The Philippine mining sector's murky regulatory environment impedes expansion

Progress on commoditising the Philippines’ vast mineral potential is proceeding at a painstaking pace, with a few successful mine openings in 2014 driving modest growth in the sector. Although overall output and revenue are being sustained by existing operations, new investment continues to lag, as mining companies wait out the finalisation of new mining regulations, which have dragged on since 2011. In 2014 the mining sector contributed just 0.9% to national GDP in real terms, with the contribution of mining and quarrying increasing only marginally in recent years, from P72.05bn ($1.62bn) in 2012 (equivalent to 1% of GDP) to P72.9bn ($1.64bn) in 2013 and P75.48bn ($1.7bn) in 2014, according to the Philippine Statistics Authority – National Statistical Coordination Board (PSA-NSCB).

HOLDING STEADY: The dearth of new mining projects coming on-line in the Philippines in recent years has resulted in inelastic production since 2010, with any minor variations in the nominal value of output in the mining sector primarily due to fluctuations in global commodity prices rather than substantial changes in production levels. According to the Mines & Geoscience Bureau (MGB), the gross production value of mining in the country amounted to P157.1bn ($3.53bn) in 2013, compared to P144.6bn ($3.25bn) in 2012, P163.2bn ($3.67bn) in 2011 – when commodity prices briefly rebounded – and P145.3bn ($3.27bn) in 2010.

Virtually all metallic mining has been accounted for by large-scale mines since 2011, due to a change in tax collection practices that essentially eliminated smallscale gold mining operations from the formal sector (see analysis). According to the Bangko Sentral ng Pilipinas (BSP), the Philippine central bank, the gross production value from such operations came to just P1.2bn ($27m) in 2012 and P300m ($6.75m) in 2013 – a significant decline from the P42.9bn ($965.25m) and P34.1bn ($767.25m) in 2010 and 2011, respectively.

By contrast, data from the MGB saw large-scale metallic mining steadily increase its gross production value over the period, from P69.1bn ($1.55bn) in 2010 to P88bn ($1.98bn), P97.8bn ($2.2bn) and P99bn ($2.23bn) in the following years. The growth in the value of the sector in past years is thanks to higher output from existing mines, as only a handful of new mines have come on-line of late due to legislative delays that have slowed sector investment to a trickle.

However, there was some good news in early 2014, with the start of two new commercial-scale gold-copper projects and the resumption of another helping to boost precious metals output, in addition to a slight yearon-year (y-o-y) increase in production, from P7.62bn ($171.45m) in the first quarter of 2013 to P8.63bn ($194.18m) in 2014. Substantial growth in copper and nickel production helped push base metal output in the first quarter of 2014 to P13.35bn ($300.38m), up from P11.15bn ($250.88m) one year earlier.

PRECIOUS METALS: The Philippines boasts some of the vastest precious metals reserves in the world, valued at around $840bn in 2010 prices, according to a study by the World Bank – equivalent to 14 times the country’s external debt as of January 2014, according to the BSP. Its unique geographic location along the confluence of the Eurasian and Philippine tectonic plates has resulted in a wealth of geologic formations, with the country widely believed to have the third-largest gold reserves in the world, the fourth-largest copper reserves and the fifth-largest nickel reserves. This includes 14.5bn tonnes of metallic minerals, including gold, copper, iron, chromite, nickel, cobalt and platinum, along with 67.66bn tonnes of non-metallic minerals such as sand and gravel, limestone, marble, clay and other quarry materials, according to the Department of Environmental and Natural Resources.

Precious metals production surged 13% in the first three months of 2014 to P8.63bn ($194.18m), according to data from the MGB, thanks largely to higher output from three of the country’s gold mines, which boosted production by volume by nearly one-third, from around 3434 kg in the first quarter of 2013 to 4509 kg by the first quarter of 2014. Conversely, silver production fell by more than half over the same period, from 8629 kg to around 4226 kg.

