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The Philippines’ resource wealth is among the highest in the world, but unclear laws and anti-mining sentiment are keeping it from reaching its full potential.
It’s not hard to see why foreign miners are attracted to the Philippines. The island nation is sitting on a treasure trove of natural resources — including gold, nickel and copper — with an estimated value of around $850 billion. What’s more, it lies on the doorstep of China, one of the world’s top resource consumers.
Even so, the country has never been able to effectively tap into that wealth for a number of reasons, including a strong anti-mining lobby that includes the Roman Catholic Church, which still holds considerable sway in the Philippines. The church opposes new mining projects on environmental grounds.
Miners must also deal with the country’s restrictive and frequently changing mining rules. Making matters worse is the fact that local and national laws sometimes conflict with each other. That’s currently holding up what could become the Philippines’ largest mine, the $5.9 billion Tampakan open-pit copper/gold project located between the towns of Tampakan, South Cotabato and Kiblawan, Davao del Sur on the island of Mindanao. The project is run by Sagittarius Mines, a subsidiary of Xstrata (LSE:XTA).
The Tampakan deposit contains 15 million metric tons of copper and 17.6 million ounces of gold, according to the company’s latest resource estimate. Sagittarius envisions a mine on the site with a 17-year life.
Conflicts between national and local governments frustrate Sagittarius
Tampakan’s future could be in jeopardy if a 2010 ban on open-pit mining passed by South Cotobato’s government stands up. The province passed the ban even though the national government allows the practice. Even so, the ban has prompted the federal Department of Environment and Natural Resources to refuse to issue Sagittarius the necessary environmental permits.
This week, Pacifico Agabin, the chairman of the Constitutional Law Department of the Philippine Judicial Academy of the Supreme Court, called for the government to quickly deal with the situation.
“It should be noted that local governments cannot regulate large-scale mining. Congress already passed a national law authorizing open-pit mining and LGUs [local government units] cannot pass an ordinance that contravenes the national law,” he said. “The National Government, I think, should see the urgency of resolving this concern and without further delay defend national law and the constitution.”
Due to ongoing regulatory hold-ups, as well as security concerns at the site, where a security guard was shot and killed in June, Sagittarius has delayed production from its original target of 2016. That’s bad news for the Philippine economy, which grew at a healthy 5.9 percent annualized rate in the second quarter of 2012, but is still struggling with a 7 percent unemployment rate — the highest in Southeast Asia.
Unclear royalty regime, new license restrictions add further uncertainty
In July, President Benigno Aquino III’s government passed Executive Order No. 79, a new package of mining industry reforms. This legislation, which has undergone some minor revisions, will come into effect shortly.
Under this new law, the government will impose stricter environmental rules on the mining industry and increase the number of so-called “no-go” zones, where mining is prohibited. In what could be a helpful step for miners, the new legislation also aims to ensure the primacy of national mining laws over local ones.
However, the new rules contain other provisions that have raised greater concerns in the industry. For one, they cut the maximum term of new mining contracts to 25 years from 50 and did away with automatic renewals at expiry. Instead, companies will have to undergo a public bidding process to renew.
The new law also seeks to increase the royalties the government collects from miners. Right now, companies operating in areas that the government has designated as mineral reservation sites pay a 5 percent royalty.
However, the government has not yet decided how the new royalty regime will work and has given no indication of when it will put a law outlining its plans before the House of Representatives. And until it does so, it will not issue any more mining licenses, which effectively puts a freeze on development. Miners are still able to conduct exploration activities.
The freeze has resulted in 10 billion Philippine pesos (US$239.5 million) worth of lost investments in the sector in 2011 and another 2 billion pesos this year, according to Benjamin Romualdez, president of the Chamber of Mines of the Philippines. And those losses are mounting with each passing day.
“The Philippine mining industry is at a crossroads. After being the raging bull of the Philippine stock exchange from 2008 to early 2010, mining stocks have sputtered to become a sitting bull,” said Romualdez. “The 16 billion pesos in mining investments we are expecting in this administration will not happen.”
I, Chad Fraser, do not hold any equity positions in the companies mentioned in this article.