Mining Trends 2022: Will the Outlook Remain Positive?
by Fernando Penarroyo - March 10, 2022
Photo credit: Economic Times
Last year saw miners experiencing record profitability and revenue. While the industry continues to benefit from relative high metal prices and opportunities from the clean energy transition and digital transformation, there are identified risks arising from COVID-19's resurgence and disruptions, potential for weaker-than-expected global economic growth, government intervention, and community opposition. Meanwhile compliance with environment, social and governance (“ESG”) standards will obligate mining companies to protect the environment, contribute to community development, and behave ethically.
On the local front, Department of Environment and Natural Resources (“DENR”) Secretary Roy Cimatu lifted the four year-old ban on the open-pit method of mining for copper, gold, silver, and complex ores. Enforced in 2017, the ban was one of the high-impact measures taken by the late DENR Secretary Regina Lopez. The former DENR secretary also ordered the closure of 26 mines. However, with the completion of the Mining Industry Coordinating Council audit which started in 2019, only 3 out of the 26 mines were deemed unsafe and the other closures were reversed.
The Chamber of Mines of the Philippines deplored the lost opportunities in the mining sector in the last decade. The chamber believed that the industry has been unjustly scrutinized and subjected to unfair publicity, which cost billions in lost revenue. Foreign direct investment (“FDI”) will remain stagnant for the industry unless regulations are eased and barriers are lowered. The ban also delayed FDIs in open pit mining projects like Sagittarius Mines Inc.’s $5.9-billion Tampakan copper project in South Cotabato and St. Augustine Gold and Copper Ltd.’s $2-billion King-king copper-gold project in Compostela Valley.
The lifting of the ban according to the DENR order, is meant to “revitalize the mining industry and usher in significant economic benefits to the country by providing raw materials for the construction and development of other industries and by increasing employment opportunities in rural areas.” With the lifting of the ban, the Department of Finance said the mining industry can become a key contributor to the nation’s economic recovery per DENR’s projection that open-pit mining will lead to the immediate development of 11 pending projects. These projects are expected to generate about PHP11 billion combined in yearly government revenue, increase annual exports by PHP36 billion, and provide employment to 22,880 people living in remote municipalities.
Economists see the Philippine economy’s continuing rebound this year after registering a 5.6 percent GDP growth in 2021. However, the outlook is threatened by the emergence of new COVID-19 variants and how the government handles them. Based on the World Bank’s Global Economic Prospects, despite the spike in infections from the omicron variant, the Philippines is poised to register the fastest growth in ASEAN this year and the second highest growth in 2023. According to the World Bank, the projected economic growth rate of 5.9 percent for 2022 will be the fastest growth expected in ASEAN, while the 5.7 percent expected next year will be second only to Vietnam’s 6.5 percent.
ESG will dictate investments in mining
Miners are under increasing pressure to integrate ESG into corporate strategies, investment decisions, and stakeholder reporting. Demands from shareholders, financial institutions, local communities, national governments, customers, and the sector’s own workforce are requiring miners to adhere to ESG standards. Sustainability in mining means minimizing the consumption of resources, reducing the use of energy through new technologies, and the use of alternative energies. Mining operations must utilize cost-effective and environmentally sound extraction alternatives, and efficient biodiversity and water management.
Green transition leads to a low-carbon economy
The green transition will accelerate amidst global pressures to reduce carbon footprints. At the latest UN Climate Change Conference (COP26) summit, many mining countries pledged to bring down their methane emissions. The rise in sustainable finance and tighter ESG criteria set by financial institutions on mining projects have led to an upcoming rise in GHG emission costs due to carbon pricing. Reducing emissions will require companies to invest in renewables to energize operations and advanced technologies in their decarbonization efforts. Renewable energy technologies, green buildings, electric vehicles, solar panels, wind turbines and battery storage will rely to a great extent on minerals and metals.
Project developers and governments are moving away from investments in thermal coal. Major mining companies, driven by ESG targets, will remove thermal coal projects from their portfolios and coal mining will be dominated by small-cap, pure-play and state-owned mining companies. Coal projects will be mostly self-funded, private equity-funded or state-funded as international banks reduce their financing of coal assets.
Miners will have to contend with license to operate (LTO)
Miners are under intense scrutiny on how they contribute to the social and economic well-being of local and national governments, engage with host communities and indigenous peoples, and protect water resources and heritage sites. Needless to say, LTO is also linked to a company’s ability to access capital and financing. While metals are a critical input for green transition technology, the mining sector’s social license to operate is contending against the rising public opposition to mines arising from environmental pollution and loss of diversity. The difficulty in acquiring LTO could lead to a slow-down in new project development.
