A Shot in the Arm for Philippine Mining

by Fernando Penarroyo - August 31, 2021

During the early stages of the pandemic, the performance of the mineral industry was seriously dictated by the slowdown of economic activities, lethargic world metal prices, and limited and hampered mining operations. The mining index however, made a turnaround by the end of 2020 and has recovered by an astonishing US$636 billion thanks to a boom in spending brought about by the current green energy and digital transition, and unprecedented infrastructure-focused stimulus packages initiated by many governments to lift their economies.

As the global economy slowly recovers, prices for energy and metals are helping big commodity producers and exporters. Big miners, awash with cash from record-high metals prices and forced to adapt operational efficiencies during the pandemic, are returning billions of dollars to shareholders through dividends and buybacks. Bullish investor sentiment has been a critical driver of surging metal prices as the rollout of Covid-19 vaccines sees major economies emerge from lockdown restrictions. Mining financing hit an eight-year high in 2020.

Dawn of a Super-cycle?

The rapid expansion of a global middle class continue to fuel the demand for coal, copper and iron ore. While the mining and refining sectors for ‘traditional’ base metals are well established, lithium and cobalt mining will develop quickly in the coming years. Copper, nickel, tin, aluminium and rare earths which, together with lithium and cobalt, are expected to see a demand boom amidst the battery revolution.

In the case of copper, some major banks are already predicting a super-cycle, i.e., a sustained spell of abnormally strong demand growth that producers struggle to match, sparking a rally in prices that can last decades. Previous copper rallies reveal a pattern of broad-based growth, industrialization, and new technologies that can help drive demand and prices. As copper is set to play a key role in electricity infrastructure, electric vehicles (EV) including hybrids and renewables fuel additional demand. The copper price hit a record high in May 2021 ($10,476 a tonne) and trading house Trafigura Group, Goldman Sachs, and Bank of America expect the metal to extend its recent gains. Market watchers and analysts, however, have debated how long the boom will last.

On the other hand, the EV Metal Index, which tracks the value of battery metals in newly registered passenger EVs around the world, came in at $477 million in April, an increase of 326% over the same month last year and bringing the year-to-date total to $2.03 billion. Lithium prices are averaging $10,800 so far in 2021 versus over $17,000 in 2018. Fitch Solutions Country Risk & Industry Research expects lithium consumption growth to outpace current supply developments. Demand is to be boosted by strong government support to promote EVs and large-scale energy storage systems. Low supply means that prices will remain high in the short term.

Mining as a Contributor to a Battered Economy

The Philippines is one of the countries that has a high vulnerability to Covid-19 as it continues to struggle to contain the Covid-19 pandemic and normalize economic activity. The economy contracted last year by 9.6% while GDP shrank by 3.9% in the first quarter this year. While the economy registered 11.8% growth in the second quarter, the country is currently battling the latest surge of Covid-19 cases under the more infectious Delta variant. With the reimposition of the enhanced community quarantine in the national capital region, renewed mobility restrictions, and higher petroleum prices, full economic recovery is expected to be delayed further. According to a report from the Asian Development Bank, public spending on infrastructure and social assistance, better progress in the country’s vaccination drive, and a steady recovery in the global economy will underpin the growth of the Philippine economy this year and the next.

Despite the pandemic, the Mines and Geosciences Bureau (MGB) reported that the metallic mineral production value ended 2020 on a positive note with a 1.13% gain from ₱130.74 billion in 2019 to ₱132.21 billion, a ₱1.47 billion increase. The gains were driven mainly by nickel demand from China and high gold prices. The MGB further reported that:

  • Mining industry contributed ₱102.3 billion to the GDP in 2020 comprising 0.76% and ₱25.52 billion from national and local taxes, fees and royalties;
  • Mining and quarrying activities generated 184,000 jobs and around ₱25.71 billion was committed for Social Development and Management Program to host communities;
  • Metallic mineral production was at ₱132.69 billion; and
  • Total value of minerals, mineral products, and non-metallic mineral manufacture exported was at US$5.2 billion.

The domestic nickel industry also benefitted as Indonesia, the world’s biggest nickel producer, continues to impose an export ban on the metal. The Philippines, the world’s number two producer, stepped in to fill the demand from China, exporting 333,962 tonnes in 2020. Government policy changes and upbeat commodity prices boosted mining and oil stocks in the Philippine Stock Exchange (PSE). The sector closed 17.5% higher by the end of 2020, making it one of the biggest gainers for the year.

