Guarded optimism in the Philippines

There’s nowhere to go but up when it comes to mining production in the Philippines.

In 1980, the mining sector accounted for 20% of the country’s exports but today that number is less than 2%.

And it’s not because of a lack of resources political turmoil, ongoing policy issues and religious influences have together hindered growth in the industry despite the rich deposits of gold, copper and other minerals.

Future investors should look at the Philippines with “guarded optimism,” according to an economic update by London-based Ambrian Partners, which provides investment banking, institutional brokerage and research services.

The report says that with the vast resources, which include the fifth largest gold and copper deposits of 957 million tonnes and 5.3 billion tonnes respectively, any government put into power will be forced to encourage the revival of the industry for financial and economic reasons. The country has an international debt of US$79 billion.

Low commodity prices and political turbulence caused many mines to drastically downsize or shut down during the 1980s.

Right now, there is only one copper producer, seven gold producers and four producers each for nickel and chromite.

Foreign ownership accounted for only 13% of new mining company investments in the period of 1979 to 2004 and between 2001 and 2004 total government revenues were less than half a percent.

In response to this, the government has made the mining sector’s development a priority but at the same the government must stay on good terms with the Roman Catholic Church, which in recent years has helped raise awareness about the negative effects of mining.

In 2004 the production figure was US$850 million and the production value of metallic minerals grew by 27% from the previous year to US$710 million, aided by an increase in production volume and firmer prices.

Development in the mineral sector is regarded as underexplored, with just 1.6% of the country’s 30 million hectare land area covered by drilling permits.

The Philippine Mining Act of 1995 was designed to revive the industry by providing fiscal reforms and incentives while enshrining the guiding principles of the constitution, but instead the years that followed were spent defending its legitimacy. The Act was found unconstitutional in January 2004, particularly with regard to allowing foreign participation, but the ruling was overturned in December of the same year.

Amidst all the policy debate, permit applications have been steady since 2001 with over 2,000 coming in each year. Getting these permits is part of the problem. There have been many complaints about the layers of red tape a company must go through in order to receive one, especially with the National Commission on Indigenous Peoples and local government units for their certifications.

As for the environment and social compliance, indigenous people are protected through an informed consent requirement and the financial benefits of mining are shared at a 50:50 ratio between the government and the contractor. Environmental and social provisions are similar to those in developed countries with certain cost percentages going towards environment protection and infrastructure.

Even still, the Ambrian report calls for improvement in environmental management capabilities, such as detailed regulations for tailings management. Serious health and environmental problems still exist from a 1996 spill of highly toxic tailings from Marcopper Mining’s Marinduque mine sites. That was after the company, 40% owned by Placer Dome at the time, had dumped as much as 200 million tonnes of tailings into Calancan Bay between 1975 and 1991.

For companies that do get permits, the state requires permit holders to submit detailed work programs for every stage of their operations to the Mines and Geosciences Bureau. The MGB can approve, reject or demand changes in programs and budgets.

Political instability is still one of the major issues holding back mining development in the Philippines. Since 1986, two presidents have been forced from office after mass demonstrations. Since current President Gloria Macapagal Arroyo took office in 2001, she has faced two serious military rebellions, though the leaders have been arrested. Military and police generals say they support Arroyo’s administration, but the possibility of future coup attempts cannot be ruled out before her legal term ends in 2010.

Despite the instability, the government hasn’t used unilateral action to cancel a contract or expel a company, instead choosing due legal process even amidst coup attempts and other political battles.

The International Monetary Fund’s 2006 review noted a reform momentum in government and pointed out the need for new revenue raising measures to reduce government debt, especially given funding needs for infrastructure plans. On the other hand, according to the World Bank in September 2006, the Philippines has slipped considerably over the years in governance tables mainly because of corruption.

The Chamber of Mines of the Philippines rescheduled mining conference in October 2005 for 2007 because of a policy shift from active promotion to one of cautious reconsideration of policy reforms. Permits are still difficult to get and four provinces have passed resolutions banning mining in their areas. Many areas rich in mineral deposits are in the south where Muslim rebels, communist insurgents and bandits operate.

This hasn’t scared everyone. The Ambrian report says mining majors such has Rio Tinto and Harmony Gold Mining have been looking to expand production in the Philippines so they can make the most of high gold and metals prices.

China’s Jinchuan Group and Baosteel Group have agreed to invest US$1 billion to reopen the Nonoc nickel refinery in the southern Philippines. As well, Anglo American is in a joint venture with Philex Mining to develop the Boyongan copper deposit, also in the south.