New COVID-19 variants will be a game changer
Hopefully, COVID-19-linked operational disruption will ease with increased vaccinations. However, new wave of restrictions with the omicron variant or subsequent waves will be a challenging environment for mining operations in 2022 and will cause a setback in economic recovery. Lockdowns not only hamper mine site operations but also slow down the movement of products and services in the supply chain, and affect consumption of goods. The COVID-19 pandemic resulted in the increase of costs of inputs, shipping, talent and decarbonization programs. COVID-19 has challenged the deployment of investments in 2020 and to some extent in 2021. Hopefully with the roll out of vaccines especially in emerging economies, COVID-19-related operational disruptions will most likely ease in 2022, helping exploration, construction and mine works to pick up.
Mineral demand will continue to grow but metal prices to weaken
Global demand for minerals and metals especially arising from the green transition, will continue to grow despite slowing growth in 2022. The outlook for auto manufacturing, machinery, appliances, and consumer electronics sectors is positive. Households with huge savings realized during the pandemic are eager to go into revenge spending. All eyes will be on China’s property development sector woes which will put a cap on overall metal demand in 2022. Evergrande’s financial difficulties and a general slowdown in Chinese construction activity will put pressure on ferrous metal prices. Meanwhile, investments in infrastructure is expected to remain relatively stable.
Fitch Solutions forecast that most metal prices to average lower in 2022 but will remain high compared with 2016-2020 averages. Looking at 2022, slowing economic growth, slow normalization in fiscal and monetary policy, and China's property sector woes will push metal prices lower in 2022. However, prices will still average at elevated levels, higher than pre-COVID-19 levels as the market balance for most metals remain extremely tight and stocks are historically low. Existing deposits that are known or held by the majors are being depleted and new ones will be required. Investments in mines and oilfields have dropped sharply over the past five years. The result is “greenflation” in commodity prices, which have had their biggest yearly increase since 1973.
Access to Capital will be a challenge amidst upward trend in global exploration budget
Access to capital for new projects or expansions will continue to be a challenge for the industry, as investors are deterred by risks associated with ESG, LTO, resource nationalism and geopolitics. Higher ESG ratings can enable access to a larger pool of attractively priced capital. Still, elevated metal prices coupled with an increase in production across commodities in 2022 will help mining and metal companies' financial performance to remain strong next year amidst the acceleration of the green transition and opening up of new business opportunities. However, strict ESG requirements will make development of new projects potentially more difficult.
Meanwhile, a report by S&P Global Market Intelligence notes that the aggregate annual global exploration budget is expected to increase between 5% and 15% year over year for 2022. According to S&P, a faster-than-expected recovery in market conditions and easing of lockdowns allowed explorers to reactivate programs by mid-2020, which caused some campaigns to carry over into 2021.
Government intervention intensifies In 2022
Because of the economic and fiscal hardships, and rising social inequality during the pandemic while mining companies are benefitting from elevated metal prices, government intervention in the sector will remain firmly in play in 2022 posing additional risks to mining projects. Companies will be subjected to resource nationalism in the form of increased taxes and royalties, policies to boost domestic beneficiation, and the renegotiation of contracts to get better terms for the governments. Governments are also developing investment plans to boost their own production or secure minerals that will be key to the green and digital transitions. Thus, miners will also need to contend with trade wars, geopolitics of the COVID-19 pandemic, and changing governments or policies aimed at protecting strategic resources and increasing “self-sufficiency” in critical products like fossil fuels and rare earths.
Automation, digitalization, and electrification to address productivity, safety, and ESG priorities
The mine of the future will be less visible and smaller, use less water and energy, less polluting, more productive, and extract minerals more efficiently due to the application of new technologies. Incorporation of new technologies in mining is critical for companies to modernize their operations and meet increasingly stringent environmental and sustainability goals, while remaining competitive and relevant.
The automation, digitalization and electrification of mining operations has the potential to increase mine productivity, daily operational capacity, sustainable use of non-renewable resources, operational safety, and productive lifespans of mines. The transition to off-grid mining and battery storage, together with the use of renewable energy to power operations are expected to bring advantages not only in terms of CO2 emissions reduction, but also in terms of helping industry-related companies manage costs. Electrification of mines have the potential to incur lower expenses due to minimal maintenance requirements leading to a reduction of operational downtime. Operational downtime is common among diesel-powered machinery due to the extensive maintenance required for their internal mechanisms that are prone to breakdown.
While automation and electrification will result in a decrease of operational input costs, digitization produces predictable data. Data management also converts data into decision-making information. Digital innovation also allows diversification into greener products and improve transparency of reporting. These innovations include artificial intelligence, big data and satellite imagery. However, digitalization also exposes companies to cyber threats and hacking. Technical advances have also been made in waterless processing and waste disposal, and biogenic processes.
Technological change in mining will require a workforce with new skills in roles that would be familiar with new technology. There will be a shift in the skills profile for future workers who will need to manage and engage the electric and digital transformation in the industry. A reevaluation of current skills sets will need to be considered as the future mining workforce is likely to change, which will be driven primarily by the adoption of new technologies.
