Philippines - Mining sector review

Report No. 6898-PH The Philippines Mining Sector Review October 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 recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS June 1987 US$1 = P 20.45 1986 average US$1 = P 20.38 1985 average US$1 = P 18.6 1984 average US$1 = P 16.7 1983 average US$1 = P 11.1 WEIG"'TS AND MEASURES 1 ounce troy (oz) = 31.1 gram 1 kilogram (kg) = 32.1 oz troy 1 kilogram (kg) = 2.205 pounds 1 ton (t) = 1,000 kilograms 1 megawatt (MW) = 1,000 kilowatts 1 cubic meter (m3) 1.308 cubic yards ACRONYMS Ag - Silver APT - Asset Privatization Trust Au - Gold BHA - Brook Hunt Associates BMGS - Bureau of Mines and Geo-Sciences BOI - Board of Investments BP - Batasang Pambansa (Parliament) CB - Central Bank CG - Consolidated Goldfields C/M - Care and Maintenance Cu - Copper DBP - Development Bank of the Philippines DER - Department of Economic Research, Central Bank DMT - Dry Metric Toui EO - Executive Order IFC - International Finance Corporation Le - Leaching LIBOR - London Inter-Bank Offer Rate LME - London Metal Exchange LOI - Letter of Instruction MAR - Mining Annual Review MMIC - Marinduque Mining and Industrial Corporation NDC - National Development Corporation NEDA - National Economic Development Authority NPA - Non-Performing Asset OP - Open-pit PASAR - Philippines Associated Smelting and Refining Corporation PD - Presidential Decree PNB - Philippines National Bank RA - Republic Act RR - Revenue Regulation tpd - tons per day tpy - tons per year UC - Underground WBMS - 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 of the Mining Sector during an Industrial Sector Mission which visited the Philippines in August/September 1986 and a follow-up mission in May 1987. The report 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 deep appreciation to the Bureau of Mines and Geo-Sciences and to the Department of Trade and Industry for the staff and logistical support provided to the mission. The World Bank also thanks the Chamber of Mines and private industry representatives who warmheartedly gave time and informr-ion to assist the mission and, in particular, Atlas, Marcopper, Maricalum, Nonoc and Philex for permitting and facilitating site visits to their operations. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - i - PHILIPPINES MINING SECTOR REVIEW Table of Contents Page No. EXECUTIVE SUMMARY .................................... i-Yi I. INDUSTRY STRUCTURE* ...... .....o.............................. 1 Reserve Baseo............... ....**.*#.*oo***...****.**. 1 Production and Exports...........o.............o............ 2 Employment, Value Added, Technology and Productivity...... 6 II. INTERNATIONAL COMPETITIVENESSo...o......,.................... 9 Major Companies................................................ . 9 Non Performing Assets in the Mining Sector................. 12 International Competitiveness of Philippine Copper 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 18 Distressed Copper Companiese.....o.... .......... ..e........ 19 PASAR Copper Smelter.......... ........................... 23 Nonoc Nickel Refinery.......*.......*..*......* .o*.o.oo. 25 IV. GOVERNMENT RESPONSE...o ................................o....ooo 28 Legislative Environment .............. ...... ... 0o ......... 28 Taxation*... ...................... *oo .................. 29 Deferred Taxes for Copper Producers................o....... 31 Tax Burdeno ..... ....o.o..........................o.o.o..... 32 V. FUIlURE PROSPECTS AND ISSUES.............................*.... 34 Prospects for New Investment.............................o 34 Policy Priorities ., .ooo.to ooo o.........ooooo......ooo............. 38 ANNEXES MAP  - ii - LIST OF TABLES Table Title 1.1 Philippines - Mine Production 1986 1.2 Philippines - Non Fuel Mineral Production and Exports 1986 1.3 Philippines - Value of Mine Production 1972-86 1.4 Philippines - Share of Minerals to Total Exports 1.5 Selected International Metal Price Trends 1976-86 1.6 Philippines - Mine Production 1972-86 2.1 Philippines - Financial Ptrformance of Six Major Mining Companies 1970-86 2.2 Marcopper - Selected Financial Indicators 1971-86 2.3 Philippines - Investment by Selected Mining Companies 1971-86 2.4 Philippines - Closure of Copper Mines 2.5 Philippines - Closure of Non-Copper Mines 2.6 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 Companies 3.2 PASAR - Selected Financial Indicators 1984-86 4.1 Philippines - Taxes paid by the Mining Industry 1980-85 4.2 Philippines - Mining Industry Payments to Government as Estimated