Report No. 6898-PH

The PhilippinesMining Sector ReviewOctober 30, 1987

CouLntry Depiartment 11

Asia Region

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

June 1987 US$1 = P 20.451986 average US$1 = P 20.381985 average US$1 = P 18.61984 average US$1 = P 16.71983 average US$1 = P 11.1

WEIG"'TS AND MEASURES

1 ounce troy (oz) = 31.1 gram1 kilogram (kg) = 32.1 oz troy1 kilogram (kg) = 2.205 pounds1 ton (t) = 1,000 kilograms1 megawatt (MW) = 1,000 kilowatts1 cubic meter (m3 ) 1.308 cubic yards

ACRONYMS

Ag - SilverAPT - Asset Privatization TrustAu - GoldBHA - Brook Hunt AssociatesBMGS - Bureau of Mines and Geo-SciencesBOI - Board of InvestmentsBP - Batasang Pambansa (Parliament)CB - Central BankCG - Consolidated GoldfieldsC/M - Care and MaintenanceCu - CopperDBP - Development Bank of the PhilippinesDER - Department of Economic Research, Central BankDMT - Dry Metric TouiEO - Executive OrderIFC - International Finance CorporationLe - LeachingLIBOR - London Inter-Bank Offer RateLME - London Metal ExchangeLOI - Letter of InstructionMAR - Mining Annual ReviewMMIC - Marinduque Mining and Industrial CorporationNDC - National Development CorporationNEDA - National Economic Development AuthorityNPA - Non-Performing AssetOP - Open-pitPASAR - Philippines Associated Smelting and Refining CorporationPD - Presidential DecreePNB - Philippines National BankRA - Republic ActRR - Revenue Regulationtpd - tons per daytpy - tons per yearUC - UndergroundWBMS - World Bureau ot Metal Sta'isties

FOR OMCIAL USE ONLY

PHILIPPINES

MINING SECTOR REVIEW

Preface

This report was prepared by John E. Strongman following a review ofthe Mining Sector during an Industrial Sector Mission which visited thePhilippines in August/September 1986 and a follow-up mission in May 1987. Thereport is a companion volume to Issues and Policies in the Industrial Sector,July 30, 1987 (Report 6706-PH). The World Bank wishes to convey its deepappreciation to the Bureau of Mines and Geo-Sciences and to the Department ofTrade and Industry for the staff and logistical support provided to themission. The World Bank also thanks the Chamber of Mines and private industryrepresentatives who warmheartedly gave time and informr-ion to assist themission and, in particular, Atlas, Marcopper, Maricalum, Nonoc and Philex forpermitting and facilitating site visits to their operations.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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PHILIPPINES

MINING SECTOR REVIEW

Table of Contents

Page No.

EXECUTIVE SUMMARY .................................... i-Yi

I. INDUSTRY STRUCTURE* ...... .....o.............................. 1

Reserve Baseo............... ....**.*#.*oo***...****.**. 1Production and Exports...........o.............o............ 2Employment, Value Added, Technology and Productivity...... 6

II. INTERNATIONAL COMPETITIVENESSo...o......,.................... 9

Major Companies................................................ . 9Non Performing Assets in the Mining Sector................. 12International Competitiveness of PhilippineCopper Mines.. ......... .o..................oo..oo *o.o 13

Gold Production and Small Scale Mining.e ................... 16

III. NEED FOR RESTRUCTURING.ooo.o... o..oooo ..... oo.o......... ..... 18

Sound Companieso...... '.0..,.,. *. . .,...,0..0.00000.*. 0 18Distressed Copper Companiese.....o.... .......... ..e........ 19PASAR Copper Smelter.......... ........................... 23Nonoc Nickel Refinery.......*.......*..*......* .o*.o.oo. 25

IV. GOVERNMENT RESPONSE...o ................................ o....ooo 28

Legislative Environment .............. ...... ... 0o ......... 28Taxation*... ...................... *oo .................. 29Deferred Taxes for Copper Producers................o....... 31Tax Burdeno ..... .... o.o..........................o.o.o..... 32

V. FUIlURE PROSPECTS AND ISSUES.............................*.... 34

Prospects for New Investment.............................o 34Policy Priorities ., .ooo.to ooo o.........ooooo......ooo............. 38

ANNEXES

MAP

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LIST OF TABLES

Table Title

1.1 Philippines - Mine Production 19861.2 Philippines - Non Fuel Mineral Production and Exports 19861.3 Philippines - Value of Mine Production 1972-861.4 Philippines - Share of Minerals to Total Exports1.5 Selected International Metal Price Trends 1976-861.6 Philippines - Mine Production 1972-86

2.1 Philippines - Financial Ptrformance of Six Major MiningCompanies 1970-86

2.2 Marcopper - Selected Financial Indicators 1971-862.3 Philippines - Investment by Selected Mining Companies 1971-862.4 Philippines - Closure of Copper Mines2.5 Philippines - Closure of Non-Copper Mines2.6 Comparison of Average Philippines and World Cash Production

Costs for Copper 1975, 1980 and 1985.2.7 Philippines - Primary and Co/Bi-Product

Gold Production 1975-86

3.1 Philippines - Distressed Copper Companies3.2 PASAR - Selected Financial Indicators 1984-86

4.1 Philippines - Taxes paid by the Mining Industry 1980-854.2 Philippines - Mining Industry Payments to Government as

Estimated by the Chanber of Mines 1982-854.3 Philippines - Deferred Taxes for Copper Producers as of

December 31, 19864.4 Atlas and Marcopper - Breakdown of Deferred Tax Liabilities

as of December 31, 19854.5 Philex - Selected Financial Indicators 1982-19864.6 Atlas and Marcopper - Deferred Tax Burden 1985 and 19864.7 Atlas and Marcopper - Liabilities and Stockholder Equity as

of December 31, 1986

5.1 World - Copper Price Projections 1987-20005.2 World - Nickel Price Projections 1987-2000

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LIST OF ANNEXES

1. Philippines - World Ranking for Selected Mine Producers 19862. Philippines - Value of Mine Production 1972-863. Philippines - Volume of Mine Production 1972-864. Philippines - Sales Revenues of Selected Mining Companies 1971-865. Philippines - After Tax Net Income of Selected Mining Companies

1971-866. Marcopper - Selected Financial Indicators 1971-867. Philippines - Capital Expenditures of Seloicted Mining Companies

1971-868. Philippines - Copper Production by Company 1975-869. Comparison of Copper Production Costs for Major Producing Countries

1975, 1980 and 198510. Philippines - Annual Average Copper Production Costs 1975-8511. Philippines - Cold Production 1975-8612. Atlas Consolidated Mining and Development Corporation13. Marcopper Mining Corporation14. Maricalum Mining Corporation15. North Davao Mining Corporation16. Batong Buhay Gold Mines, Inc.17. Strategic Issues in the Coal Sector

PHILIPPINES

MINING SECTOR REVIEW

Executive Summary

i. The Philippines is well endowed with mineral resources and is rankedamong the world's top ten mining countries for gold, copper, nickel andchromite production. In 1986, the value of Philippine nonfuel mineralproduction (excluding cement and coal) was P 20.2 billion. Nonfuel mineralexports were estimated to be P 15.1 billion (US$744 million) about 15.4% oftotal exports.

ii. The Philippines has a long tradition as a mining country and has astrong cadre of skilled and experienced managers. It also has a high'Lyskilled and competent mining labor force witX competitive wage rates byinternational standards. The technology of the Philippine mining industrycompares well to that elsewhere in the world. Many Lines are in remotelocations and provide their own infrastructure including transportation andcaptive power generating facilities.

iii. From the early 1970s to the early 1980s the mining industryexperienced an investment boom during which twelve major mines were developedas well as two mineral processing plants--the Nonoc nickel refinery and thePASAR copper smelter. The investment boom was encouraged by expectations oflarge profits, attractive fiscal incentives and ready availability offinancing with much foreign borrowing being guaranteed by the Development Bankof the Philippines (DBP) or the Philippines National Bank (PNB). From 1972 to1980 mining industry production increased from P 1.9 billion to P 10.8 bil-lion. During this period mining industry profitability (i.e. after tax netincome) averaged over US$100 million per year--about 29% of net sales revenuesfor the thirteen largest mining companies.

iv. In spite of the advantages held by the Philippine mining industry,the 1980s has been a period of hard times for the industry. Since i980, thevalue of mine production has fallen steadily in US dollar terms due todepressed world metals prices and stagnating production volumes. The value ofcopper, nickel, and chromite mine production has declined sharply. Only goldmine production increased in vslue. Many high-cost producers have been forcedto close and profitability has declined sharply.

v. The collapse of many new projects and mines in the early 1980sreflected a sharp deterioration in the competitiveness of the Philippinemining industry. In 1975, the net cash cost of Philippine copper producerswas estimated by Brook Hunt Associates (BHA) at US$0.38 per lb--25Z below theworld average of US$0.49 per lb. By 1980, BHA estimated that the averagePhilippine cost was US$0.57 per lb--14% above the world average which wasUS$0.50 per lb. Many of the new Philippine mining projects were simply notcost competitive in deteriorating market conditions. During the investmentboom investors and lenders placed too much emphasis on price projections and

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gave too little heed to cost competitiveness. Other contributing factorsincluded inadequate project management, imprudent gearing ratios andinadequate appraisal work by lenders. Several mines suffered from severetechnical difficulties and it is also reported that corrupt practices weakenedthe commercial and technical soundness of sote projects.

vi. The Philippine copper mining companies can usefully be divided intothree categories of companies/projects. First, there are companies who arebasically sound and whose future is reasonably assured. There are three suchmajor companies--Philex, Benguet and Lepanto (which produce about 65,000 tpycopper contained in concentrates). Sound smaller mining companies includeApex, Benguet Exploration, Itogon-Suyoc and Surigao. Second, there arecompanies which are presently operating but, at present copper prices, dependon deferment of taxes and rescheduling of debt to continue operating. Thisgroup consists of two private companies (Atlas and Marcopper which each havelarge debt obLigations to consortia of international commercial banks) and twocompanies which are now largely owned by DBP/PNB (North Davao and MaricalumMining). Third, there are mines Or projects which are presently notoperational but which may be suitable for consideration for some type ofproduction start-up (especially if copper prices improve). These includeprojects (a) which are on a care and maintenance basis (Batong Buhay), (b)which have received substantial investment but have since been shelved(Hinobaan and San Antonio), or (c) which have been closed but where most ofthe equipment is still in place (Basay). Several of these operations (inparticular North Davao, Maricalum, Batong Buhay, and Basay) have been takenover and foreclosed by DBP/PNB and are now so-called mining-Non PerformingAssets (NPAs).

vii. The development of the PASAR copper smelter, which started operationin 1983, has enabled the economy to obtain the value added of processingcopper concentrate into refined copper as well as supplying sulphuric acidfeedstock to the adjacent PHILPHOS fertilizer plant. PASAR is a viableoperation and has been able to make a small profit each year but has a highlyleveraged financial structure (debt/equity ratio of 10/90 as of December 1986)and has been unable to meet its debt repayment obligations. The governmentintends to privatize PASAR and some type of debt rescheduling and/or financialrestructuring is needed to restore PASAR's financial soundness. This couldinclude a debt to equity swap as part of a possible privatization.

viii. The Nonoc nickel refinery has been closed since March 1986.The plant has a complex design and is located in a remote place with difficultclimatic conditions. It is eleven years old and has suffered from originaldesign deficiencies as well as inadequate maintenance. It has a history ofproduction difficulties and financial losses. Studies have been made of re-opening the plant which indicate a large capital injection would be needed(probably US$30 million or more). The main issue is whether to attempt toreopen the plant with its present technology or delay a reopening until thenickel market is stronger or a lower cost technology can be introduced.Efforts to put together a new financial package have so far been unsuccessfulpartly reflecting a cautious approach by potential investors and lenders to aproject which faces significant technical risks (in terms of plantperformance) as well as price and market risks (in terms of prices for itsnickel and cobalt products as well as prices for supplies and energy inputs).

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ix. Small-scale mining is an important source of employment in ruralareas as well as a small but significant source of gold production. Small-scale gold mining is reported in over twenty locations and is estimated toprovide employment for over 200,000 miners--with each miner having an averageof four dependents who also directly benefit from small-scale mining. In 1986small-scale mine production was estimated at over 11 tons of goli with a valueof about US$135 million. The Bureau of Mines and Geo-Sciences (BMGS) havemade the improvement, regulation and promotion of small-scale mining a toppriority for the next several years. This is an appropriate and importantrole for BMGS which intends improving the mechanism and procedures forestablishing and documenting mine claims, maintaining reasonable safety andenvironmental standards, improving the technical capabilities of small-scaleminers, and supporting the development of mineral-processing channels. Aspart of these efforts a high priority is being given to improving health andsafety conditions and in particular reducing mercury contamination which isbecoming an increasing nealth hazard. ;hese are challenging tasks which mayrequire significant effart on the part of BMGS to implement and achievesatisfactory results.

x. Tax payments by the mining industry were in the order of P 900 mil-lion each year in 1984 and 1985--just under 3% of total Government revenuecollections. The tax burden on profitable mining companies is relativelyhigh. For example, over the past five years, Philex (the most profitablemining company in the Philippines in that period) has paid P 1,535 milliondirect and indirect taxes which represent 26% of net revenues. By comparison,Philex's net income after tax was P 1,585 million of which P 535 million wasdistributed in dividends to shareholders. Recognizing that several copperproducers are in financial difficulty, a Presidential Letter of Instruction(LOI 1416) was introduced in 1984 which provides for the deferment of alltaxes, duties, fees, etc. to financially distressed copper companies. Suchcharges are a liability to be paid to the Government at such time as thecompanies become profitable. So far, five copper companies have benefitedfrom LOI 1416--they are Atlas, Marcopper, Maricalum, North Davao and BatongBuhay. As of December 31, 1986, a total of P 1,801 million taxes had beendeferred including P 940 million for Atlas, P 562 million for Marcopper andP 242 million for Maricalum. The taxes deferred under LOI 1416 are alsostarting to represent a major item on the balance sheets of Atlas andMarcopper. As of December 31, 1986, they represented 13% and 40% respectivelyof the liabilities of Atlas and Marcopper. As such they represent aconsiderable barrier, especially for Atlas, to attracting outside investors,which could facilitate a financial restructuring resulting in a viablecompany.

xi. The best prospects for new investment in the mining sector are insmall to medium size gold prospects. The Philippines has several promisinggold areas. Some are already well covered by small-scale miners. Small-scalemining is potentially an important growth area requiring little, iS anycapital investment. Small-scale mining can make an important contribution toincreased gold production. Other areas will be best developed by miningcompanies who can also undertake more detailed exploration where warranted,

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although the lack of strong interest by foreign companies is noteworthy.Given the high indebtedness of many companies in the sector, there is aconsiderable need for new equity to strengthen the sector. Philex hastypically undertaken investments almost entirely with equity and hence avoidedany debt obligations. Benguet is considering financing new projectspredominantly with equity. However, the weaker companies have so far beenunable to attract much interest from local or foreign investors. The obsta-cles to a more active interest by foreign minerals companies appear to includelegal constraints on foreign ownership, uncertainties regardinig the politicalenvironment, and the unattractiveness of certain aspects of the mining codeand mineral tax.

xii. With regard to nickel, the prospects for the successful reopeningand survival of tLe Nonoc nickel plant are uncertain especially given veryweak nickel prices in the latter part of 1986 and early 1987. Copper produc-tion is likely to further decline around 1990 with the closure of theMarcopper Tapian mine due to exhaustion of economically mineable ore. Thebest possibility for an increase in copper production in 1988 is the reopeningof Atlas' open-pit operations (at Biga and possibly Carmen) on a limited life,"high grade (pit within a pit)" basis if copper prices increase aboveUS$0.75-80 per lb and/or if Atlas can achieve a financia, restructuring. Thebest prospect for copper development from 1987-90 may be u major expansion atMaricalum's Sipalay mine if copper prices consistently average over US$0.70per lb. In this event, the Bank could usefully assist the Government inreviewing the options for expanding Sipalay (prior to possibly privatizingMaricalum). However copper prices in real terms of over US$0.80 per lb arerequired from Marcopper's San Antonio ore body to warrant serioua considera-tion for development.

xiii. The most ressing issue in the mining sector is the stuccessfuldisposal of the mining NPAs. The Government has established a basic policydirection, that wherever possible, NPAs should be returned to the privatesector. The disposal of the mining operations, along with NPAs in othersectors, is to be undertaken by an Asset Privatization Trust (APT) which hasbeen appointed by the Government to deal with NPAs. The APT has a three yearperiod in which to dispose of over 300 NPAs including about a dozen miningoperations. The APT's approach is to prepare brief prospectae to informinterested parties of assets beng made available for purchase. Once two orthree parties show serious interest, an asset will be auctioned to the highestbidder. Little attempt is made by the APT to value or package the asset--itis up bidders to undertake their own evaluation and then make their best bid.

xiv. Many of the largest NPAs and most complex cases to resolve are inthe mining sector. While the APT has received some inquiries regarding miningassets there were no disposals as of mid-1987. Indeed, the disposal of someof the mining NPAs may not prove practical due to the large working capitaland rehabilitation start-up costs required to bring them into operation.Possible new owners may consider the stakes too high and the risks too greateven to bid modest sums. In such cases, the APT may be faced with the choic2of shutting down and mothballing the operation--unless alternatives such asleasing, management contracts and even som.e type of joint ventures areconsidered.

v

xv. In the event that the APT is unable to dispose of NPAs sach asNonoc, Batong Bubay, North Davao, Maricalum, Basay, etc., arrangements need tobe made to ensure that the APT has suitably qualified support to provideexpert judgment on the technical problems and risks faced by the properties,in order to place a value and the asset and decide if there is any otheralternative to closure and mothballing. It is recommended, therefore, in viewof the size of the mining portfolio (value and numbers) and inherent complex-ity of mining/mineral projects, that a mining subcommittee be established toassist the APT. The subcommittee would draw upon suitable expert staff fromagencies su'.h as BMGS and BOI as well as possible expert assistance fromindustry representatives which could be coordinated by the Chamber of Mines.At the same zime, it is recommended that thought should be given by theMinistry of Trade and Industry and the Ministry of Nariral Resources as to themost suitable and feasible place within the existing Government agencies toestablish a group with strategic analytical and decision-making capability forthe mining and mineral processing industries.

xvi. The mining industry, like many other subsectors, is subject to awide variety of laws, regulations, executive orders, presidential decrees,letters of instruction, etc., regarding taxation and incentives. However, inview of the large investments involved, there seem to have been an exception-ally large number of regulatory orders providing "special deals" for indivi-dual projects and companies in the late 1970s and early 1980q. An inter-agency study has been initiated by BMGS to review which of these should bemaintained and how a more orderly taxationiincentive regime can beestablished.

xvii. It is recommended that BMGS ensure that the ongoing review offiscal arrangements and incentives for the mining sector is completed in atimely manner and that it include, in particular, the following four issues:

(a) A review of the present tax policy for distressed coppercompanies. Without deferment of taxes, Marcopper, North Davao,Atlas and Sipalay would cease production (at least on a temporarybasis). Yet, the deferment in the present market conditions isresulting in large overdue tax obligations to the Government withoutany likely resolution in the foreseeable future. This will resultin serious difficulties especially for Atlas in cleaning up itsbalance sheet. It may also seriously impede attempts to eventuallyprivatize Sipalay and North Davao.

(b) Royalty Payments. The present royalty system has the effect ofincreasing the price/cost at which reserves are viable for recoveryand hence turning potential recoverable ore into uneconomic waste(by increasing the cut-off grade). This is undesirable and shouldbe reviewed.

(c) Incentives to Encourage Foreign Investment. A major priority of thenew Government is to encourage foreign investment. However, presentregulations place strict limits on the degree of control and thelevel of income and profitability of foreign owners in local opera-tions. Given the inhe-:ent high risk characteristics of mining, work

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is needed to establish a framework of suitable incentives to attractpotential foreign investment.

(d) Effect of Policy Framework on Tax Revenues and Foreign Exchange.More work is required to examine the implication of different policyoptions for tax revenues and foreign exchange earnings in both thenear term (1-2 years) and medium term (3-5 years), It is possiblethat trade-offs exist between the level of taxation and the amountof fiscal incentives (in:luding possible eaemptions for deferredtaxes) in the next 1-2 years in the light of the ability ofcompanies to survive the present difficult market circumstances andeventually generate taxes at such time as market prices improve.This is a cemplex and politicaLly sensitive topic which requiresurgent and careful work by qualified authorities.

xviii. Small-scale mining offers a potentially important growth areafor the mining sector. It is a very new area, greatly in need of improved andincreased regulations and assistance. The expansion of small scale mining isa major priority and, appropriately so, for BMGS. Given the size of resourcesavailable to BMGS, it is recommended that BMGS cor.tinue to -ocus on small-scale mining as an area of high priority and provide necessary_health andsafety regulations, infrastructure, transport, Rrocess t and marketingassistance, It is also recommended that BMGS continue to take the leadregarding_ soci ial

PHILIPPINES

MINING SECTOR REVIEW

I. INDUSTRY STRUCTURE V

Reserve Base

1.1 The Philippines is well endowed with mineral resources. In particu-lar, there are important reserves of both metallic minerals (especially gold,silver, copper, nickel, cobalt and chromite) and non-metallic minerals (espe-cially sand and gravel, salt and silica sand). There are also many othermineral deposits which are of lesser significance. These include lead, zinc,molybdenum, iron ore, manganese, platinum, bauxite, pyrites, gypsum, lime(quicklime), rock phosphate, limestone, marble, perlite, aggregates, sand-stone, various clays, feldspare, magnesite, silica quartz and talc ore.

