Dark Clouds Gather, But Great Long-Term Potential

BMI View: The Philippine government's ongoing plans to introduce a new mining law has created uncertainty in the investment community and led to a large number of projects being deferred. Nonetheless, we retain our view that the country will slowly emerge to become one of the brightest spots in Asian mining on the back of its rich resource endowment, as well as considerable efforts taken to address the infrastructure shortfalls and political situation by the government.

Although capital inflows into the mining space will remain on the backburner in the near ter m , w e remain optimistic over the future growth prospects of Philippines' mining sector . In line with a trend that we have witnessed in the global mining arena, the rising tide of resource nationalism has continue d to rear its ugly head with the Philippine go vernment looking to revise its tax structure from the curre nt rate of 2% to between 5-7%. The new mining policy laid out by President Aquino prohibits the issuance of mining applications until a resolution on the revenue-sharing scheme between the government and min ing firms is reached. Indeed, a large number of new projects and expansion plans have been deferred due to uncer tainty over the new mining law which is expected to pass after the midterm elections in May 2013, when a new Congress is sworn in. To highlight, the Philippines' Mine and Geosciences Bureau (MGB) has recently slashed its mining investment targets for the next four years by 218% to US$3.1 bn. In addition, g lobal miner Xstrat a has pushed back the commercial operations for the US$5.9bn Tampakan copper-gold mine from 2016 to 2019. The Tampakan mine, estimated to contain 15mnt (mil lion tonnes) of copper and 18moz (million ounces) of gold , would be the single largest foreign direct investment in the Philippines.

More Project Deferrals On The Horizon
Philippines - Mining Investment Targets (US$bn)

Pertinent Risks Still Lurk

Apart from the uncertainty of mining regulations, we note that the poor business environment in Philippines will continue to weigh on investors' sentiment and poses significant risk to further developments in the mining space. Wi th more than a third of the country's gold resources located in the con flict-laden region of Mindanao, mining operations in the country are vulnerable to attacks and extortion from rebel groups. To further complicate problems , Xstrata' s plan to develop the Tampakan project has sparked off widespread criticism and demonstrations by the locals in Mindanao , citing concerns over involuntary displacement and contamination of the water tables. The mine is situated in a water catchment on the Mount Matutum Range which supp lies water for the vast agricultural lands of three provinces and could affect 150,000 farmers in rural communities that depend heavily on the aquifers for their daily water needs.

Production To Increase Rapidly
Philippines - Copper & Gold Production

A Star In The Making

Despite the persistence of headwinds mentioned above , we retain our view that Philippines' mining sector is set to slowly realise its potential and experience rapid growth over the coming years . With a series of positive reforms on the cards, we expect the Philippines to emerge as one of the most popular destinations for mining investment in Asia. Indeed, the country is host to some of the largest untapped deposits of mineral resources in the world, including gold, silver, iron and copper that are estimated at more than US$850bn. Furthermore, the government is making pertinent efforts to solidify its commitment to addressing the massive infrastructure deficit in the country. Our infrastructure desk remains bullish on the Philippine construction sector and forecast real construction growth to peak at 8.0% in 2013, before declining slightly to 7.2% in 2014. Indeed, accommodative monetary conditions in the Philippines could reignite private sector interest for construction while the government remains committed to investing heavily in infrastructure over the coming quarters.

The Aquino administration has also demonstrated serious commitment to establishing peace in the troubled south, with the signing of a preliminary peace pact with the Moro Islamic Liberation Front (MILF) in October 2012. No doubt, this marked the first major step towards ending one of Asia's longest-running insurgencies which has left over 120,000 people dead and displaced 2mn others.

This article is tagged to:
Sector: Mining
Geography: Philippines, Philippines, Philippines, Philippines

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