What lies beneath: High commodity prices and incentives bring a surge in investment, although local opposition in some areas remains an issue

Located on a belt of volcanic activity, the archipelagic nation of the Philippines is the fortunate beneficiary of millions of years of violent volcanism and tectonic plate convergence, which have left behind a fortune in mineral wealth just beneath the surface. The attraction of these potential riches has drawn in some of the world’s preeminent mining companies over the years including BHP Billiton, Japan’s Sumitomo Metal Mining, Brazil’s Vale, Norway’s Intex Resources, CGA Mining, Canada’s Rugby Mining, Anglo American, AngloGold Ashanti, CVRD, Phelps Dodge and Xstrata. In total, more than 30 foreign companies currently operate in the sector. Large homegrown conglomerates have also been jumping on the mining bandwagon, with the country’s largest and most powerful companies, such as the First Pacific Company, San Miguel, MacroAsia and APC, now operating mining projects.

RICH RESERVES: The attractiveness of the Philippine mining sector lies with the nation’s vast mineral wealth, estimated at a total value of $850bn, according to the Chamber of Mines of the Philippines. In terms of global comparisons, the country is estimated to have the world’s third-largest gold reserves at 4.91bn tonnes, ranks fourth in copper reserves with 8.03bn tonnes, fifth in nickel with 810m tonnes and sixth in chromites with 39.66m tonnes. The country also holds an estimated 480.26m tonnes of iron and 433.88m tonnes of aluminium, as well as an as yet undetermined amount of minerals used in the manufacture of high-tech products, such as tellurium, molybdenum, platinum-group minerals, cobalt, titanium and vanadium.

As of 2011, there were approximately 30 ongoing metallic mining operations and an equal number of coal mining operations in the country, according to figures from the Department of Environment and Natural Resources (DENR) and the Department of Energy (DoE). These include three copper mining projects with associated gold and silver; one copper mine with associated gold, silver and zinc; five gold mines; 18 nickel mines; two chromite mines; and one magnetite mine.

MINING ACT: Following a period of stagnation in the mining industry in the early 1990s, due primarily to an unfavourable business environment for investors, the government took action to address the situation by passing a new mining act designed to overhaul the sector in 1995. Unfortunately, this success was short-lived, and the legislation became entangled in a court battle for the better part of a decade. In 2005 the Supreme Court finally upheld the law, opening the door for the development of the sector.

The current legal framework governing the sector is based on the 1987 constitution as well as the 1995 Mining Act. The latter was created with the implicit aim of attracting much-needed investment into the sector and facilitating the establishment of new mining operations. Under the terms of the law, foreign investors are allowed to enter into a financial or technical assistance agreement (FTAA), exploration permit (EP) and mineral production-sharing agreement (MPSA) for mining exploration and mineral processing operations.

FTAA: Allowing 100% foreign ownership, FTAAs are often preferred by major international players as they enable companies to carry out the largest-scale mining operations. The maximum workable area under this type of contract is 324,000 ha for offshore projects and 81,000 ha for onshore, good for 25 years, with a possibility of doubling this period through renewal. The minimum authorised capital for an FTAA is $4m, along with a minimum project construction cost of $50m.

The FTAA generally allows for the recovery of all pre-operating expenses for a maximum of five years, although this may be extended for projects requiring very large investments with high production rates over an extended production period. Net mining revenues are split evenly between the company and the government, with the state deriving its 50% share through a mix of federal taxes including excise tax, corporate income tax, Customs duties and fees; local taxes including business tax and real property tax; and other required social responsibility-based payments, such as special allowances and royalties to indigenous people, land owners or claim owners. If the previously listed taxes and payments do not cumulatively reach 50% of net mining revenue, the state receives the additional government share for the outstanding balance.

EP & MPSA: EPs allow for smaller-scale operations but also for 100% foreign ownership. Onshore workable area is limited to 32,400 ha and 81,000 ha offshore for a period of two years but can be renewed multiple times, up to a maximum total term length of six years. Finally, MPSAs allow workable onshore and offshore areas of 16,200 ha and 40,500 ha, respectively, and offer the same term limits as FTAAs. The major differentiating factor of the MPSA is the limitation of a 40% foreign ownership stake in the venture, with the minimum authorised capital set at P10m ($227,000), of which P2.5m ($56,750) must be paid-up.

