A team of bankers starts to tap the country's vast mineral riches, with help from the Pentagon.

Fortune | May 11, 2011
By James Bandler

FORTUNE -- Qara Zaghan, Afghanistan: The four Black Hawk helicopters sweep down on this remote river valley, flying fast and single file. Snow covers the mountains' peaks, but the lower slopes look like rust -- dry, rocky, and bare. As we bank around the river bend, we see our first flash of green in the fields below and then the rectangular mud huts of the village, where hundreds of Afghans mass to greet us.

"That's the mine over there," one of my companions says, pointing to the cliffs rising above the village.

That's it? That's the gold mine? It doesn't look all that different from the forbidding country we've been traversing: just another pile of rocks and scree. The jet-lagged man in the seat across from me knows better. His sleepy eyes are suddenly alert. If anyone can wrest a fortune from Afghanistan's rubble, it is this man, Ian Hannam.

Arriving in a developing nation with his iPad and his enigmatic smile, Hannam personifies the soft side of Western power. He doesn't bend people to his will with weapons or threats. But there is no mistaking the dealmaker's impact: In his wake, mountains are razed, villages electrified, schools built, and fortunes made.

To Hannam, chairman of J.P. Morgan Capital Markets, Afghanistan represents a gigantic, untapped opportunity -- one of the last great natural-resource frontiers. Landlocked and pinioned by imperial invaders, Afghanistan has been cursed by its geography for thousands of years. Now, for the first time, Hannam believes, that geography could be an asset. The two most resource-starved nations on the planet, China and India, sit next door to Afghanistan, where, according to Pentagon estimates, minerals worth nearly $1 trillion lie buried. True, there is a war under way. And it's unclear how the death of Osama bin Laden will impact the country's political and economic environment. But Hannam is not your usual investment banker: A former soldier, he has done business in plenty of strife-torn countries. So have all the members of his team, two of them former special forces soldiers who have fought here.

As he flies to the mine for the ribbon-cutting ceremony, Hannam thinks back over the past 12 months. This little mine, where operations have yet to commence, is puny by J.P. Morgan's (JPM) standards, but he knows it might be the project for which he is remembered. A lot of powerful people, including the commander of U.S. forces in Afghanistan, Gen. David Petraeus, are counting on him to demonstrate that the country is safe for foreign investors. Hannam has chafed at times under the pressure from the Pentagon, and the cold-eyed realist in him wonders whether unrealistic expectations are being placed on this business venture.

Hannam ducks his head and climbs out of the chopper, necktie flapping in the prop wash. As he trudges up the hill, even the jaded, 55-year-old banker seems swept away by the pageantry of the moment: the village elder in a ceremonial robe, the silhouettes of women watching from the ridges, the saluting Afghan soldier. Hannam is enveloped in a crush of local tribesmen chattering excitedly in Dari. One of them puts a garland around his neck. Another hands him a Ziploc bag containing a chunk of Afghan gold. A mullah utters prayers. Afghanistan's minister of mining gives a long speech.

Hannam and his local partner, Sadat Naderi, walk up the hill to pose for photographs. Naderi points to a narrow band of quartz that runs in an east-west line across the cliff side. It shimmers in the sun. That is the treasure, he says.

"Unless," Hannam mutters, "it's fool's gold."

Absurd risks vs. amazing rewards

Investing in conflict zones is often thrilling, but the great commodities rush that J.P. Morgan and the Pentagon are trying to spark in Afghanistan creates a risk/reward equation of a different magnitude. It's extreme at both ends.

When J.P. Morgan launched its Afghan initiative in 2010, violence was at its worst since the American-led occupation began in 2001. The Taliban have made a point of killing Westerners and have specifically said they would attack any companies involved in mining. Before our trip to the mine was done, our group would get a taste of the insurgents' ability to strike violently and unpredictably.

Then there's the Afghan infrastructure -- or rather, there isn't. Big mines need power, lots of it. Outside of cities, only 15% of Afghanistan is electrified. The mountain roads -- ungraded and often without guardrails -- are perilous, I learned the hard way, particularly in winter. Seat belts? No one bothers. You crash, you die.

