Anglo find fails to launch Philippine flurry

Vancouver — Mining companies willing to face considerable political risks have been rewarded with impressive exploration results in the Philippines. However, advancing discoveries to the development stage is proving to be much more challenging, as the nation’s mining industry struggles with daunting legal issues and a recalcitrant bureaucracy.

Shunned internationally during the presidency of Ferdinand Marcos, from 1966 to 1986, the battered Philippine mining industry began to see a glimmer of hope for a revival in 1992, when newly elected president Fidel Ramos began liberalizing the economy. One result of this was the introduction of the New Mining Law, in 1995. Moving away from the nationalistic policies that limited foreigners to only a 40% interest in any project through mineral production sharing agreements (MPSAs), the new law allows foreign companies to hold a 100% stake through approved exploration permits and financial or technical assistance agreements (FTAAs).

The change in policy brought in exploration applications from more than 50 foreign firms. Philippine mining officials expected the explorers to spend about US$200 million a year on exploration and development. However, shortly after its implementation, a legal challenge was filed against the new mining law on the grounds that it violates a constitutional provision restricting exploitation of natural resources to Filipinos. The suit continues to linger in the Philippine courts.

Adding fuel to the already negative mining sentiment was environmental damage caused by the 1996 tailings spill at Marcopper Mining’s Marinduque operation. Vancouver-based Placer Dome (PDG-T) held a 40% stake in the Philippine company, which began mining on Marinduque Island at the Tapian copper pit in 1969. By 1992, the Tapian deposit was depleted and the firm began mining a second pit, dubbed San Antonio. The bulk of the tailings from the new operation were stored in the mined out pit. In 1996, a drainage plug in the Tapian pit collapsed, releasing 1.6 million cubic metres of waste into the Boac River. Mining operations were then suspended and, one year later, Placer transferred its 40% interest in Marcopper to one of its subsidiaries, a Cayman Islands-based company called MR Holdings. The major says that all the shares of MR Holdings were then transferred to “a group of Philippines financial investors.”

Although all of Marcopper’s mining practices received government approval, the fact that all of the company’s presidents and resident managers came from Placer prompted the major to spend an estimated US$71 million fulfilling its commitment to clean up the spill. Any remaining environmental issues, according to Placer, are the responsibility of its former partner. In December 2001, Placer closed its offices in Marinduque and Manila, pulling out of the Philippines. Placer says it has “entered into a number of agreements with Marcopper” that require the Philippine company to clean up the river and compensate affected residents, using funds Placer has made available. Legal issues over responsibility for the spill are ongoing.

With uncertainty hanging over the mining law and environmental issues being raised as a result of the Marinduque spill, the national government all but stopped granting permits to explore for minerals. Frustrated after years of delays, most foreign companies left the country in search of greener pastures.

Over the past two years, mining giant Anglo American (AAUK-Q) has carried the bulk of the exploration expenditures among foreign explorers in the Philippines. In 1999, it determined that the geological rewards outweighed the potential political risks and inked a deal with Philex Gold (PGI-V), the gold arm of Manila-based Philex Mining, to earn a 40% stake in the North property on the southern most island of Mindanao.

Boyongan prospect

Situated on the northeastern side of the island, in the historic Surigao gold district, the project covers part of a north-south-trending Pliocene volcano-magmatic arc, which hosts several gold mines. In September 2000, the property garnered international attention when Anglo American announced that hole 6 at the Boyongan prospect returned a 365-metre intercept grading 0.7% copper and 1.9 grams gold per tonne. Subsequent drilling throughout 2001 continued to yield impressive numbers, including 393 metres grading 1.58% copper and 2.39 grams gold in hole 15.

So far, some 34 holes have been completed over the property, outlining a high-grade mineralized core over a 400-by-300-metre area within a mineralized zone covering a 900-by-300-metre area. The mineralization is hosted in an intermediate intrusive stock comprising seven phases of diorite. Most of the mineralization occurs in the first three (coarse-grained) diorite porphyries, and metal content decreases from the earliest to youngest. The stock was unroofed during the Pliocene-Pleistocene period, probably near a mountain top, explaining the unusually deep supergene oxidation that exceeds depths of 500 metres. Cuprite, azurite, malachite, chrysocolla and native copper characterize the oxide zone. Chalcopyrite and bornite make up the primary mineralization.