USE IT OR LOSE IT: In 2011 the government enacted a use-it-or-lose it policy to encourage inactive permit holders – many of them speculators – to move forward with development or risk voiding their contracts. This resulted in the forfeiture of hundreds of mining permits from inactive projects, with 5m-odd ha freed up for new investment. While the project has been successful in weeding out non-productive contracts, the Mines and Geosciences Bureau (MGB) suspended accepting and granting new permits during this eight-month review process that ended in September 2011.

OTHER RULES: The 1995 Mining Act also provides for significant social and environmental safety nets, which are among the most progressive in the industry. These are designed to address the concerns of numerous local anti-mining groups, as well as to safeguard the environment. In addition, the federal government has enacted a number of other laws and regulatory practices pertaining to the sector such as the Philippine Mineral Reporting Code (PMRC), modelled on Australia’s Joint Ore Reserves Committee, to reduce risk and gain investor trust. The country has also made recent progress towards joining the international Extractive Industries Transparency Initiative to boost the sector’s transparency and increase investor confidence.

Adding to laws directly targeting the mining sector, companies must also navigate numerous other regulations that can frequently conflict with federally approved operations. These include the People’s Small-Scale Mining Act, Indigenous Peoples Rights Act, Local Government Code, National Integrated Protected Areas System Act and other environmental laws. Additionally, in early 2012 the government was looking at changing the industry’s regulations yet again, which may complicate matters further going forward.

METALS: The gross production value of large-scale metallic mining in the Philippines totalled P68.2bn ($1.5bn) in 2010, up from the P42.8bn ($971.6m) registered in 2009, according to MGB data. Small-scale gold mining also increased from P36.8bn ($835.4m) to P42.9bn ($973.8m) over the same time. Total exports of minerals and mineral products rose from $1.47bn (3.9% of total exports) in 2009 to $1.87bn (3.7% of total exports) in 2010, while total taxes, fees and royalties received by the government from mining activities grew from P12.38bn ($281m) to P13.7bn ($310.1m).

Since 1985, there have been 10 significant discoveries of gold deposits throughout the country, according to the DENR. The majority of these finds have been on Mindanao Island in the southern Philippines. The largest of these is the Sibutad discovery owned by Philex with 41m tonnes yielding 1.46 grams of gold per tonne (g/t). This is followed by other sites on Mindanao, including Diwalwal, operated by PMDC with 10.2m tonnes at 8.10 g/t; the 3.74m-tonne Co-O mine operated by Medusa at 10.28 g/t; Balabag TVI with 3.33m tonnes at 2.72 g/t; T’Boli Cadan Res with 1.3m tonnes at 11.6 g/t; and the Batoto-Tarale site with an undisclosed find. Moving northward to Negros Island, Philex also has rights to the 23.9m-tonne Bulawan site yielding 1.91 g/t, while the Luzon Island sites in the northern Philippines include the 7.7m-tonne Nalesbitan site at 1.11 g/t operated by El Dore; the 8. 8mtonne, 5.23-g/t Teresa site run by Lepanto; and the 25.4m-tonne site operated by MetalsEx with 1.74 g/t.

IN OPERATION: In terms of currently active gold mines, the Masbate project operated by CGA Mining is the largest in the country. It has a total reserve of some 262m tonnes with an average gold yield of 0.87 g/t. The mine increased production by approximately 27% in 2010 for an annual output of more than 190,000 ounces, according to company reports. Continued exploration activities are expected to yield greater production in the future, and CGA has allocated around $20m for exploration activities in 2012, including 144,000 metres of reverse circulation drilling and a further 28,000 metres of diamond drilling.

The long-running Padcal copper project, in operation for more than 50 years, produced 2264 kg of gold through the first six months of 2011 worth P4.36bn ($99m). Operated by the Philex Mining Corporation, this output represented a 52% increase over the 1590 kg mined over the same time period the previous year. The site also produced 34,264 dry tonnes (DT) of copper concentrate valued at P3.3bn ($74.9m) through the first half of 2011, up 17% year-on-year from the 29,377 DT in 2010. Philex Mining is one the largest domestic players in the sector and also operates numerous other gold, copper and silver mines.