If the brutal war and roads don't give a businessperson pause, the country's governance and corruption problems should. Massive fraud marred recent elections. Transparency International rates Afghanistan as the second most corrupt country on earth after Somalia. The last minister of mining was identified in a Washington Post report as the recipient of a massive bribe, an allegation he denied to Fortune. The current minister, who had been widely described as an honest reformer, has recently had his integrity questioned in State Department cables released by WikiLeaks. He, too, told Fortune he has done nothing improper.

But if the risks are absurd, the potential rewards are off the charts. Hundreds of billions of dollars' worth of iron, copper, rare earth metals, and, yes, gold are buried beneath Afghanistan's deserts and mountains. This wealth has lain there mainly undisturbed for thousands of years as armies of Persians, Greeks, Mongols, Britons, Russians, and now Americans tramped above. Invaders have dreamed of exploiting it since the time of Alexander the Great, but no one has yet succeeded on a large scale.

In an 1841 article in a journal of Asiatic studies, Capt. Henry Drummond, a member of the British 3rd Bengal Light Cavalry, described his rambles through the wildest parts of Afghanistan to conduct the first Western mineral survey of the country. He found "abundant green stains" of copper, some of which rivaled the deposits of Chile, and veins of iron ore that "might no doubt be obtained equal to the Swedish." While many of his countrymen viewed Afghanistan as an untamable place, where a man could not stray many yards from his home or tent without risk of being murdered, Drummond was smitten. Mining, he felt -- not the gun -- offered the best hope to pacify the territory and win over Afghans.

"Give them, however, but constant employment, with good wages and regular payment; encourage a spirit of industry, both by precept and example; let strict justice be dealt out to them without respect of persons; and we shall shortly see their swords changed into plowshares, industry take place of licentiousness, and these people be converted into peaceable and useful subjects," Drummond wrote. But the Afghans weren't keen on the idea of handing over their minerals to occupiers, or on the British occupation itself, for that matter. A year later they massacred the entire British army, save one English survivor, at Gandamak.

During the Cold War, both Soviet and U.S. geologists conducted surveys. The Russians bored thousands of test holes and identified big deposits of copper, zinc, mercury, tin, fluorite, potash, talc, asbestos, and magnesium. But instability in the countryside put an end to serious mining exploration.

After the toppling of the Taliban by the U.S.-led coalition, the Afghan government, with financial assistance from the U.S. Agency for International Development, commissioned new, high-tech aerial surveys of Afghanistan. The results were stunning: The U.S. Geological Survey identified huge veins of copper, iron, lithium, gold, and silver. The Afghan government solicited bids for one of the biggest of the copper deposits, a site south of Kabul that had been identified by both Drummond and the Soviets. China, offering a rich price, won the bid in 2007, beating out four other mining companies. But the Chinese mining company has yet to extract any copper from the site because of delays clearing land mines from the area, and the discovery of archeological relics.

Then, in 2009, mining in Afghanistan got the push it needed -- from the U.S. military. Petraeus had been appointed commander of U.S. Central Command, which had ultimate authority over Afghanistan. He realized that a U.S. exit from Afghanistan depended on getting the country's economy running. Up to 60% of Afghanistan's $15 billion GDP comes from foreign aid, according to Pentagon estimates, and another 20% comes from the illicit drug trade -- poppies. What Afghanistan needed was the real hope that it might achieve economic sovereignty. "I'm an old economist," the general says in an interview at his headquarters in Kabul. "And at the end of the day this is about progress for the [Afghan] people and giving them the prospect for a much brighter future for them and their families. That's what persuades the citizenry to support the government rather than support the Taliban."

Realizing that conventional foreign-aid organizations weren't getting the job done, Petraeus moved a crack economic stabilization team from Iraq into Afghanistan. That team quickly realized that mining would be key.

Enter Ian Hannam.

"This is the time in Afghanistan for the adventure venture capitalists -- for those who can do business in tough places in the world," Petraeus says.

From special forces to making billionaires

Ian Charles Hannam seemed bound for a swashbuckling career at an early age. Raised in a working-class neighborhood in South London, the son of a council worker who oversaw a housing and street-repair crew, Hannam grew up knowing that nothing would ever be handed to him. He joined the Territorial Special Air Service at age 17, one of the younger men to pass the service's grueling selection process.