About 18,000 metres of drilling are planned for 2002, the objective being to define the lateral and vertical extent of the deposit. Five rigs are turning, and a sixth will be added shortly. Of these, four are slated for delineation drilling at Boyongan and two will be used for reconnaissance work to the south,

“We look forward to an expanded drilling program with a target of 15,000 metres of resource definition work,” says Gerard Brimo, chief executive officer of Philex. “We’ll also carry out scout drilling, primarily south of Boyongan, because the debris flow of mineralized diorite porphyry encountered in hole 30 indicates the possible presence of another mineralized porphyry system in the general area.”

In mid-December, Anglo American showed its confidence in the North project, and the country, by purchasing an additional 10% equity stake in it and surrounding ground from Philex for US$20 million. Additional payments of up to US$5 million will be required should the metal content of the deposit or of any other discovery within the surrounding claims contain more than 3.6 million tonnes copper-equivalent. The additional payments will be computed by applying US2.51 per lb. copper-equivalent to 10% of the metal content above 3.6 million tonnes copper-equivalent, multiplied by a factor of 0.5.

The deal is expected to close early this year, at which point Philex and Anglo American will each hold a half-stake in the project. The major can then earn an additional 30% interest by completing a bankable feasibility study.

Another steadfast supporter of the geological potential of the country has been Edmonton-based Mindoro Resources (MIO-V). The Tony Climie-led junior entered the hunt in 1997 by teaming with Philippine-based Minimax Mineral Exploration to earn a 75% interest in four large projects close to the Boyongan discovery, namely Tapian San Francisco, Tapian Main, Agata and Mat-I, as well as the Pan de Azucar gold project on the island of Panay.

Last year, in partnership with Australian-based Delta Gold, Mindoro sank 11 drill holes into the Pan de Azucar property. The holes yielded some promising copper-gold grades from the Valderama target. The best results included 37.1 metres grading 0.8% copper and 1.87 gram gold per tonne in hole 3, and 41.5 metres averaging 0.12 % copper and 1.2 grams gold in hole 6. Other results are as follows:

– Hole 7 returned 4.7 metres grading 0.99% copper, 0.5 gram gold, 13.43 grams silver and 1.24% zinc.

– Hole 9 tallied 2.7 metres grading 2.2% copper, 1.97 grams gold, 31.1 grams silver and 1.3% zinc.

– Hole 8 was deepened from its initial 33 metres depth hitting disseminated chalcopyrite and sphalerite from 55.75 to 113.2 metres. A 40.3-metre section from 55.75 to 96 metres returned 0.69% copper, 1.21 grams gold, 4.34 grams silver and 0.63% zinc. Included in this interval w
as a higher-grade portion running 1.1% copper, 1.19 grams gold, 6.49 grams silver and 1.19% zinc over 19.3 metres.

‘High sulphidation’

Mineralization at the Valderama zone is described as a “high-sulphidation style” pyritic sulphide overprinted by low-sulphidation events. The zone is exposed at surface at Valderama Hill, where it is 20 metres thick. The extent of the mineralized zone has not been determined, but based on geophysics, the mineralization covers an 800-by-200-metre area.

Delta Gold funded the drill program as part of its option to earn a 65% interest in the project. The Pan de Azucar deal calls for Delta to spend A$4.5 million on exploration over four years to earn 45%. The junior can earn an additional 10% by completing a bankable feasibility study within the following three years, and another 10% by paying half of the gross value of the reserves outlined to a minor Philippine partner. If all goes as planned, Mindoro will be left with a 25% participating stake, which can be converted to a 2% net smelter return royalty (NSR).