According to the Philippine Statistics Office (PSO), the government expects an increase in earnings from excise tax collections. The PSO attributes this to the Tax Reform for Acceleration of Inclusion (TRAIN) Act passed in 2017, which doubled excise taxes on minerals, mineral products and quarry resources from 2% to 4%. Meanwhile, the Department of Finance (DOF) is proposing further amendments to fiscal provisions in mining laws that will allow for the rationalization of existing revenue-and benefit-sharing schemes and incentives given to companies to ensure that the country benefits from mineral resources.

Government’s New Policies Expected to Give Mining a Boost

President Rodrigo Duterte’s earlier policies on mining have caused anxiety in the industry. At the start of his administration, the Department of Environment and Natural Resources (DENR) issued  MO 2016-01 on 08 July 2016, mandating the audit of all operating mines and declaring a moratorium on new mining projects, covering the environmental, economic, social, legal, and technical aspects of the mining operations. In addition, DAO 2017-10, issued on 27 April 2017, banned the open pit mining method for gold, silver, copper, and complex ores describing open-pit mines as “perpetual liabilities, causing adverse impacts to the environment, particularly due to the generation of acidic and/or heavy metal-laden water, erosion of mine waste dumps and/or vulnerability of tailings dams to geological hazards.” What hit the industry real hard was when former DENR Secretary Regina Paz Lopez ordered the closure of twenty-eight (28) operating mines and the cancellation of seventy-five (75) Mineral Production Sharing Agreements (MPSA) as they allegedly encroached on watersheds and destroyed marine ecosystems. These development dampened investor interests in the local industry.

Lately however, the Philippine government seemed to be considering the mining industry as part of its economic recovery plans in light of the havoc created by the pandemic. Various policies and administrative actions, notably the lifting of the moratorium on new mining agreements and the favorable resolution of an FTAA renewal, were implemented with the view of attracting more mining investments.

Lifting the moratorium on new mining agreements

The industry was given a boost when President Duterte issued Executive Order (EO) No. 130 on 14 April 2021, which lifted the nine-year moratorium on mineral agreements. EO 130 amended Section 4 of EO No. 79, series of 2012 that prohibits the grant of mineral agreements “until a new legislation rationalizing existing revenue sharing schemes and mechanisms shall have taken effect”.

The MGB has noted an increase in mining applications, especially coming from inactive mining companies and exploration permittees that have scaled down their operations in the last few years. Three months after the issuance of EO 130, the MGB approved 26 out of 36 applications for new non-metallic mining operations. In April this year, 36 new metallic and non-metallic mines have been identified as priority in terms of the processing of applications. The MGB will also be prioritizing 65 applications that are likely to be granted with MPSAs. These mining applications were accepted and processed and the MPSAs will be issued once EO 130’s implementing rules and regulations (IRR) take effect.

According to the DOF during the Philippine-Extractive Industries Transparency Initiative National Conference 2021, the lifting of the moratorium on new mining projects is expected to boost mineral production by around ₱15 billion every year until 2023, and an additional ₱43 billion annually until 2027. Potential new entrants will increase exports by $1 billion to $2 billion every year, as well as employ as many as 1.3 times more workers. The DOF is expected to collect an additional ₱34 billion in taxes and fees.

In the same conference, Rep. Joey Salceda, Chair of the House Committee on Ways and Means, however, identified key deficiencies in the country’s extractive industry governance framework which could be resolved by a “coherent tax regime.” He noted that in EO 130, neither Congress nor the DOF is given a specific role in the taxation process. Salceda also observed that EO 130 delegated some powers that were not supported by law, including the power of the DENR to negotiate tax agreements with mining applicants. He recommended that the DOF, which has the experience in financial management, negotiate revenue sharing agreements on the government’s behalf. 

Resolution of OceanaGold FTAA Renewal

Another recent bright spot for the industry was the much-awaited government’s renewal of the Financial or Technical Assistance Agreement ("FTAA") of OceanaGold Corporation’s Didipio operations. The FTAA was renewed for an additional 25-year period on substantially the same terms and conditions but included certain modifications:

  • The equivalent of an additional 1.5% of gross revenue shall be allocated to community development in the form of increased contributions to communities in the region and provincial development projects in addition to the existing fund for Social Development and Management Program provided to the host and neighboring communities. One percent (1.0% ) will be allocated to community development for additional communities and half-percent (0.5%) to the host provinces of Nueva Vizcaya and Quirino;
  • Net Smelter Return will be reclassified as an allowable deduction and shared 60%/40% rather than wholly included in government share;
  • At least 10% of the common shares in OceanaGold Philippines Inc. ("OGPI"), the Company's Philippine operating subsidiary and holder of the FTAA, shall be listed at the Philippine Stock Exchange within the next three years;
  • OGPI shall offer to the Banko Sentral ng Pilipinas  for the latter to buy not less than 25% of OGPI’s annual gold doré production at fair market price and mutually agreed upon terms; and
  • OGPI's principal office shall be transferred to the host province within the next two years from execution of the renewal agreement on 19 June 2019.

