2014 was an uneventful year for the mining industry. Despite the country’s much-vaunted mineral potential[1] and sizable investor interest in mining in the Philippines, the DENR and MGB have continued to withhold action on pending applications for MPSAs and FTAAs pursuant to the President’s directive under EO No. 79. And despite the lifting of the moratorium on the issuance of exploration permits in March 2013, only one (1) new exploration permit (EP) was issued by the MGB, with 17 EP renewals.
Since 2011, government has not actively pursued investments in minerals development, opting instead to focus on reviewing the current fiscal regime for mining. In 2012, mining was excluded from the government’s Investment Priorities Plan (IPP) and all incentives, save for those under the Mining Act and the National Internal Revenue Code, have been removed. The policy change was premised on the notion that government was “getting a mere pittance” as its share in mining revenues while the country bears the cost of the environmental degradation brought about by mining activities.
But industry data readily debunk these assumptions. Under its current fiscal regime, mining companies—MPSAs operating with no fiscal incentives—already give government a substantial share in a project’s net cash flows, averaged over its entire mine life. More importantly, mining companies have set up social development and environmental protection funds to ensure the development of host communities, the rehabilitation of mined-out areas and the compensation of affected communities in the case of mine accidents. (Footnote: In 2012, MGB reported that companies spent over Php673 million for their environmental protection and enhancement programs, and an additional Php498 million for social development and management programs.)
Nonetheless, the Cabinet-level Mining Industry Coordinating Council (MICC) has gone on to propose draft legislation with an inordinately high tax rate that would make the country uncompetitive for foreign investments.
The MICC has also proposed to expand the areas closed to mining applications.
As a result, the Philippine mining industry is now in deep freeze. No new mining agreements have been approved and worse, even projects with approved ECCs and DMPFs have not moved forward. Only 3 small mining projects were expected to start operations in 2014:
  • Atro Mining’s Vitali iron ore mining project in Zamboanga city,
  • the Libjo nickel project of East Coast Mineral Resources in Dinagat Island, and
  • The Agata nickel project of Minimax Mineral Exploration Corporation in Agusan Del Norte.
With the closure of the Rapu-Rapu Polymetallic Project and TVIRD’s Canatuan mine earlier in the year, the industry’s growth is at a virtual standstill.
Investors have largely taken a wait-and-see posture, unwilling to risk their capital under such uncertain conditions. While the DENR secretary has come out with a statement saying that at least 10 mining firms are willing to invest under the revised fiscal regime proposed by the MICC, the Chamber of Mines of the Philippines has expressed its opposition to the MICC-proposed scheme.
But while I would love to say that “all is quiet on the western front”, I cannot. Developments in the legislative, executive, and judicial branches of government indicate that this is merely the quiet before the proverbial storm.
We note, with concern, the following developments:
  • A new revenue sharing bill. A revised mining revenue scheme has been a legislative priority of the Aquino Administration since 2012. HB5367 has been filed and is now before the House Committee on Ways & Means.
  • A push by anti-mining CSOs and party list groups for the passage of an “alternative” mining law.
  • The exclusion of mining from the Fiscal Incentives Rationalization bill, also pending with the House Committee on Ways & Means.
  • The growing trend of LGUs declaring their jurisdictions as “mining-free” zones, both through local ordinances and national law.
  • A proposed “no-go” zones map which enlarges the areas closed to mining applications;
  • The juridical challenge to the validity of the mining act pending before the Supreme Court.
Two other developments in 2014 have added to investors’ concerns:
  • In May, the MGB proposed to increase Occupation Fees and Mine Waste and Tailings Fees (MWTF) by an average 900%. The Chamber of Mines has denounced the plan as confiscatory, an unauthorized taxation, and a power beyond that given to the DENR Secretary under law.
  • More importantly, in July, Rep. John Erlpe Amante filed HB No. 4728, proposing a total ban on the export of unprocessed mineral ores. Rep Francisco Matugas soon followed after with HB5058.
Perhaps the only bright spot in the industry’s lackluster year has been the progress achieved with the Extractive Industries Transparency Initiative (EITI). After achieving candidate status in May, the Philippines-EITI Multi-Stakeholder Group (MSG) went on to appoint an Independent Administrator that reconciled the accounts submitted by the relevant government agencies and the participating firms. The Philippines’ first country report was submitted to the EITI International Secretariat in December.
The Philippines EITI was significant in several regards: it opened a venue where government, civil society, and the private sector could meet and discuss issues on transparency and, it instituted an acceptable mechanism capable of producing a credible report on the contributions of the mining and oil & gas sectors to the country’s economy.
Let me just discuss our Top 3 concerns:
HB5367 proposes a government share equivalent to 10% of gross revenue, or 55% of the “adjusted net mining revenue,” whichever may be higher. This government share shall be in lieu of all national and local taxes.