1.2 The mineral resources are widely distributed throughout the islandsand are often found in multi-product ore bodies. Important copper/gold/silverdeposits are found in Northern Luzon (especially Benguet Province and ZambalesProvince), Marinduque Island, Cebu Island, Negros Island and Mindanao Island(especially Davao del Norte Province). There are several gold districtsincluding Baguio (Northern Luzon), Paracale (Camarines, Luzon), Masbate(Masbate Island), Masara and Suriago (Mindanao Island) and south-westernNegros Island, Nickel-cobalt deposits are found on Palawan Island, NonocIsland and Hinatuan Island and chromite depooits are found in Zambales(Northern Luzon), Palawan Island and Suriago (Mindanao Island).

1.3 Copper is the most commonly found metallic mineral in thePhilippines. Most of the copper ore bodies have a copper grade between 0.3%and 1.0% copper (with the bulk from 0.3%-0.7%). These grades are relativelylow by world standards. Other major producers (such as Chile, Zambia, Zaireand Peru) have copper ore grades of 1-3%. Of the major copper-producingcountries only USA and Canada have ore grades predominantly below 1%. However,almost all of the Philippine copper ore bodies have gold and silver co-products and bi-products which help offset the low copper grades. Theprecious metal content tends to be higher (about 3-10 g gold per ton of ore)in the northern-most deposits (especially on Luzon) but lower (about 1-3 ggold per ton of ore) in the depoits in the southern half of the Philippines(e.g. Cebu Island and Negros Island) although some higher grade deposits arefound on Mindanao Island.

1/ This report addresses the non-fuel minerals subsector. The report con-centrates on metallic non-tuel mi"erals since these are produced mostlyfor export markets. The bulk ot the non-metallics are constructionmaterials for domestic consumers.

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1.4 The ore grade of gold deposits are slightly below average by worldstandards, with ore grades of 1-10 g per ton of ore in the PhiLippinescompared with ore grades of 2-14 g/t (averaging 6 g/t) in South Africa and3-12 glt gold in other major producing countries (such as Canada, US andAustralia). The nickel ore grades are in the range of 1.0-1.4% which arerelatively low compared with ore grades of over 2% for major prodi:cers such asCanada, Australia and New Caledonia.

Production and Exports

1.5 In 1986, the Philippines ranked among the world's top ten miningcountries for gold, copper and nickel mine production as shown in Table 1.1below and in Appendix Table 1.

Table 1.1: PHILIPPINES - MINE PRODUCTION 1986

Philippines World % of WorldMetal production production Ranking production

(--- metal content) ------

Gold (t) 35.4 1,281 6 2.7Silver (000 oz) 51.5 9,500 20 0.5Copper (OOOt) 217.0 6,526 8 3.3Nickel (OOOt) 12.7 506 5 2.5Chromite (OOOt) 202.2 6,686 7 3.0Cobalt (t) 92 25,811 - -

Source: Bureau of Mines and Geo-Sciences (BMGS); World Bureau of MetalStatistics (WBMS); Mining Annual Review (MAR)

1.6 The total value of Philippine non-fuel mineral production (excludingcement and coal) as reported by the Bureau of Mines and Geo-Sciences in 1986,was P 20.2 billion (equivalent to US$994 million as shown in Table 1.2). Theproduction consisted of P 18.2 billion metallic minerals and P 2.0 billionnon-metallic minerals; 86% of the value of production was accounted for b; twomajor minerals namely gold--P 8.5 billion (42%) and copper--P 8.9 billion(44%). The volumes refer to the products specified, thus 824,900 dry metricton (DMT) of copper concentrate contained about 217,OOO t recoverable coppermetal. The Philippines Associated Smelting and Re-ining Corporation (PASAR)produced and exported about 127,300 tons copper cathodes (by processing about440,000 DMT copper concentrates).

1.7 Almost all of the metallic mineral production is exported whereasthe non metallic production is largely for domestic use. According to theBMGS statistics, the value of metallic mineral exports in 1986 was P 15.0billion (about US$741 million). By comparison, the value of non metallicexports was P 61 million (US$2.4 million). However, the BMGS "export" figures

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Table 1.2: PHILIPPINES - NONFUEL MINERAL PRODUCTION AND EXPORTS 1986

Production ExportsMineral Product Unit Quantity Value Quantity Value

(P mln) P mln US$ mln

MetallicsGold Meta'l /a t 35.4 8,395.6 35.:' 8,493.4 418.0Silver Metal /a t '1.5 174.6 48.8 174.6 8.6Cobalt Metal '000 t 0.1 33.4 0.3 95.0 5.0Nickel Metal '000 t 1.0 83.5 3.5 235.9 12.5Nickel Ore '000 OMT 504.9 238.4 339.3 156.3 7.7Copper Concentrate '000 DMT 824.9 5,460.6 360.9 2,241.3 111.1Copper Cathode '000 DMT 127.3 3,479.8 127.3 3,479.8 170.0Chromite Refractory ore '000 DMT 72.0 141.2 81.4 141.8 7.0Chromite Concentrate '000 DMT 70.6 119.0 - - -Chromite Other '000 DMT 59.6 69.2 13.3 15.3 0.8Zinc Concentrate '000 DMT 3.0 10.6 3.4 11.3 0.6Manganese Ore -000 DMT 0.4 0.1 - - -Iron Laterite '000 DMT 15.0 1.3 15.0 1.4 0.1

Subtotal 18,207.3 15,046.1 741.4

Nonmetallics /bSalt - '000 MT 442.1 391.1 - - -Silica sand - '000 MT 307.3 57.2 - - -

Sand and gravel - - 12,481.8 1,221.3 - -Others - 300.0 - 61.4 2.4

Subtotal 1,969.6 61.4 2.4

GRAND TOTAL 20,176.9 15,107.5 743.8

/a Includes shipments to Central Bank.lb Excludes cement and coal.

Source: BMGS - preliminary.

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include about 22 tons of gold (valued at about US$262 million) which weredeposited with the Central Bank. Thus, actual traded exports were aboutUS$479 million. Ic is estimated that about US$200-250 million foreignexchange was required by the mining sector (including PASAR) for operatingexpenditures (for spare parts, supplies, fuel, etc.) of foreign origin. Thus,the industry generated about US$500-550 million in neF foreign exchange(before any foreign exchange needed for capital expenditures or for foreigndebt service).

1.8 The decade of the 1970s was a period of high growth for thePhilippine mining sector as shown in Table 1.3 and Appendix Table 2. From1972 to 1980, the value of production increased from P 1.9 billion (US$284million) to P 10.8 billion (US$1,435 million) with over half of the growthaccounted for by two commodities--copper and gold. Since 1980, the value ofproduction declined steadily from 1980 to 1986 in dollar terms (with theexception of a modest recovery in 1985). The decline from 1980-1986 largelyreflects the fall in world metal prices and stagnating volumes of exports.

Table 1.3: PHILIPPINES - VALUE OF MINE PRODUCTION 1972-86

1972 1975 1980 1981 1982 1983 1984 1985 1986

(P million)

Gold 225 575 2,785 2,642 2,651 3,822 4,773 6,088 8,396Copper /a 1,360 1,640 4,409 3,782 3t446 4,047 4,970 5,630 5,461Nickel 4 263 1,437 1,109 577 400 466 1,713 322Other metallic 186 305 1,146 539 468 506 595 961 549

Subtotal metallic 1 775 2 783 9 777 8 122 7 142 8 775 10 804 14 392 14 728Non metallics /a '5i 1,803 ' Z,TIt54 1 ,TU3 169

Total 1,929 3,036 10,760 9,706 8,726 10,605 13,738 16,195 16,697

(US$ million)

Gold 33 77 371 334 312 344 286 327 412Copper 200 219 588 479 405 365 298 303 268Nickel 1 35 192 140 68 36 28 92 16Other metallic 27 41 153 75 55 46 36 52 27

Subtotal 261 372 1,304 1,028 840 791 648 774 723

Nonmetallics 23 34 131 174 186 165 176 97 96

Total 284 406 1,435 1,202 1,026 956 824 871 819

Peso: US$ 6.8 7.5 7.5 7.9 8.5 11.1 16.7 18.6 20.4

/a Excludes copper cathodes.TS Excludes coal and cement.

Source: BMGS.

1.9 The decline in the value of production between 1980-1986 affectedall minerals witnt the major exception of gold. Traditionally, copper has beenthe predominant mineral. In the early 1970s, copper accounted for about 70%of the value of mine production. Since then, copper's share has steadilydeclined as the production of gold, nickel and other minerals has increasedrelative to copper.

1.10 The value of mineral exports and the share of mineral exports intotal exports also declined sharply from 1980-1986. According to figures fromthe Central Bank Department of Economic Research (DER), the share of mineralexports declined from about 21% in 1980 to about 11.5% in 1986 as shown inTable 1.4. It should be noted, however, that these data appear to excludegold delivered to the Central Bank (valued at US$113 million, US$172 andUS$262 million in 1984, 1985, and 1986 respectively, according to BMGS).

Table 1.4: PHILIPPINES - SHARE OF MINERALS TO TOTAL EXPORTS(US$ millions)

Year Mineral exports Total exports % Share

1980 1,235 5,788 21.31981 1,025 5,722 17.91982 727 5,021 14.51983 550 5,005 13.21984 516 5,392 9.61985 594 4,629 12.81986 557 4,842 11.5

Source: DER

1.11 The decline in value of production since 1980 of copper and nickelrepresents the effects of two main factors, namely international market pricesand production levels. The two are closely related. 1980 was a boom year formost metals and minerals and in particular, gold as shown below. Since then,metals markets have been generally depressed with low prices (in US$ terms)especially for copper and nickel, as illustrated in Table 1.5. It should benoted that price trends have been strongly influenced by exchange rate changesbetween the major currencies and especially the US dollar and other curren-cies. For example, the London Metal Exchange (LME) price for copper indicateda rising trend from 1980-85 if measured in pounds sterling terms but a declineif measured in US dollar terms.

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Table 1.5: SELECTED INTERNATIONAL METAL PRICE TRENDS, 1976-1986

Metal Units 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Cold /a US$ioz 125 148 193 307 613 460 376 426 360 317 368Copper /b US$/lb 0.64 0.59 0.62 0.90 0.99 0.79 0.67 0.72 0.63 0.64 0.62Copper 7T b/ton 782 750 711 934 942 866 846 1,049 1,031 1,103 930Nickel Tc US$/lb 2.26 2.28 2.08 2.72 2.95 2.69 2.18 2.12 2.18 2.22 1.76

/a London Bulletin Dealers Fixinig Price, $ per troy ounce.7T LME Cash Settlement Higher Grade Cathodes (wirebars prior to December 1, 1981).Tc 1975-79 US Producer Price for cathodes as quoted by Metals Week, 1980-85 LME Cash

Settlement Price.

Source: WBMS

1.12 Philippine mine production of copper, nickel and chromite declinedin the 1980-1986 period in the face of the deteriorating world market condi-tions. Silver production also declined modestly. In contrast, the 1980s hasbeen a period of significant growth in Philippine gold production as shown inAppendix Tablo 3 and suammarized in Table 1.6.

Table 1.6: PHILIPPINES - MINE PRODUCTION 1972-1986

Mineral Units 1972 1975 1980 1982 1983 1984 1985 1986

Cold t 18.9 15.6 20.0 25.9 25.4 25.7 33.1 35.4Silver t 57.5 50.4 60.7 61.7 56.7 49.0 52.4 51.5Copper Conc./a 000 t 213.7 225.8 304.5 292' 271.4 233.4 237.7 217.0Chromite Ore 000 DMT 268.3 423.0 378.6 208.. 155.1 148.5 177.9 202.2Nickel Ore /a 000 t /a 0.4 9.5 30.3 19.6 13.9 13.6 27.6 12.7

/a Metal content of ore and concentrate.

Source: BMGS (except nickel 1972-1983 WBMS).

Employment, Value Added, Technology and Productivity

1.13 The bulk of mineral production in the Philippines is undertaken byincorporated mining companies. In 1986, the Philippine Chamber of Minesreported an employment of 44,452 to the BMGS. In addition to the employmentreported by mining companies, there has been a major boom in small scalemining in the Philippines especially in the past five years. Most of thisboom has taken place in the gold sector following the gold boom of the late

1970s (when annual average prices increased from US$125 per oz in 1. 76 toUS$613 per oz in 1980). Although gold prices have since declined to the rangeof US$300-500 per oz, such prices have made small scale gold-panning a veryattractive activity. In 1984, BMGS estimated small scale mining employment at200,000--making small scale mining extremely important from an employmentstandpoint.

1.14 The employment provided by the mining companies is an importantsource of income in the regions where mining activities are located.According to a socio-economic survey of mining communities conducted by BMCSin 1983 of eight major mining operations, the per capita income of mininghouseholds was three to seven times higher than the per capita GDP for theregion where the mine was located. The regional per capital GDP estimatesranged from P 1,009 to P 2,069 compared with the mining household per capitaincomes of P 5,436 to P 10,060 (in 1983 terms). The value-added contributionof the mining industry (including coal and cement) is estimated to havedeclined from 2.24% of GDP in 1980 to 1.92% in 1985 according to the NationalAccounts Staff, National Economic Development Authority (NEDA). Many of thedeposits are found in relatively remote locations. Thus, in many cases, minedevelopment has also included infrastructure development. For most mines, theinfrastructure requirements have included new port facilities, road (or roadimprovements) to connect the mine site to the port, community and townshipdevelopments and, frequently, power generation facilities also. The isolationof the mines increases the importance of the employment benefits (if the minecloses often, th& local economy can no longer sustain itself and most peoplemust leave the area to find other means of amployment) as well as requiringthat the mines have a high degree of self sufficiency regarding maintenanceand other technical capabilities.

1.15 The technology of the Philippine mining industry compares well tothat-elIewhere in the world. Open-pit mines use 120t and 170t dump trucks and10-20 m shovels. These are appropriately sized for the operations concernedand only a handful of mines worldwide have larger equipment. By and large,each of the major open-pit mines is largely self sufficient in its maintenanceoperations. One company, Atlas, even has its own foundry facilities. Theunderground mine operations are equally, if not more, technically sophisti-cated than the open-pit mines, and some of the block caving underground opera-tions are probably as good as any other in the world. Due to their remotelocations, many of the mines have to have their own power generation facili-ties. Atlas has over 100 KW generating capacity for its Cebu mining opera-tion. Other operations with large (over 50 MW each) generating capacity,include Marcopper, Nonoc and Maricalum--the tatter has the largest land baseddiesel generating unit (33 MW) in the world. Discussions with the companiesindicate that safety and environmental standards appear broadly in line withinternational practices. However, there is some community concern regardingthe environmental effects (especially fo; fishing) of coastal disposal oftailings. Some companies will be faced with the need to provide new tailingsdisposal facilities in the near future. It is important, both for thecompanies and the communities, that standards be well-established so thatcompanies can make the necessary investment decisions and the communities canbe assured of satisfactory environmental conditions.

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l.l6 In addition to the mining operations, there are two major mineralprccessing plants in the Philippines--the Nonoc nickel refinery and PASARcopper smelter. The International Finance Corporation (IFC) was involved infinancing both these projects. In both cases, foreign technology was obtainedfrom international suppliers. The Nonoc plant which started up in the mid1970s has suffered from a long series of technical problems, including designdeficiencies, and its achievable production capacity is reported to be no morethan 70% of original design capacity. The PASAR smelter started up in 1983and has been able to reach its targetted production levels--although withsomewhat higher init production costs than anticipated. Further discussion ofboth plants is provided later in the paper.

1.17 Productivity is generally measured in terms of output per man houror man vear. In the case of mining operations, the production of ore per manyear is one such measure. Comparative data are available for different miningoperations around the world. However, the interpretation of the data must betreated very cautiously since there are many factors which influence theproductivity achievable. For open pit mines, these include ore to wastestripping ratio, scale of equipment, selection of haulage system (in particu-lar conveyor versus truck), length of haulage from the pit face to the crusherand from the pit to the waste disposal ore. For underground mines, thefactors include the type of access (drift versus shaft mines), seam size, seamconditions, roof and floor stability and degree of faulting. In both cases,production can also be influenced by the use of contractors to reduce employ-ment requirements. In addition, productivities in different country groupsalso indicate different labor/capital intensities often reflecting the higherreal wage rates found in industrialized countries relative to developingcountries.

1.18 Bearing in mind these caveats, data for open-pit mines prepared byBrook Hunt Associates Inc. (BHA) indicates that in 1985, output was 4,500 tonsof ore per man year and 7,600 tons of ore per man year for the Dizon andTapian mines respectively in the Philippines--which compared reasonably wellwith estimates of 1,000-8,000 tons per man year for other major open pitcopper mines in Latin America and Africa. However, al'L these figures werewell below the reported performance of several North American mines which werein the 20,000-30,000 tons per man year range in 1985. For underground mines,BHA reports an output per man year for Philippine mines ranging from about 300tons ore at Lepanto and 2,100 tons per man year at Philex in 1985. Bycomparison, other underground mines in Africa, Canada, Latin America, Europeand Asia were predominantly in the range 500-2,000 tons of ore per man year.Some individual mines in Australia, Chile, Sweden and USA, however, were inthe range 3,000-5,000 tons of ore per manshift.

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II. INTERNATIONAL COMPETITIVENESS

Major Companies

2.1 The Philippine mining industry developed as a private industry.During the 1970s, six companies accounted for over 90% of mining industryproduction and revenues--Atlas, Benguet, Lepanto, Marcopper, Marinduque andPhilex. All of these companies were listed on the Manila Stock Exchange andpwith one ext-eption, all were predominantly managed and operated by localstaff. The one major exception was Marcopper, in which Placer of Canada hasan important minority shareholding and for which Placer provides part of thecore management team.

2.2 The 1970s was a period of rapid growth in both sales and profita-bility for these six companies as shown by the data in Appendix table 4 and 5and summarized in Table 2.1.

Table 2.1: PHILIPPINES - FINANCIAL PERFORMANCE OF SIX MAJORMINING COMPANIES 1970-86 /a

(million ? per year)

1971-73 1974-76 1977-79 1980-82 1983-85 1986

Revenues /b 1,887 2,788 3,858 7,031 8,027 8,388

Net Income (After tax) 762 674 637 (532) (3,069) (638)

/a Namely, Atlas, Benguet, Lepanto, Marcopper, Marinduque and Philex7i Net of smelting and refining charges

Source: Board of Investments (BOI) derived from company annual reports.

The profitability of the mining sector in the 1970s is illustrated by theMarcopper operation. The mine started operation in 1971 ane had earned suffi-cient profits to pay back the initial investment in 1973. For most of the1970s, the mine generated large profits, dividends for shareholders and taxesfor the GCovernment as shown in Appendix Table 6 and summarized Table 2.2.

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Table 2.2: MARCOPPER - SELECTED FINANCIAL INDICATORS, 1971-86(million P per year)

1971-73 1974-76 1977-79 1980-82 1983-85 1986

Revenues 320 464 515 517 666 785Costs (154) (251) (325) (495) (768) (1,127)

Profit Before Tax 166 213 190 22 (102) (342)Income Taxes T3i) T50) T72) (15) 2 -

Profit After Tax 131 163 118 7 (104) (342)

Dividends 125 162 95 52 - -

Source: Company Annual Reports.

2.3 The early 1970s saw the start of an investment boom that lasted intothe early 19809. Several major new mines were opened by the major producersincluding Atlas (Carman copper mine and Masbate gold mine), Benguet (Dizoncopper mine), and Myinduque (Nonoc nickel mine and refinery), In addition,several new copper - mines were developed by other companies such as CDCP(Basay), Batong Buhay, Hercules, Consolidated (Ino), North Davao, Sabena,Western Minolco and Zambales and the PASAR copper smelter was also con-structed. The factors contributing to the boom included the high profitabil-ity of the existing mines (and hence expectations of similar profitability fornew ventures), attractive fiscal incentives (investment tax credits, etc.) fornew mining ventures, and the ready availability of financing for equipment(trucks and shovels, etc.) and plant (crushers and concentraters) needed forthe projects with much of the foreign financing being guaranteed by the Devel-opment Bank of the Philippines (DBP) or the Philippines National Bank (PNB).Annual investment by company is given in Appendix Table 7 and in Table 2.3.