by the Chanber of Mines 1982-85 4.3 Philippines - Deferred Taxes for Copper Producers as of December 31, 1986 4.4 Atlas and Marcopper - Breakdown of Deferred Tax Liabilities as of December 31, 1985 4.5 Philex - Selected Financial Indicators 1982-1986 4.6 Atlas and Marcopper - Deferred Tax Burden 1985 and 1986 4.7 Atlas and Marcopper - Liabilities and Stockholder Equity as of December 31, 1986 5.1 World - Copper Price Projections 1987-2000 5.2 World - Nickel Price Projections 1987-2000  - iii - LIST OF ANNEXES 1. Philippines - World Ranking for Selected Mine Producers 1986 2. Philippines - Value of Mine Production 1972-86 3. Philippines - Volume of Mine Production 1972-86 4. Philippines - Sales Revenues of Selected Mining Companies 1971-86 5. Philippines - After Tax Net Income of Selected Mining Companies 1971-86 6. Marcopper - Selected Financial Indicators 1971-86 7. Philippines - Capital Expenditures of Seloicted Mining Companies 1971-86 8. Philippines - Copper Production by Company 1975-86 9. Comparison of Copper Production Costs for Major Producing Countries 1975, 1980 and 1985 10. Philippines - Annual Average Copper Production Costs 1975-85 11. Philippines - Cold Production 1975-86 12. Atlas Consolidated Mining and Development Corporation 13. Marcopper Mining Corporation 14. Maricalum Mining Corporation 15. North Davao Mining Corporation 16. 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 ranked among the world's top ten mining countries for gold, copper, nickel and chromite production. In 1986, the value of Philippine nonfuel mineral production (excluding cement and coal) was P 20.2 billion. Nonfuel mineral exports were estimated to be P 15.1 billion (US$744 million) about 15.4% of total exports. ii. The Philippines has a long tradition as a mining country and has a strong cadre of skilled and experienced managers. It also has a high'Ly skilled and competent mining labor force witX competitive wage rates by international standards. The technology of the Philippine mining industry compares well to that elsewhere in the world. Many Lines are in remote locations and provide their own infrastructure including transportation and captive power generating facilities. iii. From the early 1970s to the early 1980s the mining industry experienced an investment boom during which twelve major mines were developed as well as two mineral processing plants--the Nonoc nickel refinery and the PASAR copper smelter. The investment boom was encouraged by expectations of large profits, attractive fiscal incentives and ready availability of financing with much foreign borrowing being guaranteed by the Development Bank of the Philippines (DBP) or the Philippines National Bank (PNB). From 1972 to 1980 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 net income) averaged over US$100 million per year--about 29% of net sales revenues for 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, the value of mine production has fallen steadily in US dollar terms due to depressed world metals prices and stagnating production volumes. The value of copper, nickel, and chromite mine production has declined sharply. Only gold mine production increased in vslue. Many high-cost producers have been forced to close and profitability has declined sharply. v. The collapse of many new projects and mines in the early 1980s reflected a sharp deterioration in the competitiveness of the Philippine mining industry. In 1975, the net cash cost of Philippine copper producers was estimated by Brook Hunt Associates (BHA) at US$0.38 per lb--25Z below the world average of US$0.49 per lb. By 1980, BHA estimated that the average Philippine cost was US$0.57 per lb--14% above the world average which was US$0.50 per lb. Many of the new Philippine mining projects were simply not cost competitive in deteriorating market conditions. During the investment boom investors and lenders placed too much emphasis on price projections and  - ii - gave too little heed to cost competitiveness. Other contributing factors included inadequate project management, imprudent gearing ratios and inadequate appraisal work by lenders. Several mines suffered from severe technical difficulties and it is also reported that corrupt practices weakened the commercial and technical soundness of sote projects. vi. The Philippine copper mining companies can usefully be divided into three categories of companies/projects. First, there are companies who are basically sound and whose future is reasonably assured. There are three such major companies--Philex, Benguet and Lepanto (which produce about 