Guarded optimism for miners in prospective Philippines

Although it’s the fifth most mineralized country in the world, the Philippines’ mining industry is extremely underdeveloped — a result of years of ongoing policy issues, political turmoil and opposition from the anti-mining Roman Catholic Church. But a recent economic report says the puzzle pieces are finally fitting together.

Investors should look at the Philippines with “guarded optimism,” says the report, by Ambrian Partners, a London, U.K.-based company that provides investment banking, institutional brokerage and research services.

Geologically, the Philippines is enticing. It’s part of the Pacific Rim of Fire, which is known for its volcanic activity and associated with rich deposits of copper, gold and other minerals. Gold, copper and nickel resources are valued at US$1 trillion, yet the country has secured only US$500 million–mostly from foreign firms–since 2005.

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

However, the report says that any government in power will have to encourage the revival of the industry for financial and economic reasons; the country has an international debt of US$79 billion, a per capita gross domestic product of US$4,700 and about 40% of the population lives in poverty.

A surge in foreign investment in the mining sector could have a positive impact on the country, says John Ridsdel, investor relations advisor for Calgary-based TVI Pacific (tvi-t, tvipf-o), which runs the Canatuan copper-gold project on Mindanao Island in the southern Philippines.

“The mining industry can be an engine of development for the Philippines,” Ridsdel says. “But no company should come to the Philippines without understanding that you have to work on the social and political side.”

Right now, the country produces about 30 tonnes of gold per year, 50 tonnes of silver and 200,000 tonnes of copper. Nickel production ranged from 9,600 to 25,000 tonnes per year before high fuel costs shut down the Nonoc mine in 1982.

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

The mineral sector is underdeveloped, with just 1.6% of the country’s 300,000-sq.-km land area covered by drilling permits.

The country’s Mining Act of 1995 was designed to revive the industry, but that didn’t happen — especially after the highly toxic tailings spill into the Boac River at Marcopper Mining’s Marinduque site in 1996. Serious health and environmental problems still exist today, despite the US$70 million that 40%-owner Placer Dome spent on cleanup. A local partner owned 60% of the project.

And that wasn’t the first spill: Marcopper dumped as much as 200 million tonnes of tailings into Calancan Bay between 1975 and 1991 and, in 1993, seasonal rains caused the collapse of a heavily silted tailings dam, sending the overflow of toxic silt into the Mogpog River.

This is why foreign companies have themselves to blame for the uncertainty of lobby groups and local governments and people surrounding foreign investment, says Tony Climey, president and CEO of Mindoro Resources (MIO-V, MNODF-O), based in Edmonton, Alta.

“Let’s just look at ourselves and the track record of foreign companies — it’s not very good,” says Climey, whose company has interests in several copper, gold and nickel properties in the Philippines. “Placer Dome — that was a major environmental incident. The Philippines is densely populated. When you have a problem like that, it’s not like in outback Canada or Australia. It’s a significant problem that affects local people and we have to understand that,” Climey says.

But Ridsdel says a lot of pollution is caused by thousands of illegal miners who can’t be regulated. When TVI Pacific started operating at Canatuan, there were already high levels of mercury and cyanide in the watershed, so it first began as an environmental cleanup project.

“It’s been a nightmare Wild West gold rush town for decades,” Ridsdel says.

Civil society groups focus on foreign companies and don’t see the mafias and other social consequences of small-scale miners who must buy contraband chemicals for their operations, he explains.

In 1997, when the constitutionality of the Philippines’ Mining Act was challenged, the focus was on the foreign investment sections of the act.

Around the same time, the Bre-X Minerals fiasco, the Asian Crisis and low metals prices also made investing in the Philippines an unlikely venture; many juniors up and left. TVI Pacific and Mindoro Resources are two Canadian companies that stuck around.

“It was a global phenomenon that was slightly worse in the Philippines,” Climey says. “We had already put together a nice package in March ’97 when things started to collapse, and as a technical person, I recognized they had a lot of potential, so we hung on. But the problems weren’t inflicted by the Philippines itself — you try raising money from anything in the world at that time. It was a tough three to four years.”

The lack of competition from other exploration companies helped Mindoro pick up highly prospective properties that would be impossible for a junior to collect now, Climey says.

It wasn’t until January 2004 that the country’s Supreme Court found the Mining Act unconstitutional — another blow to the industry. That ruling was overturned in December of the same year, allowing foreign companies 100% ownership of projects worth more than US$50 million. Projects can otherwise be up to 40% foreign-owned.

Since then, Philippines President Gloria Macapagal Arroyo has taken a firm pro-mining stance, shushing the anti-mining Catholic Bishops Association, which tempered its stance from outright opposition to one of vigilant concern for the environment and equitable distribution of the benefits of mining.

Another setback for foreign investment occurred in October 2005, when Australia-based Lafayette Mining (LYMGF-O, LAF-A) had two minor spills at its Rapu-Rapu gold project. The company is only now getting back on its feet after the Department of the Environment and Natural Resources suspended its operations.

“(Lafayette) created additional grist for the mill in the political debate over mining in the Philippines,” says Ridsdel. “The government has understood the need to make sure regulation is intense and the mining industry will be able to demonstrate that was a minor incident.”

Meanwhile, foreign companies in search of exploration permits are still going through layers of red tape while Philippine companies have less trouble, says Richard Chase, head of mining at Ambrian Partners.

“That’s where there’s a backlog,” says Chase, noting that most local companies are after permits for industrial minerals and building materials, not exploration or major production permits.

Chase says the permit process is especially slow for foreign companies at the local government level and with the National Commission on Indigenous Peoples, which must give consent for any project affecting indigenous people.

The opposition to mining is strong in some areas. Four provinces have passed resolutions banning mining altogether and many areas rich in mineral deposits are in the south where Muslim rebels, communist insurgents and bandits operate.

Under the Mining Act, the financial benefits of mining are shared equally between the government and the company. Environmental and social provisions are similar to those in developed countries with certain cost percentages going towards environmental protection and infrastructure.

Political instability has also held back mining development. In the last 20 years, two presidents have been forced from office after mass demonstrations. Since Arroyo took office in 2001, she has faced two serious military rebellions. Military and police generals say they support Arroyo’s administration, but the possibility of future coup a
ttempts before her term ends in 2010 cannot be ruled out.

To its credit, the government hasn’t used unilateral action to cancel any contracts or expel any companies, instead choosing due legal process — even amidst the political turmoil.

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

But this hasn’t scared everyone off. The Mining Act ruling is irreversible and Chase says recent permits awarded to foreign companies are a sign of progress.

According to Ambrian Partners, mining majors such as Rio Tinto (RTP-N, RIO-L) and Harmony Gold Mining (HMY-N, HRM-L) 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. Anglo American (AAUK-Q) has joint ventured with Philex Gold (PGI-V, PHXGF-O) to develop the Boyongan copper deposit, also in the south. And early in December, Australia’s Medusa Mining (MML-L, MML-A) finalized a partnership with Philsaga Mining for the Co-O gold mine, with initial production forecast at 40,000 oz. per year, increasing to 100,000 oz. by 2008.

“The ball is in our court to prove we can put these things into production without causing problems,” Climey says.