The bulk of increasing gold production is due to two new operations – the high-grade gold-copper Didipio Mine and copper-gold Padcal mine –which ramped up operations at the end of 2013. Operated by Australia’s OceanaGold, the Didipio mine – located about 270 km north of Manila on the island of Luzon – commenced commercial operations in April 2013 and increased annual output to 106,256 oz of gold and 25,010 tonnes of copper by end-2014, according to statements by the company. In the first four years of the 16-year project open-pit mining will be taking place, with underground operations scheduled to ramp up starting in years 5-7. Nominal annual production is slated to reach 100,000 oz of gold and 14,000 tonnes copper from total reserves of 1.59m oz of gold and 210,000 tonnes of copper.

The closure of the Padcal mine by its owner, Philex Mining, from April 2012 to March 2013 limited production at the site in Benguet to 99,802 oz of gold in 2013, up from 71,297 oz in 2012, but 29% less than the 140,113 oz recorded in 2011. Increased throughput of higher-ore grades boosted copper output by 46% from 10.14m kg in 2012 to 14.77m kg in 2013, but was down 14% from the 17.25m kg seen in 2011. According to data from the MGB, the mine produced 28,995 oz of gold in the first quarter 2014, a 247% rise over the 8360 oz mined the previous year. Copper production likewise improved, increasing by more than three-fold from 4393 tonnes to 18,052 tonnes of concentrate.

The 2012 closure came as a result of heavy rains brought on by two typhoons that caused one of the tailing storage pits to overflow, discharging some 20m tonnes of silt into the Balog Creek and Agno River and resulting in fines of P188.6m ($4.24m). According to company estimates, the total reserves of the Padcal mine covered by mineral agreements are spread out over an area of 13,492 ha and amount to around 65.8m tonnes of copper and gold grades of 0.20% and 0.40 grams per tonnes, resulting in recoverable resources of 108.7m kg of copper and 627,000 oz of gold.

ESTABLISHED PRODUCERS: Strong production from the well-established Toledo copper mine in Cebu also helped to bolster output, with the facility turning out 41.6m kg of copper concentrate in 2013, a 2% y-o-y increase from the 40.9m kg produced in 2012, according to company reports. As a subsidiary of the Australian Atlas Mining through its domestic operator Carmen Copper Corporation, Toledo is one of the country’s largest copper mines, with estimated mineral resources of 1.43m tonnes at 0.29% copper grade and 4.1m tonnes of copper metal at 0.15% cut-off grade.

A handful of other operations also posted positive y-o-y gains in the first quarter of 2014, including the Co-O Gold Project, operated by Mindanao Mineral Processing and Refining, which increased production 19% from 494 kg to 588 kg. The output from the Benguet Corporation’s Acupan Contract Mining Project also more than doubled y-o-y, from 92 kg to 188 kg. These rises combined to more than offset declines in other areas, such as from the shuttering of Greenstone Resources Corporation’s Siana gold project and the Rapu-Rapu polymetallic project, which had been producing around 182 kg and 201 kg, respectively, as recently as the first quarter of 2013.

The closure of Siana and Rapu-Rapu also significantly affected the country’s overall silver production, as the two projects had been contributing some 460 kg and 2709 kg, respectively, to the segment’s total output of 9629 kg as of the first quarter of 2013. The only significant silver mines to boost output over the period were Padcal, where production rose by a factor of more than three, to 753 kg, and the Carmen mining area of Toledo, which doubled output to 441 kg.

NICKEL FOR YOUR THOUGHTS: The country’s existing nickel mines continue to ship out vast quantities of raw ore, primarily to China, where it is processed into nickel pig iron used in Chinese stainless steel plants. In 2013 the Philippines was tied with Indonesia as the largest nickel producer in the world, though the latter banned exports of the metal in 2014 in an effort to promote local industry. This was a boon for other nickel producers like the Philippines, as nickel commodity prices rose dramatically from less than $14,000 per tonne on the London Metals Exchange at end-2013 to peak at over $21,000 per tonne in May 2014 before receding. The Philippines and Indonesia each produced approximately 440,000 tonnes of nickel in 2013, according to data from the US Geological Survey. The Philippines had increased production from 424,000 tonnes in 2012, with reserves estimated at 1.1m tonnes.