If this bill is passed into law and the moratorium on mining agreements lifted, we believe that very few investments will come in. The bill gives government a punishing 79% take of any prospective mining project’s net cash flow averaged over its mine life. This is way higher than what Australia, Chile, Peru, or Papua New Guinea would take if that same ore body were to be found and extracted within their countries. Inversely, the internal rate of return (IRR) for the investor will be a mere 13%. The proposed regime is too onerous andunattractive for any investor, especially considering the state of the country’s security, infrastructure, and bureaucracy.
The Chamber is also concerned with the growing trend of cities, provinces, and legislative districts declaring their territorial jurisdictions as “mining-free” zones and prohibiting all forms of mineral extraction activity, except for those undertaken by government agencies for basic services.
Following this trend, the MICC, pursuant to its mandate under EO79 has also come up with a “no-go” areas map which proposes to exclude tourism development areas and prime agricultural lands from mining applications, closing off nearly half of the 9 million hectares identified by MGB as having high mineral potential. The no-go zones map remains pending approval with the Office of the President, but we understand it is already being used by the MGB in its review and processing of exploration permit applications.
A local mining ban will not solve the problem of illegal small-scale mining. Even today, with the activity already prohibited under RA7076,[2]illegal small-scale mining operations remain rampant in mineral-rich areas of the Philippines like Mt. Diwalwal and Paracale. More importantly, local mining bans will set a dangerous precedent for other cities and provinces to follow; making it attractive to impose a similar ban riding on the popular sentiment of “love for the environment”. This piece-meal reduction in the areas open for minerals development, without proper research and study, renders nugatory the basic precept under the constitution that all mineral resources are owned by the state, and that their exploration, development and utilization must always be subject to the full control and supervision of the state.[3]
Not all provinces are blessed with mineral resources. If the state is havefull control over its mineral resources, these areas must be open and available to the national government for exploration, planning, and where necessary, development and utilization. Provinces “blessed” with mineral resources must align themselves with the national minerals development plan, and not arrogate to themselves the decision whether or not these minerals may be mined.
If the proponents’ concern is the perceived environmental destruction brought about by large-scale mining activities, the rational answer is not to ban all forms of mineral extraction. We believe the more rational approach would be to strengthen existing regulatory frameworks and the strict enforcement of mining and environmental laws.
The law already prohibits mining activities in certain areas. (sec. 19 of RA No. 7942):
  1. in military and other government reservations;
  2. near or under public or private buildings, , except upon written consent of the government agency or private entity concerned;
  3. in areas covered by valid and existing mining rights;
  4. in areas expressly prohibited by law;
  5. in areas covered by small-scale miners as defined by law unless with prior consent of the small-scale miners; and
  6. old growth or virgin forests, proclaimed watershed forest reserves, wilderness area, mangrove forests, mossy forests, national parks, provincial/municipal forests, parks, greenbelts, game refuge and bird sanctuaries as defined by law and in areas expressly prohibited under the National Integrated Protected Area System (NIPAS) and other
While additional areas may be closed off to mining applications, the closing-off must be for compelling reasons—either because of a superior right or land use, or because of environmental considerations.
EO79 adds “prime agricultural lands”, areas covered by the comprehensive agrarian reform law, strategic agriculture and fisheries development zones (SAFDZs), tourism development areas, island ecosystems, and other critical areas to the “no-go” list. The “no-go” zones map developed by the MICC in 2013 closes approximately 65% of the Philippines to mining applications. More importantly, about 4.5M hectares of the 9M hectares generally considered to be of high mineral potential are now closed off to mining.
On the other hand, mining’s physical footprint on the map may only be described as small. Viewed on the map, the 43 operating mining projects occupy at most, 10,000 hectares—mere pinpricks that are located far from any viable tourist destination. Taken together, present and future mining projects will take up only about 18-20 thousand hectares of remote mountainous land that will not be prime agricultural land, nor a forest or forest reserve, nor a critical habitat or any of the categories previously mentioned. Those are already off-limits to mining.
The Chamber of Mines submits that a national land use bill that will rationalize the allocation, utilization, management, and development of our country’s limited land resources may be the key to answering the proponents’ social and environmental concerns.
An ore export ban. In July 2014, Rep. Erlpe John Amante filed House Bill No. 4728 proposing a total ban on the export of unprocessed mineral ores. It is claimed that the measure, if passed into law, will increase domestic revenue andencourage investments in the mineral processing sector which will, in turn, create jobs and increase domestic revenues through taxes and duties.[4]
While there is a need to integrate mining more effectively in the country’s industrialization strategy,[5] this requires a thorough study that considers the prerequisites of mineral processing moving towards the development of capital-intensive manufacturing activities along with other industries and towards heavy engineering industries if that can be pursued.
The Chamber is thus very concerned with the proposed strategy of imposing a ban on the export of raw ores as a means of compelling mining contractors to invest in minerals processing plants.
Market forces must be allowed to determine whether or not an economic activity like minerals processing can be established in the country. If the investment prerequisites are absent or insufficient, a ban on ore exports will not lead to the construction of minerals processing plants, but to mine closures, job losses and economic dislocation in communities hosting mining projects.