Meanwhile, Medusa Mining reported a 58% increase in revenues to $149.6m for 2010 after it boosted gold production by 13% at its Co-O gold and copper mine to 101,474 ounces on the year. In July 2011 the company revised its estimates of the mine’s reserves, putting the new total, which includes both indicated and inferred reserves, at around 1.96m ounces.

Carmen Copper operates the country’s largest copper mine, Toledo, located in Cebu. The firm produced 15.77m kg of copper through the first half of 2011, up 30% over the same time period the previous year. Parent company Atlas Consolidated Mining and Development has also announced plans to boost daily output at the facility from the current level of 42,000 tonnes per day to 100,000 tonnes within three years at a cost of $200m. Atlas also owns a stake in Berong Nickel, which resumed mining operations in May 2011.

In addition to these active mines, a number of firms are currently investigating potential gold reserves. These include the Dickson site being explored by CNCFaratuk, Pao-Yabe by Royalco, Archangel-Lobo-Calo and Agata-Tapian by MRL, Central Masbate ( Geograce-Vale) and North Davao Prospects (North Davao).

COAL: As one of the cheapest sources of electricity generation, coal powers about one-fourth of domestic capacity, though that share is expected to rise quickly over the next few years as multiple new coal plants are planned to meet surging demand. Until these come on-line, the Philippines is heavily reliant on imports to meet demand. Domestic coal production for 2011 amounted to just 6.29m tonnes compared to imports of 10.96m tonnes, according to the DoE. The vast majority of imports are purchased from Indonesia, which shipped 10.89m tonnes of coal to the Philippines in 2011, with the remainder coming from Vietnam.

In terms of quality, local stock is usually classified as low-rank coal and averages around 9500 British thermal units per pound, although there are pockets of higher-grade coal. The technology employed in most thermal plants calls for higher-grade coal, and as a result the vast majority of this is imported. Most domestic output is therefore channelled into heavy industry and is used to fuel plants manufacturing products such as cement, garments and chemicals, among others.

LOCAL PRODUCTION: Although there are 31 different licensed coal mining companies in the development or production phase of operations, the vast majority of coal output comes from just one mine operated by one company. In 2011 the Semirara mine, located on Semirara Island in the central Antique province and operated by DMCI Holdings, was responsible for 94.5% of the nation’s coal output, or a total of around 7.19m tonnes. Recent discoveries of new reserves at the site are expected to boost production further, into the range of 8m-9m tonnes by 2012. Other smaller-scale production was derived from Zamboanga Sibugay in Zamboanga province, which produced 168,951 tonnes, with the remainder coming from mines in Cebu, Batan Island, Surigao, Negros and Albay. Total domestic production in 2011 amounted to 7.61m tonnes.

EXPLORATION: An additional 29 companies are also in the exploratory phases of development, with tendering for a new round of contracts announced in December 2011. This fourth round will include 30 new blocks requiring up to $600m in investment and bring the number of active coal mining contracts to 99. This new round of tenders will not include small-scale operations (those under 3000 tonnes per month), whose licensing procedures are handled through separately.

NEW DIGS: With only around 2% of the country’s 30m ha currently covered by mining permits, substantial untapped potential lies buried in the ground. Despite some uncertainty about the regulatory framework in early 2012 as the government discussed altering existing legislation, millions of dollars in investment flowed into the sector in 2011 and a host of exploratory and development efforts are under way.

One large-scale project with significant potential is the $5.9bn Tampakan open-pit copper and gold project, located in South Cotabato and being developed by Sagittarius Mines, which is 62.5% owned by Xstrata Copper, the world’s fourth-largest copper producer. The rich deposit was first discovered in 1992 and is expected to contain at least 13.9m tonnes of copper and 16.2m ounces of gold. Billed as the largest known undeveloped gold and copper deposit in South-east Asia, the federal government granted permission for the Tampakan project to proceed in October 2009. After 689 exploration, metallurgical and geotechnical holes were drilled in the project area, operations were put on hold as the company awaits the outcome of a decision by the Philippine government on the legitimacy of a locally instituted mining ban at the site.

