New Delhi: A group of six Indian companies may slash investment in an Afghan iron ore mine to almost an eighth of its original plan amid rising security risks, two people with direct knowledge of the matter said.

The Afghan Iron and Steel Consortium, led by Steel Authority of India Ltd (SAIL), is considering cutting its initial outlay for the Hajigak project to $1.5 billion from as high as $11 billion, the people said, asking not to be identified before a final decision. The mountain ridges 100 km west of Kabul are estimated to hold 1.8 billion tonnes of ore. President Hamid Karzai’s cabinet in 2011 awarded the rights to mine three out of four blocks to the group.

The prospect of increasing violence after the planned withdrawal of US troops from the war-torn country next year is scaring away financiers and the Indian companies, which need supplies of the raw material at a time when court-imposed mining curbs have crimped output at home. The perception of risk surrounding the key Hajigak project may cast a shadow on Afghanistan’s plan to rebuild its economy as it seeks more than $30 billion in foreign investment for roads, mines and railways.

“Safety has to be paramount," said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Equities Pvt. Unless there is a complete assurance of safety, there’s no point investing even $100 million in the project.

C.S. Verma, chairman of SAIL, said the Indian group has yet to sign a final contract with the Afghan government and declined to comment further. The consortium also includes Rashtriya Ispat Nigam Ltd and NMDC Ltd, both state-owned, JSW Steel Ltd, Jindal Steel and Power Ltd and Monnet Ispat and Energy Ltd.

Steel mill

The group now plans to build a steel mill that can produce 1.5 million tonnes a year, one-fourth of the earlier plan, which will cater to Afghanistan’s domestic demand.

The original plan envisaged building an 800 megawatt power plant, power transmission lines and a 900km railway line from Bamiyan, Afghanistan, the province where Hajigak is located, to Zahedan, Iran, which is near a port.

A.P. Choudhary, chairman at Rashtriya Ispat Nigam Ltd, Seshagiri Rao, chief financial officer of JSW Steel Ltd and V.R. Sharma, chief executive officer of Jindal Steel’s alloy business, didn’t respond to calls seeking comment. Abdul Jalil Jumriany, Afghanistan’s director general of policy and promotions didn’t respond to e-mail queries.

Steel Authority advanced as much as 2.7% to 67.85, headed for its highest in eight months, and traded at 66.85 as of 9:33 am in Mumbai trading. The stock has declined 26% this year, compared with a 6% gain in the benchmark S&P BSE Sensitive Index.

Strategic partner

The steel group sought $7.8 billion in interest-free loans and aid from the Indian government, which considers Afghanistan as an important strategic partner, in 2011. The request is still pending, one of the people said.

India, which has given more than $1 billion in aid to Afghanistan since 2002, is competing with China for access to the country’s resources, which are estimated at $1 trillion, according to an estimate by the US Geological Survey.

Work on two Chinese projects has already begun. Amu Darya oil basin, run by China National Petroleum Corp. is operational, while the Aynak copper deposit is being developed by Metallurgical Corp. of China.

Troop withdrawal

Afghanistan, which is fighting the Taliban with help from NATO troops, faces elections next year. The US has 52,000 of its military personnel stationed in the country, and the Pentagon plans to withdraw all combat forces out by the end of next year. The two nations said last month they were close to a deal that would allow some US soldiers to stay on beyond 2014.

Armed conflict killed 1,319 civilians in Afghanistan in the first half of this year, 14% more than the same period a year earlier, the United Nations Assistance Mission in Afghanistan said in a 31 July report. Injuries to people climbed 28% to 2,533, the report said.

“The situation in Afghanistan is very uncertain and fraught with risks," said C. Uday Bhaskar, a New Delhi-based analyst at the National Maritime Foundation, a research group that specializes in security affairs. Even though the investment is not devoid of any returns in the longer run, companies should move cautiously. Bloomberg