HOLDING PATTERN: Despite the Philippines’ veritable stockpile of mineral wealth, the country has yet to take full advantage of its natural resources as a result of uncertainty over mining regulations. At the heart of the matter is Executive Order 79 (EO 79), which was first issued in 2011 with the intention of clarifying inconsistencies in existing mining regulations – primarily governed by the Philippine Mining Act of 1995.

However, four years on, EO 79 has yet to make a substantial impact on the sector, as its accompanying implementation legislation has remained incomplete. This is largely due to different interests struggling to reach an agreement on a host of issues, including environmental regulations, transparency, the role of local government units (LGUs), the structure of exploratory and production leases, and taxation (see analysis).

POLITICAL WILL: One point of contention is the need for stronger political will by the national government over the involvement of LGUs in large-scale mining projects. While LGUs have the authority to issue small-scale mining permits, they can also block federally approved, large-scale mining projects by enacting their own conflicting legislation, such as a ban on open-pit mining. While the EO 79 was designed in part to address the inconsistency between the national mining law and LGU ordinances, in practice this has not happened.

It is likely that a move by the national government to limit the involvement of LGUs in large-scale mining will meet with strong resistance from LGUs that hold sway over operations planned in their territories and are often backed by influential interests, including the Catholic church and environmental groups. Several projects remain on hold as a result of local ordinances – notably, the Tampakan Copper-Gold project. Developed by Glencore Xtrata and Indofil, the mine is valued at around $5.9bn, making it the single largest foreign direct investment in the country to date. However, Tampakan remains in limbo due to an open-pit mine ban enacted by an LGU in South Cotabato back in 2010.

MAPPING EXERCISE: Heavy geographical restrictions are also being codified into federal regulation in the form of a “no-go” zone map, delineating areas where mining operations are forbidden owing to social or environmental restrictions. Released in mid-2013 by the Mining Industry Coordinating Council’s technical working group, the zone map reduced the total land area previously open to extractive activities by some 50%. As a result, around 4.5m ha of land with high mineral content was ruled off limits due to criteria like the presence of tourism sites, agricultural land (including non-producing land), marine sanctuaries and island ecosystems. However, after mining advocates protested that the new map effectively nullified the majority of previously approved permits for exploration, the government agreed to revisit it and was still in the process of redrawing the boundaries as of early 2015.

After years of debate, compromise and hand wringing over the implementation of EO79, the order could still be rescinded. Unlike laws passed by Congress, executive orders can be easily revoked. With a presidential election on the horizon, there is a distinct possibility that EO79 could be modified or scrapped altogether.

TRANSPARENCY: One of the subjects covered by EO79 that has been gaining traction in recent years is the domestic implementation of standards from the Extractive Industries Transparency Initiative (EITI), designed to open up the books of both mining companies and the government to public scrutiny. As of February 2015, some 32 countries had been deemed compliant with EITI standards, while another 48 countries were in the process of implementing its framework.

EITI certification is intended to alleviate public distrust of the government and mining companies, which often struggle with negative perceptions arising from past incidences of pollution from mines and oil fields. It will also open up the government’s books to allow the collection and distribution of revenues derived from extractive industries to be traced. The transparency afforded by the process will facilitate more consistent benchmarking, fostering a more accurate and objective picture of the sector’s actual operations, in addition to taxes paid and government revenue streams.

The Philippines officially became an EITI candidate country in May 2013, and has since been working with stakeholders to compile its official validation report, which will be submitted to the EITI for review. The local response to this voluntary initiative has been largely positive, with 40 mining companies having signed a disclosure waiver as of late 2014.

“I would like to see mandatory compliance so that reluctant companies would be forced to comply," Teresa Habitan, assistant secretary in the Department of Finance and PH-EITI focal person, told OBG. “This would also speed up data collection by setting up a centralised data centre. The bottom line is that if they have nothing to hide, then why withhold information? And it is not just their information that is collected, but also counterpart information from the government.”