OGPI plans a staged restart of operations with milling to recommence utilizing stockpiled ore approximately 19 million tonnes. It also aims to achieve full underground production capacity within twelve months. Once fully ramped-up, OGPI expects Didipio to produce approximately 10,000 gold ounces and 1,000 tonnes of copper per month. The resumption of Didipio’s mine operations will give direct employment to about 1,800 people and indirect employment for another 2,000 to 3,000 employees.

Processing plant at the OceanaGold gold-copper mine in Didipio, Nueva Vizcaya.

Addressing the open pit mining ban

The issuance of EO 130 sparked some hope in the industry that President Duterte will give the go-signal to the DENR to lift the ban on open-pit mining, which has been a contentious issue among miners, host communities, local government units, and environmental advocates. Among the salient features of the DENR-drafted EO 130 IRR was the provision lifting the ban on the open-pit mining method.

Open pit mines are often used in mining near-surface metallic or non-metallic deposits and more sparingly in coal and other bedded deposits. Open pit mining is an internationally accepted method done in many countries and repeatedly proven to be safe for miners, the community and the environment.  While the environmental footprint may be visibly large, open pit mines can be successfully rehabilitated and converted into other land uses like agriculture, forestry, tourism, and recently as sites for renewables. For shallow ore deposits, such as nickel, iron, coal, and copper, open pit mining is the only economically viable method extraction. An open pit mining ban will also have adverse impacts on our energy security, as coal mining is presently done in the country only through open pit mines.

In the meantime, the definition of open pit mining method as per DAO No. 2017-10 vis a vis other surface mining methods was clarified  by the MGB through the issuance of MC 2019-08 on 10 December 2019. Open pit mining method is the process of mining by means of a surface pit excavated using one or more horizontal benches. The MC defined and clarified that open cast mining, strip mining, and quarrying are not considered as open pit mining methods.

PMRC 2020 Approval and CRIRSCO Membership to Boost Investor Confidence

The ongoing revisions to the Philippine Mineral Reporting Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (“PMRC”) is considered auspicious by the industry as investors are expected to take a look at the Philippines following the lifting of the nine-year moratorium on new mining projects.

The PMRC was created on 08 August 2007 to set out the standards, recommendations and guidelines for public reporting of exploration results, mineral resources and ore reserves, as may be required as a listed company or when applying for listing with the PSE. The PMRC is also currently used as a reporting standard by the DENR/MGB in technical submissions by mining companies under DAO 2010-09, “Providing for the Classification and Reporting Standards of Explorations Results, Mineral Resources and Ore Reserves.”

Last 26 February 2019, the PMRC Committee (PMRCC) applied for membership in the Committee for Mineral Reserves International Reporting Standards (CRIRSCO), the committee of all internationally recognized national reporting organizations. When implemented in 2008, PMRC was compatible with the Australian Joint Ore Reserve Code of 2004 and CRIRSCO Template 2006. 

As a condition for PMRCC’s acceptance under the Memorandum of Understanding dated 27 February 2019, there is a need to revise the 2007 PMRC to make it compatible with the current 2019 CRIRSCO template. The PMRCC Standards Sub-Committee (StandCom) completed the current draft of PMRC Edition 2020 after CRIRSCO finished its detailed review on 10 October 2020.

The PMRCC submitted the draft to the PSE on 30 October 2020 that was followed by a public comment period from 04 to 16 March 2021. The PMRCC conducted virtual public consultations on the drafts on 11 June and 18 November 2020. The PSE Board approved the draft on 25 March 2021 with additional revisions on sustainability: such as mitigation and remediation plans to solve environmental, social, and health and safety impacts; and the inclusion of a consent form to indicate the accredited competent person agrees to the public disclosure of the report.

The PSE endorsed the revised draft to the Securities and Exchange Commission (SEC) which is currently under deliberation. Once the PMRC has been upgraded to the 2019 CRIRSCO Template and approved by the PSE and SEC, the PMRCC is expected to be accepted as a CRIRSCO member. The sooner the PSE and SEC approve the submitted draft, the better for the mining industry so that it will be at par with global reporting standards to professionalize the industry and attract investors. Meanwhile, the PMRC StandCom is currently reviewing the draft IRR of PMRC 2020, which is targeted for completion in 2021 and will be subsequently submitted to the PSE anew for endorsement and approval.