2/ Many of the mines noted here also had minor bi-products, generally goldand silver.

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Table 2.3: PHILIPPINES - INVESTMENT BY SELF,CTED MINING COMPANIES, 1971-86(million P per year)

1971-73 1974-76 1977-79 1980-82 1983-85 1986

Eight miningcompanies /a 80 254 452 454 6 395

Marinduque 26 285 331 1,088 2,594 /bAtlas 119 158 270 539 478 306

Four New CopperProjects _c - - 139 688 292 30

Total 225 697 1,193 2,769 5,468 7311~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

la Bengliet, Lepanto, Marcopper, Philex, Apex, Itogon-Suyoc, Surigao,Rio-Tuba.

/b Foreclosed 1984.7T Basay, Batong Buhay, North Davao, Sabena

Source: BOI, derived from Company Annual Reports

2.4 The investment boom resulted in the number of operating copper minesincreasing from 12 in 1975 to 18 in 1979/80. However, many of the new projectswere unable to survive the downturn of the copper market following the 1979/80boom (as shown in Table 1.5) and the early 1980s saw a prolonged series ofcopper mine closings as summarized in Table 2.4 below. Annual copper produc-tion figures are given on a mine-by-mine basis in Appendix Table 8.

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Table 2.4: PHILIPPINES - CLOSURE OF COPPER MINES 'a

Maximum productionand year (tons of

Year of First year of copper contained DBP/PNBClosure Company (Mine) production in concentrate) Involvement

1980 Ino .980 7,620 (1979) PNB1981 Acoje (Barlo) pre-1975 3,330 (1979) -

1981 Consolidated Mines 1978 7,600 (1979) PNG1981 Aarinduque (Bagacay) pre-1975 4,370 (1975) DBP (also PNB)1981 Kennon (Black

Mountain) pre-1975 3,450 (1976) DBP1981 Sabena (Camanlangan)1981 Santo Nino pre-1975 6,060 (1980) DBP1981 Zambales 1978 400 (1979) PNB1982 Hercules (Bully

Bueno) 1982 1,490 (1981) PNB1982 Western Minolco pre-1975 14,430 (1980) DBP1983 Basay 1979 20,400 (1980) PNB (also DBP)1985 Batong Buhay /b 1983 7,800 (1984) DBP (also PNB)1986 Atlas (CarmenY/b 1977 50,000 (est) -

/a Most mines also had some bi-products, especially gold.7T On a care and maintenance basis presently.

Source: BHA, Bank Staff.

Non Performing Assets in the Mining Sector

2.5 Two Government banks--the Philippines National Bank (PNB) and theDevelopment Bank of the Philippines (DBP)--played an especially important rolein that they provided guarantees for the foreign debt and provided most of thelocal debt for many of the new projects and, in some cases, effectivelyprovided part of the equity. The two Government banks have a substantialexposure in many of the copper mines listed above. However, their largestexposure is in the Nonoc nickel operation which was foreclosed in 1983;subsequently reopened in 1984 but closed again in 1986. (A section of thenext chapter is devoted to Nonoc). In addition, DBP and PNB have exposures ina number of failed noncopper mining projects as shown in Table 2.5 below:

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Table 2.5: PHILIPPINES - CLOSURE 01 NON-COPPER MINES

Capacity DBP/PNBCompany Mine Product (tpd ore) Involvement

Sabena Batoto Gold 200 DBPVulcan Marian Gold/Silver 500 PNBGolden River Golden River Gold 9,000 PNBFilipinas Marble Romblon Marble 400 m3/mth DBPPhilippine Eagle Longos Gold/Silver 500 DBPTrident Mining Trident Chromite 750 PNB

Source: BMGS

2.6 DBP/PNB's exposure in mining sector nonperforming assets (N?As) isvery substantial. Major exposures in order of magnitude terms includeMarinduque (Nonoc and Maricalum) P 18 billion, Basay P 1 billion, North DavaoP 5 billion, Batong Buhay P 6 billion. Following the collapse of so manyprojects, mining investments form the largest single subsector of the NPAs ofPNB and DBP. The original value of the investment in the mining NPAs wasabout US$1.3 billion. Outstanding accounts, including penalties and foreignexchange losses are estimated to be on the, order of P 35 billion (US$1.9billion equivalent) at the end of 1985 for PNB and DBP combined.

2.7 Inadequate concern for cost competitiveness, combined with depressedmarket conditions, have been significant elements in the failure of thesemining NPAs. Other contributing factors included inadequate appraisalcapabilities for mining projects on the part of DBP and PNB, imprudent gearingratios, inadequate project preparation and inexperienced or ill-qualifiedproject management. In some cases, it is also alleged that commercial andtechnical soundness was weakened by corrupt practices. Investors and lenderstended to placed too much emphasis on price projections, which proved overlyoptimistic, and too little emphasis on cost competiveness art technicalsoundness. Mining projects are technically very complex and very risky.Several of the failed projects also suffered from technical problems due toinadequate project preparation or inadequate management. In particular, theWestern Minolco, Batong Buhay and Ino copper projects all faced severedifficulties due to inacequate exploration and geological work. Designinadequacies have caused major problems at North Davao and Nonoc. Some ofthese projects have also experienced long delays in establishing adequateaccess and infrastructure (such as roads and power), e.g., Ino, Batong Buhayand Hercules.

International Competitiveness of Philippine Copper Mines

2.8 In 1975, the Philippine copper industry had an average cash produc-tion cost (including taxes, interest and bi-product credits) of US$0.38 per

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lb,3/ By comparison, average world cash production costs were US$0.49 perlb. Thus, the Philippine producers were well in the lower half of the worldcost curve. In 1974, (a copper "boom" year), world copper prices averagedUS$0.93 per lb--indicating the Philippine industry was extremely profitable.But, even in 1975, a year when copper prices slumped to US$0.56 per lb, thePhilippine industry had a very good financial performance. From 1975 to 1980,average cash production costs for Philippine producers increased to US$0.59per lb--whereas average costs for all world producers remained almostunchanged--at US$0.50 per 1'b. Thus the Philippines moved into the top half ofthe world cost curve. However, in 1980, copper prices averapRd US?0.99 per lband the Philippine industry was still in good financial shiapt

2.9 Since 1980, however, the average cash costs for Philippine producershave continued to increase and were estimated at US$0.86 per lb in 1985 com-pared with US$0.51 for average world producers. As a result, in 1985Philippines had the highest avera_e cash production costs of major producingcountries as detailed in Appendix Table 9 and summarized in Table 2.6 below.

Table 2.6: COMPARISON OF AVERAGE PHILIPPINES AND WORLD CASHPRODUCTION COSTS FOR COPPER, 1975, 1980 and 1985 /a(US cents per lb of refined copper--current terms)

Direct Indirect Interest Gross /b Bi-Product Net /bcosts costs costs costs credits costs

Philippines 1975 42.8 4.6 1.5 49.1 11.3 37.81980 86.0 8.9 9.3 104.2 20.6 59.01985 /c 80.6 7.4 32.2 120.2 34.3 85.91985 Th 74.0 6.3 14.0 94.3 34.3 60.0

World 1975 57.6 10.4 2.9 70.9 22.0 48.91980 87.0 17.0 4.8 108.7 58.8 49.91985 64.3 7.4 6.6 78.2 27.7 50.6

/a 1985 data are estimates.7-b Excludes depreciation.7- Includes certain deferred taxes and postponed interest payments.7d Excludes deferred taxes and postponed interest payment, as estimated by the

mission.

Source: BHA.

3/ As noted in the tables, most of the cost data noted in this section istaken from Western World Copper Costs 1985/86 Edition, Brook HuntAssocihtes.

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2.10 However, two important qualifications must be made to the Brook HuntAssociates data for 1985 cost estimates for the Philippines. First, marginalproducers are presently able to apply to the Government and have all taxpayments deferred. Such deferred tax payments account for about 8% (US$0.07per lb) of the cost estimate of US$0.86 per lb. In the case of Marcopper(which requires large amounts of fuel oil--which is highly taxed--for powergeneration), the defe:red taxes are estimated at US$0.17 per lb in 1985. ForAtlas, they are estimated to be US$0.11 per lb in 1985. Second, the interestpayments include very large interest liabilities of North Davao to DBP and PNBwhich are not being paid. If North Davao's interest costs were to beexcluded, the average production cost for the entire copper industry would bereduced by US$0.18 per lb. Thus, if these two items are excluded in 1985 thePhilippine industry had average cash costs of about US$0.60 per lb comparedwith world average costs of US$0.51 per lb and a 1985 copper price of US$0.64per lb.

2.11 The comparative cost data for the Philippines and average worldproducers indicate some important structural changes in the cost structure ofthe Philippine industry. In 1975, Philippine average costs were about $0.10per lb below world average costs. Philippine producers had mining advantageswhich resulted in the production costs being US$0.20 per lb lower than theworld average--but other producers benefitted from bi-product credits beingUS$0.10 per lb higher than for the Philippines. From 1975 to 1980, the miningadvantage of the Philippines was reduced by $0.10 per lb. While data is notpresently available foe a definitive judgment, it is believed t0at this waspartly because the 1979 OPEC oil price increasA impacted the Philippine indus-try more strongly than other copper producers due to the relatively heavyreliance of Philippine copper mines on oil-fired power generators. (Year byyear costs are given in Appendix Table 10). Direct and indirect productioncosts in the Philippines also increased because new projects had higher coststhan existing projects. Furthermore, the heavy borrowing of the Philippineindustry (especially for few projects) increased interest charges to nearly$0.10 per lb--a substantial increase from less than US$0.02 per lb in 1975.

2.12 Since 1980, the competitiveness of the Philippines has furtherdeteriorated. 1980-85 has been a period of extreme austerity and cost cuttingin the worldwide copper industry. High cost producers have been forced out ofbusiness, costs have been cut to the bone, pits have been redesigned toimprove costs and in many cases, high graded, in order to survive. Overall,average world direct and indirect costs have been reduced (in US dollar terms)by US$0.32 per lb. In the Philippines, however, average direct and indirectcosts have been reduced by only US$0.04-0.05 (excluding deferred taxes) orUS$0.11 per lb (including deferred taxes). Fortunately, for the Philippineproducers, however, the apparent decline in mining competitiveness has beenlargely offset by a large improvement in the value of bi-product creditsrelative to other producers. The bulk of the copper bi-product credits in thePhilippines are for gold--where prices in the 1980s have been much higher thanin the 1970s. In other countriest metals such as nickel, cobalt, molybdenum,lead and zinc are also important bi-product metals for copper. The price ofthese other metals have been generally depressed in the 1980s.

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Gold Production and Small Scale Mining

2.13 In contrast to the copper sector, gold production has increasedsubstantially in the Philippines ~-uring the 1980s as shown in Table 2.7.Primary gold production increased from about 6,500 tons in 1980 to over 9,800tons in 1986 with increases from several operations. Co-product and bi-product gold production increased from about 12,800 tons in 1980 to about14,200 tons in 1986 with large increases at Benguet (Dizon) and Philex.Company by company details are given in Appendix Table L1.

Table 2.7: PHILIPPINES - PRIMARY AND CO/BI-PRODUCT GOLD PRODUCTION, 1975-86(kg)

1975 1980 1982 1983 1984 1985 1986

Primary 5,209 6,485 8,425 9,977 8,937 9,629 9,835Co/Bi-Product 9,654 12,836 15,488 14,113 14,641 15,449 14,155Small-scale mines 1,200 2,700 6,000 9,200 10,500 8,084 11,439

Total 16.062 22,021 30,913 33,290 34,078 33,162 35,429

Source: BHA (1975-84); BMGS (1985, 1986)

2.14 Philippine gold Tning operations are fairly efficient by worldstandards. BHA estimates - indicate Philippine cash mining costs areslightly below average western world mining costs for open pits (US$12.3 perton of ore versus US$13.0 per ton of ore in 1985) and well below averagewestern world mining costs for underground mines (US$31.3 per ton of oreversus US$37.1 per ton of ore in 1985). However, Philippine gold depositstend to have somewhat lower ore grades than elsewhere. Gold yields in openpit gold mines in 1985 were reported by BHA to be 1.80 g/ton compared withabout 2.2 g/ton for the average western world. For underground mines, the1985 figures were 3.70 g/ton (Philippines) and 6.6 g/ton (average westernworld).

2.15 Philippine gold production costS are in the upper range of the worldcost curve. BHA reports that average Philippine cash costs were US$280 per ozin 1985 compared with average western world costs of US$232 per oz (and aprevailing price of US$317 per oz). However, the primary gold producers inthe Philippines had cash costs estimated at US$320/oz in 1985--indicating the

4/ Much of the data in this section is taken from Western GoldMines,P?oduction and Costs 1975-1990, 1985 Edition, Brook HuntAssociates.

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average production was at only a cash breakeven and several producers in aloss-making situation. Gold production costs for co-producers (calculated bypro-rating costs between gold and copper production) were estimated to besomewhat lower (US$260/oz). At 1986 prices (which averaged US$368 per ozcompared with US$318 per oz in 1985), the financial situation of most primaryproducers was greatly improved.

2.16 While production by primary and co-producers is well documented, thefull extent of production by small-scale (alluvial) producers is uncertain.For 1985, snmall-scale gold production was estimated at 13 tons by ConsolidacedGoldfields PLC (CC) in their publication (Cold 1986) compared with, about 9tons as reported by BMGS. The following accour.t is given by CC which providesa flavor of the small-scale mining. (See, Gold 1986, Page 20.)

The (Central Bank) authorities competed much more effectively to buygold production from the ever-increasing number of non-mechanisedoperations. This third sector of the industry in the Philippineshas increased its production from an estimated 8 tonnes in 1983 toat least 13 tonnes in 1985, and the Central Bank buying offices wereable to secure 8 tonnes of chis by paying a premium of up to 3%above international prices. This compares with official purchasesfrom the panners of little more than half a tonne in 1984. Whilethis rate of growth in production from surface deposits is notexpected to be maintained, that will depend to a large extent onpolitital and economic developments within the country, which willdetermine the alternative employment opportunities available. ThePhilippines contains more than 20 active gold mining areas where thegold occurs in placers and in weathered rock, from which it can beextracted by relatively simple methods. The greatest coixcentrationsof activity are at Davao del Norte in the southern island ofMindanao and in the northern part of Luzon Island. The gold produc-ing areas tend to lie in remote and sometimes mountainous terrain,and the panners have to maintain an often uneasy coexistence withbands of armed insurgents who exact a tribute in the form ofunrefined gold in return for allowing the mining operations tocontinue.

2.17 While any production figures for small-scale mines must be viewed asspeculative, the CG report indicates that small-scale gold production hasincreased sharply in response to several factors including the devaluation ofthe peso in the 1980s, a liberalized purchasing policy for gold by the CentralBan'; since 1984, promotional efforts by BMGS and new legislation supportingsmall-scale mining (PD 1899, 1984). BMGS estimates that in 1987 the number ofsmall-scale miners in the Philippines had .ncreased to about 200,000--witheach miner having an average of four dependents who also directly benefit fromsmall-scale mining.

2.18 The improvement, promocion and regulation of small-scale mining isone of the top priorities of BMGS over the next several years. This is a mostimportant activity. Small-scale mining offers considerable employment bene-fits far rural areas as well as small, but potentially important, foreignexchange benefits for the national economy. BMCS can play an important role

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regarding the provision of adequate mechanisms and procedures for establishingand documenting mine claims, maintaining reasonable safety and environmentalstandards, improving the technical capabilities of small-scale mines andsupporting the development of processing/marketing channels. These aredifficult tasks which may require significant effort to implement and achievesatisfactory results.

2.19 Recently, BMGS has developed rules and regulations to govern small-scale mining operations. The government has also launched a program for theenhancement of small-scale mining. The objectives include (a) rationalizinglaws and regulations for small-scale mining; (b) formulating and providing acomprehensive assistance package to support the development of the small-scalemining industry; (c) alleviating depressed, rural socio-economic conditions byproviding viable and labor-intensive means of livelihood through small-scalemining; (d) attaining increased small-scale productivity and mineralresources; (e) providing on-site technical, marketing, financial and otherbasic services, including infrastructure development to small-scale miners.The program also seeks to increase the incomes available to small-scaleminers. The program will support small-scale mining efforts, in particular,for six minerals found throughout the Philippines--namely gold, fertilizerminerals (guano, rock phosphate, limestone for agri-lime), building stones(marble, adobe, perlite), clay, beach sand and chromite. In addition, theNatural Resources Development Corporation, the corporate arm of the Departmentof Natural Resources9 has slated five small-scale mining projects fordevelopment (including marble, chromite, iron and gold-processing projects).

2.20 £he government is also giving immediate priority to improving safetyand health conditions for small-scale mining. One of the most urgent issuesis to reduce and prevent mercury poisoning which can result from the use ofmercury to recover gold from mined ores. The ore and mercury are mixedtogether to form an amalgam (paste) which is heated until the mercury boilsand vaporizes and leaves a gold ore which can be sold to the Central Bank.Mercury poisoning can occur through the handling of mercury and from mercuryfumes which are released when the amalgam is heated. The fumes can be con-tained if the heating takes place in a sealed retort--but sound procedures andsuitable equipment are not necessarily used in practice. The fumes aredangerous both to the miners and to the surrounding communites because themercury condenses ana settles thereby polluting the countryside and watertable. The highest priority is needed to ensure the successful implementationof effective measures to reduce this serious health hazard.

III. NEED FOR RESTRUCTURING

Sound Companies

3.1 The Philippine copper mining couiipazies can usefully be divided intothree categories of companies/projects. First, there are companies who arebasically sound and whose future is reasonably assured. There are three suchmajor companies--Philex, Benguet and Lepanto (which produce about 65,000 tpycopper contained in concentrates). Sound smaller mining companies include

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'Jpex, Benguet Exploration, Itogon-Suyoc and Surigao. Second, there arecompanies which are presently operating but, at present copper prices, dependon deferment of taxes and rescheduling of debt to continue operating. Thisgroup consists of two private companies (Atlas and Marcopper which each havelarge debt obligation to consortia of international commercial banks) and twocompanies which are now largely owned by DBP/PNB (North Davao and MaricalumMining--which was formed in 1984 to operate the Sipalay copper mine followingthe foreclosure of Marinduque Mining). In addition, one small nickel miningcompany, Rio-Tuba has had small losses in three of the past five years, but isstill in a sound financial condition. Third, there are those which are pre-sently not operational but which may be suitable for consideration for sometype of produntion start-up (especially if price improves). These includeprojects which (a) are on a care and maintenance basis (Batong Buhay),(b) have received substantial investment but have since been shelved (Hinobaanand San Antonio), or (c) which have been closed but where most of the equip-mernt is still in place (Basay).

3.2 The first group (of sound companies)--Philex, Benguet, andLepanto--all have important underground mines in Benguet province, NorthernLuzon with high gold content. Philex and Lepanto have copper/gold operationsbut today, it is almost a misnomer to consider them "copper" mines. Forexample, at 1986 gold and copper prices (of about US$368/oz for gold andUS$0.62/lb for copper) the Philex mine derives approximately two thirds of itsrevenues from gold and one third from copper. Thus, these mines might beconsidered today'as gold mines with copper bi-products. Benguet also owns andoperates the Dizon open-pit copper mine. All three companies are well managedand sound financially. Benguet had minor losses in 1985, partly due todifficulties with its gold operations, but has since succeeded in bringingdown its gold production costs sharply and was profitable again in 1986. Themain issues for these companies are (a) proving up additional reserves anddeveloping additional production at their existing underground operations;(b) proving up and developing some small new gold deposits and (c) beingassured of reliable and cost-effective power supplies from the Northern Luzongrid. (Presently the companies have direct connection to the grid and thereis a proposal that they should be linked through some type of intermediarysuch as a local cooperative or power authority. The companies are apprehen-sive that such a change would reduce the reliability of supply and/or increasetheir cost of power).

Distressed Copper Companies

3.3 The second group of mining companies are known as marginal companiesor distressed companies. This group consists of Atlas, Marcopper, Maricalumand North Davao. They presently account for about 150,000 tpy copper (con-tained in concentrates) although their capacity is much greater as shown inTable 3.1.

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Table 3.1: PHILIPPINES - DISTRESSED COPPER COMPANIES

Annual CashOre capacity operating Deferred

Year of grade tpy cost taxesCompany Mine start-up % copper copper/a US$/lb US$/lb

Atlas Lutopan (u/g) 1966 0.4-0.7 73,000 0.40 0.11/cBiga (o/p) 1963 0.35 20,000 0.50-0.60/d o.i17Carmen (o/p) 1977 0.4 50,000 0.55-0.757- m.ii7

Marcopper Tapian 1971 0.4 33,000 0.48 0.17Maricalum Sipalay 1985/e 0.5 41,500/f 0.52 0.04/kNorth Davao Amacan 1982 0.35 22,000 0.58 0 j

/a Copper contained in concentrate.Th Cost per lb of refined copper includes bi-product credits; excludes

deferred taxes,depreciation and interest./c Separate figures not available for each mine.7T Higher cost is for full capacity; lower cost based on reduced pit size and

highgrading for a limited period (1-5 years)./e Originally opened by Marinduque in 1960s; mine was closed in September 1983

when DBP foreclosed Marinduque and mine re-started in August 1985 under anew company--Maricalum.

