BMI View: The mid-2014 exit of Glencore Xstrata from the USD 5.9bn Tampakan copper-gold project reflects continuing challenges for mining investment in the Philippines, largely due to subdued metal prices . Moreover, resource nationalism will remain a threat as the Philippine government continues to consider raising taxes on the mining sector.
Falling metal prices and fading attraction of frontier mining will continue to dampen investment into the Philippines' mining space over the coming years. As spotlighted by the exit of Glencore Xstrata from the USD5.9bn Tampakan project in South Cotabato, which announced its decision to sell its stake in the mine in a bid to prune its portfolio and focus on the development of brownfield projects, we expect the majority of international miners to focus on brownfield investment rather than costlier and riskier greenfield projects. Indeed, we believe frontier regions will suffer the brunt of cutbacks in investment given the inherent risks and huge capital commitment associated with immature regulatory frameworks and a paucity of sound infrastructure. However, domestic players will continue to expand their footprint and develop deposits deemed economical. Average annual sector growth will come in at 5.3% in 2015-2019, though this will be from a low base. Moreover, the mining sector will continue to make up a minor part of the wide Philippine economy.
|Source: Mines and Geosciences Bureau. Note: *As of Q314.|
|Copper (with gold)||-||-||-||1||1|
|Copper (with gold & silver)||3||3||3||2||3|
|Copper (with gold, silver, & zinc)||1||1||1||2||1|
|Gold (with silver)||8||5||6||6||6|
|Total Operating Metallic Mines||28||30||36||41||46|
Despite Mineral Resources, Operational Challenges For Global Miners
While the Philippines possesses significant mineral reserves, various operational challenges will limit the mining sector's growth potential. These challenges include terrorism, bureaucratic corruption, inefficient transport networks, and high labour costs. Compared to some regional peers, the country has fairly low foreign direct investment (FDI) levels. This is partly linked to provisions which restrict foreign ownership in companies to only 40% for a wide variety of sectors, limiting the overall level of interest. Further, regulatory inconsistency, lack of transparency, and the aforementioned corruption are often cited by foreign businesses as being a serious drag on investment, particularly while regulatory authority remains weak or ambiguous.
Resource Nationalism To Remain Concern
Despite subdued metal prices, the Philippine government may seek to raise taxes on the mining sector. In particular, the Mining Industry Coordinating Council was established in January 2014 to review all existing mining-related laws and regulations, with a draft bill expected to be filed in Congress. According to the Department of Environment and Natural Resources (DENR), the draft bill is expected to increase the government's take from the mining sector by over ten-fold. Furthermore, there will also be a provision for windfall tax in order to enable the government to extract a greater share from mining companies during times of higher commodity prices.
Indonesian Ban Provides Upside
The country's nickel sector will continue to outperform given the ongoing Indonesian export ban on unprocessed ore. While Philippine nickel ore is of lower grade, exports to China have increased significantly given the latter's need to supply its nickel pig iron (NPI) operations. Nickel Asia, the country's top nickel producer, saw its profits increase significantly in H114 on the back of higher shipments. However, we forecast the country's copper and gold sectors will see slower output growth on the back of weak global prices.
|Modest Growth Ahead|
|Philippines - Select Minerals Production (% chg y-o-y)|