The Mettle of the Metal: First Class Mining in the Philippines

"FIRST CLASS" DESIGNATION SUSPENDED: See comment thread for pertinent information.  01/20/2013 

The First Class Philippines is not a place of rabid glow-eyed priests and ever-spinning drooling politicians or skinny, unhealthy kids crawling in the dirt. It is place of compassionate and reflective priests and leaders who put their jobs and the Philippines first and freshly showered kids off to school to learn something new today.

It is not mining companies derelict in their duty to preserve Philippine resources and beauty or government agents taking payoffs to permit illegal log-cutting. It is disciplined, thoughtful companies who recognize that making a profit is not their sole reason for being. They must also be stewards of good Philippine behavior. 

I find mining in the Philippines to be an interesting subject. I opined some months ago that the Philippines ought to nationalize all mining companies because resources are so valuable. Ores represent long-term assets that, once sold, are gone. And today the Philippines is selling its earth on the cheap, thereby robbing its future generations of the wealth that they need and deserve.

It is fascinating that a nation mired in poverty would manage its resources so poorly.

Well, the recent Philex mining disaster, a flood of poisons released downstream by a broken dam, has focused attention on mining. That and the deaths from soil erosion and floods caused by unregulated small scale  gold mining. Philex got fined P1.034 billion for the company's negligence. Furthermore, three pieces of legislation are in the pipeline to "fix" Philippine mining. That the legislative effort is so fractionalized is itself a reflection of a nation that simply has no common idea of what mining ought to be about.

The industry, too, is fractionalized. Thirty three mines operate under special agreement that allows extraction of minerals upon paying a small 2 percent excise fee. President Aquino recently issued Executive Order 79 that called on Congress to raise this fee to 5 percent. Most companies qualifying for the low fee are foreign owned.

Why oh why does the poor Philippines sell itself so cheaply?

Short term revenue seems to be the driving goal, and one wonders what bank accounts of public officials got cash injections to enable such foreign rape to take place in broad daylight.

Mining is managed by DENR, an organization that seems to stand for corruption.  So my personal confidence in State oversight of the mining industry is negligible.

Here is Time Magazine's recent scathing description of how the Philippines manages its mines:

• . . . Under the 1995 mining law, foreign companies typically pay no income tax, no export tax and just 2% excise tax — which is in large part why mining takes up less than 2% of the country’s GDP. That taxes are determined by self-reported production figures presents another obvious problem: underreporting of production. From 2000 to 2008, reported mineral production was between 17% and 45% lower than actual mineral exports, according to a 2010 study commissioned by Action for Economic Reforms. The lack of oversight behind such a discrepancy is a major criticism of the existing mining law. Father Edwin Gariguez, who won the 2012 Goldman Prize, a prestigious international environmental award, for his work on mining, argues that Aquino gives too much weight to the regulatory power of government agencies. He says most agencies don’t have the capacity or the will to enforce the law.

That said, I have changed my mind about nationalization. All it took was a look at one responsible company to change my perspective. The company is Nickel Asia, which came up in an article on Rappler citing their record ore shipments last year. I was upset that Rappler provided no information about the company and popped off a snide remark in the comment box.

To myself I exclaimed! "Damn. Probably another foreign company ripping off the Philippines."

So I dug some information up myself, going back to those horrid days when I actually used to work for a living and analyze this business or that.

I was very wrong about Nickel Asia.

Nickel Asia  went public in 2010 and is now listed on the Philippine Stock Exchange. It is Filipino through and through. Here is a summary of the company's performance from 2009 to 2011 (the 2012 Annual Report is not out).

