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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Commentary

Fernando Penarroyo - November 23, 2021

Investing in ESG is Good Business for Mining

New mining projects faces relative difficulty in attracting investments because of opposition by host communities and local governments brought about by potential mine accidents, transparency issues, and operations infringing on ancestral and agricultural lands. Regulators often impose huge taxes and environmental users’ fees on new projects, in addition to stiff penalties on erring mining companies involved in violation of safety and environmental laws and regulations. The industry is currently benefitting from the global objective of lowering carbon emissions to keep the rise in mean temperatures to below 2°C above pre-industrial levels in accordance with the 2015 Paris Agreement and 17 Sustainable Development Goals, which requires the deployment of renewable energy and efficient battery storage. The unprecedented demand for green metals like copper, nickel, lithium, and cobalt needed for energy transition and digital transformation has also paved the way for sustainable investments in mineral projects. To address these developments, mining companies are now including environmental, social and governance (ESG) and sustainability issues as part of their strategy to improve the reputation of the industry, acquire the consent of stakeholders to operate, and at the same time realize profits from their operations. According to the Ernst and Young 2022 Report on the Top 10 Business Risks and Opportunities for Mining and Metals, ESG tops the list of risks/opportunities facing mining companies over the next 12 months. The study indicates that shareholder expectations are impacted by numerous challenges, including the mining industry’s contribution to communities, economies, protection of heritage sites, and engagement with indigenous communities. Shareholders are also concerned with the industry’s role in prioritizing ethical supply chains, with diversity and inclusion also in the spotlight. Lenders and investors are also focusing on mining projects especially those that are vital to the energy transition but these projects need to have a good ESG strategy to become bankable. The formalization of the requirement for ESG criteria to be incorporated into the financial evaluations of companies started in August 2005 in a conference hosted by The United Nations Global Compact in Switzerland. The financial industry’s recommendations were compiled into a report entitled "Who Cares Wins.” The report came out with a conclusion that the "endorsing institutions are convinced that a better consideration of environmental, social and governance factors will ultimately contribute to stronger and more resilient investment markets, as well as contribute to the sustainable development of societies.” In the report, the financial industry called on all sectors of society and business to integrate ESG into their core activities, and investors should "reward well-managed companies" that embrace ESG. In 2006, a group of large institutional investors under the auspices of the United Nations, collaborated on a process to develop what has become the Principles for Responsible Investment (PRI). Developed "by investors, for investors," the six PRIs aim to contribute to a more sustainable global financial system and in the long term, the interests of the environment and society as a whole. Signatories to the PRI have grown to over 3,000 since its launching. The World Economic Forum (WEF) also published the Davos Manifesto, which set out a common code of ethics for business leaders. The manifesto was updated at the WEF's Annual Meeting in 2020, which built on the concept of 'stakeholder capitalism' first introduced in the initial manifesto. Stakeholder capitalism recognizes that long-term business value is only created when the interests of all stakeholders -- employees, shareholders, governments, the environment, and society as a whole, are served simultaneously. What is ESG? ESG is a set of standards or criteria for a company’s operations that investors now use to screen potential investments. While ESG is spoken about as a single concept, it is an amalgamation of three distinct but clearly overlapping disciplines -- environmental, social, and governance, each with their own knowledge base, areas of focus, and methodologies for approaching problems and solutions. Environmental criteria consider how a company performs as a steward of nature. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. They include a company’s energy use, waste, pollution, hazardous substances, mine waste/tailings, mine closure, natural resource conservation, treatment of animals, biodiversity, ecosystem services, water management, climate change, carbon footprint, and greenhouse gas emission. Social criteria, on the other hand, examine how a company manages business relationships with employees, suppliers, and customers. Social criteria also look at how the company deals with the communities where it operates and include human rights, land use, resettlement, vulnerable people, gender, diversity, labor practices, worker/community health and safety, security, artisanal miners, and mine closure/after use. Lastly, governance criteria deal with a company’s leadership, executive pay, audits, accounting systems, internal controls, and shareholder rights. It also includes legal compliance, ethics, anti-bribery and corruption, anti-money laundering, transparency, corporate governance, ethics, compliance, diversity, lobbying, and approach to taxation. Governance also covers how stockholders are allowed to vote on important issues. Investors want assurances that companies avoid conflicts of interest in their choice of board members and don't use political contributions to obtain unduly favorable treatment. ESG investing is also referred to as sustainable (or responsible) investing, impact investing, or socially responsible investing. Sustainable investing incorporates ESG criteria in the investment decisions of investors in companies, organizations, or funds. These decisions are based on the investor’s real or perceived understanding of the environmental and/or social impacts that will result from their investments in parallel with the expected financial returns. The purpose of directing funds towards investments that are seen as sustainable is to generate measurable environmental