Afghanistan Committee on Feb. 15th, 2011

[Bryon Wilfert, Liberal, Richmond Hill, ON]

Thank you, Mr. Chairman.

Welcome, Mr. Schafer. I'm sharing my time with Mr. Oliphant.

I have one question, through you, Mr. Chairman. You talked about security and about political risk insurance. The issue I'd like to raise is the issue of a regulatory regime, with regard to royalties and taxes. There isn't one presently. That is an issue that I cited with the early witnesses, regarding Mongolia, where without a foreign investment protection act or something of that nature in place, there is clearly uncertainty for companies that invest.

I want to know your comments with regard to that type of regime, which would be obviously necessary to encourage companies to invest in Afghanistan. Then I'll turn it over to Mr. Oliphant.

[The Chair, Conservative, Garry Breitkreuz]

Go ahead.

[Robert Schafer]

Thank you.

I'd be happy to speak to the idea of royalties or sharing of the proceeds from mining with the country and its inhabitants. I think that is key to any successful business activity in virtually any country in the world, and not just with regard to mining.

Royalties are a direct way of sharing the bounty of the operation without having the country or its local people sharing in the cost risk, if you will. As there is the need to establish a regime in that regard, it needs to be quite responsibly thought out and not—how should I say?—looked upon with greed, if you will. One of the things that is often forgotten by governments when they're establishing a royalty regime is that there is a lot of risk money that goes in at the front end, a lot of investment money that goes into the construction side, and that there is a need for the investors who put up the risk money to receive a fair return on that, just as the citizens expect to receive a return on the bounty that's derived from their own country. Bring that in together with the vagaries of business cycles and the way metal prices move up and down and across the board. Rather than having floating-level percentage royalties, a fixed royalty that then on a gross basis—I call it a gross smelter basis—is something that could be considered. And in a case when metal prices are higher than might be historically typical, a profits tax or a profits royalty could be put upon it.

But don't undercut the base line of revenues that go into the investment that ultimately makes the mine happen, because mines take not just a one-time investment; they're an ongoing investment.

[The Chair, Conservative, Garry Breitkreuz]

Thank you.

The next question is for Mr. Oliphant on the Liberal side.

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you for coming.

It's always hard—I'm not a regular on this committee and I feel like I've dropped into a conversation. It feels a bit like I've dropped into an alternative universe. I have about 4,000 Afghans living in my riding. I've never met one who is a geologist. I've never met one who is a geophysicist. I've never met one who is a miner. I've never met one who has worked in a mine or knows anything about mining. I've talked to all of them. So either all the miners, geologists, and geophysicists have stayed in Afghanistan and are busily working or the industry really doesn't exist in any meaningful way.

Are there geologists there? Are there geophysicists? Does this geological survey compare to the Geological Survey of Canada in its expertise and what it can do? I worked as an accountant in a steel company responsible for an iron ore mine. I know something about what it takes to run a mine. It not only took having iron ore in the ground, it took a railway to get the iron ore out of there to a steel plant, which means it took a steel plant too. It took trucks to move finished product out of the steel plant, which took roads. It took a regime with a governance system that made the roads safe to travel on. It took labour-management relations. It took a capital market. It took a market for the steel. This is a huge thing.

I feel like I'm Alice in Wonderland dropped into this conversation that makes absolutely no sense to me. We have a dozen parliamentarians sitting around here talking in la-la land, and we have professionals taking their time to try to inform the committee. Help me. Is this realistic in the foreseeable future?

[Robert Schafer]

You've asked me two questions. I'll try to answer the second one first, because in effect you're asking me about the multiplier effect of a mining activity in a remote region. Yes, the multiplier effect of a mine in a developed area, say in Ontario or Quebec, is probably in the order of 8 to 10, whatever the annual revenues and the initial investment were in that project. Take it to a remote area and you can probably bring that up to 12, 13 times the investment.

[Rob Oliphant, Liberal, Don Valley West, ON]

Really?