/f Could be expanded to about 54,000 tpy by debottlenecking concentrator andincreasing pit production; further expansion (doubling?) also possible ifinvestment funds were available and market prospects improve.

/g Maricalum and North Davao are largely tax-exempt.

Source: Mission estimates.

3.4 Atlas was very profitable in the 1970s and undertook a large invest-ment program from 1975-83 to expand copper production capacity and reduceenergy costs (in particular to convert its major power generation facilitiesfrom fuel oil to coal). (Fuller details of the background for Atlas areprovided in Appendix Table 12.) However, with exception of 1983 when Atlasbroke-even, Atlas has experienced large losses since 1982. Atlas has nowcutback its operations so that the remaining production is viable and Atlaswas able to cover all of its cash operating and interest costs in 1986.Howeverp Atlas has a substantial foreign debt burden which it presently cannotservice and a major balance sheet problem in terms of deferred tax liabilities(paras. 4.10-4.16), unpaid interest and overdue principal payments. A keyissue for Atlas is how to restructure its balance sheet. Discussion havetaken place with interested foreign investors who might provide a substantialequity infusion. However, the attractiveness of Atlas to possible newinventors is diminished by Atlas deferred tax liabilities which represent alarge claim on Atlas by the Government. If metals prices do not improvesignificantly, the whoe deferred tax policy will need careful review(para. 5.18).

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3.5 Marcopper was a very profitable mine in the 1970s (as sho,wnpreviously in Table 2.2). However, the Tapian orebody is almost at the end ofits economic life and Marcopper is presently unable to service its interestand debt re-payment obligations (further details are given in AppendixTable 13). It had been proposed to replace the Tapian orebody, which has twoto three years remaining life, with the nearby San Antonio orebody--but SanAntonio does not appear viable given present and future expected prices. Theclosure of Tapian is inevitable. The main issue, therefore, is to ensure thatadequate preparation is taken for an orderly closure to minimize the economicdislocation on the community on Marinduque Island. A second issue is toinvestigate under what conditions the San Antonio mine could be developed.

3.6 Maricalum Mining Corporation was formed in 1984 to operate theSipalay mine following the foreclosure of its previous owner and operatorMarinduque Mining and Industrial Corporation (MMIC). (Further details aregiven in Appendix Table 14). The mine has been re-opened with financing andtechnical assistance from Marubeni, a Japanese company. In 1986, the mineproduced just over 42,000 tons copper contained in concentrates--about 17%below a target of 50,600 tons. Total cash operating costs were about US$0.69per lb. (including US$0.09 per lb interest and principal) compared with anaverage price of US$0.62 per lb resulting in difficulty in meeting debtservice obligations. Major priorities are to increase production to targetedlevels which should help reduce unit operating costs. However, the mine facesdifficulties in terms of equipment availabiliaty and is operating on a hand-to-mouth basis. In the short term, the major issues relate to improving mineequipment availability, debottlenecking the concentrator and getting the wasteconveyor operational. These depend on the capabilities of the mine staff aswell as on adequate funds for spare parts, repairs, back-up equipment, etc.It has been suggested that a major expansion of Sipalay may be the best copper"investment" possibility in the Philippines. An important priority is toexamine the economics and possible timing of a major medium term expansion.In particular, a decision will be needed within a year for additional tailingsdisposal with two main alternatives--either a new tailings pond or a pipelinefor disposal into the sea. Both methods are presently used in the Philip-pines. The decision will require a cost/benefit analysis of the alternativestaking into account the maintenance of satisfactory environmental standards.One priority area requiring Government attention is the disposal of tailingsand, in particular, the establishment of criteria for assessing coastaldisposal arrangements so that companies such as Maricalum can undertake thenecessary analyses in assessing investment decisions for new tailings disposalfacilities.

3.7 North Davao owns and operates the Amacan mine as noted in AppendixTable 15. The mine started-up in 1984 and is presently operating at slightlybetter than a cash break-even. The mine has experienced recurring technicaldifficulties with regard to the shells (walls) of the ball mills cracking.The ball mills were sunplied by Outokumpu of Finland who have made efforts torectify the situation, but proble.is still persist. In order to improve themine's financial position, the mine has been high-graded and mining costs willalmost certainly increase in 1987 and 1988 as the ore grade declines. NorthDavao has been unable to service its debt all of which was guaranteed by PNBand DBP. These two Banks now effectively own North Davao. While rising

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copper prices in the first half of 1987 should help improve the financialsituation, a cash infusion will likely be needed if North Davao is to continueoperating beyond 1987. A decision will be needed shortly ai to whether tosell the assets (as an operating concern) if a buyer can be found, provide acash infusion or undertake an orderly closure or mothballing.

3.8 The third group of companies/projects consist of projects that arepresently not operating. The most notable of these projects is BatongBuhay. Batong Buhay is an underground copper mine (with gold by-products) inNorthern Luzon that opened in April 1984 (see Appendix Table 16). The orebodyis one of highest grade in the Philippines and cash operating costs are esti-mated at US$0.50 per lb at full capacity. However, the mine is in a remotelocation in insurgent-influenced territory. The opening of the mine wasoriginally delayed due to lack of infrastructure development and connection tothe power grid. The connection was provided in 1984 but towers holding up theoverhead power lines have been demolished by terroists several times since themine opened. The last time was in November 1985, when the mine was placed ona care and maintenance basis. Many of the staff were still at the mine sitein late 1986 but were not receiving wages on a regular basis. The major issuefor Batong Buhay is should the mine be mothballed or should an attempt be madeto find a more effective way of protecting the power supply so that the minecan be reopened and sold if a buyer can be found.

3.9 Besides Batong Buhay, two other noteworthy projects are Basay andHinobaan. The Basay mine started-up in 1979 and operated until 1983 when itclosed due to losses. The mine had an annual capacity of over 20,000 tpycopper contained in concentrates. Basay is a high cost mine with low oregrade, high stripping ratio and poor by-products. It is also in a insurgentdominated area (about 20 km south of the Sipalay mine in Negros Island). Muchof the original equipment is still at the site and PNB are interested intrying to sell or re-open the mine. But the pit has been flooded and, givenits past performance, it is highly unlikely that Basay would be a seriouscandidate for re-opening unless copper prices were 50-100l higher than 1986levels. However, there is an attractive gold property called Bulawan (near tothe copper orebody) for which Basay has the mining rights. PNB asked for bidsfrom other mining companies and interest was expressed by several miningcompanies. The gold property is almost certainly viable for development andthe next step is to establish the terms and conditions on which the companiescan bid to acquire the mining and development rights. The Hinobaan mine is acopper mine which was being developed as a joint venture by Lepanto andNational Development Corporation (NDC). The mill and concentrator werepurchased from the closed Western Minolco mine and erected at Hinobaan.However, Hinobaan requires copper prices much higher than 1986 levels in orderto be viabl / and the partners have stopped development and are trying to sellthe assets.-

5/ Similar issues of viability, restructuring and project selection (asdiscussed in this chapter for the non-fuel mining industry) are found inthe coal sector. A brief assessment of strategic issues in che coalsector is provided in Appendix Table 17.

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PASAR Copper Smelter

3.10 Traditionally the Philippines has exported copper concentrates fortreatment by foreign smelters and refineries (generally in Japan). Thedevelopment of the PASAR smelter has enabled the economy to obtain the valueadded and has helped protect the domestic mines from cutbacks in offtake byforeign smelters. The smelter also supplies sulphuric acid feedstock to theadjacent PHILPHOS fertilizer plant. The PASAR has an annual productioncapacity of 138,000 tpy copper cathode and is located at Isabel, in southernLeyte Island. It started operations in 1983. The major equity holder inPASAR is the Government (through the NDC). Small amounts of equity are alsoheld by local mining companies (which supply concentrate feed), by certainJapanese interests and by IFC. The Chairman of PASAR is the Minister of Tradeand Industry. The project's capital cost was about US$370 million. Construc-tion was undertaken on time and within budget, on a turnkey basis, by aJapanese consortium. While start-up problems were experienced with theelectrostatic precipitators in the flash furnace and production was inter-rupted for 45 days in 1984 due to an overflow of molten blister, the plantstart-up and operation so far may be considered reasonably successful from atechnical and production stand point.

3.11 A major problem so far has been that PASAR has been unable to matchthe treatment (i.e. smelting and refining) charges of its major competitors--the Japanese smelters. PASAR started up in 1983, when the concentrate marketwas tending toward a shortage of supply--at least for customer smelters inEurope or Japan. When PASAR started-up, Philippine concentrates were switchedfrom Japan to PASAR with the result that the Japanese smelters were biddingfor concentrates from other sources in a relatively tight market. As aresult, Japanese smelting and refining terms were somewhat lower than mighthave been expected if PASAR had not been constructed. According to data forindividual mines, PASAR's charges were about 8% more expensive than Japanesecharges (including freight) in 1985--about US$0.19 per lb versus US$0.175 perlb. This cost differential added to the financial difficulties of thePhilippine mining companies. For 1986, PASAR lowered its charges by aboutUS$0.02/lb and is now comparable to the terms offered by foreign smelters(such comparisons are indicative since smelter charges also depend onvolume). At the same time, the Japanese smelters are obtaining concentratesfrom new supply sources including Ok Tedi (Papua New Guinea) and Butte(Montana, USA) so that the concentrate market is starting to soften. Further-more, the recent revaluation of the Yen has increased the operating cost ofthe Japanese smelters when measured in US$ terms. It is reported that theJapanese smelters are now signing contracts with smelting and refiningcontracts higher than PASAR presently charges. In 1987 PASAR should be wellable to match the Japanese treatment charges.

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3.12 PASAR has been able to generate a small profit each year as shown inTable 3.2.

Table 3.2: PASAR: SELECTED FINANCIAL INDICATORS 1984-86

1984 1985 1986…-------- (US$ million) -

Revenue 276 348 350Costs and Expenses (207) (292) (298)Depreciation and Amortization (29) (19) (13)

Operating Income 40 37 39

Interest (35) (36) (40)Other Income 3 2 3

Net Income 8 2 2

Source: PASAR Financial Statements converted at annual average exchange rate.

While PASAR's income statement is positive, PASAR has experienced workingcapital difficulties and cash management problems. At present, PASARpurchases and pays for concentrates upon delivery and subsequently sellsrefined metal at cash conversion cycles of 90 days for copper and 105 days forgold and silver, resulting in large working capital requirements. PASAR'scash situation has also been worsened by overdue payments from the fertilizerplant for the sulphuric acid supplies.

3.13 PASAR has a highly leveraged financial structure. As of Decem-ber 31, 1986, long-term debt (including current portion) was US$429 millioncompared with US$49 million equity. PASAR's long term debt consists ofUS$81 million loan from Fuji Bank, Ltd. with interest of 3/4% per annum aboveLIBOR up to March 1986 and 7/8% p.a. above LIBOR thereafter (payable in 19consecutive semi-annual installments starting September 1986), and a Y 53 bil-lion (equivalent to about US$33 million at an exchange rate of US$1.00 =Y 161) loan from Marubeni with interest of 8X p.a. (payable in 24 consecutivesemi-annual installments starting June 1984). In 1985, the Company availed ofa US$ loan rescheduling arrangement set forth by the Central Bank by virtue ofCircular 1076. In line with this program, PASAR paid the peso equivalent ofthe Fuji Bank loan maturity in September 1986 of US$3.8 million to the PrivateDebt Restructuring and Repayment Corporation of the Central Bank. TheCompany's obligation to the creditor pertaining to the portion of the loanpaid is discharged by the Central Bank. Payments of the principal notrescheduled and interest due on the loan are payable in US$ directly to thecreditors. Meanwhile, the Marubeni loan was still covered by the Paris Club

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Agreement for rescheduling of the principal and 60% of the interest paymentsuntil June 30, 1986. Repayment under this program (which took effect Januaryof 1985) is set to start in 1991. Principal maturities in December 1986 notcovered by the restructuring remained outstanding in the books as at the closeof 1986.

3.14 Until mid 1985, the then Minister of Trade and Industry took anextremely active role in guiding PASAR's activities. However, following thechange of government a five-member Managing Committee was established whichincludes representatives from PASAR, the Ministry of Trade and Industry, andlocal mining companies. This is a useful step which should support PASAR'smanagement in addressing its financial situation and debt service require-ments. It is important that efforts be made to ensure that the committee meeton a regular basis.

3.15 PASAR is a viable plant. However, it faces a major debtservice/restructuring issue. It can also be considered for privatization--though timing is uncertain. Options which need to be examined include:

(a) reschedule the foreign debt (either through direct negotiation or aspart of a possible economy-wide round of reschedulings);

(b) privatize immediately and/or convert part of the debt into equity(if suitable new sources of equity can be found); and

(c) use short-term lines of credit or other working capital to makelong-term payments until the plant can be privatized and the capitalbase can be restructured.

3.16 There are three other important issues (beside debt service) thatthe Managing Committee will need to address. First, the plant has beenoperated until now with expatriate technical assistance (especially from Japanbut also North America and Great Britain). The future performance of theplant (in particular operations and maintenance) will depend critically onadequate PASAR capabilities as the technical assistance is slowlv reduced aridphased out. Second, PASAR is considering whether or not it should start toact as a toll smelter. In this case PASAR might take some copper concentrateshipments from non-Philippine mines and from traders. The benefit is thatPASAR could reduce its working capital requirements (since it would onlycharge a fee for its services and would not necessarily purchase or takeownership of the concentrate). PASAR has arranged to take shipments frommines in Papua New Guinea and it is important that PASAR be able to importconcentrate without undue Government regulation. Third, it is the aovern-ment's intention that PASAR should be privatized--possibly in the nearfuture. PASAR needs to be able to assist in preparing and/or to readilyrespond to any such proposals.

Nonoc Nickel Refinery

3.17 The Nonoc Nickel Refinery (located on Nonoc Island) had an originaldesign capacity of 31,000 tpy nickel metal plus 3,000 tpy nickel in mixedsulphides and 1,500 tpy cobalt in mixed sulfides. Presently, the achievable

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production capacity is considered to be about of 20,700 tpy nickel metal plus2,60C tpy nickel in sulfide and 1,240 tpy cobalt (as a by-product from thenickel sulfide). The plant originally started-up in 1975. At present, thereare about fifteen years of ore reserves (at 1.21% nickel feed grade) remainingbut other ore sources are located nearby. The plant is presently on a careand maintenance basis. In 1985 the plant had cash operating costs of US$2.10per lb. Management estimate that cash operating costs could be reduced by asmuch as 30% (given fuel oil and coal prices in 1986) if the plant were re-started and if it were able to operate at the "achievable" capacity levelsnoted above. Cash operating costs include mining, refining, transportation,marketing costs and by-product credits; they exclude depreciation, interestand taxes,

3.18 The plant is a complex plant which suffered from originalshortcomings, in particular, due to cost cutting material substitutions whichsaved initial capital investment but significantly increased maintenancerequirements, for example, the use of rubber-lined mild steel instead ofstainless steel. It has a long history of operating difficulties and hassuffered from inadequate maintenance and poor material provisioning. Itsproblems have been worsened by being in a remote location subject to verydifficult climatic conditions (including typhoons as well as monsoons). Nonochas experienced large operating losses due to much lower than expected nickelprices as well as low production vis-a-vis feasibility estimates. It waspreviously owned by MMIC which was foreclased by DBP and PNB in 1984. IFChelped finance the plant and still have outstanding arrears due from MMIC.(MMIC's other operations were the Sipalay Copper Mine and the Island CementOperations. Each of these operations has since been re-opened as a separatecompany.) Nonoc was formed in September 1984 to own and operate the nickel-related assets. New financing, largely in the form of debt was provided forspare parts, repairs, working capital, etc. As of August 1986, Nonoc hadabout US$40 million liabilities. (In addition, there is also a claim againstNonoc of US$8.55 million by a trading company, for funds provided to theprevious owner (MMIC). This itatter is presently in litigation.)

3.19 During the re-opening in 1984, the plant was severely damaged by atyphoon and insufficient funds were available to make the necessary repairs aswell as provide for necessary spare parts and initial inventories of operatingsupplies. Nonoc operated during 1985 and produced about 17,000 tons nickelmetal (plus sulphide). Nonoc shut down during a work stoppage in March 1986and has not re-opened since largely due to insufficient working capital andlow nickel prices in 1986. The plant is presently being maintained on a careand maintenance basis by a skeleton staff until a re-open/mothball decision ismade.

3.20 Since the shutdown in March 1986, a rehabilitation plan has beenprepared by the staff of Nonoc in conjunction with experts from Marc Rich.(IFC has also financed a study by consultants of possible improv,ements inNonoc's operations including the possibility of introducing a new acid-leachtechnology instead of the existing roast-reduction ammonia leach. This wouldbe a major step probably requiring a large capital expenditure.) Anothermatter which has been studied and may need further attention is the possibil-ity of obtaining higher gr.de ores from outside sources to blend with Nonoc's

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own ore. Design capacity for the plant was originally just under 100 tons perday (tpd). In practice, the maximum achieved was 65 tpd for the year 1980with a maximum single month of 77 tpd. The achievable capacity is consideredto be 65-70 tpd if the plant can be re-opened. The rehabilitation planindicates that about US$30 million new money would be required to restart theplant with its present technology. Given the present state of the plant and,in particular, work needed to rehabilitate the roasters and working capitalneeded to provide adequate inventories of supplies and spare parts, it is acritical question as to whether this sum is sufficient. In addition, somefurther "clean-up" of unsatisfactory items on the balance sheet might also beneeded.

3.21 The main issue is should the plant be mothballed or is it justifiedto make another attempt to reopen it using its present technology?Preliminary cash flow projections prepared by Nonoc indicate the plant couldhave an annual cash generation of US$11-21 million depending on assumptionsregarding plant performance, nickel and cobalt prices, and supplies(especially energy) costs. These three aspects all represent major riskswhich must be addressed in a decision to re-open/mothball the plant. First,there is a risk that the plant will not reach its performance and costtargets. There are a number of aspects to this risk. Specifically, the planthas a complex design, and is located in a remote place with difficult climaticconditions. It is eleven years old and has suffered from original designproblems as well as inadequate maintenance in recent times. Any re-openingdecision must be based on very careful and detailed scrutiny by suitablyqualified technical experts of the adequacy of the rehabilitation plan (interms of technical content, timing and cost estimates) as well as the capa-bilities of the plant staff and management to implement the plan successfully(including the selection of local or expatriate senior staff since one reportproposes additional expatriate staff for the rehabilitation plan). Second,there is a risk of nickel and cobalt price fluctuations. In particular nickelprices were very depressed in the second half of 1986. LtE nickel pricesaveraged US$1.76 per lb in 1986 but have improved to US$2.15 per lb as of mid-1987. Any rehabilitation plan must take account of the possibility of nickelprices falling back below US$2.00 per lb. In particular, increased nickelexports by the Soviet Union and/or aggressive production and selling by INCO,Ltd. (the world's largest nickel producer) could result in nickel prices inthe range US$1.60-1.80 per lb. (Indeed, an announcement of Nonoc re-openingcould possibly have a temporary downward impact on nickel prices.) Third,there is a risk that supplies costs, and in particular, energy costs mayincrease in the medium term.

3.22 If the plant is considered viable on economic grounds, a re-openingdecision will then depend on a suitable financial package being put inplace. Cash flow projections prepared by Nonoc indicate a re-opening financedlargely by short-term debt may not be practical. An equity infusion would bevery desirable if not essential. In any case, careful attention is needed toensure that the grace and repayment periods arranged for any debt financingare not unduly burdensome. A financial package could be enhanced by linkingdebt repayment and sales commissions to nickel prices and, possibly, plantperformance. It would also be advantageous if three to five year contractscoulld be signed fixing upper price limits for energy-related supplies.

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3.23 Other issues to be addressed include possible blending of higherquality ores from outside sources, to improve feed to the plant and possibleintroduction of an acid-leach pilot plant. However, if the plant is to bemothballed, suitable arrangements will need to be made for closure costs(including payment of overdue back wages) and plant security/maintenance whilemothballed. In particular, it would need to be decided how much the costswould be, as well as which arm of the Government would pay them.