and social impacts in addition to financial returns. Governments and regulators are obviously supportive of ESG criteria. It is for this reason that ESG investing was identified as an investment megatrend. The Covid-19 pandemic also proved to be a positive catalyst for many investment managers to place their money in the accelerating global trend in sustainable investment. This emerging, new normal investment strategy is gaining momentum and the use of ESG criteria is set to be the standard in sustainable investments. Aside from proposing new standards and frameworks against which investments should be measured using ESG criteria, institutional investors and fund managers have also created investment products that enable investors to put their money into products that meet their ESG performance requirements. ESG-based investments can offer quick returns. Investors, notably millennials who are the major beneficiaries of the largest intergenerational transfer of an estimated wealth of $30 trillion, have shown interests in putting their money in EGS. ESG in Mining Mining has never been regarded as a “green” or sustainable investment, and this stigma has been the main reason for the difficulty in financing large-scale operations. Investor appetite has gone beyond balance sheets and now dwells in the realm of addressing the urgent need to preserve resources for future use of the coming generations. To responsible investors, mining may not be on the top of the list when considering an investment based on their ESG criteria. Recently, ESG has provided the opportunity for the industry to address the sustainability challenges by laying down a comprehensive framework that stakeholders can use as metrics when considering their involvement in a mining project. Before risking capital in a project, investors are now looking to consider the ethics, competitive advantage and culture of a mining organization to determine how the company can balance profits and the benefits to the environment. Mining finance transactions have evolved in recent years to integrate ESG and sustainability considerations. Now, investors, lenders and other stakeholders in the financial industry look into the ESG credentials of mining companies and very few transactions are done without conducting a due diligence of of ESG issues. Failure to address these issues will ultimately reduce access to funding while good ESG equates to more and cheaper funding. Mining investors, shareholders, as well as financiers across the spectrum —export credit agencies, development finance institutions and commercial lenders — are making sure that borrowers have the appropriate ESG strategy in place for full implementation. Investors are no longer passive in their sustainability due diligence of mining projects and exerting efforts to obtain more information from other available sources in addition to mandatory disclosures made under existing regulations and codes. Aside from traditional environmental and social reporting covenants, enhanced ESG and sustainability reporting are becoming standard provisions in loan documentation. Some investors and lenders are requiring that borrowers comply with the lenders’ own internal ESG policy and sustainability reporting requirements. Some mining finance transactions may also require the appointment of a lender to take on an ESG or sustainability coordinator role for the project. One particular organization, the World Gold Council, is lobbying for insurance providers to become more involved in the ESG movement by requiring mining companies to uphold ESG principles in order to be eligible for insurance policies. In some large mining initial public offerings, investor roadshows have become venues for investors to grill companies of their ESG initiatives in relation to relevant laws and internal reporting. On the demand side, cautious buying of mineral commodities is now a reality, as socially-responsible customers want to be kept informed about ESG issues of the supplier. End-users not only look into to the ethical production of minerals but also to the supply chain as well. Stakeholders like government and financial regulators, ESG rating agencies, civil society and advocacy groups, employees, and host communities are increasingly demanding transparency and performance on ESG issues more than ever. ESG factors have also led to a rise in shareholder activism, where existing investors use their shareholding to influence the mining company’s ESG performance. Non-compliance with ESG regulations and best practices will result in activist shareholder protests and class action suits against the parent companies of global mining groups particularly those operating in developing countries where environmental laws and governance rules are not properly implemented. ESG Strategy, Mineral Reporting Standards, and Sustainability Reporting Frameworks As pressure mounts from capital markets and the public, investments with a well-defined ESG strategy are outperforming their peers in the market and experiencing lower levels of volatility. According to a review of companies listed in the S&P 500 undertaken in 2019 by NASDAQ, companies that received high sustainability ratings "exhibited both higher returns and less risk.” On the other hand, companies with poor ESG ratings "showed the opposite results.” It is thus imperative if not good business practice for mining companies to engage in the preparation and implementation of a clear ESG strategy that will help address investor concerns and promote additional investments. The strategy containing the company’s corporate values and ESG priorities must fully explain how the company complies with both mandatory and voluntary obligations set out in the ESG company policy. The ESG strategy must also outline the company’s management plans and how it will assist in meeting its key performance indicators in relation to its sustainability goals. Lenders are also prescribing ESG principles to companies for them to receive green loans and sustainability-linked investment facilities, and incentivize the borrower to meet predetermined sustainability targets. Examples of predetermined sustainability targets for mining companies are increased energy efficiency and improved working or social conditions. Foremost among the inevitable risks that come with poor ESG management record is the loss of the social license to operate. Dissatisfied government and host communities will post obstacles to mine start or expansion