Hannam's unit, the Artists Rifles, was a part-time regiment akin to a U.S. National Guard special forces unit. The Artists Rifles had a storied past and a reputation for attracting adventure seekers from all social classes. Since then, Hannam has counted his old SAS cronies as his closest friends, often calling on them to help him in the world's tougher places.

While serving in the Artists Rifles, Hannam pursued a degree in civil engineering from England's top school in that field, Imperial College. Upon graduation in 1977, he took a job with Taylor Woodrow, a large British construction firm. His first assignment was to build roads, radar stations, and airstrips in Oman for the SAS, which was in the final stages of crushing a Marxist-led insurgency that had been boiling in the Dhofar region for more than a decade. The experience convinced Hannam that revolts could be beaten with a counterinsurgency program that emphasized developing a country's infrastructure and natural resources.

Still working for Taylor Woodrow, Hannam went to Nigeria and then back to Oman. Living in a tent, he could not help noticing how well oil-company executives lived. That's when he decided to go to business school and become rich.

After graduating from the London Business School, Hannam got a job in 1984 in the training program at Salomon Brothers in New York. At the airport on his way home to London for Christmas that year, he was detained by immigration officials because he had no U.S. entry stamp on his passport. The reason: He had parachuted into the U.S. with an SAS unit that was training with American special forces, and then traveled to New York to start the training program.

With a work ethic that former colleagues describe as ferocious and an engineer's taste for understanding complex financial mechanisms, Hannam was fast-tracked to the bank's vaunted debt syndicate desk. "His embrace of complexity and change, his indifference to organizational hierarchy and abundant self-confidence born of experience set him apart," recalls Terry Fitzgerald, founder of Longbow Capital Partners, who was at Salomon with Hannam.

When Salomon was hired to advise media baron Robert Maxwell's Mirror Group during its public offering, Hannam was one of Salomon's lead bankers charged with marketing the IPO. Salomon lost money on the deal. Months later Maxwell died and Mirror Group collapsed amid investigations into accounting fraud and raids on its pension fund.

Hannam left Salomon soon after the fiasco and was hired by merchant bank Robert Fleming, a Scottish firm founded by the grandfather of James Bond creator Ian Fleming. By 2000, Hannam was the highest-paid employee at Fleming, making more than the CEO. After the bank was acquired by J.P. Morgan, much of Fleming's staff was laid off. Not Hannam. He helped engineer a joint venture with, and eventual takeover of, venerated British banking house Cazenove.

Among the old guard at Cazenove -- which was subsumed by J.P. Morgan, though the British franchise still bears its name -- Hannam was regarded as a bit of a barbarian. He bragged about his wealth. He had appalling table manners. "I've got more degrees than I can count, but I still talk like I'm illiterate, and my colleagues hate me for it," he'd say.

From Congo to Colombia, from Iraq to Sierra Leone, Hannam and his small team of soldiers-turned-bankers and advisers did business with oligarchs, gem dealers, and former mercenaries. He could be bracingly direct. When he landed in Baghdad for a meeting with Iraq's oil minister, the minister asked, "What are you here for?"

"I'm here to make five new Iraqi billionaires every year for the next 10 years," Hannam said with a twinkle in his eyes. It was an effective icebreaker, recalled his friend Richard Williams, a former SAS commander who is now CEO of the Afghan gold mine. "They're all thinking, 'How can I be one of those?' Which is not a question that a minister should be thinking." However crude, Hannam's point -- it would be Iraqis, not Westerners, who were getting rich -- worked.

Over the years Hannam had starring roles in a string of huge deals, including the combination of BHP and Billiton (BHP) and its listing on the London exchange, the creation of mining group Xstrata, and the formation of Kazakh commodities giant Kazakhmys. In 2007, Hannam's appetite for risk and intrigue nearly sank him. A group of Omani investors had hired him to explore the possibility of a leveraged buyout and breakup of Dow Chemical. Hannam and another top J.P. Morgan executive held clandestine meetings with two Dow Chemical executives at the Compleat Angler, a luxury hotel on the bank of the Thames.

The only problem: Dow's CEO had no idea that the meeting was taking place. The scandal attracted front-page notice around the world.

