Rich opportunities and profound challenges await mining firms in the Philippines

By Ton C. Reyes

Few industries can create as many opportunities and bring investments to the rural areas as the mining industry. Few, too, can create as much rancor.

Allowing industries to exploit the earth’s riches while preserving the ecological integrity of the land are seemingly contradictory objectives that the mining industry have to meet and balance, even if, to quote Philippine Chamber of Mines president Benjamin Philip Romualdez, “everything is in shades of gray and white.”

open for business

Even as certain bishops of the influential Philippine Catholic Church, continue to voice their deep concern over the environmental and social impact of mining operations, interest in the Philippine mining industry continues to grow. The Supreme Court ruling in December 2004 that the Mining Act of 1995 (RA 7942) is constitutional paved the way for the entry of foreign investments into the sector. This decision effectively opened the doors for foreign investors to perform large-scale exploration, development, and utilization of the country’s mineral resources.

Wasting no time, the world’s largest mining firms have all come to the country, bringing with them the needed resources to tap the country’s mines. Among the companies that have committed to invest in various mining projects across the country are Anglo American, which is investing US$1 billion for a copper mine in Lake Mainit, Surigao del Norte; Xstrata, which is putting in US$1.5 billion to develop copper and gold mines in South Cotabato, as well as an additional US$500 million for a new port and power plant transmission; and Oceana, with a US$150-million investment in Didipio, Nueva Vizcaya. Sumitomo, one of the largest mining firms in the world, invested US$200 million for its Coral Bay nickel processing plant in Palawan and is planning a US$208-million expansion. It has another US$1.7-billion project in Surigao and another US$500-million investment in Hinatuan.

Other projects include Atlas Carmen, which had a US$100-million infusion and an additional US$40 million from Deutsche Bank and Crescent Asian Portfolio Fund; Rusina, with a US$15-million infusion and a new heap leaching plant worth US$500 million; and Apex Mines, with a US$70-million investment for Masara Gold. Phelps Dodge has already been purchased by Freeport-MacMoRan, which operates the world’s largest copper mine in Indonesia.

Foreign direct investments have reached US$822 million since the Mining Act was declared constitutional. It is estimated that between now and 2011, some US$11.3 billion more will be spent on various mining projects. According to the Department of Environment and Natural Resources, at least 23 major mining operations are expected to start exploration and operations within the next six years, and these will have the capacity to generate US$3 billion in annual gross sales, US$61.4 million in excise taxes, and US$434.3 million in income taxes annually. Also expected to become active during the period are 37 exploration projects with annual expenditures worth US$92 million.

rich reserves

Interest in the sector is being piqued by strong metal prices abroad. Nickel currently fetches US$32,000 a ton from US$7,000 a ton a few years ago. Copper has risen to US$3.52 per pound from a low of US$0.52 a pound. With demand for metals increasing sharply worldwide and supplies remaining limited, prices are soaring. Eager to take advantage of this, mining companies have made a beeline for the Philippines, which is richly endowed with mineral resources.

Seventy-five percent of the Philippines’ mineral reserves are metallic, while 25% are nonmetallic. Copper accounts for 70% of the metallic reserves, followed by nickel at 16%. Limestone and marble make up almost 85% of the nonmetallic mineral reserves.

Believed to have the fifth-largest reserves of gold and copper in the world, the Philippines has around nine million hectares of potential mining land. Of this number, less than 10% are covered by mining permits. “For every square meter, there is a higher chance here than anywhere else in the world that there is a mineable area. The likelihood of finding a mine is higher here than the rest of the world. Others may have richer mines, but these are harder to mine. Ours are economically developable mines,” explains Romualdez, who is also president and CEO of Benguet Corporation.

Mining’s gross production value reached P50.2 billion in 2005 from P35.2 billion in 2002. Export revenues are climbing. From US$400 million in 2003, the mining sector’s export revenues grew six-fold to US$2.3 billion in 2006. Mining exports used to account for just 1.1% of the country’s total exports; these have since expanded to 4.3% of the aggregate. Remarkably, this growth happened even if no new mines came onstream, and even if most projects remain at the exploratory and feasibility stages.

New jobs are also expected. Romualdez says that, at the very least, some 200,000 direct jobs will be created.

capacity building

For the Philippines to make the most of the situation, however, it will have to address its capability problems and capacity shortfalls.

For now, laments Romualdez, there is a yawning gap between what the industry and the government have and what the industry needs. Such gaps exist in almost every sphere, from the technical knowledge to monitor movements, to the ability to pinpoint the location of minerals. The technologies for these exist (aerial photography or aeromagnetic surveys), but their costs remain high at this point. However, if the country is to be truly effective in the disposition of its resources, it is necessary to know where the mineral deposits are. “We have to engage in capacity building,” Romualdez declares.

The investing community likewise has to rebuild its ability to understand information on mining companies and activities due to the long hiatus since mining stocks were the darlings of the exchange. The Philippine Stock Exchange has announced that it will soon require mining firms to comply with the Philippine Mineral Reporting Code, which sets out standards, recommendations, and guidelines for the public reporting of exploration results, mineral resources, and ore reserves.

Romualdez says the Chamber of Mines is working with the PSE on this. Standards have to be imposed so that these reports, which investors rely on, will contain actual geologic data. Measurements will have to be certified before being made public. Equity analysts and stockbrokers who regularly use these data will have to be trained on how to read and interpret these.

Indeed, the Chamber of Mines has its work cut out for the next few years. “We want to be the entity that will provide a conscience to our companies, by bringing up capacities,” according to Romualdez.

other action areas

The industry also needs to address the problems identified with some small-scale mining operations. Operating below the radar coverage of the government, some small-scale miners are able to sidestep administrative and other requirements, and yet their activities have a profound impact on the environment and the communities in which they operate.

Then there are the illegal miners, usually big-time contractors working in collusion with local government units. If one compares the Chinese government’s record of mineral imports from the Philippines, the figures far exceed the export numbers being posted by local officials here. Romualdez emphasizes that “policies have to be implemented in that sector. Government needs to help police these kinds of activities.”

Finally and most importantly, the mining industry needs to be assured of a predictable and stable environment under which it can operate without having to contend with policies being changed to suit a particular sector’s whim.

With the declaration of the constitutionality of the Mining Act, the government has taken steps to improve the operating environment for mining firms. A new fiscal regime for the Financial or Technical Assistance Agreement has been put in place. The FTAA is a mode of mining contract that allows majority foreign equity and is open to large-scale mining projects with an initial capital of at least US$50 million for mine infrastructure and development. The fiscal regime defines the benefit-sharing scheme between the FTAA contractor and the government, as owner of minerals.

The Mines and Geosciences Bureau has prepared a revitalization plan of the minerals industry that involves revisiting 24 priority mining projects, a review of the Mineral Action Plan, and the preparation of an industrialization plan for the development of upstream and downstream industries.

bullish, cautious

Horacio Reyes, director of the Mines and Geosciences Bureau, is aware of the opportunities and challenges that lie ahead. “Combined with positive developments in the local scene and the so-called period of prosperity for the global minerals industry that resulted in increased exploration spending and higher demand and prices for metal, we are both bullish and cautious. We are bullish about prospects for an industry take-off next year and cautious of the challenges that come with increasing mining activities. But in the bottom line, we believe that, for as long as long as it is done responsibly, mining can be pro-people and pro-environment, creating wealth, and improving the quality of life of the Filipinos,” he concluded.