IV. GOVERNMENT RESPONSE

Legislative Environment

4.1 The Government is the owner and holder of all mineral resources inthe Philippines. The Government provides leases and concessions for mineralexploration and development. Once a property is leased, it falls underprivate ownership and cannot be taken back by the Governmeznt without duecompensation providing the owner satisfies the regulatory requirements. Themining industry is basically under the regulation of the Na:tional Governmentand there are few local or provincial laws, regulations and taxes affectingthe industry. Government regulation and administration is provided largely bythe Bureau of Mines and Geo-Sciences (BMGS) and Ministry of Natural Resources(MNR). Mining industry regulation is largely determined by the 1974 MineralResources Development Decree ('D 463) which included regulatory matters suchas, mineral licenses, recording of claim, mineral leases, work obligation ofclaim holders, mining rights, as well as certain fiscal incentives andpollution control measures for the mining industry. The original provisionsof PD 463 hav: been amended by a number of subsequent decrees includingPD 1385 (1978), PD 1654 (1979), and PD 1677 (1980). In addition, PD 1151,PD 1251, and PD 1586 (1979) strengthened the pollution control aspects ofPD 463 by requiring environmental impact statements by mine operators and byproviding a mechanism to compensate for damages caused by pollution.

4.2 The mining industry is subject to a wide variety of laws and regula-tions. These take many different forms--Batasang Pambansa (BP) Laws, RepublicActs (RA), Presidential Decrees (PD), Executive Orders (EO), Presidential,Letters of Instruction (LOI), Revenue Regulations (RR), and Central Bank (CB)Circulars. Taxation and incentives are governed both by general economy-widemeasures and legislation and by a number of ad-hoc orders designed to assistindividual mining projects/companies or to respond to particular miningindustry circumstances. These include a copper price subsidy scheme (in 1982and 1983), a copper stabilization fund (in 1983), a gold assistance program(to scll and buy back gold to and from the Central Bank), and recently,measures to defer taxes for distressed copper companies. Overall, thelegislative environment of the mining industry in the Philippines for most ofthe past 20-25 years has been "Government by decree" with a high degree ofuncertainty with regard to the legislative environment--a situation which hastended to discourage the entry of international mining companies and foreigncapital, and to protect marginally viable or loss-making companies.

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4.3 Investment incentives were made available to the mining industrythrough the Investment Incentive Act RA 5186 in 1969--as part of the economy-wide investment incentive program administered by the Board of Investments(BOI). Subsequently, additional incentives were granted through RA 6135 (1970for export producers) and RA 1828 (for investments in the Suriago reserva-tion). In addition, the mining industry had tax benefits through a depletionallowance scheme provided under PA 2698 (1960) which was subsequently revisedby PD 69 and by Revenue Regulation 5-76 of April 2, 1976. The MineralResources Development Decree of 1974 (PD 463) effectively superceded the aboveacts by excluding new mines and reopened mines from all taxes and dutiesexcept income taxes for five years. This tax holiday was in effect from 1974to 1981 when it was repealed--then mining companies became eligible for taxincentives under PD 1789 as amended by BP 391 (Investment Incentives Act).Under these laws, industries with exports exceeding US$5 million in 1968 wereexcluded from the exporter category. Thus, the mining industry was onlyeligible for investment incentives for "domestic" producers which were lowerthan for "export" producers. More recently, there have been major changes inthe investment code, and the mining industry now has the same eligibility forthe investment incentives as other exporters.

Taxation

4.4 Mining companies are required to file annual statistical reportswith BMGS. Based on these reports. BMGS has compiled estimates of the totaltaxes paid by the industry from 1980-1985 as shown in Table 4.1.

Table 4.1: PHILIPPINES - TAXES PAIL, BY THEMINING INDUSTRY, 1980-85

(P million)

1980 794.61981 594.21982 271.81983 446.11984 963.01985 891.0

Source: BMGS

4.5 The fluctuations in taxes reflect, in part, the varying profita-bility of the industry (for example, 1980 was a year of high profits, 1982 ayear of losses for many companies) as well as changes in taxation (forexample, in 1984 ad valorem taxes were increased on imports and a new tax wasintroduced on the purchase and sale of foreign exchange). Available figuresindicate that in 1984, total mining industry taxes as reported by BMGS of P963 million contributed about 2.9% of the total revenue collection of theGovernment which were were reported to be P 33,218 million.

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4.6 However, it is important to emphasize that the above estimates maywell understate the full value of taxes directly generated by the industry.The explanation is two-foldi. First, companies report larger tax payments inthe Annual Reports than in their BMGS submission possibly because they do nottake the same care and effort in preparing their BMGS submission as they do inpreparing their annual reports for shareholders. Second, some categories oftaxes such as duties may not be fully included in the BMGS data base.

4e7 Furthermore, even the annual report figures may be underestimatedsince Marcopper officials commented that it was not until the introduction ofa tax deferral scheme for distressed copper companies in 1984 that a thoroughreview of taxes was undertaken. That review identified much larger taxliabilities (P 121.2 million in 1984) than Marcopper had estimated forprevious years (for example P 71.2 million in 1983).

4.8 The Chamber of Mines provides a somewhat detailed breakdown ofestimated paymprts to Government by its members.

Table 4.2: PHILIPPTNE: - MINING INDUSTRY PAYMENTSTO GOVERNMENT AS ESTIMATED BY THE CHAMBER OF MINES, 1982-85

(? million)

1982 1983 1984 1985

Corporate income tax 88.8 182.2 154.4 132.8Ad valorem/royalty tax 113.8 163.9 233.6 272.1Export premium and custom duties 93.0 102.9 148.4 157.0Compensating tax 34.9 40.5 63.3 73.1SSS, Medicare, ECC and Pag-Ibig 32.5 38.5 42.6 42.6Final tax on interest income 11.0 30.6 35.8 19.8Withholding tax on foreign loans 58.6 97.3 68.4 31.4Others 9.0 10.0 31.9 4.3

Total to National Government 441.6 665.9 778.4 733.1

Taxes paid to Local Government /a 18.5 19.1 21.5 55.1Taxes withheld by Company 75.5 110.1 81.6 60.3

Grand Total 535.6 795.1 881.5 848.5

/a Mainly real estate taxes.

Source: Chamber of Mines (as reported in Business Day, May 29, 1987).

4.9 In the past one of the most important taxes levied on the miningindustry has been ad valorem (royalty) taxes. These were introduced in 1974

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under PD 463 at a rate of 1.5% of the value of mineral production for non-metallics and gold and 2% for metallics. In 1980, the rates were raised byBP 84 to 3% for nonmetallics and 5% for gold and metallics. However, underBP 84, a provision was made for lower rates for marginal companies (of 1.5%for nonmetallics and 3% for metallics). Subsequently, the preferential ratesfor marginal companies was abolished (by PD 1955) in 1985. The royalty taxraises a fundamental issue regarding the types of taxation which should beused since a royalty has the effect of reducing the size of economicallyrecoverable ore reserves. This can be illustrated as follows. Because ofvariations in the ore grade and shipping ratio, generally not all of the orein an ore body is economic to recover. Broadly speaking, the cut-off pointwill be determined by the point where the cost of recovery equals the value ofthe metal in the ore. Thus, if price increases, more ore is economicallyrecoverable; if price falls, less ore is economic to recover. Correspond-ingly, if production costs rise then (all other things being equal), theamount of recoverable ore oil will decline. Thus, a royalty which has theeffect of increasing production costs, reduces economically recoverablereserves.

Deferred Taxes for Copper Producers

4.10 Recognizing the plight of financially distressed copper producers,LOI 1416 was passed in 1984 which provides for the deferment of all taxes,duties, fees, etc. to financially distressed copper companies. Such chargesare a liability to be paid to the Government at such time as the companiesbecome profitable. So far, five copper companies have benefitted fromLOI 1416--they are Atlas, Marcopper, Maricalum, North Davao and BatongBuhay. As of December 31, 1986, a total of P 1,801 million taxes had beendeferred as shown below. The deferred taxes are much larger for Atlas,Marcopper and Maricalum than for North Davao and Ba-ong Buhay because thelatter two companies have operated on a largely tax exempt basis.

Table 4.3: PHILIPPINES - DEFERRED TAXES FOR COPPER PRODUCERSas of December 31, 1986

(P million)

Company Deferred taxes as ofDecember 31,1986

Atlas 940.5Marcopper 561.6Maricalum 241.7North Davao 51.2Batong Buhay 6.0

Total 1,801.0

Source: BOI

- 32 -

4.11 The deferred taxes provide an indication of the full extent ofindirect taxes levied on the mining companies. According to a breakdown ofdeferred taxes in 1985 for Atlas and Marcopper, the largest single componentfor both companies is taxes on fuel oil and other petroleum products used forpower generation and mine haulage, etc.

Table 4.4 ATLAS AND MARCOPPER - BREAKDOWN OF DEFERRED TAX LIABILITIESAS OF DECEMBER 31, 1985

(P million)

Atlas Marcopper

Fuel-related taxes 337.7 160.1Ad Valorem tax 94.2 17.4Customs duties and taxes 216.8 }Withholding tax 68.8 }Economic Stabilization Tax 20.6 } 38.4Others 12.7 }

Total 751.0 218.6

Source: Atlas-BOI; Marcopper-Marcopper

Tax Burden

4.12 The tax burden on profitable mining companies is also relativelyhigh. For example, over the past five years, Philex (the most profitablemining company in the Philippines in that period) has paid P 1,535 milliondirect and indirect taxes which represent 26% of net revenues. By comparison,Philex's net income after tax was P 1,585 million of which P 535 million wasdistributed in dividends.

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Table 4.5: PHILEX - SELECTED FINANCIAL INDtCATORS 1982-1986(P million)

Five year1982 1983 1984 1985 1986 total

Net revenues 697 895 1,185 1,495 1,629 5,901Total tax payments 167 250 358 368 392 1,535Net income after tax 178 291 297 337 482 1,585Dividends paid 97 93 106 94 145 535

Source: Philex Annual Report

4.13 It should also be noted that the deferred taxes under LOI 1416 are arelatively heavy burden on Atlas and Marcopper representing 21% and 31% of netrevenues in 1985 for each company and 13% and 34% respectively in 1986 asshown in Table 4.6. The indirect tax burden on these companies is heavierthan on Philex since Atlas and Marcopper must purchase their own fuel forpower geieration whereas Philex (and other mining companies in Northern Luzon)is connecSed to the Luzon grid.

Table 4.6: ATLAS AND MARCOPPER - DEFERRED TAX BURDEN, 1985 AND 1986(- million)

Atlas Marcopper1985 1986 ' 1985 1986

Net sales revenues 2,593.9 2,260.6 704.0 785.3Net profit/(Loss) (1,538.1) (976.4) (188.9) (342.0)Deferred taxes (under LOI 1416) 508.4 294.9 218.7 264.8

Source: 1986 Company Annual Reports

4.14 The taxes deferred under LOI 1416 are also starting to represent amajor item on the balance sheets of Atlas and Marcopper. As of December 31,1986, they represented 13% and 40% respectively of the liabilities of Atlasand Marcopper (see Table 4.7). As such they represent a considerable barrierto attracting new equity, especially for Atlas, which could facilitate afinancial restructuring resulting in a viable company. In early 1986, Presi-dential Decree 2027 was issued which provides for the waiving of all deferredtaxes by the President upon the recommendation of the Minister of Industry.However, it is now unlikely that PD 2027 will actually be implemented. It isimportant that careful consideration and analysis be undertaken of the

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conditions under which the deferred taxes might be collected. In 1986 Atlashad a net loss of P 976 million including P 663 million interest charges. Ifa financial restructuring is necessary for Atlas to become viable and if thedeferred taxes before a deterrent to such a restructuring being achieved, astalemate may occur. Therefore, some types of restructuring of the taxliability, especially regarding fuel related taxes and customs duties onoperating supplies, may be in the best interest of both the Government andAtlas, so that Atlas could improve its financial performance and again makepositive fiscal and economic contributions to the national economy.

Table 4.8: ATLAS AND MARCOPPER - LIABILITIES AND STOCKHOLDERS EQUITYas of December 31, 1986

(P million)

Atlas Marcopper

Current liabilities /a 3,610 /b 829 /cTaxes and duties deferred under LOI 1416 940 574Deferred income taxes /d 119 49Long term debt 2,803 -

Total liabilities 7,472 1,452

Canital stock issued and outstanding 848 /e 389Revaluation increment in property 2,286 -Deficit (2,871) (573)

Total Stockholders Equity 263 (184)

/a Atlas includes deferred taxes under LOI 1416 in current liabilities inits financial statements. They are excluded in the above table.

/b Includes P 1,470 million current portion of long term debt.7& Includes P 626 million current portion of long term debt.7- Due to accelerated depreciation, foreign exchange losses, etc.Te Includes P 12 million additional paid in capital.

Source: 1986 Company Annual Reports

V. FUTURE PROSPECTS AND ISSUES

Prospects for New Investment

5.1 The Philippines has a number of noteworthy advantages as a mineralproducer and exporter. It is well endowed with mineral deposits and wasranked within the top ten world producers of gold, copper, nickel and chromite

- 35 -

in 1986. It has a long tradition as a mining country and has a strong cadreof skilled and experienced managers. It also has a highly skilled andcompetent labor force with wage rates that are presently very competitive byinternational standards. It has many ore deposits and is well locatedgeographically regarding one of the most important minerals markets--Japan.

5.2 In spite of these advantages much of the mining industry is experi-encing hard times and the present outlook is not very promising. The depositsin the Philippines tend to have somewhat poorer ore grades. than frequentlyfound elsewhere and are generally located in relatively isolated locationsrequiring considerable infrastructure including costly power generatiolnarrangements. In the past, the industry prospered when minerals prices werestrong. During the 1970s, however, there was a mining boom when severalmarginal projects were developed by ill-qualified investors with insufficientattention to cost competitiveness.

5.3 The prospects for gold production in the Philippines over the nextfive years are quite promising. The prospects for copper, nickel and theother metallic minerals are less certain. Several Philippine copper producersare only marginally competitive at present world prices and depend oncontinued tax deferments as well as rescheduling for their survival. With theexception of gold, most metal markets have been in oversupply with relativelylow prices for several years. While some price improvement is expected in1987 and 1988, it is also quite possible that further price declines may occurin following years which would cause further mine closures in the Philippines.

5.4 Given the high indebtedness of many companies in the sector, thereis a considerable need for new equity to strengthen the sector. Philex hastypically undertaken investments almost entirely with equity and hence avoidedany debt obligations. Benguet is considering financing new projects predomi-nantly with equity. However, the weaker companies have so far been unable toattract much interest from local or foreign investors. The obstacles to a moreactive interest by foreign minerals companies appear to include constraints onforeign ownership as well as uncertainties regarding the stability of thepolitical environment and regarding the attractiveness of the mining code andmineral tax and incentive regime to foreign investors. Even if domesticmining companies have a promising prospect which might be suitable for projectfinancing, local credit markets are ill-suited to provide the funds needed fornew mining projects because of high interest rates, an absence of medium tolong term funds, and a "single business limit" that keeps the size ofindividual loans relatively small vis-a-vis the needs of a typical miningproject. Further, the growing difficulties of companies such as Atlas andMarcopper in servicing their foreign debt make the sector less attractive toforeign lenders.

5.5 The best prospects for new investment in the mining sector are insmall to m;dium size gold prospects. The Philippines has several promisinggold areas. Some are already well covered by small scale miners. Small scalemining is potentially an important growth area requiring little, if anycapital investment. Small-scale mining can make an important contribution toincreased gold production. Other areas will be best developed by miningcompanies who can also undertake more detailed exploration where warranted,

- 36 -

although the lack of strong interest by foreign companies is noteworthy.There are several gold prospects presently considered suitable for proving upand development although some of these are controlled by DBP and PNB. Delaysby DBP and PNB in deciding the terms at which they will sell or lease themining rights may hinder development of presently viable projects.

5.6 There have been fundamental changes in the world copper market sincethe early 1970s. Copper intensity of use has decreased in most industrializedcountries due to substitution of copper by other materials, material savingtechnologies (downsizing/miniaturization) and a declining share of industry/manufacturing in GDP. Copper consumption growth rates are now much lower thanin the 1950s and 1960s. World copper consumption is expected to grow in therange of 1.3-1.7% per year in the next 10 to 15 years compared with 2.9% peryear from 1960-84. 1

5.7 On the supply side, many new mines entered the market in the 1960sand 1970s, reducing the influence of major producers. Many high cost mineshave closed, not only in the Philippines but also in North America andAfrica. Further closures of mine capacity are expected by high cost producersirh United States, Zambia and South Africa. However, new capacity is underdevelopment in countries such as Chile, Australia, Portugal, Papua New Guineaand Mexico. These new sources of supply will probably be sufficient to keepsupply and demand broadly in balance--at least until the early 1990s.

5.8 During the past decade, copper producers worldwide have closed highcost mines, curtailed marginal operations and implemented austerity measuresto cut costs. Such measures have included effoets to slim down labor forces,increase labor productivity, improve equipment availability and utilization,and reduce the energy intensity of production. These measures, re-enforced byexchange rate devaluations in several major copper producing countries, haveresulted in most remaining producers now being able to sustain operations withprices of about US$0.60 per lb in current terms.

5.9 The outlook for world copper prices is that they will be in therange US$0.61-0.65 per lb (in 1986 terms) until the early 1990s and willaverage US$0.875 per lb (in 1986 terms) on a trend basis in the mid to late1990s as shown below:

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Table 5.1: WORLD-COPPER PRICE PROJECTIONS 1987-2000 /a(US$ per lb)

1987 1988 1989 1990 1995 2000

Constant 1986 terms 0.65 0.61 0.61 0.65 0.85 0.90Current terms 0.69 0.68 0.72 0.76 1.06 1.61

/a LME high grade cathodes, settlement price.

Source: World Bank International Economics Department, September 1987.

5.10 In considering the copper price projections, it must be emphasizedthat the copper market is very volatile and average prices in any one yearcould be as much as 20% above or below the estimates. Indeed, given theemerging tightness in the copper market in mid-1987, there are signs that 1988may be a year of strong copper prices--well above the trend prices in Table5?1.1 However, with as much as 0.7 million tpy new copper production comingon-stream in 1987-1990 from projects in USA (Bingham), Papua New Guinea (OkTedi), Portugal (Neves Corvo) and Chile (Chuquicamata expansion) prices couldfall back to the US$0.50-0.60 per lb level around 1990 or 1991 in currentterms. Over the longer term, the projections indicate that prices areexpected to average about US$0.875 per lb (in 1986 terms) in the mid to late1990s on a trend basis. Such a strong increase from present levels wouldindicate a supply-demand balance being reestablished with producers keepingcapacity in line with consumption. However, this trend estimate depends oncertain key assumptions regarding economic growth and investment decisionsregarding incremental copper capacity. Sensitivity analysis indicates thatannual average copper prices could fall anywhere in the range US$0.60-US$1.00per lb (in 1986 terms) in the mid to late 1990s on a trend basis.

5.11 The world nickel market has also experienced a sharp decline inconsumption growth and in price levels, From 1961-84, world nickel consump-tion increased at 3.6% per year but demnd growth is expected to be only 1.3%per year from 1985-2000. Nickel prices are expected to be in the rangeUS$1.74-1.81 per lb (in 1985 terms) on a long-term trend basis in the next 15years as shown below.

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Table 5.2: WORLD-NICKEL PRICE PROJECTIONS 1987-2000 /a(US$ per lb)

1987 1988 1989 1990 1995 2000

Constant 1986 terms 1.78 1.81 1.79 1.74 1.75 1.75Current terms 1.88 2.02 2.11 2.05 2.19 3.12

/a LME cathodes' morning session weekly average bid/asked price.

Source: World Bank International Economics Department, September 1987.

5.12 The prospects for major new mine investments, expansions or re-opening in the Philippines are slim. Benguet is planning to develop a newgold mine at Paracale and a new copper mine at Taisan. Freeport Gulf isplanning a sulfur project. The King King gold deposit would probably beviable for development once a dispute over its ownership is resolved and theBulawan gold project will likely be developed once it is sold to a miningcompany. While other possibilities exist, most are marginal at 1986/87 pricesand need strong price increases and/or major incentives to go ahead. Withregard to nickel, the prospects for the successful reopening and survival ofthe Nonoc nickel plant are uncertain especially given very weak nickel pricesin the latter part of 1986 and early 1987. Copper production is likely tofurther decline around 1990 with the closure of the Marcopper Tapian mine dueto exhaustion of economically mineable ore. The best possibility for anincrease in copper production in 1988 is the reopening of Atlas open-pitoperations (at Biga and possibly Carmen) on a limited life, "high grade (pitwithin a pit)" basis if copper prices increase above US$0.75-80 per lb and/orif Atlas can achieve a financial restructuring. However, Atlas is in aprecarious financial position and any infusion of new local or foreign capitalwhich would enable Atlas to regain its financial strength will likely dependon measures to resolve Atlas deferred tax liabilities. The best prospect forcopper development from 1987-1990 may be a major expansion at Maricalum'sSipalay mine if copper prices consistently average over US$0.70 per lb. Inthis event, the Bank could usefully assist the Government in reviewing theoptions for expanding Sipalay (prior to possibly privatising Maricalum).However copper prices in real terms of over US$0.80 per lb are required forMarcopper's San Antonio ore body to warrant serious consideration fordevelopment.

