Rosario Querubin

. INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 INDUSTRY FOCUS: MINING Contribution to the Economy The Philippines is well endowed with minerals due to its location at the western fringes of the Pacific Ring of Fire, wherein the processes of volcanism and plate convergence caused the deposition of minerals, both metallic and non-metallic. In terms of world ranking, the Philippines ranks third in gold, fourth in copper, fifth in nickel and sixth in chromite deposits in the world. It was estimated that the Philippines has US$1 trillion worth of mineral deposits. Despite the large amount of mineral deposits, the mining industry made only a modest contribution to the economy (Table 1). Table 1.Mining Contribution to Philippine Economy, 2014-Q- 2015 Jan-Sept 2016 90.7 80.9 41.5 Year-on-Year Growth (%) 16.7 10.8 - % Contribution to GDP 0.7 0.6 0.6 Employment ('000 workers) 235 236 219 Gross Value Added ( at current prices, PB) % Contribution to Total Employed Exports of Mineral and Mineral Products ($M) % Share to Total Exports Exports of Non-metallic Mineral Manufactures ($M) % Share to Total Exports 0.6 0.6 0.5 4,038 2,797 1,020 6.5 4.8 3.8 327 176 81 0.3 0.3 0.5 Source: Mines and Geosciences Bureau (MGB) Industry Performance There were 40 operating metallic mines as of Q3 2016, of which 3 mines produce copper with gold and silver; 5 produce gold with silver; 4 produce chromite; 27 produce nickel; and one produces iron. for 37.2% in Q3 2016. (See Figure 1) Figure 1. Percent Share of Mineral Commodities in the Total Value of Metalic Mineral Production in Q3 2016 Total value of mineral production declined by 22.8% to P108.21 billion in 2015 and by 11% to P75.93 billion in Q3 2016. Suspension of mining operations and poor base metal prices of nickel and copper were key factors for the weak performance in Q3 2016 (Table 2). The two major metallic mineral products were nickel and gold. Gold production accounted for 44.2% of the total value of metallic mineral production while nickel production accounted Page 1 . INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 Table 2. METALLIC MINERAL PRODUCTION Mineral Commodity Unit Used for Quantity Q3 2016 Quantity Value (P) 2015 Quantity 2014 Value (P) Quantity Value (P) % Change- % Change Q- Quantity Value Quantity Value % Share Value 2015 Value Q3 2016 PRECIOUS METALS Gold KG 17,555 33,572,189,938 20,643 34,240,250,925 Silver KG 26,942 714,359,536 29,780 647,017,112 258,311 13,316,254,798 337,185 18,920,613,393 18,423 32,970,404,193 12.1 3.9 13.0 30.0 31.6 44.2 23,005 616,436,586 29.5 5.0 23.0 48.0 0.6 0.9 349,269 22,757,540,739 -3.5 -16.9 4.0 -7.0 17.5 17.5 -19.0 16.1 14.4 -44.0 33.9 22.8 BASE METALS Copper Concentrate Copper Content of Concentrate Mixed Nickel-Cobalt Sulfide Mixed Nickel-Cobalt Sulfide (Metal) DMT MT 83,835 DMT 59,431 10,909,569,367 84,995 MT 49,151 Nickel Direct Shipping Ore DMT 19,789,558 17,300,307,520 32,304,313 Nickel Content of Ore MT 415,366 17,471,045,543 91,922 -8.8 87,280 20,311,015,241 -2.6 50,647 -3.0 36,733,436,603 33,127,757 62,701,769,864 -2.5 393,262 5.6 7.0 -14.0 -8.0 -13.8 -41.4 -24.0 0.0 Chromite DMT 16,075 109,900,006 15,502 113,527,965 47,056 337,103,559 -67.1 -66.3 25.0 18.0 0.1 0.1 Iron Ore DMT 6,549 12,273,594 41,942 86,166,465 153,775 455,257,143 -72.7 -81.1 -93.0 -94.0 0.1 0.02 -11.0 100.0 100.0 TOTAL 75,934,854,759 KG-kilograms Source: MGB DMT-dry metric tons 108,212,058,008 140,149,527,324 -22.8 MT- metric tons The large decline in nickel production is due to the following: Continued suspension of mining operations due to environmental issues of four nickel mines in Zambales, namely: 1) Sta. Cruz-Candelaria Mining Project of Zambales Diversified Metals Corporation; 2) Sta. Cruz Nickel Mining Project of Benguet Corp Nickel Mines Inc.; 3) Sta. Cruz Mining Project of Eramen Minerals Inc.; and 4) Sta. Cruz Mining Project of LNL Archipelago Minerals Inc. These firms together with Shangfil Mining and Trading Corp. were served the writ of kalikasan issued by the Supreme Court. Likewise, an executive order signed last July 2016 by the local government of Zambales suspended all mining operations in the province. Two nickel mines in Palawan were also suspended namely Berong Nickel Project of Berong Nickel Corporation and Toronto & Pulot Nickel Projects of Citinickel Mines and Development Corporation due to a spill that affected corals. The mining operation of Ore Asia Mining and Development Corp., the lone iron ore producer, in 1 Bulacan was suspended by the DENR due to its failure to secure an ISO certification and it had caused siltation in a river which is a tributary of the