In 2008, Hannam was passed over for the top job at Cazenove in favor of an outsider. Hannam flew to New Zealand for two weeks, turned off the phone, and brooded. But he decided to stay at the bank, and soon he was doing multibillion-dollar deals again, including lead work on the recapitalization of HSBC. With a job that paid bonuses as high as 10 million pounds, Hannam had come a long way from his boyhood in Bermondsey. He had a wife and three children, a townhouse in Notting Hill, a wild game preserve in the Stormberg mountains of South Africa, and a 230-acre estate in Vermont. But the council worker's son was hungry for something bigger.

In 2009, at a dinner in Baghdad, he met the man who would give him his chance. The name of their meeting place was fitting for a rendezvous that would help touch off a 21st-century version of the Great Game: the Baghdad Hunting Club.

Hannam was at the banquet hall for a reception thrown by the Trade Bank of Iraq to honor J.P. Morgan. Also at the reception was Paul Brinkley, a deputy under secretary of defense charged with jump-starting Iraq's stalled economy. A former tech company executive, Brinkley served as a matchmaker of sorts between Iraqi entrepreneurs and foreign businessmen. With the blessing of Defense Secretary Robert Gates, he operated outside normal bureaucratic channels, eschewing the bulletproof vests and helmets his civilian colleagues wore in combat zones. In three years he had secured some $8 billion in private investment contracts for Iraq, helping start textile mills, cement factories, and electronics companies. Hannam and Brinkley had heard about each other's work. J.P. Morgan had been one of the first Western companies to plant the flag in Iraq, overseeing the country's currency and setting up a big oil project in Iraqi Kurdistan. Hannam and Brinkley fell into conversation about Afghanistan, which was to be Brinkley's next posting.

"I've got a problem in Afghanistan," Hannam remembers Brinkley saying. Brinkley was talking to the right man.

Soon they were having more meetings, in New York and Washington. Brinkley wanted to know what it would take to get the big international mining companies into Afghanistan. Hannam said it was too early. The giants weren't likely to leap into Afghanistan until smaller, wildcat operators went first. Copper and iron-ore mines were complicated and required huge infrastructure investments: railroads, roads, power plants, and smelters. Hannam said the first project should be less ambitious. A gold or lithium mine would be perfect. These materials could be transported by helicopter or trucked out by road. Hannam and Brinkley agreed that any such project should be led by an Afghan, lest it be seen as part of a resource grab by foreigners. Hannam pledged to bring entrepreneurial support, technical expertise, and capital. "And I'll make some Afghans very rich, by the way," he added.

In February 2010, Hannam flew to Kabul to see the situation on the ground. Brinkley took him to a reception at the American ambassador's home. There, Hannam met an Afghan businessman named Sadat Naderi. British educated, smooth, and brimming with energy and ambition, Naderi ran a diversified company that included insurance, logistics, and supermarkets. There was one other thing, he said: "I'm one of the first Afghans that has actually won a gold license."

Hannam's eyes lit up. Naderi, it turned out, already had a little gold mine in Baghlan province. His family had run a tiny artisanal operation there, even minting some coins, for years. He had won the legal rights to it in formal bidding in 2008. To develop it, he needed technical advice, equipment, and capital.

Naderi was an Ismaili, a member of a Shiite sect. That was a good thing in Hannam's eyes. Progressive in their views toward women and education, Ismailis are renowned businessmen. The Ismailis' religious leader, the Aga Khan, presides over a vast charitable and business network that includes the Serena Hotel chain. The sect has a long-standing relationship with the British, dating back to the 1840s, when Ismailis provided British armies in Afghanistan with cavalry and intelligence.

Naderi's father was the religious leader of all the Ismailis in Afghanistan. The family has several mansions and a palace in their home village, Kayan, which has athletic facilities and a train, and once had a zoo. Naderi's brother Jafar had been a militia commander during the last days of Soviet occupation, with a 12,000-member private army. A documentary film titled The Warlord of Kayan had shown Jafar fishing with a grenade, riding his motorcycle, and blasting AC/DC. During the Taliban era, the Naderis had fled for their lives, and Osama bin Laden briefly occupied their palace in Kayan.

Sadat Naderi, not surprisingly, was happy to contemplate an investment of working capital raised by J.P. Morgan and backed up by the Pentagon. "The sooner we stand on our own feet, the better it is for us Afghans," Naderi says. "You cannot be a beggar nation forever."

"Don't fall behind."

