• Extracting the most value



    As if the mining industry has not yet hit rock bottom of an open pit, losses continue to pile up with miners still contracting operations and postponing planned significant capital investment until business environment has improved.

    The most recent financial performance review that PwC conducted of the top 40 global mining players’ in 2015, entitled Mine 2016: Slower, lower, weaker . . . but not defeated, found that mining leaders reported, for the first time in 13 years, a collective net loss of $27 billion. In addition, market capitalization declined by 37 percent or equivalent to $297 billion, bringing it to a much lower level than it was during the height of the global financial crisis in 2008.

    Locally, the situation is no different with operations directly connected to the world market and the miners are always at the receiving end of government and public scrutiny, especially on areas of taxes, environmental compliance and social development. These questions are nonetheless welcomed by the industry, which respects the state’s responsibility of making sure equitable return is received in exchange for the extraction of natural resources. Defining and agreeing what is equitable and just, however, remains contentious and the subject of continuing chatter and argument primarily on unit and method of measurement and on accuracy and completeness of underlying data to be evaluated.

    In bills and coins

    The simplest way is based on absolute value of taxes and fees paid by mining companies in the normal course of operations. In 2014, the total contribution of the 20 leading large-scale metallic mining operators to government coffers reached P5.4 billion as reported in the 2nd country report of the Philippine Extractive Industries Transparency Initiative (PH-EITI). PH-EITI aims to gather and present relevant information on the local mining, oil and gas sectors, and ultimately promote healthy debates for legislative and regulatory purposes, among others. The information includes, but not limited to, regulatory framework, total number of issued licenses and permits to date, and a reconciliation of taxes and fees between company and government reports. The amount of P5.4 billion represents approximately 35 percent and 8 percent of reported operating profit and revenue, respectively, of the 20 companies. Taken on a stand-alone basis, the number and percentages, however, may not prove valuable and if analyzed against non-comparable figures are subject to misinterpretation. A direct comparison with other extractive industries such as oil and gas, cement and coal, as well as with other mining countries namely Australia and Canada without considering differences in business models and varying economic conditions may lead to misleading conclusions. Accordingly, deeper assessment is suggested to provide better context.

    Multiplier effect

    One constraint of the PH-EITI report is that the data gathering process, specifically on taxes, is limited to the miners and does not encompass economic contributions of entities that are directly influenced by mining operations. These include local processing plants, transportation and freight entities, manpower agencies and even power generators, which are heavily invested in the industry and mainly depend on its strong performance for their own growth and development. The enumeration even excludes the ultimate users of minerals in the production of respective goods, such as mobile phones, automotive, and housing, that have all become necessities. In the same report, it was confirmed that the 20 companies spent an additional P2.6 billion for social development, environmental protection and investment to health and safety, which translated to a number of infrastructure and road projects, hospitals and schools.

    There indeed is a multiplier effect that should be taken into account if we are to evaluate the industry’s impact to the country as opposed to a piecemeal review. Unfortunately, there is no readily available resource that summarizes all of this information that needs to be considered.

    A holistic approach

    It can, however, be contended that any discussion in gauging value should be complemented by an assessment of how taxes, social and environmental funds are utilized to the fullest, guarantee that host communities are provided, what they are due and that government projects, both local and national, are for the long haul. Any debate on fiscal and tax regimes to increase peso collection would need to be supplemented by a review of how fast the money is transmitted to local government units and are allocated for programs that promote social and environmental sustainability, both of which are areas for improvement consistently raised by the industry. If benefits do not completely go to affected communities on a timely manner, any debate that endeavors increased monetary contribution will come to naught.

    Likewise, any proposition to increase value should be taken from all fronts particularly studying feasibility of expanding and ramping up the downstream sector as first done by Indonesia, which has taken first steps in requiring processing to be done in the country. This ensures that the industry is evaluated on the entirety of the value chain that it has created, with miners not being singled out.

    As the industry is greeted with a flicker of optimism from improved commodity prices at the start of 2016, the emphasis on responsible mining by the current administration, and a greater appreciation of the industry’s economic and social impact, conversations amongst parties, hopefully, will extend beyond the questions of whether or not to pursue mining and how much we should earn. Rather, discussions should also touch into how we create and maximize value for the greater national interest as stakeholders in these resources.

    Pocholo C. Domondon is a Partner from Assurance, Deals and Corporate Finance and also the Markets Co-Lead for Priority Targets of Isla Lipana& Co./PwC Philippines. of Isla Lipana& Co. Email your comments and questions to markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


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    1 Comment

    1. The critics of mining like to repeat ad infinitum that mining makes only a small contribution to the GDP. But as the multiplier effect shows, the value of an industry’s contribution does not always use GDP as the benchmark. The communities near the mining site benefit greatly through the social development mentioned. As an example, Philex Mining operates an elementary and high school in Tuba, Benguet, in addition to the medical, livelihood, infrastructure, housing and other social services there, especially employment. Those host communities benefit much more than if the same amount went to the national government to be dissipated among numerous projects. A far cry from the spurious and hysterical mantra: Wherever there is mining there is poverty.
      Finally, we shouldn’t get the idea that improved metal prices are an indication that the mining industry can afford to be taxed more. They are just starting to recover from depressed metal prices only last year, particularly for nickel, of which we are top producer. That, plus the long-term investment for mining before any profit starts to come in makes it a very volatile indiustry and tinkering with the tax scheme could upset the delicate balance, rendering the industry uncompetitive.