Another project closer to production is the long-delayed Didipio mine, scheduled to begin production of copper concentrate by 2013, with output targeted to reach as much as 100,000 ounces of gold and 14,000 tonnes of copper per year by 2014. Developed by OceanaGold of Australia, the $185m project could boost output as high as 200,000 ounces and 30,000 tonnes of copper with the exploitation of further discoveries at the site. The firm estimated the total reserves at Didipio at 50.7m tonnes and the mine life at 16 years.

Mining firm Far Southeast had conducted 22,000 metres of drilling at 17 sites within the company’s porphyry copper and gold mine as of August 2011, confirming the presence what the company indicated were “vertically and laterally extensive ore body”. The project’s resources have been estimated at a total of 657m tonnes at 0.65% copper and 0.94 g/t of gold.

Other companies currently engaged in exploratory works include the MRL Gold Philippines Copper Development Corporation with its Taysan porphyry copper and gold project, as well as government-sponsored research studies on the King-king porphyry gold and copper project, Kay Tanda gold project and Runruno gold project carried out by the Philippine Council for Industry and Energy Research and Development.

OBSTACLES: Despite the recent enthusiasm sweeping the sector, mining operations still face an uphill battle in many ways. Anti-mining sentiment runs high in the country, particularly in the less-developed southern regions of Mindanao, with numerous groups all digging in against mining operations. Local government units (LGUs), non-governmental organisations and environmental groups, communist separatists and other militants, and even the Catholic Church have all thrown up roadblocks to development. While their methods vary from peaceful protests to local bans on mining operations to violent monkey-wrench operations destroying equipment and inflicting bodily harm and even death, the combined effect has been to cool investor sentiment. As of late 201 the CMP reported that a number of local governments had implemented mining bans including the provinces of Capiz, Bohol, Samar, Romblon, and North and South Cotabato.

Security has also become a serious concern as attacks on mining operations have become almost routine over the years. Following one particularly brazen attack in October 2011 in which insurgents raided and burned the facilities of three mining companies in Surigao del Sur, causing an estimated P3bn ($68.1m) in damage, President Benigno Aquino III approved a military proposal giving mining companies permission to muster and fund private militias in order to provide increased security for their operations. The government also contributed some of its own troops, assigning a 150-man-strong infantry battalion to secure vital infrastructure in the trouble spots on the island of Cebu.

IMPACT: The impact of the opposition to mining is having a measurable effect on the economy and has brought development on the country’s single largest mining project to a standstill. The $5.9bn Tampakan copper and gold mining project being developed by Xstrata’s local partner, Sagittarius Mines, has been under fire since its inception by LGUs, indigenous groups and environmental organisations, and progress has ground to a halt as the federal and local authorities sort out the fate of a locally imposed mining ban. After more than a year of wrangling between the local and state authorities over the legality of the ban, the situation remains unresolved. As a consequence of these anti-mining measures, the Chamber of Mines of the Philippines has revised 2011 sector investment estimates down to $1bn, from an initial projection of $3bn.

“When it comes to mining, increased consistency and simplicity in dealings with the government, and in particular with LGUs, would lead to increased mining activity and investment,” James A Climie, the president and CEO of MRL Gold Philippines, told OBG.

As a result of these factors the Philippines has become a high-risk, high-reward environment for mining operations. In the developed countries where many of the large international mining outfits operate, profit margins are often slimmer but this lower profitability is made up for by greater stability. The uncertainties involved in operating locally have in part already proven too much for some companies, including sector stalwarts Anglo American and BHP Billiton.

OUTLOOK: The recent surge in mining investment coupled with high commodity prices should drive growth in the coming years, though the industry will be waiting to see if and how mining regulations change during 2012. As the vast majority of extraction operations are taking place in well-established sites, with very few recent discoveries, further research and exploration activities, such as remote sensing and regional airborne geophysics, will be necessary to sustain the industry’s expansion in the years ahead. Additionally, deposits of minerals that can be used in the manufacture of hightech products have yet to be exploited and could be the basis for a significant new niche in the sector.

While the mineral potential of the Philippines is indeed rich and investment by foreign and domestic players is growing, the concerns of local communities will need to be addressed to ensure that the country can make the most of the wealth it is sitting on.