Naderi's gold mine, in Baghlan province, is only 50 miles from Kabul as the crow flies. During winter months it might as well be on the moon. To get there by road you must traverse the dangerous Salang Pass, which cuts through the towering Hindu Kush range. In 2010, in the same month that the J.P. Morgan team first arrived in Afghanistan, 180 travelers were killed on the pass in an avalanche.

I had my own taste of winter travel over the 11,000-foot-high pass when I set out with a convoy led by Richard Williams, the mining company's CEO. Garrulous, self-deprecating, and brimming with insights about the Muslim world, Williams could be mistaken for an Oxford don. But he remains the hard-charging individual depicted in Mark Urban's book Task Force Black, which describes Williams' exploits in Iraq as the leader of an SAS team charged with capturing and killing Hussein loyalists and al Qaeda members. "Richard is a buccaneer, a pirate," Urban quoted one of Williams' former associates as saying. "He goes for the opportunities and adrenalin every time."

It was snowing when we left Kabul early one morning, and by the time we reached the start of the climb, the weather had turned so nasty that police had halted traffic up the road. Nonetheless, our party of VIPs received permission to proceed with a police escort.

Williams and his group were in armored, four-wheel-drive vehicles. There was no room in the caravan for me, a translator, and a photographer, so we hired a driver and a Toyota Corolla. The front-wheel-drive car was soon laboring in the heavy snow. Our chains kept slipping off the tires. The radiator overheated, belching coolant into the snow. When it became apparent that we might not keep up, Williams' group put a policeman in our car, and then proceeded on ahead without us. Visibility was terrible; the only way our driver could navigate was to crane his neck out a side window. After we passed the summit, the driver lost control of the car, which skidded and spun 180 degrees into a snowbank. Hands trembling, I lit my first cigarette in decades, wheezing on the first puff.

The next day, after spending the night in a hut, we set off on the return trip to Kabul. I begged Williams and his group not to abandon us. But when one of our party was stricken by a stomach ailment and we pulled over to let him relieve himself, the convoy swept on without us. We spun out again, narrowly missing a head-on collision with a truck.

When we caught up with Williams' convoy near Kabul, we were too furious to wave. "I thought the SAS motto was similar to that of the U.S. Army [Rangers]: 'Leave no man behind,' " I complained to one of Hannam's soldiers-turned-bankers afterward.

"Leave no man behind?" He laughed. "Where did you get that idea? It's 'Don't fall behind.' And 'Don't forget your Imodium!' "

A deal too important to die

Of all the obtacles that could have wrecked the mining project -- the murderous roads, the Taliban, the corrupt government -- the one that nearly killed it was the most predictable: the profit margin.

In late September, J.P. Morgan CEO Jamie Dimon, Brinkley, and Mining Minister Wahidullah Shahrani met at J.P. Morgan's headquarters in Manhattan. Dimon pledged J.P. Morgan's support. On the way down in the elevator, Dimon told Shahrani, "You're in good hands with Ian. He's eccentric, but he gets things done."

But soon Brinkley's team was wondering. On the day the deal signing was to take place, Hannam's team stopped acting like former warriors and began behaving like, well, nervous investment bankers. Hannam, after talking about how rich he was going to make his clients, suddenly began to complain that there was no way to make a profit. The 26% royalty rate for the mine, his team claimed, was way too high. Mining Minister Shahrani was bewildered -- the rate had been agreed upon years before, when the Naderi family had first bid for the mine. Nothing had changed.

Brinkley's Pentagon team was deeply frustrated. They felt the bankers had pulled a fast one. Had Hannam's group not done its homework? Or were they just being bankers, trying to squeeze more money out of the deal with some 11th-hour brinkmanship?

Brinkley lit into the J.P. Morgan group: "When are you going to get this done? You've told people you're going to do it!" The bankers, in turn, felt they were being unfairly pressured by the government, which seemed desperate to get the deal done even if it was uneconomical.

Everyone recognized, though, that the deal was too important to die. Naderi and Hannam's team worked out an arrangement with the Ministry of Mines in which the royalty would be deducted from the corporate tax, as it is in many other countries. Soon, helped by rising gold prices, the deal was back on track. J.P. Morgan says it is not charging its usual advisory fees. While Hannam has described his work on the mine as a charitable endeavor, he says he expects a big payoff down the road for clients who invest in it.