Opportune time for new business and operational models
Miners now operate in a more volatile environment because of ESG and technology disruptions. They should adopt new business and operational models that will deliver greater returns directly to host communities and governments, minimize waste, reduce emissions, bring more value to investors, and gain low-risk access to capital.
Mining and metal players need to accelerate their efforts to benefit from the new opportunities brought about by the green transition. These involve more exposure in energy transition materials and spinning off higher growth businesses linked to the green transition to unlock value. Miners also have opportunities to invest in product differentiation to benefit from green price premiums on lower-carbon products. Product differentiation based on green/ESG credentials and assorted price premiums will make some metals more of a specialized product sector and less of a bulk commodity material.
Disruptions open the industry to new risks and volatility. The local industry needs to adapt to these disruptions in light of the possibility of a more severe COVID variant and the political uncertainty in the conduct of the coming elections. The lifting of the open pit mining ban was a step in the right direction. However, the incoming government’s stand on mining will determine if the industry will be able to take advantage of the increasing global demand for minerals and metals or miss out on the boat again.
Fernando “Ronnie” S. Penarroyo specializes in Energy and Resources Law, Project Finance and Business Development. He may be contacted at email@example.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
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Fernando Penarroyo - August 31, 2021
A Shot in the Arm for Philippine Mining
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. 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 firstname.lastname@example.org 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
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 email@example.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
Fernando Penarroyo - June 28, 2022
My Tampakan Experience
President Rodrigo R. Duterte issued an order last year that lifted the ban on open-pit mining imposed in 2017. The lifting of the ban would have allowed the $5.9-billion Tampakan copper-gold mine project to proceed, the largest untapped copper-gold deposit in Southeast Asia and one of the world’s biggest. Sagittarius Mines, Inc. holds the Financial and Technical Assistance Agreement (“FTAA”) to operate at the site, which reportedly has a potential of 15 million tons of copper and 17.6 million ounces of gold. The Tampakan copper-gold project was again recently placed in the limelight when Governor Tamayo of South Cotabato vetoed a provincial board resolution lifting the ban on open-pit mining in the province. The governor said he vetoed the lifting of the ban on open-pit mining for being prejudicial to the public welfare and inimical to the overall interest of the province. To add to the confusion, the governor stressed that this however, did not affect the operation of the stalled Tampakan copper-gold project stating that the ordinance was limited to the scope of the local government’s authority and covered small-scale mining. The ordinance, according to the governor, has nothing to do with whatever the national government decides on large-scale mining. However, Tamayo appealed to the provincial board not to override the veto and allow the incoming Sanggunian to conduct its review of the province’s Ordinance No. 4 Series of 2010 otherwise known as the “South Cotabato Environment Code”. Tamayo’s move was met with jubilation by environmental, religious, and other groups opposed to the Tampakan project. These developments brought back memories of my time as lawyer for the project operated by the original FTAA holder. Entry of Western Mining Corporation Western Mining Corporation (“WMC”) arrived in 1987 and during the next ten years evaluated many exploration sites. In 1990, Gerry Palermo, a Davao-based businessman who headed a group of mining claims held by members of the Visayan community in South Cotabato, introduced the prospect to WMC. In a contract denominated as "Tampakan Option Agreement" dated 25 April 1991, WMC Resources International Pty. Ltd. (WMC), a wholly owned subsidiary of Western Mining Corporation Holdings Limited, a publicly listed major Australian mining and exploration company, through its local subsidiary Western Mining Corporation (Philippines), Inc. (“WMCP”) acquired the mining claims of Southcot Mining Corporation, Tampakan Mining Corporation, and Sagittarius Mines, Inc. Geophysical and geochemical surveys were completed in 1992 and the results identified a target for exploration drilling in 1993. The Philippine government awarded to WMCP an FTAA on 30 March 1995, a month before the Mining Act of 1995 went into effect on April 30 and before the Indigenous Peoples Rights Act (“IPRA”) was passed into law in 1997. The original FTAA covered 99,3876 hectares in the quad-boundary of South Cotabato, Sultan Kudarat, Davao del Sur and North Cotabato. In early 1998, WMCP announced a large tonnage, low-grade mineral resource of 900 million tons at 0.75 percent copper and 0.30 gram per ton gold using a copper cut-off grade of .50 percent. In 1997, the La Bugal-B’laan Tribal Association of Columbio, Sultan Kudarat challenged the constitutionality of the Mining Act, asserting that its provisions regarding 100% foreign ownership of companies engaged in mining as well as other provisions of the said law went against the 1987 Philippine Constitution. In 27 January 2004, the Supreme Court (“SC”) declared the Mining Act unconstitutional, thereby voiding the FTAA issued to WMCP. However, the SC overturned its own decision in December of the same year. Principal Agreements with Stakeholders In accordance with the terms of its FTAA, WMCP sought agreements with the three provinces - South Cotabato, Sultan Kudarat, and Davao del Sur - and their respective municipalities - Tampakan, Columbio, and Kiblawan, as well as five Barangay Councils - Pula Bato, Danlag and Tablu in Tampakan, Datal Blao