Policy Priorities

5.13 The most pressing issue in the mining sector is the successfuldisposal of the mining NPAs. The Government has established a basic policydirection, that wherever possible, NPAs should be returned to the privatesector. The disp4sal of the mining operations, along with NPAs in othersectors, is to be undertaken by an Asset Privatization Trust (APT) which hasbeen appointed by the Government to deal with NPAs. The APT has a three year

- 39 -

period in which to dispose of over 300 NPAs including about a dozen miningoperations. The APT's approach is to prepare brief prospectae to informinterested parties of assets being made available for purchase. Once two orthree parties show serious interest, an asset will be auctioned to the highestbidder. Little attempt is made by the APT to value or package the asset--itis up to bidders to undertake their own evaluation and, then make their bestbid.

5.14 The Government recognizes that the cash realized from the sale ofdefunct mining assets may be relatively small compared to book values. Eventhough mining assets may have apparently high book values or replacementvalues, mining operations which have relatively high production costs vis-a-vis their competition may have little or no value to investors in a depressedmarket. Indeed, restarting a mine or plant which is presently closed, mayrequire large sums of working capital in addition to any purchase cost fromthe present owners. Generally, investors may consider re-opening a mine orplant if they believe they can manage it more efficiently than the previousowner and/or they expect a price improvement in the market. But, given theinherent risks (both technical and market) investors tend to try and minimizethe size of their equity funds at risk if the project should fail again and,as far as possible, share risks (and future benefits) with other interestedparties. If a mining asset does net have any perceived market value, theplant and equipment can be sold to other operations or as scrap. Given thecosts of dismantling, transporting and reassembly plant and large miningequipment resale or, scrap values are often extremely low, if a buyer can befound at all. The mining rights may also have some value, but if a viableoperation is not possible at the present time, the value of the ore in theground will likely be insignificant.

5.15 Many of the largest NPAs and most complex cases to resolve are inthe mining sector. While the APT has received some enquiries regarding miningassets there were no disposals as of mid-1987. Indeed, the disposal of someof the mining NPAs may not prove practical due to the large working capitaland rehabilitation start-up costs required to bring them into operation.Possible new owners may consider the stakes too high and the risks too greateven to bid modest sums. In such cases, the APT may be faced with the choiceof shutting down and mothballing the operation--unless alternatives such asleasing, management contracts and even some type of joint ventures areconsidered. In the event that the APT is unable to dispose of NPAs such asNonoc, Batong Buhay, North Davao, Maricalum, Basay, etc., arrangements need tobe made to ensure that the APT has suitably qualified support to provideexpert judgments on the technical problems and risks faced by the properties,in order to place a value and the asset and decide if there is any otheralternative to closure and mothballing. It is recommended, therefore, in viewof the size of the mining portfolio (value and numbers) and inherent complex-ity of mining/mineral projects, that a mining subcommittee be established toassist the APT. The subcommittee would draw upon suitable expert staff fromagencies such as BMGS and BOI as well as possible expert assistance fromindustry representatives which could be coordinated by the Chamber of Mines.At the same time, it is recommended that thought should be given by theMinistry of Trade and Industry and the Ministry of Natural Resources as to themost suitable and feasible place within the existing Government agencies to

- 40 -

establish a_Srop with strategic analytical and decision-making capability forthe mining anid mineral processing industries.

5.16 The mining industry, like many other subsectors, is subject to awide variety of laws, regulations, executive orders, presidential decrees, andletters of instruction, etc., regarding taxation and incentives. 14owever, inview of the large investments involved, there seem to have been an exception-ally large number of regulatory orders providing "special deals" forindividual projects and companies in the late 1970s and early 1980s. Aninter-agency study has been initiated by BMGS to review which of these shouldbe maintainted and how a more orderly taxation/incentive regime can beestablished.

5.17 The situation of the loss making copper is a complex matter from afiscal standpoint. On the one hand, the Government needs to collect taxrevenues to improve the overall fiscal situation in the economy and, as ageneral principle, should attempt to treat different industries equally. Onthe other hand, attempts to collect taxes from the distressed mining companiesthat are presently operating may result in closure of those operations--to thedetriment of the local communities and with a loss of foreign exchangerevenues to the economy overall. To the extent that such companies can keepoperating without requiring any direct transfers from the government, a casecan be made for relief from tax payments. Such companies provide often impor-tant benefits to isolated communities including infrastructure (power, trans-port, schools, etc.) as well as employment (both directly from mining and fromancilliary industries) and there would be considerable social and economicdislocation if the operations were to close. The operations are all forexport markets (either directly or indirectly via PASAR) and hence closurewould reduce export earnings. The operations are capital intensive, but themine plant and equipment would have little saleable or scrap value. Theoperations are found in an international market which is very volatile. Ifprices deteriorate, the owners will in any case close the operations. But ifprices increase in the r.ext two to three years or, thereafter, there could beimportant benefits for the economy and with better revenues and cash flows,tax payments to the Government.

5.18 Within the review of the present taxation/incentive arrangements,several issues have been raised by the Chamber of Mines. These touch onimportant questions such as whether or not the taxation system is equitable(in terms of giving special treatment to individual projects) and progressive(in terms of not sterilizing otherwise economic reserves). In some cases, aposition had been taken previously by the Government. However, actions havebeen delayed following the change of government in 1986. It is recommendedthat BMGS ensure that the ongoing review of fiscal arrangements and incentivesfor the mining sector is completed in a timely manner and that it include, inparticular, the following four issues:

(a) A review of the present tax policy for distressed coppercompanies. Without deferment of taxes, Marcopper, North Davao,Atlas and Sipalay would cease production (at least on a temporarybasis). Yet, the deferment in the present market conditions isresulting in large overdue tax obligations to the Government without

- 41 -

any likely resolution in the foreseeable future. This will resultin serious difficulties especially for Atlas in cleaning up itsbalance sheet. It may also seriously impede attempts to eventuallyprivatize Sipalay and North Davao.

(b) Royalty Payments. The present royalty system has the effect ofincreasing the price/cost at which reserves are viable for recoveryand hence turning potential recoverable ore into uneconomic waste(by increasing the cut-off grade). This is undesirable and shouldbe reviewed.

(c) Incentives to Encourage Foreign Investment. A major priority of thenew Government is to encourage foreign investment. However, presentregulations place strict limits on the degree of control and thelevel of income and profitability of foreign owners in local opera-tions. Given the inherent high risk characteristics of mining, workis needed to establish a framework of suitable incentives to attractpotential foreign investment--given the position taken in the newconstitution regarding foreign investors in natural resourceindustries.

(d) Effect of Policy Framework on Tax Revenues and Foreign Exchange.More work is required to examine the implication of different policyoptions for tax revenues and foreign exchange earnings in both thenear term (1-2 years) and medium term (3-5 years), It is possiblethat trade-offs exist between the level of taxation and the amountof fiscal incentives including possible exemptions for deferredtaxes) in the next 1-2 years in the light of the ability ofcompanies to survive the present difficult market circumstances andeventually generate taxes at such time as market prices improve.This is a complex and politically sensitive topic which requiresurgent and careful work by qualified authorities.

5.19 Finally, small-scale mining offers a potentially important growtharea for the mining sector. It is a very new area, greatly in need ofimproved and increased regulations and assistance. The expansion of smallscale mining is a major priority and, appropriately so, for BMGS. Given thesize of resources available to BMGS, it is recommended that BMGS continue tofocus on small-scale mining as an area of high priority and provide necessaryhealth and safety regulations, infrastructure, transport, processing andmarketing assistance. It is also recommended that BMGS continue to take thelead regarding social and environmental concerns including, in particular,pollution control issues relating to mercury contamination and tailingsdisposal (as noted in paras. 2.20 and 3.6 respectively).

AppendixTable 1

PHILIPPINES

MINING SECTOR REVIEW

World Ranking for Selected Mine Production, 1986 /a

Gold (tons) Copper ('000 tons) Silver (n000 ounces) lb Nickel (-000 tons) /b Chromite (-000 tons)

South Africa 640 Chile 1,400 Mexico 2,159 Canada 152 South Africa 3,484United States 108 United States 1,150 Peru 1,778 Australia 85 India : 617Canada 108 Canada 776 Canada 1,327 New Caledonia 74 Turkey 600Australia 75 Zaire 511 United States 1,206 Indonesia 48 Zimbabwe 544Brazil 67 Zambia 480 Australia 1,063 Philippines 28 Finland 525Philippines 40 Peru 386 Chile 518 Dominican Republic 26 Brazil 286Papua New Guinea 36 Australia 239 Japan 324 South Africa 20 Philippines 183Colombia 27 Philippines 223 South Africa 244 Botswana 20 Greece 85Chile 19 South Africa 191 Spain 221Zlmbabwe 15 Mexico 182 Sweden 190

Yugoslavia 156Morocco 127Namibia 106Honduras 81Italv 67Braz;l 67Argentina 62Greece 57Korea, Rep. of 53Philippines 53

/a World excluding Centrally Planned Economies.

/b Data for 1985.

Source: Mining Annual Review, 1987.

AppendixTable 2

PHILIPPINES

MINING SECTOR REVIEW

Philippines: Value of Mine Production, 1972-86(Million pesos, current prices)

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Precious Metals 243 388 606 625 490 636 857 1,313 3,053 2,794 2,773 4,039 4,972 6,274 8,570Gold 225 360 554 575 446 587 799 1,180 2,785 2,642 2,651 3,822 4,773 6,088 8,396Silver 18 28 52 50 44 49 58 133 268 152 122 217 199 186 164

Nonmetallics /a 154 164 174 253 352 399 676 829 983 1,371 1,584 1,830 2,934 1,803 1,969Sand and gravel 38 40 43 103 15 230 432 491 613 691 858 1,022 1,142 1,071 1221Salt 30 30 44 68 87 77 81 161 204 213 219 318 341 365 391Silica sand 7 7 11 10 9 9 1. 11 18 21 28 56 47 25 57Other nonmetallics /a 78 13 26 61 86 86 131 166 i48 446 479 434 1,402 342 300/b

Metallic Minerals 1,532 2,503 _' 990 2,158 2,586 3,252 3,303 5,558 6,724 5,541 4,369 4,736 5,832 8,118 6.158Chromite 48 75 117 148 240 251 291 277 271 229 254 237 427 329Copper conc./c 1,360 2,296 2,794 1,640 1,842 1,927 2,164 3,690 4,409 3,782 3,446 4,047 4,970 5,630 5,460Iron ore/conc. 105 111 82 91 39 - - 1 - 1 - I - - 1Nickel 4 5 7 263 484 927 635 922 1,437 1,109 577 400 466 1,712 322Others /d 15 16 27 47 73 158 253 644 601 378 115 34 153 349 44

GRAND TOTAL 1_929 3.055 3,770 3.036 3.,.428 4,287 4.836 7,700 10,760 9,706 8,726 10,605 13.738 16,195 16,617

/a Excludes coal and cement.T7 Preliminary.7: Concentrates only (excludes cathodes)./d Zinc, lead, manganese, cobalt, pyrite and others.

Source: 8ureau of Mines and Geo-Sciences.

AppendixTable 3

PHILIPPINES

MINING SECTOR REVIEW

Philippines - Quantity of Mine Production, 1972-86

1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Gold metal (tons) 18.9 17.8 16.7 15.6 15.6 17.4 18.2 16.6 20.0 23.6 25.9 25.4 25.7 33.0 35.4

Silver metal (tons) 57.5 58.8 53.9 50.4 46.0 50.4 51.0 57.2 60.7 62.9 61.7 56.7 49.0 53.0 51.5

Copper metal ('000 mt) /a 213.7 221.2 225.5 225.8 237.6 272.8 263.6 298.3 304.5 302.3 292.1 271.4 233.4 237.7 217.0

Chromite ore ('000 dmt) 268.3 484.6 429.1 423.0 346.3 443,1 438.0 420.1 378.6 300.7 208.5 155.1 148.5 165.4 202.2

Iron ore ('000 dmt) 2,204.8 2,254.6 1,608.1 1,351.4 571.0 - 1.7 6.? - 5.7 5.6 2.6 - - 15.0

Nickel ore ('000 mt) /a 0.4 0.4 0.3 9.5 15.2 36.8 29.5 33.3 38.3 29.2 19.6 13.9 13.6 27.6 12.7

Nickel metal ('000 mt) - - - 9.4 14.3 19.3 18.7 17.9 22.7 19.4 11.2 6.4 3.5 17.0 2.1

/a Metal content of ore and concentrate.

Source: Bureau of Mines and Geo-Sciences.

tahl' 4

9190ir '7K0:R RF.ARVIEW

R1t: R+v>nt-^s7fSPtcedMilin (oes.xoe-nd PASAqR; 1971-8-1 ('set If Snwltfn-g IadJ RefIl-9n n,ri-3-

1971 1972 t973 197S 1975 1976 1977 197i 193 999 IQH SI It7 19S3 1964 i985 1986

ttinlng Co!ppanLesApex - - - h,575 ,7s1 '.,(58 2t?, 75 'S, 1"6 9.9, 1 7 Ill t II I 1t, '79 141,472 177,Sqi5 1I! 166. 394 3-J ,944fhnguet 71,Th I n2,94 232,746 339,424 29Y,5') 1;~1 74S 157,586 163,610 222,297 1,263,72Y 1,992 7103 1,286, 7013 ,9809 . I01 2,4'9,3"1 .341 9-1) 2,813,500

ttogon-su-',c 14,114 II,IJ 1Ft.,I92 26.3 73 i 1159 22744 9 ,7S3 7,S21 1t,112 43,312 .1,927 'S. 17P h 3, 642 77,396 91.962 It9,S44

k.epant-, 21S 426 33 153.6 172,8R9 326.*77 190,7qR 197.214 174,301 311,62-. 465,112 369,96! *5,5S') 4,98 Q,9 521)121 922.66h 6686 S1 900.051

Philex 17'J3,421 2115,891 418,22* 4S5,$51 3S5,821 451,313 -.1 3,S1h 445,116 524,472 791,133 SS 42 , '.' 3'11* 895,214 11,195,25 1,494,987 1,62R,503Surtgao - - - - - - - - - - 23t,43, R21,49 102,9891 217,S7' 271,4Ss

Subtntil 'I9 7

62S,199 1,.,41,92 1 , 1 83, 9087.1' H1 Ir173 877,459 943,,09 1,276,16A 2,:64.s*n 22,1*<Q752 . 'I91.R i"0,>4,60h 4,(I4,177' 4,491,272 6,O)b4,993

Atlas 460.4509 Sn4.185 851,117 950,942 761,987 870,.69 9043,22 1,293,96n l,733,439 2,259,396 ' 057,641 1,920,122 2,368,769 2,864,770 2,593,940 2,261n,575

Karcopper 2Q3,74h 2S 1,1 1 429,151 745,609 264,374 181,430 374,045 S20,311 651,134 571,359 S 1,941 4(,6409 Sn6,n1l 69,59Ro 704,094 785,30014.rlnduque /a 200,394 226.854 3;2,537 443,924 318,95SI 915,353 1,I036,395 644,354 1,648,424 2,195,S22 1,609,755 1,461S,83 1,670,632 319,138 - -

North Daa - - - - - - - - 15,)24 35,76Q l',, 47 13h,343 422.1n9 473,45H 393,564Rio-Tuha -- 58,921 72,591 100,421 136,479 133,2261 9n,.5s 8A,761 167,838 218,213 '42,047

Subtotal s 4,61A 9Rt,158 1,632,824 2,t14", 57' 1,147,21 2,067,051 2,M,191 2,131,10 4,113 ti 5,t77,4747 4,44,26 S,I7L I1 4, ,61494 3,09,705 3.5,486

Basay - - - - - 217,366 363, 11) 142,841 14 .20)7 1(1,712 - - -

Datong 3uh9 v - - - - - - - - - - - - - 122,577 127,549

Rabena 12,127 - - - - -

Subtotnt - - _ Z Z 26,$49q 481,117 142,941 142,20'7 1)5,712 1?2,S77 127,548

Total MIntng 1,452,506 1.605,357 2.674,747 3,323,776 2,255,575 2,978.124 3,250,R42 3,274,295 5,678,284 8.225,676 7,858,870 6,795,173 8,^20,234 9,498,931 9,058.525 9.646,479

PAS4R - - - - - - - - - - - - 466W) t.535 6,436,794 6.124,12t

G.RAND TOTAL 1,452.506 1,605,357 2,674,747 3,323,776 2,255,575 2,878,124 3,25n,842 3,274,295 5,679,284 9,225,676 7,859,87s 6,795,073 8,S20,234 14,105,566 l5,445,308 15,770,600

/a Foreclose t 1984.

Source: Compaiv Annual Reportq; 3StArl of investment4t ChOamber nf M4

inea.

PHILIPPINES

MI8INO SECTO8R REVEtW

After-Tax Net lncoue (Loss) for Selecte, t1ning ntConnes and P5SAR, 1971-86(e000)

1971 1972 1973 1974 1975 1976 1977 197R 1979 1981 l983 1982 1981 1984 19R5 1986

iolog companiesApex - - 3R6 (1,505) (3,208) (13045) (8605 1.795 13,417 40.794 14.317 Itl,401 74.448 21,476 10.653 36,110Reoguet 112,054 48,532 74,851 63,403 47,784 1,574 23,346 3-,67(3 55.571 220,t25 190,700 ll.-oen 296,200 141.600 (144,1n0) 154.712Itogoo-S.yoc ins 372 3,480 4.708 7,529 (2,838) (3,726) (6,q79) 6,279 3.74t 1,132 1,621 16.7n2 3,355 (851) 16,038Lepanto 713177 98.6R9 152.441 91,734 (5,517) 5,113 28,831 609331 146.99* 112.597 40,941 27,.51 303 051 8a I(32 9.285 44,249Philex 75.92n 86,987 222,179 232,976 137,413 15n,640 143,304 12n.ORl 152,717 295,A84 129.732 178.404 7Q3.419 296,5R9 316.779 481.966S3PStao (138) (48) (I 3) 499 (86) (52) (5) (617) (33) Ill 1,135 2.966 h,025 4,016 4,749 32.947

Subtotal 259.121 234,SI8 453.o07 391,715 185,917 153.312 190,692 20R, I8 376.987 663,369 377,957 43,.143 73(, n3 549,137 216,S1 766.'42

'te.s 142,096 142.445 362,342 220,557 364.137 380,502 83,351 52,770 307,668 325,050 3,529 (295.408) 99,359 (696.501) (1.538,059) (976.385)9arcopper 65,800 111,846 255,R22 37n0,53 54,003 S2,547 A.9.593 123,446 383,624 98,752 (21,274) 156A58t) v),56* (332,962) (388,873) (341.960)Marinduque /a 51,235 55,634 157,093 126,852 27,700 80,234 83,788 9R,927 165,290 (274,1S7)(899,750)t(,958,32/) (4.305,028) (3.885,653) - -North D0v n - - _- - - - - - (56.,37) (31541.056) (1.37,759) (2.19R,162)Rito-Tub - - - - - - 946 (17,134) 14,268 25.057 3,380 (8,713) (3,-96) 21,886 (4,154) 2,106

Subtotal 25S.311 309,92s 775,257 717.928 245.808 3.283 21 m 25,7959 670.8SI 174,751(914.4721) (2,3138,61) (4.255,83A) (6.214.286) (3.118.842) (3.514.401)

84.8y - - - - - - - 23.458 165 (2015.28) (299.592) (64,18S5)8aton0 Suhov - - - - - - - - 1 ,964,375) (3,332,990) -

Sabena - - - 3,390 3.388 (312) 2.34n 3.918 22,1n3 (215.400) - _ _ _ _

Subtotal _ _ _ 3.388 (112) 2.340 33,276 22,468 (416.729) (2Qq.592) (641,8qS) (1.964,375) (1.112.990) _

Total Itning 518,252 5.4.43 1.22S.264 1.109.643 433.1135 489.983 406.658 469,179 1.081.114 860.588(953,241) (2,183.130) (4,167.428) (7,630,624) (4,015,317) (2.748,360)

PASAR _ -a - .126,s76 _3,7S9 46,066

0R88 TOTAL 518,252 544,443 1.228,264 1.109.643 433.115 489.983 406.658 469.179 1.081.114 860,588(953.241) (2.183,130) (4.167,428) (7.503.648) (3.961.558) (2,702.294)

/a Foreclooed 1984.

Source: Companv 4nnual Reorts; oiatr of 14veot,ee,t; -hxmber nf Min3±.