J.P. Morgan says it isn't putting any of its own money into the project. Hannam secured $40 million from investors in the U.S., Asia, and Europe. They included Enso Capital founder Joshua Fink, son of BlackRock's Larry Fink; British mining titan Peter Hambro; and Thai businessman Pairoj Piempongsant. Hannam created an investment vehicle, Central Asian Resources, to enter into a joint venture with Naderi's new mining company, Afghan Gold. Sadat Naderi was made chairman of Afghan Gold, and Richard Williams CEO. Their goal is to pull 5.4 metric tons of gold from the mine during the first phase of operation. After that the plan is to go after five other gold sites, and then bid for the rights to other minerals, including copper and rare earths.

This past December, an ecstatic minister of mines announced the deal. Petraeus congratulated President Karzai on the news. "Wonderful," Petraeus remembers Karzai saying.

"It's big," Petraeus told me of the gold mine deal. "It's very big. I mean, everyone knows who J.P. Morgan is, and what that represents. That's substantial. It gives real encouragement to our Afghan partners."

A deceptive peace

After the ceremony to inaugurate the mine in Qara Zaghan, the barren valley rang with a merry hubbub. Hannam's close friend, Murad Megalli, responsible for J.P. Morgan's investment banking practice in Central Asia and the Middle East, made portraits of the villagers with a Leica film camera. The minister of mines was exultant. Naderi spoke optimistically of "partnership" with his new investors. Everything seemed to be going right.

Then it wasn't. At a military base on our way back to Kabul, our BlackBerrys started buzzing with news of a Taliban attack in the capital. Militants had struck one of Naderi's supermarkets, called Finest, with guns and a bomb, killing eight people. Naderi at first didn't understand what I was saying when I told him the news of the attacks. "The Finest got hit," I said. "Hit?" Naderi said. "Finest hit?" He turned ashen.

Megalli and Hannam sat on a bench trying to digest what had happened. Hannam was at first convinced the attack was linked to J.P. Morgan's presence in the country. It wasn't. (The Taliban later claimed they were trying to kill an American mercenary who they erroneously claimed was at the store.) Then, Hannam immediately put his banker hat back on. At least the deal was done, he said, and the money was in.

Megalli was struck by how fast things could spiral out of control. "The peace here is so deceptive," Megalli said. "It is so fragile."

A week later I returned to my Kabul hotel room to receive this e-mail from Hannam about his colleague and friend: "Murad died in plane in Kurdistan yesterday. Any good photos I can give family?"

Murad Megalli and Hannam had flown out of Afghanistan on a private plane, and then gone their separate ways. Megalli had taken the plane to Kurdistan. The plane crashed in a snowstorm, and Megalli and another J.P. Morgan banker were killed. Hannam was devastated. From the meeting with Brinkley at the Baghdad Hunting Club, Megalli had been a champion of the Afghan venture. He had believed mining could make a difference for the country. His death, and the attack on Naderi's supermarket, were sobering reminders of the personal risks of frontier capitalism.

Other storm clouds hover over the enterprise. Corruption allegations swirl around several key backers of the mining project in the Karzai government. Paul Brinkley's Pentagon team, which energized the Afghan mining sector and also put hundreds of Afghans to work in manufacturing technology and agriculture, is being disbanded, a casualty of interagency warfare. In April, after the burning of a Koran in Gainesville, Fla., mobs rioted in Afghanistan. The UN compound in Mazar-i-Sharif – a city that is to play a key role in the shipment of gold from the Baghlan mine -- was attacked, and 12 people were killed.

The spark that Brinkley and Hannam struck, however, continues to burn. Six major minerals sites are due to be auctioned by the Afghan government over the next year. SRK, a major mining-consulting firm, will advise the Afghan government. Bankers from Morgan Stanley (MS) and executives from Chevron (CVX) have been scouting Afghan natural-resource prospects.

And next January the bulldozers and crushing machines are set to start working in the remote valley where Hannam's investors have staked their claim. It remains to be seen whether the J.P. Morgan adventure will leave any more indelible a mark on Afghanistan than did Capt. Drummond of the Bengal Light Cavalry 170 years ago. But at least someone will have begun releasing the wealth trapped in Afghanistan's stones.

--Doris Burke and Ali Safi contributed to this article.