in Columbio, and Kimlawis in Kiblawan. The five barangays are also home to B’laan communities which occupy the more remote upland areas where actual mining was to take place. These are Bong Mal, Folu Bato, Danlag, Salna’ong and S’banken. The B’laans are one of 18 indigenous groups living in Mindanao, who are largely concentrated in the provinces of South Cotabato, Davao del Sur and Sultan Kudarat. Most of them are still engaged in subsistence farming, with corn and rice being the main produce. Originally, the B’laans lived on the fertile plains but were forced to move to the mountains when the government started bringing in majority Cebuanos and Ilonggos from the Visayas during the early 1900’s. Prior to the arrival of WMCP, traditional ownership of land at the site of the proposed mine site was not recognized by the government. B’laans occupied public or forest lands, which were non alienable and under the jurisdiction of the Department of Environment and Natural Resources (“DENR”). In 1993, DENR Administrative Order No. 2 established procedures for the issuance of Certificates of Ancestral Domain Claims (“CADC”) which recognized indigenous peoples’ claim based on traditional association to land, and recognition of their right of occupation and land-use management. In November 1997, IPRA was passed and the National Commission on Indigenous Peoples (“NCIP”) was created. WMCP supported a non-government organization and hired anthropologists and sociologists to convince the B’laans to apply for CADCs and establish formal tribal councils. These were done so that the company could have legal entities to negotiate agreements with, in relation to legally delineated land areas over which these IPs had legally recognized claims. WMCP collected the necessary data and sponsored the five B’laan communities in their applications for CADCs with the DENR. The research presented in the CADCs focused on three tasks - identification of stakeholders, delimitation of their occupancy, and estimation of the time they and their ancestors have been resident there. Initially, WMCP obtained Heads of Agreement with B’laan leaders and sought stronger and more representative organizations for Principal Agreements. WMCP stated that the Heads of Agreement and successive Principal Agreements were drawn up in accordance with the traditional Kasfala negotiation and more binding Diandi blood compact as per B’laan traditions. The agreements were negotiated, signed, and implemented in accordance with an Execution Protocol, guidelines based on Australian resource companies’ experiences in dealing with native aboriginal communities. Professor Michael Crommelin, who was a former Dean of the University of Melbourne Law School, assisted in the preparation of the Execution Protocol. He teaches several courses on Constitutional Law, Mineral and Petroleum Law, and Resources Joint Ventures. Managing Conflicts Between Indigenous B’laans and Visayan Settlers WMCP like any other foreign companies was subjected to the local socio-political dynamics of conflict and accommodation in the area where it operated. This was particularly true in how the company cautiously threaded the ethnic division between the indigenous B’laans and the Visayan settler communities. While they were ethnically different, they were of a generally uniform economic profile - that is tenant farmers. Local animosity between B’laans and Visayans was found to have historical and ethnic roots. Visayan prejudice stemmed from their settlement of this frontier region since the 1930s, and they generally viewed B’laans as primitive and pagan. On the other hand, B’laans regarded Visayans with fear as land grabbers and felt discriminated when it came to economic opportunities. With the entry of WMCP to the area, increased in-migration to traditional B’laan land by Visayan settlers, as a result of anticipated employment opportunities and real estate speculation, was exacerbating challenges facing the company and host communities. Although ancestral land which has not yet been titled was non-alienable, “rights” were being purchased by Visayans from B’laans. The presence of the company led a renewed interest in land within the proposed mining area in order for the speculators to benefit from the mining company’s compensation packages and economic opportunities. The question of landownership and the problem of land disputes became an issue of importance and concern for the company. Moreover, the award of communal title to indigenous people clashed with the aspirations of other groups who were invariably present within the ancestral lands. Those of Visayan origin felt discriminated against because they were not getting as much attention from the company as the indigenous B’laan communities. Portions of the ancestral land were shared with Visayan settlers who bitterly opposed the issuance of CADCs. The communal claims to ancestral land conflicted with the interests of Visayan settlers, who having acquired titles in some areas, had also legitimate legal claims. In December 1996, Visayan residents of Tampakan barricaded roads leading to the proposed mine site in opposition to the scheduled signing of the B’laan Principal Agreements, compelling the company to expedite the negotiation of land access agreements with the Visayan settlers and local governments. My Personal Insights What was my role in all of these? I was a new lawyer then and had the opportunity to watch all these events unfold during my early legal career. I joined WMCP in 1996, almost straight out of law school and after my stint as a petroleum geologist working at the Department of Energy (“DOE”). I was headhunted by the company who was then looking for an understudy for its Australian legal manager. As a working student balancing my time as a geologist and studying law at night in the University of the Philippines, I didn’t have much experience in mining or mining laws. At that time, the Mining Act just became law and the Marcopper accident in Marinduque was a hot news item. I believe that in my final WMCP interview, what convinced the panel was my experience and knowledge in negotiating petroleum service contracts which was part of my job at the DOE. WMCP’s FTAA and service