By Fernando Penarroyo
Global mineral exploration budget saw two consecutive years of growth in 2017 and 2018 despite the uncertainty of economic growth in mature economies and volatility of emerging markets, brought about by the US-China trade dispute. Junior mining companies who survived the previous years’ downtrend increased their exploration budget by thirty-five percent year over year but the majors continue to account for the majority of planned exploration spending.
Metals prices were also trending upward and company market capitalization recovered from lows in 2015, resulting in many investors to include the mining sector in their investment portfolio. However, the industry continues to be risk averse though global exploration budget is expected to increase in 2019 particularly for late-stage exploration. Capital market support also financed renewed drilling of promising prospects in areas with stable political and regulatory systems. Drilling programs focused mainly on gold but exploration targeting base metal assets also rebounded in the second half of 2018, indicating a vibrant exploration sector activity not seen since early 2013. The bulk of exploration spending in 2018 went to Latin America which have a high geological prospectivity and relative political stability. Latin American countries accounted for 4 of the top 10 most popular destinations led by Peru, Mexico, and Chile.
Meanwhile the Philippines is at number eight of the ten least attractive jurisdictions for mining investment according to the Fraser Institute’s 2017 survey of mining and exploration companies. The survey assessed how mineral endowments and public policy factors such as taxation and regulatory uncertainty affect exploration investment.
By virtue of the initial tax reform package implemented by the Duterte administration, mining excise tax has been raised from 2% to 4%. Under the proposed second round of reforms, the Department of Finance wants a “comprehensive mining tax that will give the government a bigger share from miners’ revenues.” There are pending bills filed in both the Senate and House of Representatives that plan to impose 5% mineral royalties on all mining operations on top of the excise tax on minerals and other taxes. President Duterte continues to look at the possibility of imposing a ban on open-pit mining through an executive order (“EO”).
The Mining Investment Coordinating Council is reportedly ready to propose the lifting of the open pit mining ban for as long as mining laws are strictly enforced. The Department of Environment and Natural Resources (“DENR”) will recommend the removal of the moratorium on new mining projects imposed under EO 79 and DENR Memorandum Order 2016-01, premised on the passage of a “legislation rationalizing existing revenue sharing schemes and mechanisms.” The DENR is also set to declare high mineral potential areas including all existing operating mines as mineral reservations. Further, the DENR seeks to promote the establishment of mineral processing plants and mandatory mineral processing of all nickel ore. It will finalize the national program and road map for the development of value-adding activities and downstream industries for strategic metallic ores while requiring all operating mines to have ISO certifications. In both houses of Congress there are pending mining bills requiring that mineral ores should be processed within the country and disallowing mining operations from exporting unprocessed mineral ores without a certification of compliance showing presence or lack of rare earth elements.
It appears that the Philippine government is now looking at different strategies to extract a greater share of the value from mining operations, employing strategies to include increasing taxes and royalties, and requiring in-country processing or beneficiation prior to export. These are clear manifestations of resource nationalism that makes countries like the Philippines less attractive for mining investment.
License to Operate Remains the Top Risk
According to a 2019 Ernst and Young Report outlining the top ten business risks facing the mining and metals industry based on a survey of over 250 global mining sector participants, “license to operate” topped the list. This has been attributed to the rise of resource nationalism and digital transformation. License to operate has evolved beyond the narrow focus on social and environmental issues. The expectations of society have increased and stakeholder participation has moved beyond the confines of the local host communities.
Social media and the internet brought about by the fast pace of progress in technology and digital capabilities, are now able to move information quickly. Resource nationalism has enabled society to examined its role as resources licensor. Society now expects more than just tax and employment opportunities from resource developers. New and strict disclosure laws have caused companies to rethink how value is being created for stakeholder communities including tax contributions, as investors now rely heavily on such disclosures. At the same time legal processes have enabled host communities and civil societies to resort to litigation to enforce environmental laws, enjoined potentially destructive operations, and seek damages for past violations and legacy mines. Any misstep on the part of resource developers can impact their ability to access capital or may even result in a total loss of their license to operate.
