War has a devastating effect on wealth creation as it decimates a country's capacity for productivity. It creates instability and insecurity, both of which prevent wealth-creating investments from being made. This is why one of the poorest nations in the world, Afghanistan, is still sitting on $1 trillion in natural resource riches.
Three decades of war yield nothing but poverty
Based on gross domestic product and adjusted for purchasing power parity, Afghanistan is the 10th-poorest nation in the world. In 2013, the average citizen of Afghanistan added just $1,072.19 to the economy. For perspective, that figure in the United States was $51,248.21. This is why Afghanistan's gross domestic product is only about $20 billion annually, which is less money than some U.S. companies make in a year.
This is despite the fact that Afghanistan has twice the natural mineral wealth of the U.S. and rivals Canada as a top-five holder of such assets. The problem has always been that the war-torn country has never been stable enough for safe investments to unearth these minerals. That could be about to change, as Afghanistan is finally starting to stabilize to the point that mining investments can be made.
Digging into Afghanistan's riches
According to studies from the U.S. Geological Survey, Afghanistan may hold as much as 60 million tons of copper, 2.2 billon tons of iron ore, and 1.4 million tons of rare earth elements, as well as aluminum, gold, silver, zinc, and lithium. Overall, at least two dozen potential world-class mineral deposits have been identified.
Of particular interest are rare earth elements, which are valuable for the defense industry and clean energy. Afghanistan is thought to be rich in lanthanum and neodymium, elements that are now largely supplied by China.
In fact, U.S. government has been looking for ways to reduce the nation's dependence on China for rare-earth elements, which are are critical components used in Tomahawk cruise missiles, smart bombs, missile guidance systems, and night-vision technology. In addition, rare earth minerals are vital to clean energy technology. For example, Toyota (NYSE:TM) each year uses 7,500 tons of lanthanum, which is important for hybrid-vehicle automotive batteries, and 1,000 tons of neodymium to build its Prius.
With security comes investment
While questions about security in Afghanistan remain, the country is slowly beginning to entice investors to help it unlock its mineral riches. The country signed a 30-year, $3 billion contract with a Chinese mining company to help it develop a large copper deposit. It has also awarded mining rights to what is believed to be the nation's biggest iron ore deposit to a group of Indian companies. The deal could be worth up to $10.8 billion, but it is on shaky ground due to increased fighting in the province in which the ore deposit is located. The consortium has been looking to renegotiate its deal.
Security concerns mean there is no guarantee that Afghanistan will ever realize the riches buried underneath the ground. However, the nation has the opportunity to become a major player in the global mining market, especially for rare earth elements critical to clean energy and other sectors, giving the world a supplier other than China. Development of this massive potential is worth investors' attention.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.