contracts have a lot in common since both have the same constitutional basis allowing 100% foreign ownership of companies engaged in the exploration, development, and utilization of natural resources. Upon my acceptance to the company, I have to hit the ground running. There were ongoing public consultations on the Mining Act’s implementing rules and regulations following public clamor and anger from the Marcopper accident. I also needed to study the nuances not only of mining law but also laws relating to forestry, indigenous people’s right, environment, and local government. As part of my preparation to eventually handle the responsibility of heading the local legal department, the company seconded me to work in its various business units in Australia in 1997. I worked at the corporate offices in Perth, Brisbane, and Melbourne on Australian mining projects with both WMC and its construction contractors. I also had a stint in an Australian law firm, which had a very advanced practice group in resources, construction, and native title law. For my mine exposure trips, I drove alone in outback roads and visited WMC mine sites at far-flung locations. I even visited some aboriginal communities to witness the company’s corporate social responsibility activities. My life as a Filipino expat lawyer in Australia was both rewarding and enriching. Returning from my Australian secondment, the first order of the day was to work on securing all the land access agreements in preparation for the mine development area. This entailed spending my time not in the comforts of our spacious Makati office but in the highlands of Tampakan for immersion with the communities, both Visayan and B’laan. I was basically living and breaking bread with farmers, politicians, and traditional strongmen in the communities. The areas which I visited were especially notorious for kidnappings by armed bandit groups where Islamic and communist insurgents also operated. It was wild, wild west in that part of Mindanao during that time but was certainly an eyeopener as I was exposed to extreme poverty in the uplands especially that of the IPs. I visited all the local government units which have jurisdictions on the proposed mine development area. I conferred with Visayan settler, indigenous, and Muslim communities. One couldn't imagine the volume of native and instant coffee I have taken in my numerous consultations. It would be the height of disrespect to decline whatever the households and offices could humbly offer to me especially someone from a place they derisively called “Imperial Manila”. The more consultations I conducted in a day, the more cups of “sweetened” coffee I was expected to partake. WMCP offered an option to develop the communities but the project has to gain social acceptability. It was also the company’s responsibility to prepare the marginalized communities and local governments for the anticipated surge in economic activity with the proposed mine development. Our objective was to put the agreements into place. However, the company had to act pragmatically in managing its own corporate strategy and balance it with the interests of the Visayan local government, the requirements of the national government, and B’laan traditions. We started with the agreements with the B’laans because they will be the first to be affected since the mine site is within their ancestral domain. This is the reason why in our discussions with the communities, we have to follow a strict and tenacious Execution Protocol. There would be no shortcuts to obtain the consent of the IP communities who were at a relative disadvantaged compared to the company. The Execution Protocol met with some hesitance even within the company. It was my responsibility that the community relations and corporate affairs departments strictly adhered to the protocol and WMC’s Code of Conduct. Their job was to get the principal agreements signed but my job goes beyond the signing of the agreements - the process should strictly adhere to the guidelines of getting the free and informed prior consent of the communities. WMC, the mother company, then was a relatively large listed resources company in Australia with global operations. All eyes were on the company because of the sensitive issue of working in a remote developing country with native title, environmental, and social acceptability issues. In fact, WMCP’s Execution Protocol had a heavy influenced in the NCIP’s administrative orders in obtaining free and prior informed consent from IPs. The company did its best to get its message across to the host communities. For the Visayan settlers, there was relative ease in our consultations because of their level of education. It was a different story with the B’laan IP communities. We have to bring in local B’laan interpreters and translate the main points of the agreement to the local vernacular. Although the final signed agreement were written in English, all the consultations were done at the communities and in the presence of NCIP officials. The company was accused of “wining and dining” the leaders of the IP communities and bribery through its community development and scholarship initiatives, coming especially from the Social Action Center of the Diocese of Marbel. As far as I am concerned, I have not witnessed those occurences. The company even played hosts to numerous international human rights and legislative fact-finding missions. Everyone was invited to visit and see for themselves the numerous activities being done by the company. What I do know was that local B’laans in the area have not been comfortable civil society groups as well. In fact the La Bugal B’laan group which was the petitioner in the FTAA constitutional challenge was not based within the mine development area. It was based in the Poblacion of Columbio Sultan Kudarat, which was the least affected area if the mine operated. WMCP was also accused of employing goons. All evil schemes, shenanigans, and machinations were by default, attributed by civil society groups to WMCP. There was one instance where I have to personally appear on behalf of the company for an NBI investigation conducted in Cotabato City in relation to the assassination of a town mayor in