Thousands

Measure	2009	2010	2012
Sales (Wet Metric Tons)	6,459	8,339	10,387
Sales Value (Pesos)	4,333,208	8,074,298	12,230,278
Price (WMT; Pesos)	12.7	18.2	24.5
Salaries & Ben (Pesos)	598,575	779,060	879,688
Net Income (Pesos)	460,519	2,371,928	5,465,557
Taxes Paid (Pesos)	549,835	1,078,810	1,666,737
Taxes to Ore Sales (%)	13.6%	13.3%	12.6%
Dividend (Pesos)	572,212	3,765,000	1,428,424

The Company has stated that 2012 financial performance would decline slightly due to a drop in nickel prices.  The company shiped a record 11,700 thousand wet metric tons of ore last year but lower prices produced a 7.4% drop in revenue from those sales. (Rappler)

Nickel Asia operates eight subsidiaries, most different mines in Luzon and the Visayas, with a modest presence in Mindanao. Nickel mines are shallow and the company has an aggressive program of rehabilitation to return the land to its natural state, plus proactive programs working with local residents.  The Board Of Directors is made up of wealthy Philippine businessmen led by Chairman Manuel B. Zamora, Jr., Vice Chairman Philip T. Ang  and President Gerard H. Brimo.

The Annual Report is thorough, of the American tradition, and financials are audited by Ernst & Young.  Nickel Asia emphasizes "sustainability", which means caretaking the earth and working with local communities. You can link over if you'd like to familiarize yourself with the particulars.

Here are some important takeaways from the above table:

1. The company is growing well.

2. The value of its product doubled from 2009 to 2012.

3. The company pumps P879 million worth of salaries and benefits into the Philippine economy. That's called JOBS folks. A lot of them. Good jobs. Career jobs. With corporate benefits like a pension plan.

4. Net income has shot up.

5. Taxes are about 13% of the value of ores sold. Compare that to the puny 2% the Philippines gets from ores shipped out by foreign companies. IT'S ENOUGH TO MAKE A BLOGGER SEE RED! What do politicians see???

6. The company has generated P 6 billion in wealth for investors during the past three years, in the form of dividends. This is the wealth creation that, in foreign owned mines, ends up overseas. Presumably most of this money is spent or invested in the Philippines.

7. The company has pumped P4.5 billion of net income the past three years, above dividends, back into the company to grow the business and multiply job opportunities and wealth-creation.

The advantages of Philippine mining over foreign mining are: (1) Better caretaking of the land, hypothetically, (2) income taxes generated, (3) jobs generated, (4) dividends paid within the Philippines, and (5) reinvestment for growth in the Philippines. Why in the world the Philippines would give this away for even a 5% excise tax is beyond me.

I would also acknowledge that Nickel Asia's mines have met with protests from local citizens who don't want their land dug up. I think that is a natural conflict that will arise with any mining activities. It is important for Nickel Asia to be sensitive to local concerns, and important for local concerns to understand that the principle of NIMBY ("Not In My Back Yard!"), if applied across the nation, is a certain path to poverty. The national government (gag, DENR) needs to adjudicate matters responsibly. Not for payola.

From my perspective, mining is a strategic business. It is the wealth of future generations. It ought not be sold to foreigners on the cheap for a quick buck. Or for payoffs that go into private pockets. It ought to be managed responsibily.

It is interesting to me that Philex, a bigger mining company than Nickel Asia focused on gold and copper mining, seems to run sloppy. Not first class. The annual reports prior to 2011 were plain paper, like a mom and pop shop. The 2011 version on the web site won't download because of a damaged file.  Like, maybe this company runs on the cheap, on the cheat.

It is interesting that the big fine has caused the company to recast its mission.  Here's how it reads now:

• Our New Mission: A Responsible Mining Company: Philex Mining Corporation is a responsible mining company that discovers and processes minerals and energy resources for the use of society. Our new mission clearly defines our reason for being and captures the essence of our mandate as a Company.  Our utmost priority at every stage of mine life is to take care of our environment while harnessing the mineral resources for the good of society.

Well, I hope so.

Here is what I would hope politicians would do as they look at new mining regulations:

• Make it unattractive for foreign companies to mine here. Establish an excise tax of at least 12% on ores shipped from the Philippines by foreign firms.

• Mandate return of the lands to a natural state.

• Ban unregulated small scale mining. Don't ban small scale mines; but expect them to comply with responsible guidelines that protect the people and the land.

And I hope Nickel Asia prospers as an example of a first class, capable Philippine corporation.