Under the Mining Act of 1995 and its implementing rules and regulations, the following are the legal requirements for a company to have a license to operate:
Technical and financial qualifications to engage in large-scale mining;
The area being applied for is open and available for mining activities and is not located within any of the areas where mining is prohibited;
An approved environmental compliance certificate, showing that the impacts of mining in the area can be mitigated and/or remediated through proper environmental protection measures;
An approved Project Feasibility Study, showing that the mine has enough ore reserves to operate profitability, and can give government a fair share in revenues.
The endorsement/approval of the local government units (province, municipality/city, and barangay) that will be impacted by the proposed mining activity; and
Free and prior informed consent of the indigenous peoples, if the area being applied for is within their ancestral domains.
New Digital Technology
Miners are now recognizing the use of emerging digital technology to improve productivity. Mobile technology connectivity between workers and management facilitates communication in the mines, ensuring a safe and productive working environment. Mining companies are also revolutionizing data collection in the field with the help of the Internet of Things, which are smart data solutions that help management to relay important data such as water pressure, temperature, concentration of gases and other information. Cloud technology allows management and employees to quickly access and alter essential information, wherever and whenever needed.
Robotics allow more autonomous vehicles and machinery to make operations smoother resulting in better safety, greater efficiency and cheaper running costs. In engineering industries which require hard labour intensive tasks, robots will be able to take over and do things faster and more efficiently than humans ever could. Predictive analytics is used currently to reduce maintenance costs and improve equipment availability.
New Workers
While automation and data analytics technologies may increase efficiency, these will require a workforce that is skilled in data science, analytics, predictive modeling and mechatronics.
However, recruiting and retaining this workforce will increase expenses as there is a limited pool of people with these skill sets. Current workforce will also need retraining as knowledge resources and will be required to possess a new set of skills needed to operate new machinery and technology, or work along-side and support automated systems.
Universities and data science companies that develop innovations could gain an edge in exploration. Further, exploration innovation will not come only from engineering or geology; it will also emerge from biochemistry, bioengineering, and computer science—disciplines too complex for resources companies to manage in-house. Demand for new jobs such as data scientists, statisticians, and machine-learning specialists is already on the rise among resource developers. Within ten years, mining companies could employ more PhD-level data scientists than geologists. Mining organizations are also employing new tools including cloud-based human resources systems, data analysis of employee performance and real-time digital learning to manage and develop talent.
New Energy Sources
Fossil fuels are the conventional sources of energy to run mine equipment and electricity for processing, representing a significant part of mine operating costs. Companies are now opting for a mix of energy sources — fossil fuels, hydroelectricity and renewable energy.
Mines, seeking to reduce costs and greenhouse gases, will be investigating ways to replace diesel-powered equipment with electric ones, as battery storage technology becomes more reliable and affordable. This will bring a number of benefits including the reduction of underground diesel emissions and ventilation costs.
The integration of conventional and renewable sources is critical to ensure reliable and safe power for the mine. Such solutions will enable the mining industry to diversify its energy sources, reduce consumption of fossil fuels and carbon emissions, and cut operating costs.
This will ultimately create a new generation of mines that will enhance the industry’s global competitiveness, long-term sustainability, and more importantly, public acceptance.
New Threats
While digital technologies will make mines more efficient, mining companies will have to allocate budgets for cybersecurity and devote additional resources to improve their defenses and work harder in embedding security-by-design due to the increasing potential of cyberthreat. As the digital transformation agenda forces organizations to embrace emerging technologies and new business models, cybersecurity is important because there is a heightened exposure to fraud, corruption and other related risks. Increased global connectivity means that anyone with access to company data especially those uploaded to cloud applications, can exploit weaknesses in data security. Companies’ critical digital and physical assets are therefore at a greater risk of theft, damage and manipulation than ever before.