Sibul spring. The operation of nickel miner Claver Mineral Development Corporation in Surigao del Norte was suspended in August 2016 because of excessive siltation in the area. The DENR has ordered the suspension of chromite miner Mt. Sinai Exploration Mining and Development Corp. and nickel miner EMIR Mineral Resources Corp., both in Homonhon, Eastern Samar, due to siltation of the coastal waters and failure to practice engineered mining methods. Exports of mineral products declined by 31.4% from $4.06 billion in 2014 to $2.78 billion in 2015 due to decline in exports of copper metal and concentrates, and chromium ore which offset the increase in 1 Per DENR Administrative Order No. 7 issued in 2015, all mining companies are required to secure ISO 14001 certificates. ISO 14001 provide assurance to company management , employees, and external stakeholders that environmental impact is being measured and improved Page 2 . INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 exports of gold and iron ore agglomerates (See Table 3). In Q3 2016, exports declined by 28.2% to $1.69 billion due to the decline in almost all mineral products except for chromium ore. Table 3. Exports of Mineral Products Exports of Mineral Products Level (US$'000) Copper Concentrates Copper metal Gold Iron ore agglomerates Chromium ore Others TOTAL % Year-on-Year Change 2014 2015 Q3 2016 2015 Q3 2016 595,785 568,696 377,760 -4.5 -15.0 462,010 351,098 62,906 -24.0 -80.7 33,616 116,893 40,435 247.7 -61.8 108,567 118,747 75,044 9.4 -20.5 5,553 4,320 3,030 -22.2 31.7 2,849,603 1,620,286 1,126,862 -43.1 -18.1 4,055,134 2,780,040 1,686,037 -31.4 -28.2 Average world price of copper, gold, silver and nickel decreased. The average world price of base metals copper and nickel declined in Q3 2016 as compared to year-ago levels while the average world price of precious metals gold and silver increased in Q3 2016 due to strong demand for gold from India and China during the period (See Figure 2). Figure 2. Average Price of Mineral Products Average Price of Mineral Products 35 30 1800 1,669.71 1600 31.2 1,416.10 1,269.57 25 1,256.71 1200 20 1000 19.08 15 10 5 1400 1,- - 800 7.56 6.78 3.6 17.05 5.34 3.31 3.07 3.95 600 400 2.48 2.04 0 - 2013 Copper ($/lb) 2014 Silver ($/oz) 2015 Nickel ($/lb) Q3 2016 Gold ($/oz) R ough R oad Ah ead The mining industry is undergoing tough times as various hurdles such as policy bottlenecks and antimining lobbying block its progress. Investments continued to decline from $1.50 billion in 2013 to $1.19 billion in 2014 and further to $924.9 million in 2015. New investments were halted when President Aquino issued Executive Order No. 79 in 2012 which imposed a moratorium on applications for new mining projects. The moratorium will be lifted only when a revenue-sharing bill that will increase the share of government in minerals extraction revenue is passed into law. Page 3 . INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 th In the 16 Congress (Aquino Administration), three bills were filed at the House of Representatives and a counterpart Senate Bill No. 2362 was also filed which all sought to change the existing revenue-sharing scheme between mining firms and the government. th In the current 17 Congress, Senate Bill No. 225 or “The Philippine Fiscal Regime and Revenue Sharing Arrangement for Large-scale Metallic Mining Act” was filed by Senator Drilon to get a fair and equitable share of mining revenues for the government. One of the items in the 10-point economic agenda of the Duterte administration calls for the implementation of responsible mining and greater value-adding. It vowed to stop illegal and irresponsible mining firms which pose threat to the community and the environment, and make these firms accountable for the environmental damage they have caused. President Duterte ordered mining firms to upgrade their practices or face closure. To further enforce this advocacy, he appointed Regina Lopez, an environmentalist and a staunch anti-mining advocate, as the new head of the Department of Environment and Natural Resources (DENR). He gave an order to the DENR to issue a moratorium on new mines and conduct an audit or assessment of existing mining operations to ensure that these are being done responsibly. Suspension of More Mi nes Due to the Environmental-Compliance Audi t In July 2016, the DENR issued Memorandum Order No.2016-01 or Audit of all Operating Mines and Moratorium on New Mining Projects. The audit covered all operating mines, and suspended mines and/or put under care and maintenance status while the moratorium shall cover the acceptance, processing and/or approval