Over the past five years, cash-strapped Mindoro continued to increase its property holdings on the island nation. Last year, the company acquired two new gold projects on the southern portion of the country’s main island of Luzon. Under the deal, Mindoro picked up a 75% stake in the Lobo and Archangel gold-bearing high-sulphidation systems, some 150 km south of Manila.

In production from 1966 to 1969, the Lobo underground mine has a remaining reserve of 90,700 tonnes grading 20.5 grams gold per tonne. The style of mineralization resembles the high-sulphidation enargite-luzonite deposits at Mankayan in the northern Philippines, where production from 1936 to 1990 was 29.3 million tonnes grading 2.4% copper and 3.82 grams gold, and the El Indio mine in Chile, which has produced 140 million tonnes grading 0.71% copper and 2.9 grams gold.

Archangel

Some 9 km southeast, the Archangel project hosts two gold-bearing zones, known as Kay Tanda and Pulang Lupa, within a 5-by-2-km zone of highly altered volcanics. Previous drilling in the late 1980s and mid-1990s defined an inferred resource of 8.3 million tonnes averaging 0.68 gram gold at Kay Tanda.

Under terms of the agreement, Mindoro can earn a 51% stake in the properties by spending US$1.5 million over three years and issuing 500,000 shares to a privately held Philippine company. Mindoro can then earn an additional 24% by issuing another 500,000 shares and taking the project to the feasibility stage. On completion of a feasibility study, the private company gets a further 500,000 shares.

Mindoro continues to seek partners for its projects.

On a small island just off the south-eastern tip of Luzon, Australian-listed Lafayette Mining has been granted an environmental permit which paves the way for development of the Rapu Rapu massive-sulphide mine.

Situated in Albay province, the project consists of two past-producing deposits, Ungay Malobago and Hixbar. Reserves at the former are pegged at 4.9 million tonnes grading 2.71 grams gold and 30.39 grams silver per tonne, plus 1.38% copper and 2.43% zinc. Plans call for open-pit mining over six years, which would yield 293,000 oz. gold, 3.6 million oz. silver, 60,900 tonnes copper and 89,200 tonnes zinc. Ore will be floated on-site to produce separate copper and zinc concentrates for smelting elsewhere. Also, a carbon-in-leach circuit will be used to produce dore bars from the soluble-portion of the zinc tailings and a gossanous cap overlying the main deposit. Capital costs are pegged at US$37.8 million, including closure and rehabilitation expenses. Mining is deemed economic at prices of US$275 per oz. for gold, US$5.10 per oz. for silver, US92 per lb. for copper, and US51 per lb. for zinc.

Although the Hixbar deposit is excluded from the study, Lafayette says it could be mined at a later date. The deposit, which extends underground from the western end of pit shell, hosts 1.1 million tonnes grading 2.7 grams gold, 25 grams silver, 1.3% copper and 2% zinc.

Calgary-based TVI Pacific (tvi-t) holds a 2.5% NSR in Rapu Rapu, as well as 3.3 million unlisted options, exercisable at A20 apiece, in Lafayette. Lafayette holds a right-of-first-refusal on the royalty.

Political risks

TVI also holds the Canatuan massive sulphide project, on the western side of Mindanao island. The project hosts an open-pit reserve of 1.14 million tonnes grading 3.77 grams gold and 105.7 grams silver in the oxide zone and 1.51 million tonnes grading 1.31 grams gold, 62.14 grams silver, 2.79% copper and 2% zinc in the sulphide portion. Ready for development, TVI has run into significant problems with indigenous groups in the area. In a July 2001 address to the United Nations Working Group on Indigenous People, the Canatuan Siocon Subanon Association called for “the immediate cancellation of TVI’s MPSA [and] the scrapping of the Philippine Mining Code and its provisions.” According to the indigenous group, a sustained campaign expressing opposition to mining in ancestral lands by another Subanon clan prompted London-based Rio Tinto (RTP-N) to exit the Philippines in 1999 after only a short stay.

A long-time explorer of the island nation, Australian-based WMC (WMC-N) also fell victim to the strong nationalistic sentiment in 1999. In February 1999, after pouring more than US$30 million into its Tampakan copper-gold project over four years, the major walked away as a result of “social and political challenges.”