by imposing onerous taxation regimes and regulatory obstacles to erring companies. Examples of ESG management failure range from repeated environmental violations to outright mining disasters resulting from failed tailings disposal systems and environmental pollution. Violation of land access agreements with local governments, landowners, indigenous peoples, and artisanal miners often lead to cancellation of consents and expose the mining companies to additional civil and criminal liability. Human rights violations, militarization, and poor workplace health and safety conditions will lead to disruption to operations brought about by labor unrest and even heightened insurgency in the mine area. Wasteful utilization of water and energy resources will not only diminish the company’s bottom line but will cause civil unrest in the communities because wastage will disrupt their livelihood. On the other hand, a well-managed and transparent ESG compliance system will bolster strong relationship with the stakeholders, easy access to financing, good customer relationship, and better management of scarce resources and raw materials, which will enhance the profitability of the mine operations. Good labor, health, and safety practices and human resources development also minimize employment turnover and enhance company loyalty. There are so many benefits and opportunities for companies with a strong ESG track record that in the long term will enable the company to operate in other mineralized sites because of good social and political risk management. Even in national mineral reporting codes that set the minimum public reporting standards of exploration results, mineral resources, and mineral reserves, the inclusion of ESG reporting has been gaining traction. Investors rely on these reporting codes before they proceed with their investment decisions. Prepared for the purpose of informing potential investors and their advisors on the mineral assets of a reporting company, these reporting codes are now including ESG issues as important contributors to modifying factors which can influence the commercial declaration of mineral reserves. ESG criteria play an important role in determining whether the mineral resources can be capable of being extracted economically. The investors are looking for evidence of how companies integrate ESG considerations into their businesses and this evidence needs to impact all aspects of the business, including geological processes and mining activities. Sustainability reporting is largely undertaken voluntarily by companies, regardless of their listing status on a stock exchange. Investors obtain ESG information about companies directly through engagement with companies or via information generated by ESG ratings agencies. The increasing influence of these rating agencies has resulted in ESG becoming a key factor in raising funds from capital markets. Rating agencies base their ratings from aggregated information directly obtained from the mining companies and rely solely on their review of publicly available information. However, there remain some questions on the ratings given by these agencies because of transparency issues on what they do with the information obtained and how they generate the ratings. In response to the growing desire to report on their ESG performance, companies have developed a number of reporting frameworks, the objective of which is to provide guidance and metrics to companies who wish to disclose their sustainability performance. Some of the more commonly used frameworks include the Global Reporting Initiative, Sustainability Accounting Standards Board, Carbon Disclosures Project, and Task Force on Climate-related Financial Disclosures. Critics of sustainability reporting suggest that these reports have done little to improve the actual management of sustainability issues and instead are utilizing company resources that could be better spent managing sustainability issues on the ground. Gaps also remain between society's expectations of mining companies and their performance in respect of ESG issues. Companies need to be realistic about what they can deliver and build an ESG strategy that can manage stakeholders’ expectation. There is also a call by industry and investors to standardize sustainability reporting metrics. Conclusion To achieve a sustainable future, the global economy will rely to a great extent on resources and raw materials to be provided by the mining industry. To achieve this, companies need to take into account ESG and sustainability practices to attract risk capital and make mining projects bankable. The industry needs to apply ESG criteria from project inception to mine decommissioning, and throughout the supply chain to make its operations efficient, cleaner, and socially responsible. To preserve their license to operate and achieve sustainability, mining companies must also ensure that they have an ESG strategy in place to adhere to relevant laws, comply with regulatory codes, and satisfy all stakeholders. 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 Environmental, Social, and Governance (ESG) Criteria, 05 March 2021, https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp ESG Investing Will Speed-up the Energy Transition, 27 July 2021, https://foresightdk.com/esg-investing-will-speed-up-the-energy-transition/ Holman, Chris, ESG Investments in Mining, Azure Capital, 11 March 2021, https://apac.cib.natixis.com/m-a-pulse-in-apac-articles/focus-on/articles/esg-investments-in-mining Introduction to Environmental, Social and Governance (ESG) Considerations for the Mining Sector: Reporting Obligations and Investor Expectations, Baker Mckenzie, Sankaran, Aparna, ESG with a Heightened Focus on Environment and Social Issues, Emerges as the Top Risk/Opportunity for the Mining Sector, https://www.ey.com/en_gl/news/2021/10/esg-with-a-heightened-focus-on-environment-and-social-issues-emerges-as-the-top-risk-opportunity-for-the-mining-sector Steele-Schober, Teresa, The Importance of ESG for Mineral Reporting, http://www.scielo.org.za/scielo.php?script=sci_arttext&pid=S2225-62532021000600003 Taking ESG Seriously: The Crucial Role of Mining investors in the Energy Transition, White and Case, https://www.jdsupra.com/legalnews/taking-esg-seriously-the-crucial-role-2066231/ Walker, David, ESG Insights: What does ESG mean for the Mining industry? https://www.slrconsulting.com/news-and-insights/insights/esg-insights-what-does-esg-mean-mining-industry