of mining applications and/or new mining projects for all metallic and nonmetallic minerals. The audit aims to determine the adequacy and efficiency of the environmental protection measures of each mining operation. The Mines and Geosciences Bureau (MGB) has imposed stricter audit standards for 105 metallic and non-metallic mines nationwide, including quarrying and small-scale mining. The comprehensive review will focus on the mining companies’ compliance with the requirements of the Mining Act of 1995. The audit of mines is also based on DENR Administrative Order No. 2015-07 that required mines to be fully compliant with ISO 14001 which certifies that appropriate measures are in place to achieve minimal negative impact of mining on the environment. However, Secretary Lopez stressed that the ISO 14001 certification will not save mining companies if they endanger or have adverse effects on the communities. According to the Chamber of Mines of the Philippines (CMP), 21 of the 40 operating mines have obtained their ISO 14001 certification; of which 17 have fully complied with ISO 14001 with the remaining four waiting to be certified soon. On September 27, 2016, the DENR announced the result of the mine audit. The audit recommended the suspension of some 20 metallic mines, viz: 1. Filminera Resources Corporation 2. Lepanto Consolidated Mining Company 3. Benguet Corporation 4. OceanaGold Phils., Inc. 5. Krominco, Inc. 6. Strongbuilt Mining Development Corporation 7. Carrascal Nickel Corporation 8. Marcventures Mining and Development Corporation 9. CTP Construction and Mining Corporation 10. Hinatuan Mining Corporation Page 4 . INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 11. Adnama Mining Resources, Inc. 12. Agata Mining Ventures Incorporated 13. SR Metals, Incorporated 14. Sinosteel Philippines HY Mining Corporation 15. Oriental Synergry Mining Corporation 16. Wellex Mining Corporation 17. Century Peak Corporation – Esperenza and Casiguran Nickel Projects 18. Oriental Vision Mining Philippines Corporation 19. Libjo Mining Corporation 20. AAM-Phil Natural Resources Exploration and Development Corporation – Parcel 1 and Parcel 2B The DENR also issued show cause orders to Sagittarius Mines Inc., Semirara Mining and Power Corp., Century Communities, Inc. and Austral-Asia Link Mining Corp. These companies should explain why they should not be shut down. Under Executive Order No. 79, small-scale mining should be done within a declared Minahang Bayan. The DENR ordered to stop all activities operating outside the so-called Minahang Bayan. A Minahang Bayan is a small-scale mining area that centralizes the processing of minerals within a zone where the government can better monitor gold production by small-scale miners. At present, there are three Minahang Bayan nationwide with 10 new applications pending before the MGB. Small-scale mining operations are the most affected by the EO. Small-scale mining operations accounts for 60% of gold production in the country There are 300,000 to 400,000 small-scale miners operating in 40 mineral-rich provinces nationwide, the majority of which operates outside the Minahang Bayan. Small-scale mining operations are no longer allowed to mine nickel and iron and metals other than gold, silver and chromite. The order also states that small-scale mining contracts shall now be issued by the provincial/city mining regulatory board concerned, instead of the provincial governor or city mayor. The other salient features of the EO No. 79 is the complete ban on the use of mercury, hydraulic and compressor mining; providing for centralized custom mills within a mineral processing zone inside a Minahang Bayan; and limiting the total term of a small-scale mining contract, including renewals, to a maximum of six years. Outlook The outlook for the mining industry is affected by the suspension orders. There are ten metal mines that are already suspended, of which eight are nickel producers. The suspension of more mines will lead to decline in mineral production, lower collection of national and local taxes and increase in displaced mine workers. The following estimates of possible decline in production is based on the 2015 metallic mineral production by firm: Suspension of Masbate Gold Project of Filminera Resources Corp. (Filmera) and Didipio Gold Project of OceanaGold Phils. Inc. (OceanGold) will reduce gold production by 49.9% or 10,624 kilograms (kg). These mines together with other firms that produce silver namely Lepanto Consolidated Mining Company and Benguet Corporation will also reduce silver production by 49% or 14,668 kg. Filmera and OceanaGold reported