- 47- AppendixTable 6

PHILIPPINES

MINING SECTOR REVIEW

Marcopper - Selected Financial Indicators. 1971-86(P million)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Revenues 263 268 429 746 264 382 374 520 651 571 520 462 606 689 704 785

Costs 183 128 150 269 201 284 296 319 359 426 541 519 610 802 893 1,127

Profits BeforeIncome Tax 80 140 279 477 63 98 78 201 292 145 (21) S (4) (113) (189) (342)

Income tax 14 28 64 106 9 35 29 78 109 46 - - 7 - - -

Profits AfterIncome Tax 66 112 215 371 54 63 49 123 183 99 (21) (57) (11) (113) (189) (342)

Dividends 101 139 135 278 111 97 78 78 128 156 - - - - - -

Source: Company Annual Reports.

6vpen'1I',

TahlI. 7

P'IILIPPtNES

'ItV1NC SECTOR REVIEW

Capital Expenditures of Selected )4ning Coapaniea and PASAR, 1971-86

1971 1972 1973 1974 197; 1976 1977 1979 1979 1991 1991 39R2 IQ83 1984 1985 1986

Mining CompaniesApex 57 112 19,2S9 6,034 5.445 2,0I12 1,5(16 3,13q 15,31l 17,'R2 31,802 77,4,S) 15,974 12,361 16,139 26,20U

Benguet - - R,,79 14,s88 19,661 13,915 70,355 190,9q9 261,2'3 142,776 77,462 m0,o50(1 271,1I0( 236,700 17?,S'h3 102,400Itogon-Suvoc 481 447 516 2,4'06 5,n47 5,485 3.235 4,?R? 1.,73.i 5,587 3,*88 4,72R 7,730 11,345 2,5*48 10,240Lepanto 19,076 31,684 21,7A2 45,002 48,717 48,728 16,112 31,092 39,656 46,7('q .6,069 46,720 189,931 197,28n) 122,612 67,720Philex 23,242 25,093 29,638 48,257 63,843 34,375 51,408 38,331) 44,986 5I1,4O2 79,8r93 158,060 94,14? 1I1,947 110,330 137,968Surigao - 389 8 451 1,084 Ii 19 12 1,7117 45,122 10,646 24,383 177,239 14.461 11,674 '3,39S

Subtotal 42,856 57,72S 79,8t1 116',798 143,848 104,531 148,615 2767,924 377,*64 334,r77 249,763 460,941 59R,066 SA9,194 436,(03 367,943

Stla, 123,542 104,562 127,669 91.697 219,327 173,441 265,367 67,073 48l,569 4n0,402 555,359 657,51l 579,198 751,949 10)3,954 30b,526 rMarconner 13,077 23,n47 24,339 192,319? l,tl?I 21,292 85,024 69,266 39,2?7 86,2747 119t,142 72,016t IR5,652 Ib,15* 12,370 6.529

t8arinduque la 13,165 10,768 52,640 541,833 145,0)66 168,303 113,101 403,196 477,653 198,028 1,329,0931,737,02R 3,63R,123 4,14',791 - -

INortb Davao - - - - 3,917 3,939 269,3Rq 4830f9n( 574, 15 ?11,647 525,3Sn 25,312 2,"133 29.795Rio-Tuba - - - - - - 65,042 26,629 2,l619 8,112 19,694 10,170 6,374 8,807 25,577 20,347

Subt,ital 149,784 1389377 204,641 815,827 545,694 363,536 Sit)1,71 570,005 1 .268,Qnfn 1,331,341 2,396,7(42,608,362 4,93S,637 4,945,.25 173,934 363,197

Raxay - - - - - - - - 76,542 197,683 ?90,o15t 1(38,300 103,951 _- -Bateng Buhav - - - - - - - 50,51I 55,n05 75,4501 98,65st 54,569 36,3n5 -

Sabena - - 652 1,340 894 522 77,822 142,793 12n,)31) 218,077 - - - -

Subtotal - - 052 l.34n 894 522 77,822 142,793 196,j72 466,278 345,556 283.73' 2n2.*6i 54,569 36,30)5

Total 9inIng 192,640 146,102 285,174 933,995 690,436 468,089 756,928 980,s2n 1,843,436 1,982,424 2,992,0233,112,953 5,735,313 5,588,688 646,242 731,340

PASAR - - - - - - - - 74,736 1,0t34,7991,327,586 1,91),122 1,565,577 856,900 16n,573

CiRAND ToTAL 192,640 196,102 285,174 933,995 690,436 468,089 756,928 98n,620 1,843,436 2,057,160 4,026,8124,660,539 7.*45,445 7,254,445 1,503,132 891,713

/a foreclosed I 354.

Source: roparnv 4nnual R-erortg; arot nf Inveetaent; -hamber if 'tinee.

AppendixTable 8

PRtLIPPINES

MINING SECTOR REVIEW

Copper Production by Company, 1975-86('000 tons copper contained in concentrate)

Company Mine Type 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1983 1986

Acoje Barlo Op 1,029 1,754 1,316 2,257 3,327 3,115 2,365 closed - -

North Davao Amancan OP - - - - - - - 7,146 18,547 21,88020,38R 16,645Atlas Toledo Op/Ug 102,805 103,053 128,720 128,755 125,258 126,049 138,975 134,370 121,942 118,06991,535 69,693Azure Azure Ug - - - - 900e 1,000e 276 closed - - - -

Marinduque Bagacay Op 4,373 4,025 1,415 1,937 3,212 2,124 76 c/m closed - - -

Batong Buhay Batong Buhay Ug - - - - - - - - 481 7,798 5,662 c/mBlack Mountain Kennon Ug 3,236 3,448 2,821 3,012 3,217 3,008 2,556 closed - - - -

CDCP Basay Op - - - - 19,651 20,408 12,430 7,479 5,594 c/m - -Benguet Dizon Op - - - - 1,106 25,320 27,909 25,409 25,919 23,45223,928 23,108Hercules Bully Bueno Ug - - - - - - - 1,487 c/m c/m - -Consolidated Ino Op - - - 5,206 7,620 5,000e c/m c/m closed - - -

Lepanto Mankayan Ug 13,308 4,172 18,571 16,111 18,646 15,231 15,243 l7,415 16,838 9,045 12,737 13,009Philex Padcal Ug 28,128 30,641 32,894 27,074 22,594 22,081 23,376 23,146 21,432 20,89123,644 22,011Sabena Sabena Op - - - - 4,486 8,153 176 c/m closed - - -Maricalum Sipalay Op 24,268 27,218 27,304 20,129 27,056 17,341 26,539 37,354 28,322 c/m 9,969 41,872Baguio Gold Santo Nino Ug 3,515 4,381 4,691 5,107 4,781 6,064 5,117 closed - - - -

Marcopper Tapian Op 31,838 45,443 45,520 52,412 42,961 32,969 34,788 35,271 33,4-3 31,43233,149 28,850Marcopper Tapian Leach Le 2,913 2,091 1,716 1,613 1,561 1,487 1,488 1,428 1,375 1,301 * *Benguet Exp. Thanksgiving Ug 139 47 4 58 155 118 109 105 102 101 34 4W. Minolco W. Minolco OP 8,539 9,198 7,985 c/m 11,853 14,427 10,137 644 closed - - -

Zambales Ayala Ug - - - 223 405 268 138 closed - -- -

Total 224,091 235,471 272,957 263.894 298,789 304,163 301,698 291,254 274,025 233,867221,046215,584

Note: Op - open-pit; Ug underground; Le = leach; c/m = care and maintenance; * = included with Tanian.

Source: Brook Hunt Associates (1975-84); BMGS (1985, 1986).

- 50 - AppendixTable 9

PHILIPPINES

MINING SECTOR REVIEW

Estimated Production Costs in Major Copper-Producing Countries, 1975-85(USO/lb)

Direct Indirect Interest Gross Co/by-product Netcosts costs expenses costs credits costs

1975Zambia 52.6 7.9 2.7 63.2 1.6 61.6Zaire 42.8 23.3 1.7 67.8 12.7 55.1South Africa/Namibia 45.7 3.0 0.1 48.8 7.5 41.3Australia 49.3 2.4 - 51.7 13.4 38.3Papua New Guinea 43.8 4.7 1.1 48.3 24.5 23.8Philippines 42.8 4.7 1.5 49.1 11.3 37.8Indonesia 36.2 2.1 7.9 46.2 10.7 35.5Canada 98.5 15.8 4.4 118.7 90.3 28.4United States 59.9 4.6 4.1 68.6 7.0 61.6Mexico 61.3 22.6 3.1 87.0 59.7 27.3Chile 36.5 14.1 2.1 52.7 5.5 47.2Peru 87.3 22.1 2.2 111.6 60.5 51.1Sweden - - - - - -

Average 57.6 10.4 2.9 70.9 22.0 48.9

1980Zambia 72.6 16.8 4.0 93.4 9.1 84.3Zaire 90.2 22.8 7.2 120.2 69.1 51.1South Africa/Namibia 87.1 7.5 4.1 98.7 56.0 42.7Australia 70.5 7.3 0.7 78.6 50.9 27.7Papua New Guinea 107.1 2.0 - 109.1 91.2 17.9Philippines 86.0 8.9 9.3 104.2 20.6 51.0Indonesia 61.2 2.7 - 63.9 30.6 33.3Canada 130.6 22.3 5.6 158.5 168.1 -9.6United States 95.7 6.2 4.0 105.9 32.5 73.4Mexico 82.9 35.4 20.8 139.1 97.0 42.1Chile 50.8 25.4 0.6 76.9 20.1 56.8Peru 90.2 30.6 9.2 129.9 88.8 41.1Sweden 210.4 22.7 4.6 237.7 222.0 15.7

Average 87.0 17.0 4.8 108.7 58.8 49.9

1985Zambia 46.3 13.0 6.5 65.8 10.0 55.8Zaire 58.8 5.2 1.7 65.7 25.9 39.8South Africa/Namibia 49.3 3.4 2.1 54.8 26.2 28.6Australia 69.4 5.9 1.8 77.1 25.2 51.9Papua New Guinea 78.3 1.2 0.8 80.3 37.1 43.2Philippines 80.6 7.4 32.2 120.2 34.3 85.9Indonesia 62.9 2.1 0.2 65.2 15.5 49.7Canada 107.7 11.6 8.9 128.2 85.9 42.3United States 65.5 3.1 3.3 71.9 6.6 65.3Mexico 63.7 19.9 39.2 122.7 43.2 79.5Chile 40.2 6.3 4.5 51.0 8.8 42.2Peru 66.6 12.4 6.4 85.4 44.2 41.2Sweden 105.9 10.4 2.8 119.1 65.1 54.0

Average 64.3 7.4 6.6 78.2 27.7 50.6

Source: Brook Runt Associates, Ltd., Western World Copper Costs, 1985/86 edi-tion, London, 1986.

-S51 - AppendixTable 10

PHILIPPINES

MINING SECTOR REVIEW

Annual Average Copper Cash Production Costs(USI/lb refined copper, current terms)

Direct Indirect Interest Gross By-product Netcosts costs costs costs credit costs

1975 42.8 4.7 1.5 49.1 11.3 37.8

1976 46.4 4.4 1.2 52.0 9.4 42.6

1977 49.3 4.0 1.8 55.0 10.7 44.4

1978 53.0 4.1 2.4 59.6 15,8 43.8

1979 64.2 519 5.4 75.5 12.7 53.0

1980 86.0 8.9 9.3 104.2 20.6 59.0

1981 87.6 7.3 14.2 109.1 34.0 75.1

1982 82.7 6.8 13.8 103.2 32.1 71.1

1983 77.1 7.6 15.4 100.0 35.6 64.5

1984 78.9 6.7 28.0 113.5 36.0 77.5

1985e 80.6 7.4 32.2 120.2 34.3 85.9

1986e 71.9 7.6 36.8 116.3 36.9 79.4

Source: Brook Hunt Associates, Western World Copper Costs, 1985/86.

Appfin4ix- 52 - Table 1I

PHILIPPINES

MINING SECTOR REVIEW

Philippines - Gold Production by Company, 1975-86(kg) /a

1975 1980 1981 1982 1983 1984 1985 1986

Primary Open-Pit ProducersManila Mining - 144 150 276 239 181 402 237Masbate (Atlas) - 1,556 2,534 2,495 2,576 2,531 2,638 2,424Surigao - - 150 585 762 579 1,088 1,081

Subtotal - 1,700 2,834 3,356 -3577 3,291 4,128 3,742

Co/By Open-Pit ProducersAcoje 13 37 28 - - - - -Amacan - - - 273 601 570 515 419Bagacay 36 15 2 - - - - -Basay - 112 75 36 27 - - -Cebu Open Pits 1,491 1,588 2,309 2,613 2,089 2,373 2,334 1,912Dizon - 2,276 3,138 3,690 3,331 4,226 4,000 3,745Sabena - 181 4 - - -Santo Nino 143 345 295 - - - - -Sipalay 114 120 205 281 224 - 82 284Tapian 937 763 885 1,053 924 746 804 584W. Mlnolco 507 728 575 - - - - -

Subtotal 3,241 6,165 7,516 7,946 7,196 7,915 7,735 6,944

Primary Underground ProducersApex (Masars) - 773 1,213 944 972 801 1,040 1,350Benguet Gold Operations 3,950 3,171 3,226 3,417 3,850 3,558 3,334 3,645Hijo (North Davao) - - 150 518 476 369 144 -Itogen Suyoc 856 277 368 427 423 393 420 487Paracale Project - -- - - - - -

Thanksgiving 403 353 356 426 374 380 373 302Vulcan - 211 401 337 305 145 - -Benguet Exporation - - - - - - 190 309

Subtotal 5,209 4,785 5,714 6,069 0 5,646 5,501 6,093

Co/By Underground ProducersBatong Buhay - - - - 20 293 229 -

Black Mountain 86 85 70 9 - - - -

Cebu Underground 1,023 1,552 1,192 1,224 898 992 /b /bCopper Shield Project - - - - - - 19 31Lepanto 1,246 1,755 1,869 2,291 1,925 1,127 1,733 1,892Philex 4,058 3,279 3,660 4,018 4,074 4,314 5,733 5,288

Subtotal 6,413 6,671 6,791 7,542 6,917 6,726 7,714 7,211

Small-Scale ProductionVarious alluvial fields 1,200 2,700 2,000 6,000 9,200 10,500 8,084 11,439

Total 16,063 22,021 24,855 30,913 33,290 34,078 33,162 35,429

/a Note that 1,000 kg - 1 ton.

lb Included in Cebu open-pits.

Source: Brook Hunt Associates (1975-84); BMGS (1Q85, 1986).

- 53 -

AppendixTable 12Page 1 of 3

PHILIPPINES

MINING SECTOR REVIEW

Company: Atlas Consolidated Mining and Development Corporation

Mine: Lutopan (u/g) Location: Toledo, Cebu Island Capacity: 73,000 tpy copper /aStatus: Operating Reserves: 10-20 years Ore Grades: 0.4-0.7% CuStart-up: 1966 By-Product: gold, silver, pyrites Revenues: 79% Cu, 19% Au /bCash Operating Costs: US$0.45/lb refined copper including US$0.15/lb by-product credits (butexcluding US$0.11/lb deferred taxes) /c

Mine: Biga (o/p) t Location: Toledo, Cebu Island Capacity: 20,000 tpy copper /dStatus: Shut (since 07/86) Reserves: 5-15 years /e Ore Grades: 0.35% CuStart-up: 1963 By-Product: gold, silver, pyrites Revenues: 79% Cu, 19% AuCash Operating Costs: US$0050-0.60/lb refined copper including US$0.15/lb by-product creditsbut excluding US$0.11/lb deferred taxes) /c

Mine: Carmen (o/p) Location: Toledo, Cebu Island Capacity: 50,000 tpy copper /fStatus: C&M (since 03/86) Reserves: 20 years /e Ore Grades: 0.4% CuStart-up: 1977 By-Product: gold, silver, pyrites Revenues: 79% Cu, 19% AuCash Operating_Costs: US$l.55-0.75/lb refined copper including US$0.15/lb by-product credits(but excluding US$0.11/lb deferred taxes) /c

Mine: Masbate Location: Masbate Island CapacitY: 90,000 oz py goldStatus: Operating Reserves: 15-20 years or more Ore Grades: 2 grams/tonStart-up: 1978 By-Product: silver Revenues: 96% Au, 4% AgCash Operating Costs: US$200/oz gold including taxes and US$5/oz by-pro,duct credit /c

/a First lift (15,200 tons) based on 15,000 tpd; 330 days; 0.38% Cu; 81% recovery. Second lift(57,800 tons) based on 25,000 tpd; 330 days; 0.77% Cu; 91% recovery.

/b In 1985, with 91,000 tons copper and 75,000 oz gold production and with copper price ofUS$0.64/lb and gold price of US$309/oz, revenues were 84% copper, 14% gold (plus 1% silverand 1% pyrite). In 1986, with an estimated production of 60,000 tons copper and 53,000 ozgold, and an expected price of US$0.63/lb copper and US$375/oz gold, revenues would becopper 79%, gold 19% (plus 1% silver and 1% pyrite).

/c The cas.. operating costs are order of magnitude estimated based on 1986 information. Theyinclude mining, milling, transportation, smelting, refining and by-product credits; theyexclude depreciation, interest and taxes. The costs for Biga and Carmen depend on pitdesign ("high grading") which could significantly reduce them but only for low levels ofproduction (up to 10,000 tpy copper each) and relatively short periods (2-4 years).

/d 23,000 topd; 330 days; 0.35% Cu; 81% recovery.Te Reserves depend on pit design and stripping ratio for open-pit mining; reserves might be

extended through underground mining./f 48,000 tpd; 330 days; 0.4% Cu; 83% recovery.

54 - AppendixTable 12Page 2 of 3

Background: Production. Atlas is the largest copper producer in thePhilippines. Atlas copper production peaked at about 134,000tons copper (contained in concentrate) in 1981. Atlas is alsoan important gold producer, both as a by-product of its copperproduction and through its separate gold mine operation atMasbate. In 1985, Atlas produced 91,500 tons copper, 75,000 ozgold (by-product) and 85,000 oz gold (from Masbate). Atlasalso produces silver and pyrites but these are of minorsignificance (about 22 total revenues). In 1986, Atlas stoppedproduction at its two open-pit copper mines (Biga and Carmen)and presently operates the Masbate Gold Mine and the LutopanUnderground Copper Mine.

Debt. From 1975-83, Atlas undertook a large investment programtotaling about US$420 million, including projects to increaseproduction and reduce energy costs (including a largeconversion from oil-fired to coal-fired power generation). Theinvestment program was financed in part by three foreignloans--US$73 millioh for the Carmen Mine; US$27 million for theMasbate Mine and the Carmen Diesel Power Plant and US$155million (of1which US$119 million was drawn by December 1985)for the Coal Conversion Project and the Lutopan qecond Lift.

Financial Performance. Atlas was very profitable in the 1970swhen copper prices were relatively strong, but has incurredlarge losses in the 1980s in the face of weak copper prices andhigh interest charges.

1971-74 1975-78 1979/80 1981 1982 1983 1984 1985 1986-- (Annual average) --

Copper price (US$/lb) 0.68 0.60 0.94 0.79 0.67 0.720.62 0.64 0.62Net revenues (US$ million) 100 124 267 260 224 213 172 142 112Net income (US$ million) 30 17 42 1 (34) 9 (42) (83) (48)

The loss of US$83 million in 1985 includes US$54 million noncashcharges and US$27 million deferred taxes. In addition, the costsincluded US$39 million interest charges. In 1986, Atlas hadlosses of about US$48 million (including noncash charges of US$38million and deferred taxes of US$15 million). Thus, in 1986Atlas was able to cover all operating costs and interest expenses(of about US$33 million).

- 55 -AependixTable 12Page 3 of 3

Liabilities* At year-end 1986, Atlas had outstanding long-termdebt of US$211 million (including current due of US$73 million)and (following a revaluation of property) equity of US$13 mil-lion. In addition to the long-term debt, Atlas' liabilitiesincluded US$25 million unpaid interest and US$63 milliondeferred taxes.

Options and The main issue at Atlas is how to restructure its BalanceIssues: Sheet, Atlas has now cut back its operations so that the

remaining production is viable and Atlas was able to cover itsinterest costs in 1986. However, Atlas has a substantialforeign debt burden which it presently cannot service and amajor balance sheet problem in terms of deferred taxliabilities, unpaid interest and overdue principal payments.Thus, Atlas needs an urgent restructuring of its foreign debtwhich may occur either through restructuring discussions at theGovernmental level or through direct negotiations with threesyndicates of foreign banks. A secondary issue relates to thedeferred taxes since these result in a large and rapidlygrowing claim on Atlas by the Government. If market prices donot improve, the whole deferred tax policy will need carefulreview including questions such as should the overdue taxes bewaived as previously proposed? Should they be converted tosome type of debt or equity? Will the deferred taxes be aproblem in restructuring Atlas' foreign debt?

