Philippines Mining sector open for business

Philip Romualdez, CEO of Benguet Corp, President of the ASEAN Federation of Mining Associations and the Chamber of Mines, talks to Finance Asia about the problems and prospects of moving the sector forward.

What are the key challenges facing the mining sector in the Philippines?

Well it is risk capital. As of mid year, over the prior 18-months foreign direct investment into the mining sector totaled over $500 million. So we can point to projects such as nickel processing plants to copper polimetalic mines being developed, new exploration and advancing projects from exploration to feasibility. The Philippine government has identified a number of projects, 23 in-fact, that are at the development stage that will require $6.5 billion for further expansion.

Having said that there aren't as many problems now, as we have addressed the majority of the major issues that had been inherent in the sector. That is why we are seeing positive movement. So the real issue now is in how to attract further foreign investment. Which is not so much a problem but a process that we will continue to go through?

You have been a leading figure in the sectors resurgence, what has been done to correct the problems of the past?

As an industry, together with the national government, we went through a process of amending or instigating a mining law which states that entities other than Filipinos can invest in mining operations and activities beyond the current constitutional limit of 40%. There is a provision in the constitution that allows for foreign participation for large scale projects. In the particular case of mining, that cap is for $50 million and above; foreign direct investment into those projects can take place above an equity position of 40%. To cut a long story short that is the major problem why the industry had not been able to move forward.

Now a number of these projects have already identified partners to move the projects forward. They just need to go through the long gestation period inherent to the mining sector. Which is confirmatory drilling, feasibility studies, financial closing and construction.

What more needs to be done in terms of structural development and investment to see the mining sector realize its full potential?

In terms of investment, to complete the first phase of the mineral revitalization we are looking at $6.5 billion in these 23 projects, alongside of that are 37 projects that are at the exploration stage and that will need, if taken to full exploration, an additional $500 million. It is difficult to estimate which of those 37 projects will translate into fully operational mines, because they are still only exploration targets at the moment. The results of those 37 are leading to a number of them materializing much faster, so potentially we are looking at an additional requirement of $6 billion.

The Philippines mineral lands account for 9 million hectares of the overall 30 million hectares. However, there are only 471,000 hectares that have been granted mining permits, so there is still a lot of territory yet to be explored. The Philippine mining sector has only scratched the surface in terms of active projects. The industry needs to do a lot more in determining the country's mineral reserves. One of the leading initiatives that we are moving forward is in engaging the cooperation of countries and international organizations that can provide some of the technical capacity to help us improve our capabilities in understanding the country's mineral potential.

For example, the industry has been working with the Australian government which has offered assistance with aero-magnetic surveys that would map the entirety of the Philippines. We are also in discussions with the US Geological Survey to help us with stream sediment sampling that would map the minerals of the Philippines from the ground. Additionally, we have been talking with the Korean Government and its resource department and the Japanese Oil and Gas and Mineral Exploration Corporation, both government-owned entities in assisting in the exploration for specific minerals in certain parts of the Philippines. All of these activities are designed to increase capacity and the level of information of the country's mineral potential. This, hopefully, will lead to mining companies identifying target areas more efficiently in order for them to undertake exploratory drilling and development. In other words we are just starting all over again.

In terms of overall worth, what would a fully realized mining sector bring to the country?

The government believes that fully explored, the country has $1 trillion worth of mineral in the ground.

Although, that is hard to validate today, because we need to gather more information to determine that. Given the success rate of exploration to discovery, the Philippines is one of the most target rich environments for minerals, which goes to the point that geologist figure that the Philippine endowment (the amount of minerals per square kilometer) is one of the highest in the world. The Philippines ranks in the top five in the world in terms of gold copper and nickel.

However, the country has not fully developed this because in the past there weren't the resources to spend on surveys, information gathering and the companies limited their activities to selective areas. Further more mining, being a capital intensive business, the owners were hesitant to grow that fast and opted to invest in other sectors. If you look at a lot of the traditional Philippine mining companies they invested in many areas outside of mining in an effort to diversify. This has proven to be a mistake. At one time, some Philippine mining companies were older and bigger than some of the current majors in the world. If the Philippine company had opted to stay within their initial area of expertise, that is mining, they could be competitive with these majors today.

When addressing foreign investors, what are the major concerns that these investors have and what does it take to dispel them?

The primary issue is really the assessment of the country risk. Firstly, one thing that we have to understand is that mining investors have a greater tolerance for risk compared with that of other types of investors because of the inherent nature of the industry and the location of mining projects.

If you look at some of the biggest mining plays in the world, most are located in areas most would deem trouble spots, such as Africa. So mining investors today understand those risks and those that are willing to venture out to those parts of the world are very familiar of the fact that they will have to deal with those types of risks.

So it is a function of understanding those risks, rating them and getting the financial institutions to understand those risks as well and getting them to price the cost of money accordingly. It is just a question of "is it more costly to do business in the Philippines because of the risk factors than say another country? But the investors must realize that even though it might be more costly the mineral potential in the Philippines is far greater than those countries where the risk is lower.

So it is really a question of what measures are needed to be put in place to mitigate the risks and working within the confines of the Philippines?

What will push investors away from the Philippines is if they feel that their time is better spent elsewhere if things don't move fast enough. What we have dealt with in the Philippines is precisely this bureaucracy, so we hope some of the measures the government has installed will shorten the bureaucratic process and allow companies to move their projects along much quicker. If companies see that happening then there isn't much of a problem.

What is the main attraction that you offer to Foreign investors to be a destination for further FDI?

The Philippines is open for business. The government has resolved the majority of those problems that had been present in the past. We don't deny the fact that we had problems, but what we tell prospective investors is that we have dealt with most of them and we are dealing with the rest of them. We are very forthright; we outline the issues that have been dealt with, as well as the issues that we are still dealing with. But rest assured what we have today that wasn't there a few years ago is a government that is fully behind the industry. The policies of former governments had been very anti-mining, but today the attitude of government leans toward sustainable development activity, which mining can lead to.

Mining can be the catalyst for growth in rural and poorer areas. Having said that, the government supports the revitalization of the mining industry and have put measures in place to make the Philippines globally competitive for foreign direct investors in the mining sector.

If you take into account other Asian countries, and ask "is the Philippines competitive?, then the answer would be yes. In fact, we just had an ASEAN sponsored conference in Manila in October. We had 19 countries and 47 speakers at the conference and the consensus at the end of the conference was for the Philippines to be given an extra term to head up the ASEAN Mining Association because they have seen what the Philippines has done to turn the mining sector around and would like to see similar results in the region and with the other ASEAN countries to. So it was a vote of confidence on behalf of the other countries to give the Philippines that mandate. That is a very strong signal that we are starting to do things right and that has given confidence to some of the larger foreign mining companies to put money into the Philippines.

What do you see going forward into the next year?

In terms of the 37 exploration stage projects and the 23 development stage projects, a number of companies have already declared feasibility studies and will start construction. So I would say you will see expansion of more mining operations, construction of new mines, you will see greater inflow of risk capital for further exploration. None of which will be recognized by the Central Bank or the Board of Investments, because an exploration company is not registered with the BoI. The Central Bank will not register it as mining investment because it does not fall under the category of construction or of capital equipment, it is a service. So this inflow enters under the service industries. If you take into account all of the corporate announcements from the mining companies, and the results that have been released, which can be confirmed by the Mines & Geo-sciences bureau of the department of Environment and Natural resources, you can see there, although in and of themselves they are relatively small, but when you add them all up you'll see half a billion dollars coming in little by little. That is all part of the process that is leading us up to the initial $6.5 billion.