Sultan Kudarat. The case against the company obviously did not prosper but one has to imagine the immense hostility and black propaganda against the company by certain sectors. We were free to roam in the FTAA area even traveling to areas called “no man’s land” where lose and unlicensed firearms proliferated in the hinterlands. Despite the banditry and insurgency, we did so without any armed bodyguards. When I travelled to the communities, I was only accompanied by a company driver or fellow employee. I didn’t experience any form of harassment but the company was fully aware of my destination and schedule. Except for the occasional barricades brought about by personal grievances against the company, there were no instances of burning of company properties or killing of employees and contractors during my time working with WMCP. Most of the barricades were related to unsettled crop damages, labor issues or petty misunderstandings with company employees and contractors. The company had to balance the employment opportunities among the locals so it has to implement a rotational labor hiring among the locals. With the signing of four out of five Principal Agreements with the IP communities, the next task was to create the B’laan foundations to manage the funds intended for the communities. Because of the veto power of the company and the government representatives from NCIP and Mines and Geosciences Bureau, the tribal council representatives in the B’laan foundations were understandably weak. Even some of the B’laans were ambivalent to the tribal council system. At that time, the tribal councils have had little influence, and the local government units tended to ignore them. This was perhaps the reason why there was intense criticism on the government-sponsored tribal council system insofar as it was susceptible to manipulation. In 1999, there was already uneasiness among WMCP’s employees and stakeholders because operations were being scaled down. In anticipation of the company’s eventual withdrawal from the Philippines, retrenchments of employees and budget cuts were becoming common. Some permanent employees including myself were given the pink slip and made contractual employees. This was when I decided to accept a scholarship to pursue graduate law studies in Australia. I initially had misgivings in accepting the offer because at that time in 2000, I had a young family and taken a loan to finance our first home. Going to graduate school would cause a dent to our financial situation since I would be out of work for eighteen months and my family had to rely on my wife’s income. My boss in WMCP talked me into accepting the offer because he explained that it would benefit my career in the long term. WMC also supported me in a small way in my law graduate studies at the University of Melbourne. Our head office in Melbourne would give me occasional part time work to augment my meager scholarship allowance. In 2001, WMCP which had invested $39 million for exploration and support activities in its Tampakan project decided to pull out of the country. Following an evaluation of the mineral resources of its mining site in Tampakan, the company decided that it would not be able to meet a rate of return on investment acceptable to WMC. WMCP said it also took into account the continuing drop in the price of copper in the world market at that time. WMC sold its rights and interests to Sagittarius Mines, Inc. The sale and transfer of its mining rights paved the way for WMC’s complete pull-out from the Philippines. When I came back from my law studies, the task waiting for me was winding up the company’s business and financial accounts. The companies’ properties - lock, stock, and barrel, were turned over to the FTAA assignee. As a gesture of courtesy, WMCP personally delivered letters to the LGUs, tribal councils, and stakeholders informing them of the company’s withdrawal from the project. It was also an opportunity to introduce the new company taking over the project to the communities. After everything was set into place, I was the last employee of WMCP - the person who turned off the office lights. My Tampakan experience provided me with fond memories of times with co-workers who eventually became good friends, sharing fresh bounties from the Mindanao seas and sweet produce from the volcanic enriched soil of Mt. Matutum. I recall road stops for breakfast of durian, marang, mangosteens, and pomelos in North Cotabato; and lunch of native chicken inasal in Tupi, ubiquitous tuna and blue marlin kinilaw, premium cuts of locally-fattened Australian cattle, mudfish inihaw from Liguasan Marsh, and fat mud crabs from Cotabato City. Our friendship continues to the present especially with social media as the nexus and facilitator. Colleagues became executives of mining companies both locally and internationally, and some were retained by the present project management. Some B’laan groups continue to consult me on several occasions and I tend to believe that they do so because they were convinced of WMCP’s sincere relationship with them when the company operated in the area. After many years since the FTAA was signed in 1995 and with the South Cotabato governor’s pronouncements over his veto, there still remains a big question mark on the final outcome of the Tampakan project. Time is certainly running out for this flagship mining project. As someone who was a part of the Tampakan experience, I can only hope that with the huge amount of financial resources and human capital poured into this project, we will eventually see a favorable outcome to this much anticipated mining project. Fernando “Ronnie” S. Penarroyo specializes in Energy and Resources Law, Project Finance and Business Development. He may be contacted at firstname.lastname@example.org 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 Reference: Smith, John Willem, The Challenge of Sustainable Local Development at the Site off the Tampakan Copper Project in the Philippines, UMI Dissertation Publishing, 2014, http://etheses.lse.ac.uk/1911/1/U215519.pdf
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Philippine Resources - May 23, 2023
MEMORANDUM OF AGREEMENT SIGNED WITH TVI RESOURCE DEVELOPMENT (PHILS.) INC.