[Robert Schafer]

You're going to be creating big industries and micro-industries to support the mining activity.

Now I'll go to your question about the professionals available in Afghanistan. Their geological survey is viable. They have engineers. They have geophysicists, geologists. They largely trained in the Soviet Union during Soviet times. I would not say they are quite at the level of the Canadian or provincial geological surveys, but they certainly understand what goes into making a mine or exploring for mineral deposits. They would probably be good at the senior project manager stage but not at running large operations.

Early in my career, I met a gentleman who was a senior exploration manager for a company called Homestake Mining. He was an Afghan national, believe it or not. He was a manager of exploration for Homestake Mining in the eastern part of North America, and he was actually the man I turned to when I planned this strategy for going forward in Afghanistan. He's now in his mid-70s and is still quite active.

When I brought him to Afghanistan, he not only acted as a technical adviser but also as a friend and interpreter. But the last and probably the most important thing was, he had formerly been the head of the Afghanistan Geological Survey. I did not realize that when I hired him, but as time went on he revealed more and more about himself.

So yes, there are people there who understand. They will need coaching to be brought to the level of capability needed to run a world-class operation, but it's a good start.

[The Chair, Conservative, Garry Breitkreuz]

Thank you.

Monsieur Dorion.

[Jean Dorion, Bloc, Longueuil—Pierre-Boucher, QC]

Can you hear me, Mr. Schafer? Are you getting the translation?

[Robert Schafer]

I can hear you. Thank you for the interpretation.

[Jean Dorion, Bloc, Longueuil—Pierre-Boucher, QC]

My colleagues have stressed the lack of infrastructure. You mentioned it yourself, the lack of infrastructure for transporting minerals, for example. There are few railways, few bridges, few tunnels, and so on.

They also have relatively little training. You mentioned geologists trained in the Soviet Union during the occupation. I imagine there are very few people like that in the local population, so a company setting up there would seem foreign to the people, because there are very few local senior managers.

You also mentioned the lack of sources of energy and the need to develop them. You mentioned security problems, like taking two years to build a wall to protect a site. You mentioned cultural difficulties. We know that Afghan society is driven in general by considerations that are not economic; they are completely different in nature.

All in all, would a prospecting and development operation in Afghanistan not be something completely artificial and foreign to the country, and seen as such by the local population, hence the security threats? To be viable and safe, would such an operation not need measures beyond the ability of the country to pay? So it would be the west that would be paying to protect the operation. Aren't we dreaming when we talk about an operation like that?

If you had all the protection and infrastructures you need, maybe your shareholders would get large returns, as you said at the start of your remarks. It might pay off for your shareholders, but it would be extremely expensive for foreign countries, including Canada, who would, indefinitely, have to make sure the operation could function properly.

[The Chair, Conservative, Garry Breitkreuz]

Go ahead, sir.

[Robert Schafer]

I would agree with you very substantially, particularly in the early years. I believe that the country itself would prosper from mine development with time. As I say, we had a 10-year timeline to essentially indigenize a world-class mining operation in Afghanistan and put it into the hands of Afghans. My belief is that, yes, with the existing engineering and geological expertise in the country, there's a basis or a foundation upon which to build. But it would take an exchange program to create more expertise and to bring them to the current levels needed to run the most efficient mine and the most efficient exploration activity.

In terms of logistics, access is probably on the same order of magnitude as access to explore in Nunavut or the Territories. Although it's very mountainous, the weather is not as harsh. At the same time, there's not a real road infrastructure. Therefore, a lot of helicopter use would be demanded and a lot of fly-in, fly-out airstrips as well.

In terms of gaining, I think I tried to emphasize the need to build mutual trust. Once a mine is developing and the people of the country realize that benefits are accruing to the local population and are starting to spread across the country, I believe that the exploration geologist will become a welcome visitor in many parts of the country. The Afghan people, by their custom, when a person knocks on their doors, are bound to protect them from any sort of danger. Therefore, yes, in the early years it could be very challenging, and there would probably be a need for military escorts to accompany small contingents of exploration geologists as they're exploring for new gold, copper, and iron mines, and so on. But again, with time, maybe a decade or a decade and a half, we're looking at a change in the way things would be approached.