The economic prerequisites to build sustainable (and profitable) mineral processing plants are simply not present at the current time. Prospective investors face many serious constraints:
  1. The generally lower quality of nickel ore, coupled with the lower overall ore resources make the construction of expensive ferronickel or electric arc furnaces unfeasible. these types of plants require higher grade nickel (saprolite ore at 1.5% - 2.5% nickel) at high sustainable volumes to make economic sense;
  1. the relatively high power cost and lack of power make minerals processing uneconomical/uncompetitive in the Philippines when compared to our ASEAN neighbors (especially Indonesia);
  1. The lower quality of locally produced coal and the non-availability of local coking coal (used for fueling Nickel Pig Iron (NPI) blast furnaces)is a serious obstacle. Indonesia has large quantities of both.
  1. NPI blast furnaces, though cheaper to build, have serious environmental issues. These will have difficulty passing the country’s high environmental air quality standards, and obtaining the prerequisite social acceptability permit.
  1. High Pressure Acid Leach (HPAL) processing plants and electric arc furnaces are very expensive to build and will require large capital (The Taganito HPAL Plant was built at a cost of us$1.7B). The general uncertainty surrounding the mining industry, the lack of needed infrastructure (roads, air- and seaports), security concerns and the lack of government support (to encourage growth in the mining industry) are serious deterrents for investors to risk their money in the Philippines.
It may thus be more prudent for government to evaluate a wider set ofpolicy options. Other policies, such as increasing public spending on power generation and distribution, roads and ports, may be more effective in encouraging domestic ore processing than an outright export ban.
Industry outlook for 2015
Government’s current track to review (and revise) fiscal and environmental policies relative to mining will likely continue. In its latest pronouncement, the office of the president, through Sec. Coloma, listed the rationalization of mining fiscal regime as one of the legislative priorities that will be pursued by the Aquino administration for 2015. As I have already mentioned, the bill has already been filed in the House of Representatives, and is awaiting action from the Committee on Ways & Means.
Until a revised fiscal regime is passed into law, no new mineral agreements will be signed. Government’s decision not to promote minerals development at this time is unfortunate, given the ongoing ore export ban in Indonesia. with Indonesia bent on continuing its export ban policy and china’s nickel stockpile expected to run low by the first half of 2015, the price of nickel ore is expected to increase from us$17,000 to 23,000/mt. the Philippines is china’s only real source for nickel ore that does not entail high shipping cost. Unfortunately, with the moratorium on new mining agreements in place since 2012, the Philippines is (again) not positioned to take full advantage of the projected increase.
Government initiatives to increase the government share in mining revenues and to expand the areas closed to mining applications will only serve to further dampen investor interest in the Philippines. Investors are keeping an eye on three key issues: mining revenue sharing, the no-go zones map, and the ore export ban. These have been under review since 2012 as a direct result of the issuance of EO No. 79, with revenue sharing being cited as the reason for the long-standing moratorium. While a review and revision of existing mining policies is not a bad thing per se, a long-winded review, especially one premised on increasing government revenues, sends the wrong signals to investors.
The industry’s only hope is the passage of a rational and competitive mining fiscal regime that not only gives government a fair share in mining revenues and allows for inclusive growth in host communities, but equally as important, gives investors security and allows them a fair and reasonable return on their investments. Continuous engagement between government and the mining industry will be key in developing a rational and competitive mining fiscal regime. The Philippines 2014 EITI country report can be a good starting point for policymakers and legislators. It validates the fiscal contributions of 30 operating metallic mines and gives an accurate picture of the industry’s tax payments. The reconciled report can therefore be used as basis to compute what should be a rational tax rate for the mining industry, given the total value of production and their operating cost.
Unfortunately, with the 2016 national elections coming in just 14 months, the chances of a rational mining fiscal regime being filed, deliberated, and passed in the 16th Congress becomes more remote with each passing month. If congress fails to pass a revised fiscal regime, then industry really has no choice but to just wait it out and see what the next administration’s policy will be when it comes to minerals development.
###
[1] Mining in the Philippines. With an estimated US$1.4 trillion worth of mineral resource underground, the Philippines’ mineral potential is considered one of the best in the world on a per-hectare basis, with an estimated 9 million hectares considered to be areas of high potential. At its peak in the 1970s, with 45 operating large-scale mines, the mining industry accounted for about 21% of the country’s total exports. But as the Marcos regime faded, so did mining, and except for a brief boom in 1988-89, the mining industry struggled from the mid-80’s through the 1990’s.
[2] Rep Act No. 7076, otherwise known as the “People’s Small-scale Mining Act of 1991”.
[3] Section 2, Article XII, Philippine Constitution.
[4] In August 2014, Senator Paolo Benigno A. Aquino IV filed Senate Bill No. 2374, providing an identical counterpart bill in the Senate. In December 2014, Rep Francisco Matugas filed his own HB 5058 with similar import.
[5] Going beyond mineral extraction into processing will link mining more strongly to downstream industries that could potentially create high-quality jobs(e.g., jewelry, manufacturing, and construction) and thereby contribute to higher GDP, enhanced fiscal revenues, and job creation for the country.