Photo credit: TVI Resource Development The Board of RTG Mining Inc. is pleased to announce that a comprehensive settlement of all outstanding issues with the Villar Family controlled Sage Capital and TVI Resource Development (Phils.) Inc. (“TVIRD”) has been reached and a binding Memorandum of Agreement signed. On execution of the final documents, expected in the next month, all litigation that RTG had launched will be withdrawn as part of an agreed restructuring of the Mabilo Project. The Villar Family is one of the most prominent families in the Philippines and RTG is pleased to partner with them in the development of the Mabilo Project, which is a significant mining project for the country. The key terms of the agreement for RTG include the following: RTG (through SRM Gold Limited) will retain a 40% interest in Mt. Labo Exploration and Development Corporation (“Mt. Labo”) with the project also developed by Mt. Labo, in line with Philippine regulatory requirements, with Sage Capital (which is owned by TVIRD) holding the remaining 60%; RTG will have a 2% net smelter royalty (“NSR”); RTG’s debt together with interest, currently in the order of US$27M (subject to audit) will be repaid out of the proceeds of Stage 1 of the project, the Direct Shipping Operation subject to customary requirements to address liquidity and ongoing operations of Mt. Labo; Funding arrangements for the project as between the major shareholders of Mt. Labo have been successfully renegotiated, (relieving RTG of a sole funding obligation) and replaced with a pro-rata funding obligation, together with a disproportionate funding obligation of Sage Capital, as set out below; With debt repayments in full and the NSR, RTG will be entitled to approximately 57% of the proceeds of Stage 1, the Direct Shipping Operation; RTG will be entitled to 40% of the operating cashflow of the project, together with the 2% NSR and repayment of its debt, which is currently in the order of US$27M; The first US$5M of expenditure for Mt. Labo (or 12 months of expenditure, whichever occurs the earlier), will be funded pro-rata between the two shareholders (ie RTG will provide 40%) and thereafter, Sage Capital/TVIRD will sole fund the next US$5M of expenditure, with all additional funding thereafter to be provided on a pro-rata basis; All parties are required to act in the best interests of the project and not compete; A shareholders’ agreement will be finalised which will provide typical minority interest protection clauses including reserve matters for voting including annual budgets and appointments of key personnel; Any disputes will be resolved by the Singapore International Arbitration Centre; and On completion of final signed documents, all litigation matters will be withdrawn and settled in full. With the restructuring of the Mabilo Project now agreed, over the balance of this year, the remaining permitting matters and financing plans will be finalised, a review of the 2016 Feasibility Study will be completed, together with finalising the acquisition of surface rights, following which, a commitment to development will be formalised by the Board of Mt. Labo. RTG is pleased with the outcome of the discussions and the co-operative and constructive approach adopted by the Villar Family representatives. RTG believes they can be a strong and positive partner to work with to take the Mabilo Project forward, with both a near term development and future exploration activities to expand the project, which will start to unlock the value of the project for all stakeholders, not only the local communities but for the country as a whole.
Philippine Resources - May 22, 2023
Mining Operational Excellence Through Digital Transformation
Part 1: Mining Operation Challenges and Mine Operations Management Domains 1 & 2. By Mae Ann Cabasag, EM Mining companies encounter numerous challenges throughout their operations. However, initiatives to mitigate these challenges and improve efficiency are often limited. Most of these limitations emanated from a common factor: the challenge of “poor visibility” in mining operations. A viable solution is to adopt digital transformation in mining operations by incorporating available real-time data into an integrated system— capable of ensuring automatic updates and reliable source of information. Through this, mining companies not only understand simulations and plans developed but also anticipate potential outcomes. Various mining industry analysts have found that using non-digital methods in the mining operations can lead to a 27% reduction in production time and 25% increase in data inaccuracy. For a mining company to remain competitive in an industry susceptible to operation challenges, i.e. production processes, workers’ and equipment performances, ore quality and quantity, compliance to regulations, and inter-departmental collaboration, it needs to embrace digital transformation. Dassault Systèmes Mine Operations Management provides transformative digital solution for mining companies to achieve excellence in their operations. Mine Operations Management (MOM) equips mining companies with an integrated system for their mining operations, enabling them to achieve efficient plan and schedule. This system integrates entire operation data into a single repository source of information, known as the “single source of truth”, ensuring complete transparency of the company’s processes from mine to port. By leveraging MOM, we can address the following global mining industry challenges: Maintaining competitiveness amidst market volatility. Eliminating waste materials, poor communication, and error duplication. Improving site productivity and efficiency. Utilizing assets and sharing