Offshore Mining Permits

Another area of interest for possible investments is offshore mining. MGB MC 2016-05 covers the conduct of offshore mining within the country’s territorial sea and exclusive economic zone and extended continental shelf, as established under Parts V and VI, respectively, of the United Nations Convention on the Law of the Sea. Under MGB MC 2016-05, offshore mining operations shall be conducted in a manner that will not adversely affect biodiversity, safety of sea navigation, and other marine activities.

The Offshore Mining Chamber of the Philippines (OMCP) announced that it received numerous expressions of interest in offshore mining following the issuance of EO 130. The OMCP urged the MGB to approve offshore mining tenement applications only from qualified offshore mining companies with adequate capital, proven technical expertise and demonstrated capability to engage and deploy offshore equipment for exploration, seabed scientific research, and sea bottom profiling. OMCP further recommended that the MGB should start a review of mine tenement systems and processes, with a view towards terminating inactive claims for offshore mining.

Dealing with Mining Industry Risks

Uncertainty concerning the administration, interpretation, or enforcement of existing laws and regulations on environment, taxes, land use, infrastructure, socio-economic agreements, and labor remain to be the biggest investment barriers to mining investments according to the Fraser Institute Annual Survey of Mining Companies 2020. Companies are also more exposed now to political risks and security issues. In addition to the traditional risk factors, the mining industry faces a wider range of challenges such as climate change, new technologies, and economic uncertainties.

The economic crisis caused by the pandemic that heightened fiscal and external imbalances in many emerging markets has led host governments to review existing mining contracts and legislations, and introduce new taxes and royalties to replace lost revenues. Resource nationalism has become much more sophisticated and complex in the forms it takes, not purely driven by nationalistic policies but by wider political, economic, social and environmental drivers.

The Philippine government is fully aware that existing mineral agreements entail that some deposits can only be extracted through open pit mining given the available data already known to both regulators and developers. An open pit mining ban would in effect cause these resources to be stranded and mineral agreements impaired if the ban is continuously imposed. The government must put in place stable policies if it wants the industry to move forward by expeditiously lifting the open-pit mining ban and existing suspension orders. The industry is keenly awaiting for a favorable outcome on these issues.

Conclusion

Recent policy initiatives by the government are laudable to erase policy uncertainties that can be extremely damaging to both investors and the host country, and hamper the successful development of mineral endowments.  The key challenge is to bring back investors’ confidence to the mining industry that will assure appropriate profit to investors, protect our natural resources, and provide other long-term benefits to the Filipinos.

Fernando “Ronnie” S. Penarroyo specializes in Energy and Resources Law, Project Finance and Business Development. He may be contacted at fspenarroyo@penpalaw.com for any matters or inquiries in relation to the Philippine resources industry and suggested topics for commentaries. Atty. Penarroyo’s commentaries are also archived at his professional blogsite at www.penarroyo.com

 

References

Annual Survey of Mining Companies, 2020, Fraser Institute, 23 February 2021, https://www.fraserinstitute.org/studies/annual-survey-of-mining-companies-2020

Are Copper Prices in a Supercycle? A 120-Year Perspective, MINING.com, 19 July 2021, https://www.mining.com/web/are-copper-prices-in-a-supercycle-a-120-year-perspective/

COVID-19 Impact & Recovery: Metals & Mining, S&P Global Market Intelligence, https://www.spglobal.com/marketintelligence/en/news-insights/blog/covid-19-impact-recovery-metals-mining

EO 130 Spurs Growth of Offshore Mining, Manila Standard, June 13, 2021, https://manilastandard.net/mobile/article/356999

EV Metal Index Quadruples Year-on-year as Lithium, Nickel Prices Rally, MINING.com, 19 July 2021, https://www.mining.com/ev-metal-index-quadruples-year-on-year-as-lithium-nickel-prices-rally/

Miraflor, Madelaine B., 26 New Non-metallic Mines Cleared to Operate, Manila Bulletin 19 July 2021, https://mb.com.ph/2021/07/19/26-new-non-metallic-mines-cleared-to-operate/?fbclid=IwAR3UL8vfSYuCqu_zMLzt3LRp6th9_xOa99V5afeF4xXZQHQhXodpkHp7CfQ

Oceanagold Advises Didipio FTAA Renewal and Provides Operations Update, 14 July 2021, https://www.newswire.ca/news-releases/oceanagold-advises-didipio-ftaa-renewal-and-provides-operations-update-844978564.html

Philippine Economy Seen Recovering in 2021, with Stronger Growth in 2022 - ADB, 28 April 2021, https://www.adb.org/news/philippine-economy-seen-recovering-2021-stronger-growth-2022-adb

Solutions to Mining Industry Risk Challenges, Marsh, https://www.marsh.com/us/industries/mining-metals-minerals-insurance/solutions-to-mining-risk-challenges.html



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