the highest gold production in 2015. Suspension of OceanaGold, which also produces copper, may decrease copper production by 28% or 93,900 dry metric tons (DMT). Page 5 . INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 DMCI Mining Corp. may resort to total shut down with the suspension of its Berong Nickel Corp., as policy direction for the mining industry remained uncertain. Nickel ore production will be reduced by 57% or 18.52 million DMT due to the combined effects of the previously suspended nickel mines and the additional mines for suspension per audit report. Only five nickel mines will remain operational, namely Rio Tuba Nickel Mining Corp.; Cagdianao Mining Corp.; Taganito Mining Corp.; Platinum Groups Metals Corp.; and Pacific Nickel Phils., Inc. According to the Chamber of Mines of the Philippines (CMP), the country stands to lose about $30 billion in mining sector investments over the next five to 10 years due to uncertainties about the Duterte Administration’s policy direction for the mining sector. Subjecting mining operations to another audit and again suspending the acceptance of applications for new mines will dampen planned investments. CMP identified the following mining projects that will be affected: Sagitarius Mines Inc.’s Tampakan copper-gold project in South Cotabato ($5.9 billion), Philex Mining Corp.’s Silangan project in Surigao del Norte ($2 billion), Nationwide Development Corporation’s Kingking copper-gold project ($2 billion), Asiaticus in Davao Oriental ($2 billion), Lepanto Mining Corp.’s Far Southeast project in Benguet ($2 billion), and Intex Resources development in Mindoro ($2.5 billion). Exports of nickel ore may further shrink by as much as 30% to 22.6 million tons this year from a 2.5% decline in 2015 as nickel output was reduced due to weak prices and poor weather in the first half of 2016 and suspension of a quarter of nickel mines in the second half of the year. The global nickel market is wary that further mine suspensions in the Philippines may hurt nickel supply as the Philippines accounts for about 20% of global nickel supply. The Philippines is China’s biggest supplier of nickel ore. The crackdown of local nickel mines in the Philippines is pushing world nickel prices upward. Secretary Lopez slammed the use of open pit mining to extract minerals. Among those using the open-pit method is top nickel ore producer, Nickel Asia Corp., the country’s biggest nickel ore supplier to China that shipped 34.3 million tons in 2015. The biggest stalled venture for the industry is the $5.9 billion Tampakan copper and gold mine project in Mindanao. Glencore quit the project in 2015 because the project failed to take off after the province of South Cotabato banned open-pit mining in 2010, even if the Philippines’ mining law allows open-pit mining. The government’s opposition to the Tampakan project is seen to send negative signals to foreign investors. It is the country’s biggest foreign investment in mining and believed to be one of the largest gold prospects in the world. The mine has an estimated 2.94 billion tons of mineral resources containing 15 million tons of copper and 18 million ounces of gold. Value of the mineral production is estimated at $37 billion over a period of 20 years. The Tampakan mine project was supposed to start operations in the next two years, as part of the aggregate $14.75-billion investments for 2018. The House of Representatives will prioritize passing of a bill that will require miners to seek a legislative franchise. This is intended to raise the level of scrutiny on the industry and eliminate the possibility of miners avoiding sanctions by bribing lower-level bureaucrats. There are also proposed bills in the House of Representatives and the Senate that will require more local processing of ore. It will require mining firms to process or semi-process their ores before they can be exported, Ore producers agreed to this measure but they are requesting time and incentives to comply with such scheme, which may require more investment and plant construction on their part. Page 6 . INDUSTRY SECTION CORPORATE PLANNING AND RESEARCH DIVISION DECEMBER 2016 The DENR plans to issue a memorandum making community consent, and not just local government endorsement, a requisite for the issuance of exploration permits. In general, the Philippine mining industry is in limbo. Uncertainties on the direction, the policies and the plans for the industry prevail. The suspension orders have adversely affected not only the production of minerals but has also discouraged expansion and investments in the country’s mining industry. Page 7