best practices across the value chain. Ensuring an utmost level of safety. Reducing environmental impacts and achieving sustainable operations. The transformative digital solution, Mine Operations Management, is composed of eight work packages, split across four domains, namely: Data Management, Material Reconciliation, Operational Control, and Assets Performance. These domains help generate valuable insights from integrated operational data for rapid and informed strategic decision-making. The Data Management consists of Master Data Model and Integration Framework packages essential for material tracking, stockpile management, task and workforce management, machine performance, and asset maintenance. It enables users to manage master data objects such as Site, Material, Location, Equipment, and Operator through manual data entry or third-party source systems. With this, mining companies can ensure efficient and integrated management of critical data required for seamless operations. Material Reconciliation, on the other hand, consists of Material Tracking and Stockpile Management packages. Material Tracking enables us to track material movements across different stages, i.e. from the least accurate grade estimated in geological model to the most precise information on shipped material quantity and quality, to account for any inaccuracies. While in the Stockpile Management, users not only can calculate daily stockpile balance, add Survey or Sampling data, analyze inventory levels and trends, create graphical representation of the stockpile balances and movements, calibrate stockpile using volumetric survey and sampling, enables comparison of different models, track movement genealogy and review stockpile slices for stockpiles with LIFO and FIFO calculation type but can create a different type of analysis such as actual vs plan vs model. In the upcoming article, we will explore the two remaining domains of Mine Operations Management to where assigning operational tasks, tracking compliance to plan, monitoring equipment down to workers’ performance are feasible in the mining operations. To know more about MOM, mining innovations and solutions, contact Dassault Systèmes Value Solutions Partner: Paramina Earth Technologies Inc. through email@example.com References: Make it happen for mine execution excellence: Dassault Systèmes®. MEGATrends. (n.d.). https://events.3ds.com/make-it-happen-for-mine-execution-excellence Dassault Systèmes. (2021, August 12). Digging deeper: The virtual solution for Mining Operational Excellence. Dassault Systèmes. https://discover.3ds.com/virtual-mining-operational excellence dassault3ds. (2022, June 16). The mining industry needs to adapt, but how? Dassault Systèmes blog. https://blog.3ds.com/brands/delmia/the-mining-industry-needs-to-adapt-but-how/
Philippine Resources - May 22, 2023
Customer’s First Choice: Sandvik Philippines Delivers 11th and 12th Pantera DP1500i Drills to Filminera Resources Corporation
Sandvik Philippines has successfully commissioned and delivered to loyal customer Filminera Resources Corporation (“Filminera”) their 11th and 12th Pantera DP1500i Top-hammer Surface Drills last 25 January 2023 at the Masbate Gold Project (MGP) located in Masbate Island, Philippines. Photo shows Sandvik Technician Larry Lugnas (second from left) and Service Operations Manager Jorge Cabello (third from left) handing over the drills to MGP representatives. Located 360 km southeast of Manila, the Masbate Mine is operated by Filminera, the Philippine subsidiary of TSX- and NYSE-listed B2Gold with headquarters in Vancouver. In 2022, the mine produced a record-setting 212,728 oz of gold out of 7.93M tonnes of ore milled at an average grade of 1.11 g/t. B2Gold also operates the Fekola Mine in Mali and the Otjikoto Mine in Namibia. Their projects under development include the Anaconda Area in Mali and the Gramalote JV Project in Colombia. The Masbate Mine started operating in 2008 initially using 4 x Atlas Copco ECM660 Drills owned and operated by the erstwhile mining contractor, Leighton. When the opportunity for re-fleeting came about in 2012, Sandvik succeeded in winning the tender which came packaged with a full maintenance contract for 24,000 service meter hours of five years. Ironically, the said maintenance contract almost led to the cancellation of the order for the first 4 x DP1500i due to a dispute with the rates. Eventually, both Leighton and Sandvik were able to arrive at a mutually acceptable arrangement, and Sandvik ran the service contract for five years without incurring penalties in the availability guarantees. The contract was so profitable, Sandvik even had to share some of the residual profit at the end with Filminera under the pain-and-gain proviso of the contract. The next re-fleeting opportunity came in 2017, with the Masbate Mine. This time, there was no service contract attached to the equipment and Leighton was no longer the mining contractor; the mine has shifted to owner-miner operation. Sandvik managed to secure the repeat order for another batch of 4x DP1500i, banking on the proven performance and reliability of the first four. That brings the total to 8 units. Drill numbers 9 and 10 were ordered in July 2020 and delivered in 2021. Numbers 11 and 12 in the photo above were ordered in January 2022 and are now handed over to the customer. Filminera ordered two more DP1500i’s in November 2022; these machines are now awaiting completion in Tampere, for delivery later this year. That should bring the total to 14 x DP1500i units spread over 11 years for our most loyal Pantera DP1500i customer in the Philippines – Filminera Resources Corporation!
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