- 56 - Appendix

Table 13

PHILIPPINES

MINING SECTOR REVIEW

Company: Marcopper Mining Corporation

Mine: Tapian (o/p) Location: Marinduque Island Capacity: 33,000 tpy copperStatus: Operating Reserves: 2-4 years remain Ore Grades: 0.4% Cuftart-u: 1971 By-Product: minor gold Revenues: 85% Cu, 15% Au /aCash Operating Costs: us$ l.48/lb refined copper including US$0.11/lb gold by-product credit(but excluding US$0.17/lb deferred taxes) /b

/a Based on gross revenues in 1985 (before treatment charges) with US$0.62/lb copper andUS$320/oz gold and US$7/oz silver.

/b Includes mining, milling, transport, smelting, refining and by-product credits; excludesmarketing, adminietrative, interest, taxes and depreciation.

Background: Marcopper is one of the best-run mines in the Philippines. Themine was very profitable in the 1970s. However, today it is com-ing to the end of the ore body and is a highly marginal opera-tion. Marcopper has been unable to service its debt since 1983and is in default with its lendefs. it presently owes US$31million to two consortia of US banks and is effectively owned bythe banks. In addition, the company has past-due taxes of US$24million as of December 1986. In 1986, the mine was able to coverits cash production costs and make US$4 million Interestpayment. The Tapian mine will close in 2-3 years due toexhaustion of ore reserves. I. has been proposed to develop thenearby San Antonio ore body to replace the Tapian ore body--butSan Antonio needs a copper price of US$0.70/lb, excluding taxes,or US$0.90/lb, including taxes (in 1986 terms), to justify devel-opment.

Options and The closure of Tapian is inevitable. The main issue, therefore,Issues: is to ensure that adequate preparation is taken for an orderly

closure to minimize the economic dislocation on the small islandcommunity. A second issue is to investigate under what condi-tions the San Antonio mine could be developed.

- 57 - pendix

Table 14Page 1 of 3

PHILIPPINES

MINING SECTOR REVIEW

Company: Maricalum Mining Corporation

Mine: Sipalay (o/p) Location: Maricalum, Negros Is. Capacity: 41,500 tpy copper /aStatus: Operating Reservest 30 years plus /b Ore Grades: 0.52% CuOriginal Start-up: 1960s? Closed: September 1983 Reopened: August 1985Employment: 2,000 By-Product: gold, silver /c Revenues: 92% Cu, 6% Au, 2% AgCash Operating Costs: US$0.60/lb ;u. includes by-product credits of US$0.04/lb of preciousmetals (but excludes all deferred taxes; value unknown)

/a Based on 28,000 tpd, 345 days/yr; 0.5% grade; 86% recovery. Capacity can be expanded to35,000 tpd at an estimated cost of US$4 million; however, this may also require additionaldebottlenecking expenditures for the concentrator.

/b Recoverable reserves (at a cut-off grade of 0.3%) are estimated to be 245 million tonsgrading 0.536% copper in the Cansibio-Binulig pit (the present pit) and 56 million tons at0.413% copper in the Baclao ore body (presently undeveloped).

/c The ore also contains molybdenum which was recovered until 1982 in concentrate form; themoly plant is still in existence but there are no plans to operate it at present since (a)prices are below recovery costs and (b) reopening the moly circuit would divert scarce fundsand manpower from the copper production.

/d Based on expected 1987 performance; includes mining, milling, transport, smelting, refiningand by-product credits; excludes interest, depreciation and taxes.

Background: The Sipalay mine was previously operated by Marinduque Mining andIndustrial Corporation (MMIC). The mine closed in September 1983due to low copper prices. Subsequently, MMIC was foreclosed byDBP and PNB in September 1984, following which the new company(Maricalum) was organized to take over and operate the assets.The mine was rehabilitated and dewatered with about US$14 millionfunds, largely provided by Marubeni of Japan. A "safety" featureof the Marubeni funds is that the repayment schedule isconditional on copper prices being above US$0.605/lb. As part ofthe agreement, Marubeni receives 90% of the mine's concentrateshipments (the balance goes to PASAR).

- 58 -AppendixTable 14Page 2 of 3

Production. Production recommenced in August 1985 followingrehabilitation of the mine plant and equipment and advance strip-ping of about 1.35 n!llion dry tons of waste. During 1985 and1986, the maintenance and repair operations were hampered by ashortage of spare parts resulting in equipment being idle forlack of spare parts, but the backlog of spare parts requirementsis now being filled. In order to improve mining operations, 22secondhand Unit Rig 100-ton dump trucks were purchased from theUnited States in 1985 at little more than the cost of one newtruck. They were transported from the United States in knocked-down condition and had to be assembled and tested at the Sipalaymine site, All were successfully put into operatiou and as ofmid-1987 sixteen were operational and six required overhaul.

Production Plan, The production plan for 1986 was to mill 52.5million tons ore and produce 24,400 tons copper in the first halfof the year and 64.4 million tons ore and 26,200 tons in thesecond half, Direct cash operating costs were budegted at aboutUS$0.52 per lb. However, the plan proved too optimistic andactual production was just over 42,000 tons copper and actualcash costs about US$0.60 per lb. Improved production depends onthree main factors. First, as noted previously, repairablemining equipment (especially shovels and graders) need to be madeoperational and the spare parts ordering and delivering systemneeds to be sufficient to ensure an adequate and reliable supplyof spare parts. In addition, repairs need to be completed onBall Mill No. 9 to provide adequate milling capacity for35,000 tpd. Second, there is a waste conveyor which runs fromnear the pit to the waste dump, saving truck haulage of about4 km. The crusher which feeds the conveyor has never worked wellsince it is easily blocked, especially by wet material in therainy season. The crusher is undergoing a major rehabilitationeffort at present to overcome the original design problem. Thesuccessful recommissioning and operation of the waste crusher andconveyor would provide important cost improvement in 1987 vis-a-vis 1986. Third, the successful completion of a program todebottleneck the concentrator (and permit an expansion to35,000 tpd) which is presently under way. This will reducebottlenecks especially in the washing section.

- 59 -

AppendixTable 14Page 3 of 3

Mining Program. Certain portions of the ore body contain arsenicas a trace element. There are two production faces presently inoperation and the ratio of production between the two is signifi-cantly influenced by limits placed by the smelter on the maximumpercentage of arsenic in the concentrate. The Marub-ni limit istwice as stringent as PASAR. A first impression is that thepresent limits make the mining program somewhat suboptimal fromthe standpoint of the mine. Further investigation would seemdesirable of the trade-off between mining costs and smelterpenalties in terms of alternative mining programs. In thisregard, it might well be useful to also have the overall pitdevelopment plan (12 months - 20 years) reviewed by an expert,outside authority.

Future Development. The reserve base is plentiful. Given theexisting infrastructure and the characteristic of the ore body,an expansion at Sipalay may be the most economical "new project"in the Philippines. Such an expansion is not straightforward inthat the concentrator might have to be moved (since it sits onpart of the ore body). In the meantime, a more urgent decisionis needed regarding the provision of new tailings facilitiessince the existing tailings dam will be full within about threeyears. The least expensive alternative is to construct anaoV tional tailing pond (No. 4). However, plans have beenprcpared for a pipeline system for disposal into the sea(Marcopper has such a system). Providing it is environmentallyacceptable, a pipeline would be the least-cost, long-run solutionif investment funds (of about US$6 million can be obtained).

Issues and Maricalum is in a difficult financial position. Direct cashOptions: operating costs were about US$0.60 per lb compared with an

average sales realisation of about US$0.63 per lb for the firsthalf of 1987. The company was not generating sufficient cash tomeet its debt service and principal repayment of about US$0.09per lb. The financial position should improve due to highercopper prices - although some of Maricalum's copper has beenpre-sold at prices fixed earlier in 1987. In the short term, themajoi issues relate to improving mining equipment availability,debottlenecking the concentrator, getting the waste conveyoroperational, etc. as noted previously. These depend on thecapabilities of the mine staff as well as on adequate funds forspare parts, repairs, backup equipment, etc. For the mediumterm, work is needed to study the economics and possible timingof a major expansion. In particular, a decision will be neededwithin a year for additional tailings disposal with two mainalternatives-either a new tailings pond or a pipeline fordisposal into the sea. The Government intends to privatiseMaricalum. If no serious interest is received, the APT will needto develop a disposal strategy taking into account the potentialvalue of Maricalum as well as its present operational andfinancial status.

- 60 -

AppendixTable 15

PHILIPPINES

MINING SECTOR REVIEW

Company: North Davao Mining Corporation

Mine: Amacan (o/p) Location: (southeast) Mindanao Is. Capacity: 22,000 tpy copperStatus: Operating Reserves: 10-20 years Ore Grades: 0.35% CuStart-up: 1984 BY-Product: some gold and silver Revenues: 83% Cu, 16X Au, 1% AgCash Operating Costs: US$0.65/lb refined copper including US$0.l3/lb gold and silver by-productcredit (but excluding US$0*03/lb deferred taxes) /a

I

/a Includes mining, milling, transport, smelting, refining and by-product credits; excludesinterest, depreciation and taxes.

Background: North Davao has been unable to service its debt since its incep-tion and is now two-thirds owned by PNB and DBP. The project hashad recurring technical difficulties due to design and fabrica-tion defects of the ball mills. In order to survive these diffi-culties the mine concentrated on higher grade ore production inthe first two years of operation. In 1985, the mine had a cashoperating cost of US$0.65/lb including by-product credits ofUS$(0 3'/lb. In 1987 and A988, the ore grade will decline andmining costs increase but capacity should be raised, after theball mills are repaired, and is expected to reach a peak of25,000 Tpd starting mid-1988. It is uncertain as to whether ornot operations can be maintained with proceeds from sales. Adirect cost infusion may be needed to maintain operations as wellas to further improve the efficiency and capacity of the mine.

Options and The disposal of North Davao will be undertaken by the APT whoIssues: will attempt to sell the mine on an "as-is" basis. If no bids

are received, other options will need to be examined such asrequesting bids for a management contract, undertaking an orderlyclosure or making a cash injection to strengthen the company andpackage it for a subsequent sale.

- 61 -

ChapterAppendixTable 16

PHILIPPINES

MINING SECTOR REVIEW

CoTpany: Batong Buhay Cold Mines Inc.

Mine: Batong Buhay (u/g) Location: Northern Luzon Capacity: 22,000 tpy copperStatus: Closed (since 10/85) Reserves: at least 20 years Ore Grades: av. 0.8% CuStart-up: 1984 By-Product: some gold & silver Revenues: 74% Cu, 24% Au, 2% AgCash Operating Costs: US$0.40/lb refined copper at full capacity including US$0.19/lb gold andsilver by-product credit (but excluding US$0.02/lb deferred taxes) /a

/a Includes mining, milling, transport, smelting, refining and by-product credits; excludesinterest, depreciation, depletion and taxes.

Background: This mine is in a remote location about 265 km from the northerncoast in terrorist-influenced territory. The mine has notreached full capacity since it opened in April 1984, becauseterrorists have damaged the over~head power lines (on sevenoccasibns). The last time was in November 1985 and since then,the mine has not been operating. In 1985, the mine had a cashoperating cost of US$0.62/lb (refined copper) including a goldand silver by-product credit of US$0.19/lb even though itoperated at only about 30% capacity. The mine operator estimatesthat the mine would have a cash operating cost of US$0.50/lb(refined copper) if power supply and sufficient operating capitalwere available to operate at full capacity. The mine is des-cribed as "a very good ore deposit in one of the worst locations'n the Philippines." In August 1986, DBP took the decision toforeclose the mine and await PNB concurrence. It is estimatedUS$5-6 million is required to reopen the mine and sustainoperations for the first three months if power supply isreestablished.

Options and Should the mine be mothballed or should an attempt be made toIssues: find a more effective way of protecting the power supply so that

the mine can be reopened? If so, are there interested bidders sothat it can be sold off immediately or should the APT attempt toarrange for the mine to be reopened so that it can be sold as agoing concern?

- 62 -AppendixTable 17Page 1 of 3

PHILIPPINES

INDUSTRY SECTOR REPORT

Strategic Issues in the Coal Sector

Viability of Existing Operations

1. The Philippine coal industry is presently struggling under theimpact of liberalization of coal trade and the simultaneous decline in thevalue of internationally traded coal. Until 1985, all coal trade in thePhilippines was administered by the National Coal Authority who (a) guaranteedto purchase all indigenously produced coal at a fixed price; (b) arranged coalimports as required; and (c) sold coal, both local and imported, to theconsumers at a fixed price. This system was basically designed at a time(1981) of relatively high international coal prices and had as one of itsobjectives, the protection of the cement industry from high coal pricesfollowing a mandated change from oil to coal as a fuel. While the system wasfar from perfect, it enabled local producers to sell all their coal at a"fair" price which permitted them to stay in business. At the same time, itprovided to users a coal supply at a guaranteed price probably lower than theywould otherwise have had to pay.

2. This system was abandoned partly as a response to tradeliberalization policy and partly as a result of pressure from cousumers whowished to avail themselves of the now historically low prices for importedcoal of better grades than indigenous coal. The result has been an almosttotal switch to imported coal by the cement producers, increased imports forpower generation and widespread depression in the local industry. One majorpublic sector coal producer, Philippine National Oil Company-coal Corporation(PNOC-CC) admits that its Bislig coal operations in eastern Mindanao areselling little or no coal. Nevertheless, they continue to operate bystockpiling coal while preserving a Government presence and employment. Thispolicy is justified by PNOC-CC as being in the national security interest.The other major operation of PNOC-CC at Malang as in southern Mindanao isallegedly remaining competitive with imported coal on the basis of its highquality and higher price in the market place. When PNOC-CC claim that Malangas production is competitive" with imported coal, it must be understood thatthe comparison is with imported coal costs after import tax which currently isabout 27Z of FOB price. The other public coal sector producer, Semirara CoalCorporation (SCC), which supplies coal to National Power Corporation (NPC) foruse in the Calaca I power plant is receiving a special price fixed by theprevious Ministry of Energy (P 750/tonne FOB Semirara) for its low grade coalproduct. Even this price, which is some 40-50% above import parity pricesenables SCC to pay operating costs only and their debt is not serviced.

3. Some of the small private coal producers face similardifficulties. A new mine (Montenegrin) which opened in Surigao in 1985 hasalready closed. Producers in Cebu while uot as hard hit by virtue of theirhigher quality product are nevertheless in some difficulty as NPC issubstituing lower cost imported coal for local coal at its Naga power plants.

- 63 -AppendixTable 17Page 2 of 3

4. As a result of these difficulties, all coal producers includingPNOC-CC, who are now in open competition with the private sector, are lobbyingfor an increased tariff on imported coal. A figure of 40-50% import tax ismentioned as a target. The usual arguments of "infant industry", "temporarymeasure pending increased international prices", etc., are being introduced.Nevertheless, these arguments are probably spurious as the industry has beenin existence for many years and only had a bright outlook for expansion duringthe high actual and projected energy prices of the early 19809. In view ofthe relatively poor geological conditions and difficult mining encountered inthe Philippines, it is unrealistic to expect the industry to be competitivewith imported coal in the foresable future. While price predications forcotmodities are notoriously unreliable, there is every indication and muchunanimity that only minor real price increases can be expected ininternationally traded coal over at least the next cen years. The Governmentis facing a very difficult decision with regard to the future of theindigenous coal industry and is not necessarily well informed of the factorsthat should be taken into consideration. It should also be borne in mind thatthe "experts" on coal in the Philippines may also be partisan proponents ofindigenous coal use by virtue of their vested interests in producing mines.

Domestic versus Imported Coal Supply for the Calaca Power Plants

5. The Calaca I 300 MS power plant near Batangas was comissioned byNPC in 1984. It was claimed to have been designed to burn coal from the Unongopen-pit mine specially commissioned by SCC for this purpose on SemiraraIsland. It was agreed that NPC would require about 1.0 million tonnes peryear of coal and that an additional 0.3 million tonnes per year would be takenby other consumers such as Atlas Mining. Mine planning and equipmentselection was based on this production scenario and capital investments madeaccordingly.

6. SCC cotmmenced shipping coal to NPC in late 1984 but problems wereidentified almost immediately. The coal-handling facilities at Calaca wereunable to cope with the high clay and moisture content (>25X) of the deliveredcoal. clogging in the silos and other associated problems pregented NPC fromachieving the required power oyputs. Following lengthy investigations intothe cause of the difficulties,_ it was determined that the plant could handle(a) raw coal if it was dried, or (b) selectively mined coal if the claycontent was reduced.

7. As no preparation plant/dryer exists at Semirara, a decision toattempt selective mining was made in February 1985. Since that date, the lOmof better quality out of the 15 m seam has been mined and shipped to Calaca.This mining method has minimized the handling problem and NPC has started toblend 50:50 selectively mined Semirara coal with imported coal. They hope toachieve a ratio of 60t40 in the future but are now plagued with a newproblem. Apparently the sodium and potassium concentrations in the

1/ It now appears the boilers were designed for an "air dried" analysis andnot for an "as delivered" analysis.

-64 -AppendixTable 17Page 3 of 3

selectively mined coal are such that stagging and fouling is now becoming aproblem. NPC would clearly like to quit accepting any Semirara coal at anartificially high mandated price of P 570 FOB Semirara Island whereas, SCCclaim that 100% Semirara coal could be utilized if the coal-handlingfacilities were modified. At present, SCC are supplying about 400,000 tonnesper year of coal to NPC and claim it would require a 600,000 tonnes per yearproduction rate to cover operaqing costs alone.

8. A government decision has apparently been made to (a) build the 300MW Calaca II for commissioning late 1991 or 1992 and (b) to use coal. SCC hasbeen required by NPC to specify the coal quality it will be able to deliver ofthe coal were to be supplied from Semirara. SCC have therefore embarked on anurgent program to evaluate their potential sources of coal. These are: (a)the existing Unong pit, (b) the proposed Himalian pit, and (c) the proposedPanian pit.

9. At first, it would seem logical to build Calaca II to take the fulloutput of the existing Unong pit now that run-of-mine/as delivered coalquality is well established and let Calaca I obtain coal elsewhere. Thisoption is, however, not available; firstly because by 1991, there will be lessthan ten years of reserves left at Unong and secondly, the coal-handlingfacilities at Calaca I are already sized to handle the coal for Calaca II aswell. NPC do not appear willing to consider major modifications to the coalhandling equipment and have placed the onus on SCC to produce a coal that canbe utilized via the existing coal handling facilities.

10. SCC have secured bi-lateral CIDA financing assistance from Canadafor a study to investigate their options which include a different miningmethod at Unong, new pit development at Himalian or Panian, and coalpreparation plant(s) for both Unong and/or the new pits. While thesetechnical issues can probably be addressed by the consultants--MontrealEngineering Company--two other major issues remain. these are the price to bepaid to SCC by NPC for the coal and the financing of any new mininginvestment. The coal price is a particularly difficult issue as import paritypricing would not even pay operating costs for the Unong pit. The otherproposed pits have higher waste to coal ratios and are apparently moredifficult technically. The development of a new pit would require significantfinancing to be raised. Even though there may be come scope for less capitalinvestment, operating costs per run-of-mine tonne of coal at peak productionwill probably be higher.

11. The selection of fuel source for the Calaca II is a criticaldecision that must be taken within the next year. Based on their experienceto date, NPC consider that the use of local coal cannot be justified ontechnical, financial and economic grounds. However, there appears to be noentities (executive Secretary for Energy versus NPC). Neither party was ableto identify either the decision-making progressor the ultimately responsiblebody/person. It is imperative that an informed high-level decision-makingprocess be identified by the Government as 3oon as possible to ensure anappropriate decision is made.

NOTES

MAP SECTION

IBRO 20282

12t 12e 128

PHILIPPINES

METAL MINING2d SECTOR *

L Gold and Sliver

Q Copper. Gold and Silver

A Copper Smelter

Cop~or GCold, Silver and0 Pyrlte <4::oncentratea

Batong <> Metallurgical Chrome

B Refraotory ChromeLopanto XBenguet Nloked and Cobalt

Philex Itogon-Suyoc Ia RefineryNlkel Ore

AcoJe <)Benguet (3 LuzO2V Internatlonal Boundarles

Benguet(Dizon)

have oeuapended orcl1osed thoir oppra*tona.

AMVDoR Maroopper

Atlas L SA AAR

-t12' AMAS0A7E '191.

PA4NAY PASAR* LzYrE

Atlas JPALAW4NV i Q 08U

NonooMaricalurn Manila °

MiningL ( Hinatuan

Basay Xurlgac,

Rio-Tuba

_d t1Sabena 0

CHINA N&Vorth PC H I N A ~~~~~~~~~~~~DavaoQ1&Apex

44I AVDA NAO

PILIPPINESr.rAy h,s, t.o rn'd hyIf WO' hqu S4flJy I

VET wWi y_0 tiw YirNAM - iynrra ysw

1'xeO - KILOMETEP8 0 100 200 300MA.VSA( I I I I I S I F pii 71 Oi'b Wyt8**ydpiS#t

I N D 0 N E 8 I A MLES O e0 t00 180 2008 2dSEPTEMBER 1987