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Mining

Philippine Resources - December 01, 2021

A grand slam in responsible mining

Photo credit: Hinatuan Mining A grand slam win for a mining company simply means being the best in class in its responsible conduct of business; in its forest management and environment enhancement and protection; its social responsibility programs and in providing safety in the workplace and the communities. Hinatuan Mining Corp. (HMC), a subsidiary of Nickel Asia Corp. (NAC) sweeps major honors this year from the country’s most prestigious award-giving body in the mining industry – the Presidential Mineral Industry Environmental Award (PMIEA). “It’s our first time and it’s a grand slam! We still can’t believe it but that these awards were accorded to us during this most difficult time of the pandemic, makes this moment doubly exulting, everyone was emotional when the news first broke, this is the reason for our existence, says Engr. Francis Arañes, HMC’s Resident Mine Manager. HMC, with operations in Hinatuan Island, Tagana-an, Surigao del Norte, takes home the Presidential award for surface mining operations; the Best Mining Forest in the Metallic category; the winner of the Safest Surface Mining Operations; and the winner of the Safest Mining Operation; plus, the individual awards of Best Surface Safety Inspector and Best Surface Miner accorded to HMC’s employees, Aldrin L. Resullar and Jennifer Q. Inting, respectively. The PMIEA is the highest accolade awarded to a mining company.  The evaluation and assessment for this year’s awardees encountered extra challenges with the threats of COVID-19 in the backdrop where movements were limited, the economy threatened, operations delayed, and bringing services to the communities were among the biggest challenge to the company’s community workers. HMC had set its eyes on these awards for years. The company remains steadfast, focusing on specific goals that the award giving body monitors and measures, such as the actual number of hectares to be rehabilitated as mandated by the Mines and Geosciences Bureau (MGB), even going outside of their areas of responsibility in supporting the Philippine National Greening Program (NGP); building a robust forest within the mine site, highlighting eco-tourism programs; setting up its host and neighboring communities to sustainable economic development programs; among other things.  And to ensure that compliance is above and beyond its mandate, HMC underscores the efficiency of reporting, of transparency, giving importance to its Information, Education and Communication (IEC) programs. “The bar in honoring mining companies has been set even higher, what with the added focus on the principles of ESG – Environment, Social and Governance – in the midst of ongoing debates about climate change,” says Engr. Aloysius C. Diaz, NAC SVP and Head of Production. Diaz says the miners, HMC in particular, are now even more cognizant of peer reviews because the world has become more critical in holding the industry accountable for a greener, healthier, and safer future. PMIEA evaluates all facets of a mining company’s responsible and sustainable business practices, keenly focusing on environmental protection and management; and ensuring the health and safety of employees and the total wellbeing of the people in the communities that they serve. The Hinatuan mine site, also known as the “Tagana-an Nickel Project”, is located in Hinatuan Island, Barangay Talavera, municipality of Tagana-an, province of Surigao del Norte. Its area of operations is within the Surigao Mineral Reservation.