I would compare it, in my mind, and I'm not trying to be funny, to the turn of the 19th to the 20th century, with the activities in western Canada or the western United States, with all the exploration for copper and gold and the dealing with the indigenous peoples there. There were lots of forts and lots of cavalry protecting the people who were living at the frontier. It would be very much the same now as it was then.

[The Chair, Conservative, Garry Breitkreuz]

Thank you. There's about one minute left.

Monsieur Bachand, do you have a brief question?

[Claude Bachand, Bloc, Saint-Jean, QC]

Yes, very quickly.

Mr. Schafer, in your organization, I see that you have an international affairs committee that is intended to raise your profile. In the conference that was held in Kabul last year, I saw that there was a discussion on mining and mineral wealth in Afghanistan.

Were you there for that, or do you know whether the matter was discussed at last summer's summit in Kabul?

[Robert Schafer]

I'm afraid I did not attend the conference myself. I would suspect that Hunter Dickinson was the only Canadian company at the time that would have shown such interest. I am aware that there were a couple of smaller American junior explorers who attended, and they largely talked about gold mining, because gold mining is perhaps the easiest type of mining to initiate in frontier regions.

[The Chair, Conservative, Garry Breitkreuz]

Thank you very much.

We're now going to go over to the government side. We'll go to Mr. Dechert, please, for seven minutes.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair, and thank you, Mr. Schafer, for sharing this very interesting information with us this afternoon.

As a commercial lawyer in private practice in Toronto for many years, I was very familiar with the Prospectors and Developers Association of Canada. I note that you're a member of that organization. I have attended the conference in Toronto on a number of occasions, and I know the great work that organization does in bringing together expertise, really, from around the world, especially Canadian expertise, and showcasing it to the world.

One of the areas of expertise I was familiar with, coming from the Toronto area, was the Canadian expertise in mining and resource company financing. I wonder if you could just comment on how that Canadian expertise could be of assistance in developing the resource industry in Afghanistan.

[Robert Schafer]

Without a doubt, the Canadian mining finance industry leads the world in bringing technical expertise into frontier areas. The mining industry and the mining finance industry are always looking for new frontiers in which to invest. When you go to a frontier area, discoveries are the easiest. In terms of trying to continuously reinvent discoveries in traditional mining terrains, like the Timmins camp, like the Val-d'Or area, and so on, it's always harder to find the second- and third-generation mines. Those first ones jump out of the ground at you, and I believe that in very short order, with appropriate incentives and security measures, you could see parts of Afghanistan blossom in terms of industrial development, the same way that northern Quebec, northern Ontario, northern Saskatchewan, and northern Manitoba did in the mid-twentieth century.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

It sounds like there could be a net benefit to both Canada and Afghanistan in the Canadian industry playing a role in Afghanistan.

[Robert Schafer]

Very much so.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

You mentioned in your comments also an interesting reference to community leaders who you've met with in Afghanistan. Although those community leaders might not be considered ideal business partners in Canada, I wonder if you could comment on whether or not you really have much of a choice in dealing with those kinds of community leaders when you're trying to develop the natural resource sector in Afghanistan.

[Robert Schafer]

I think dealing with community leaders in any corner of the world is critical to the success of a natural resource development. The people I met with, when they realized what I was proposing to them or describing to them, were very sincere in believing that they could bring benefit to their small communities, their villages, such that they would improve the quality of life for their people, not just because of mining but because, by its very nature, you would improve the quality of agriculture--the seed stock, the livestock, the breed stock, and so on. Those were all part and parcel of this kind of concept. Dealing with the local people and local leaders, once you establish mutual trust, it becomes just second nature to the success of business.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Some of those community leaders might possibly be able to assist with the protection of people involved in the resource industry in the early days of the development of that industry in Afghanistan.