The company outlined 990 million tonnes grading 0.75% copper and 0.27 gram gold on the project before throwing in the towel, following trouble with the local indigenous people and pending legal challenges against both its mining application and the validity of the new Mining Act. WMC stated at its 1999 annual general meeting that the project would be abandoned despite “insufficient work having been completed to enable a sound estimate of its extent or commercial viability.”

Just last year, Crew Development (CRU-T) was forced to suspend development of its Mindoro nickel laterite property after the government cancelled its permit. The property, some 200 km south of Manila, was held under an MPSA which granted Crew a 40% interest and the right to mine, over 25 years, 72 million dry metric tonnes grading 0.94% nickel and 0.06% cobalt.

Baseless decision

Crew says it was notified of the cancellation by the Department of Environment and Natural Resources. Another administration was in place when the permit was issued in early 2001, and Crew says it considers the latest decision baseless. The company is reviewing all legal avenues to have its tenure re-established. However, all work must stop until that is achieved.

Crew’s plans call for the use of high-pressure acid leaching (HPAL) to produce 40,000 tonnes nickel, 3,050 tonnes cobalt and 126,000 tonnes ammonium sulphate (rice fertilizer) annually. Total cash costs are estimated at US$1.06 per lb. nickel. A 1998 prefeasibility study pegged capital costs at US$665 million, which translates into a net present value of US$467 million at a 10% discount. The internal rate of return is 39%.

Another company that has faced its share of local problems is Australian-based Climax Mining. The junior discovered the high-grade Dinkidi gold-copper deposit in the early 1990s, but low metal prices and political uncertainty caused development to be delayed.

The Dinkidi project is in the northern portion of Luzon, in the Didipo Valley, 200 km northeast of Manila. Climax has one of only two FTAAs ever granted by the Philippine government. The initial engineering study completed in 1996 envisioned an open-pit mine producing 5 million tonnes per year combined with an underground mine producing at 1 million tonnes per year. However, weak metal prices force the company to look at mining the higher-grade core of the deposit.

In 1998, a feasibility study concluded that a mining reserve of 17.8 million tonnes grading 2.37 grams gold and 0.67% copper could be mined at the rate of 2 million tonnes per year
using underground block-caving methods supplemented by a small open pit. Capital costs for the project were pegged at US$138 million. By mid-2000, all the relevant statutory requirements were completed and key government approvals obtained.

Climax secured the support of two major international groups who proposed to commit US$42.5 million in equity to the project. Standard Bank London was retained to arrange the US$90-million senior project loan required to complete the funding structure. However, due to the political uncertainties in the Philippines and continued weakness in metal prices, the funding process was halted in early 2001.

The company is now considering a smaller-scale, staged development of the Dinkidi resource. Climax envisions mining 577,000 tonnes grading 1.92 grams gold and 1.59% copper, using a cutoff grade of 2 grams gold-equivalent per tonne, for open-pit material, as well as 2.4 million tonnes grading 9.07 grams gold and 1.36% copper, using 50 grams gold-equivalent, for the underground portion. Capital cost estimates for this proposed operation are US$32.44 million.

Capital needed

Once a pillar of the local economy, the Philippine mining industry badly needs foreign capital to open new mines. Of the 13 major mining companies that once operated in the Philippines, only two, Lepanto and Philex Mining, are still engaged in large-scale operations.

The industry now generates only 1.7% of total exports, down from 21% in the 1980s. Mining, which previously accounted for 3.2% of the gross domestic product, saw its contribution fall to 1.1% from 1996 to 2000.

According to the local Mines and Geosciences Bureau, the Philippines could produce 10 new “world class mines” in the next decade with potential sales of US$4 billion annually, provided investment conditions are favourable.

“If they resolve the challenge to the constitutionality of the mining act, which has been in the Supreme Court for about five years,” says the ever-optimistic president of the Philippine Chamber of Mines, Artemio Disini, “I’m sure the foreign investors will make a comeback.”