New World Commodities
At the same time, digital technologies have resulted in a change in commodity demand for critical minerals such as cobalt, lithium and copper. These minerals are required to manufacture energy conversion and storage equipment needed to supply the renewable energy industry which already is beginning to transform and disrupt global demand.
The rise of electric vehicles and the production of an ever-growing variety of high tech and green technologies, from batteries, smart phones and laptops to advanced defense systems have also boosted demand and competition for new world commodities. The European Union, South Korea, Japan and US, are defining some minerals as ”critical” to ensure they are available for their supply security and future prosperity. Chinese state-owned enterprises are also already taking a significant proportion of the lithium-ion battery supply chain by purchasing and funding lithium and cobalt mines as well as downstream processing.
New Miners
With the advent of digital technology and rising demand for new world commodities, the business of mineral exploration, development and production will not be conducted solely by traditional mining houses and junior companies. The mining and metals companies that will be the winners in the future will ultimately be those who have learned to adjust their business models and collaborate with other industries. Within their organizations, some miners are either using venture capital firms or setting up specialist internal teams to identify more specialized mining prospects as they seek to capture value beyond their core portfolios.
The typical profile of a miner will also change. Technology companies may become direct or indirect investors as a way of shoring up and securing supply. With scarce new world commodities supply like cobalt and lithium and other rare earth minerals, cash-rich technology companies will venture into mining to ensure that they can continue to produce their products. Major metal consumers, such as tech giants, are moving to control whole value chains from raw material sourcing up to product delivery. Sovereign funds of rich economies, like Saudi Arabia and Norway will become major stakeholders in the sector as they look for investment opportunities for their petroleum revenue windfalls. On the other hand, state enterprises will wish to secure supply for national industries and protect jobs.
Metal traders once again awash with cash because of recent strong commodity prices, are looking for opportunities and will reemerge as prominent players in the sector. Using blockchain technology, new technology entrants can engage in mining without owning any mines or distribution infrastructures in the same way that Uber does with no cars and Airbnb, with no real estate listings.
Conclusion
Change is the only certainty for today’s global mining industry. While the mining industry is currently benefitting from a positive outlook despite the ongoing trade war, the local industry is still facing a lot of uncertainty because of resource nationalism, regulatory issues, political risk, community relations and social license to operate. Mining companies will increasingly adopt emerging digital technologies to transform their operations in order to gain benefits such as reduced costs, improved health and safety of workers, minimized environmental impacts and a better understanding of the ore body. Innovative technologies will also facilitate the better management of operational costs, improve extraction methods, streamline distribution, and increase worker productivity. Companies will need to attract talents adept at emerging technology and adopt a level of flexibility in their business models by building partnerships with non-traditional, new technology “miners” for future growth.
Fernando “Ronnie” S. Penarroyo specializes in Energy and Resources Law, Project Finance and Business Development. He may be contacted at fspenarroyo@gmail.com for any matters or inquiries in relation to the Philippine resources industry. Feel free to follow Atty. Penarroyo on LinkedIn (https://www.linkedin.com/in/fernando-s-penarroyo-2b8a7312/)
References
Beroe, Iniyakumar, Global Mining and Exploration Trends, 21 August 2019 https://www.beroeinc.com/article/global-mining-and-exploration-trends/
Law, Jonathan, Changing the Face of Mining, Jonathan Law, CSIRO, 23 September 2019 https://www.csiro.au/en/Research/MRF/Areas/Resourceful-magazine/Issue-18/Changing-the-face-of-mining
Risks and Opportunities for Mining: Outlook 2019, KPMG International, https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/02/global-mining-risk-survey-2019.pdf
Top Ten Business Mining Risks Facing Mining and Metals in 2019-20, Ernst and Young, 2018, https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/mining-metals/mining-metals-pdfs/ey-top-10-business-risks-facing-mining-and-metals-in-2019-20_v2.pdf
World Exploration Trends 2018, S&P Global Market Intelligence, March 2019, https://www.spglobal.com/marketintelligence/en/documents/world-exploration-trends-march-2019.pdf