MOVING FORWARD: With the Didipio mine up and running and operations resumed at Padcal, only a limited number of mines now remain in stages of development that would allow them to commence operations in the coming years. At least three new mining projects with combined investments of P1.46bn ($32.85m) are expected to be up and running in early 2015 with several others also awaiting final authorisation of pending permits to begin mining as well.

Among these is the Vitali iron ore mining project, located in Zamboanga City in Mindanao, which will primarily produce iron along with smaller amounts of gold, silver and other associated mineral deposits over a projected mine life of 10 years. Hard Rock Mineral Trading secured a declaration of mining project feasibility (DMPF) in March 2014 to begin commercial operations through its mineral production sharing agreement (MPSA), which covers an area of 2077 ha.

The other projects on the horizon are two new nickel operations: Libjo nickel laterite project, developed by the East Coast Mineral Resources Company on Dinagat Island, and the Agata nickel laterite project, from the Minimax Mineral Exploration Corporation, located in Agusan del Norte. The Agata North nickel mine is estimated to have proven and probable ore (limonite and saprolite) reserves of 6.79m tonnes, with measured and indicated resources of 33.94m at a grade of 1.1% nickel, and inferred resources of around 2m tonnes with a nickel grade of 1.04%. A partial DMPF for nickel production on 600 ha was approved in April 2014 by the government, with exploration also approved in the remaining portion of the 7679-ha MPSA contract area. Commercial operations to mine chromite and nickel have also been approved for the 697-ha MPSA covering Dinagat Island which expires in November 2022.

In addition to these, the Runruno mine is also under development and could begin commercial operations as early as 2015 provided it is able to clear up a few outstanding social and environmental permits. The gold-molybdenum project boasts a defined resource of 1.42m oz of gold and 11.6m kg of molybdenum according to operator FCF Minerals Corporation, with 780,000 oz of proven and probable gold reserves.

The long awaited King-king Copper-Gold Project, being developed by the Philippines-based Nationwide Development Corporation (Nadecor) and Toronto-listed St Augustine Gold and Copper, was also on the verge of opening as of early 2015, pending the approval of its Environmental Compliance Certificate. If given the go-ahead, the mine would likely become the most productive in the country, producing around 110, 000-130,000 tonnes of copper as well as 529,000 oz of gold per year, according to company estimates.

Located near Davao City in Mindanao, the project boasts measured and indicated mineral resources of 962.3m tonnes at 0.25% total copper, 0.06% soluble copper and 0.33 grams per tonne of gold, resulting in 2.45bn kg of contained copper and 10.3m oz of contained gold, according to data from St Augustine.

Other significant projects in varying stages of development include the Far Southeast copper-gold project from Lepanto Consolidated Mining Company and Gold Fields, which is expecting approval for its Financial or Technical Assistance Agreement in 2015, and Philex’s Silangan gold and copper project, forecast to begin production in 2018.

EXPLORATION: Despite the challenges of obtaining exploration permits (EPs), mining firms continue to show considerable interest in the sector. After the moratorium on EPs was lifted in 2013, the MGB had received some 130 applications for exploration as of October 2014, sought after as a placeholder to secure land in the hopes that the legislative morass will be resolved prior to the permits’ expiration. Depending on how accommodating the government is in approving EP applications, exploration activity could begin to pick up again after the number of active EPs fell from 53 in early 2013 to 36 by July 2014, according the MGB.

OUTLOOK: The Philippine’s vast and largely untapped mining potential will continue to draw strong interest from both foreign and domestic actors despite decreasing investment in the short term. Although a few projects are moving forward, the vast majority of large-scale developments will remain on hold until the government issues the relevant sector regulations, which could feasibly drag on through the 2016 elections.

“Once these issues are resolved, there are many large, high-grade reserves in the country," Artemio Disini, chairman of the Chamber of Mines of the Philippines, told OBG. "There are large deposits of gold, copper and nickel in Eastern Mindanao. If internationals decide the risk is too great in the Philippines, large local conglomerates are already showing interest in filling the void.” The question is when the regulatory framework will catch up with demand. Timing, as they say, is everything.