The changes happening across the central Asian landscape now will have long-term impact on the future of the global economy. Unlocking Afghan, Chinese as well as Pakistani energy resources - especially their vast coal reserves - for delivery throughout the region in all directions is the key to stabilizing it and sustaining the growth of both China and India and alleviating global pricing stress when the global economy begins its next major upswing.

Investors looking for a way to play this can look to the PowerShares Global Coal Portfolio ETF (NASDAQ:PKOL) which has heavy exposure to Chinese coal companies. Mongolia is going to be a big supplier of coal in the coming decades. Turquoise Hill Resources (NYSE:TRQ) has a 59% stake in SouthGobi Resources (OTC:SGQRF) which gives you exposure to Mongolian coal, gold and copper as well as Ivanhoe Australia which is developing the world's biggest molybdenum - rhenium mine. Rhenium is an extremely rare and important metal in the production of nickel superalloys needed in high temperature applications (think jet engines) and trades at $3600 a kilogram currently ($102/oz).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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