Industry

Philippine Resources - December 01, 2021

Nuclear, solar eyed as alternatives to PH energy mix

Photo: Bataan nuclear power plant Senator Sherwin Gatchalian is considering nuclear and solar energy as a possible alternative or additional sources of energy in the country. Gatchalian, Senate energy committee chairman, said he favors “in principle” smaller nuclear reactors instead of the bigger ones for flexibility and safety. “Small ones are more flexible and safer. Safer in the sense that it is smaller, deployable, and has the technology that can use nuclear wastes. Of course, it is still in the development stage,” he said in a radio interview on Monday. He said small nuclear reactors can produce energy from 10 to 150 megawatts. Gatchalian, however, does not consider reviving the Bataan nuclear power plant as it will be too risky and too costly to rehabilitate the facility. He said many are also using solar energy with some big companies putting up solar power plants. “I believe it could be part of the energy transition because nuclear is emission-free but the risk is where to put the wastes and if it encounters a problem, the cost is too high. Solar deployment is still a challenge because it is still quite expensive,” he added. Gatchalian said he will file a bill on energy transition following the Department of Energy’s (DOE) move last year banning new coal power plants to accelerate the country’s shift to cleaner energy. “We cannot hasten the energy transition because we will have no source of energy… The energy transition can be 10 years or longer but the important thing is it’s a scientific process to determine how we can transition out of fossil fuel into renewable safely, reliably, and securely,” he said. He added that right now, the country’s energy needs are still good with fossil fuel but it is imperative to jumpstart the transition due to the increasing population and industries. Gatchalian was here on Sunday to turn over his donation of 5,000 sets of personal protective equipment and 50 sacks of slippers to the Region 1 Medical Center. By Hilda Austria   Article courtesy of the Philippine News Agency 

Industry

Philippine Resources - December 01, 2021

Gas drilling in Recto Bank should push through: Pimentel

Photo credit: Inkl The chair of the House Strategic Intelligence Committee on Tuesday said oil drilling activities in Recto Bank must proceed as scheduled amid rising tensions with China. Surigao del Sur Rep. Johnny Pimentel said the Sampaguita gas field could yield up to USD18.2 billion, or around PHP910 billion, in future royalties for the government, based on a 60 percent net share. “We have no choice but to carry on with the drilling activities because the Sampaguita gas discovery in Recto Bank has the potential to energize the entire national grid – not just Luzon – for the next 20 to 30 years,” Pimentel said. Pimentel said Sampaguita is “an untapped value-changing asset” that would be valuable to the country’s future energy security with up to 4.6 trillion cubic feet of gas, while Malampaya, which has been producing gas for the last 20 years, has only 1.6 trillion cubic feet of residual gas at best. “There is even one study suggesting that the entire Recto Bank has up to 20 trillion cubic feet of potential gas in place,” Pimentel said. The Permanent Court of Arbitration in the Hague ruled in July 2016 that Recto Bank is within the Philippines’ exclusive economic zone, as defined under the 1982 United Nations Convention on the Law of Sea. By virtue of the ruling, Pimentel said the Philippines enjoys absolute rights to exploit all resources in the seamount.   Article courtesy of the Philippine News Agency

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