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Probably the most under-reported story and possibly the most important economic development in some time came from Afghanistan of all places Monday. Massive mineral fields of copper, iron ore, and other metals were discovered and valued at $1 trillion. Even if the preliminary estimates are over-optimistic, this has the potential to turn the war-torn country into a mini-frontier market.

Afghan war implications

A major debate has been over what to do with Afghanistan’s poppy fields. While they do fuel the drug trade and often provide financing for the Taliban, they can be the only significant form of economic sustenance for Afghani tribesmen and villagers. The discovery of copper, iron ore, gold, and other resources could be a game changer. Metals like these could boost the central Afghan government–which is vital; ultimately, in a counterinsurgency war, the “winner” for lack of better term needs to be a local government that can outlast a U.S. and NATO presence.

Metals such as these also increase the interest in the region. If Afghanistan is seen by some as only an American concern, no longer. Companies like BHP Billiton (BHP), Rio Tinto (RTP) (both Australian) and Vale (VALE) (Brazilian) are likely to be very interested. While certainly the intentions are fueled by greed instead of national security, they do serve the same interest. From a geopolitical perspective, this aligns more friendly governments with an interest in Afghan stability, and could increase the chances of successfully stabilizing the country.

Economic implications

Afghanistan has historically been the shady back alley in the Silk Road trade route from Europe to China, with Afghan bandits profiting by offering “protection” services (read: extortion) to travelers. If mineral investments develop, Pakistan stands to benefit tangentially from having the most likely international seaports.

According to Tim Seymour’s blog, Afghan GDP is only $12 billion. If preliminary valuation estimates for the mineral deposits of $1 trillion are correct, then this could have a dramatic impact. Seymour indicated Freeport-McMoRan (FCX) is a favorite to watch, and I am inclined to agree. Additionally though, I would add infrastructure plays to investors with the resources and capabilities (meaning private equity and hedge funds, not retail).

I am also referring to infrastructure in a more macro sense than just roadways, although new roadways and rail lines will certainly be needed as well. To handle new resource investments, Afghanistan will need additional financial infrastructure in terms of a strong and stable banking system, additional telecom infrastructure, as well as human capital in terms of worker education. A good portion of the Afghan population is not even literate, much less trained to operate complex mining machinery. Private equity investors should consider investments in Afghan banks, Afghan telecom companies, and other essentials of modern trade.

Risks

Of course, these are merely preliminary valuations. It also needs to be noted that Afghanistan has not been properly governed due to fanaticism, communism, tribalism, monarchy, British colonialists, Tsarist Russian colonialists, ancient Persian kings, and Alexander the Great. Afghanistan’s track record of good governance is…far less than, say, anywhere else in the world except for maybe Somalia and the Congo.

That said, nothing is ever set in stone. For much of human history, Western Europe was a backwater economically and politically toward the more powerful Middle Eastern and Eastern European countries (Babylon, Egypt, and later Persia, ancient Greece, ancient Rome, and later the Byzantine empires). In more recent history, Japan started the 20th century as a very poor nation and Argentina started the 20th century as a prosperous nation, and both countries ended the century in the opposite situation. I pose these facts not to argue that Afghanistan will suddenly see a major boom. Rather, just to illustrate that world events can and often do break from long-held historical trends.

Conclusion

Afghanistan may or may not break with its war-torn past. Whether or not the preliminary valuations are true will remain to be seen. The sheer size of them, however, make it a story for frontier and emerging market investors to monitor very closely. This story will have a major impact on Central Asian economics as well as the Afghan war.

Congratulations to Afghanistan on their new find. This has potential to finally breathe new economic life into their country.

Further reading: What Afghan wealth means to miners (Emerging Money)

Disclaimer: This post is for informational purposes only and should not be considered investment advice. Always conduct due diligence before investing. Seriously, I take no liability for market risk, investment risk and general risks of making investment decisions on internet posts without you first doing your homework. These are my own personal opinions and not necessarily those of my employer.

Disclosure: None

Source: A New Beginning for Afghanistan?