65,000 tpy copper contained in concentrates). Sound smaller mining companies include Apex, Benguet Exploration, Itogon-Suyoc and Surigao. Second, there are companies which are presently operating but, at present copper prices, depend on deferment of taxes and rescheduling of debt to continue operating. This group consists of two private companies (Atlas and Marcopper which each have large debt obLigations to consortia of international commercial banks) and two companies which are now largely owned by DBP/PNB (North Davao and Maricalum Mining). Third, there are mines Or projects which are presently not operational but which may be suitable for consideration for some type of production start-up (especially if copper prices improve). These include projects (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 of the equipment is still in place (Basay). Several of these operations (in particular North Davao, Maricalum, Batong Buhay, and Basay) have been taken over and foreclosed by DBP/PNB and are now so-called mining-Non Performing Assets (NPAs). vii. The development of the PASAR copper smelter, which started operation in 1983, has enabled the economy to obtain the value added of processing copper concentrate into refined copper as well as supplying sulphuric acid feedstock to the adjacent PHILPHOS fertilizer plant. PASAR is a viable operation and has been able to make a small profit each year but has a highly leveraged financial structure (debt/equity ratio of 10/90 as of December 1986) and has been unable to meet its debt repayment obligations. The government intends to privatize PASAR and some type of debt rescheduling and/or financial restructuring is needed to restore PASAR's financial soundness. This could include 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 difficult climatic conditions. It is eleven years old and has suffered from original design deficiencies as well as inadequate maintenance. It has a history of production 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 to reopen the plant with its present technology or delay a reopening until the nickel market is stronger or a lower cost technology can be introduced. Efforts to put together a new financial package have so far been unsuccessful partly reflecting a cautious approach by potential investors and lenders to a project which faces significant technical risks (in terms of plant performance) as well as price and market risks (in terms of prices for its nickel and cobalt products as well as prices for supplies and energy inputs).  - iii - ix. Small-scale mining is an important source of employment in rural areas as well as a small but significant source of gold production. Small- scale gold mining is reported in over twenty locations and is estimated to provide employment for over 200,000 miners--with each miner having an average of four dependents who also directly benefit from small-scale mining. In 1986 small-scale mine production was estimated at over 11 tons of goli with a value of about US$135 million. The Bureau of Mines and Geo-Sciences (BMGS) have made the improvement, regulation and promotion of small-scale mining a top priority for the next several years. This is an appropriate and important role for BMGS which intends improving the mechanism and procedures for establishing and documenting mine claims, maintaining reasonable safety and environmental standards, improving the technical capabilities of small-scale miners, and supporting the development of mineral-processing channels. As part of these efforts a high priority is being given to improving health and safety conditions and in particular reducing mercury contamination which is becoming an increasing nealth hazard. ;hese are challenging tasks which may require significant effart on the part of BMGS to implement and achieve satisfactory 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 revenue collections. The tax burden on profitable mining companies is relatively high. For example, over the past five years, Philex (the most profitable mining company in the Philippines in that period) has paid P 1,535 million direct 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 was distributed in dividends to shareholders. Recognizing that several copper producers are in financial difficulty, a Presidential Letter of Instruction (LOI 1416) was introduced in 1984 which provides for the deferment of all taxes, duties, fees, etc. to financially distressed copper companies. Such charges are a liability to be paid to the Government at such time as the companies become profitable. So far, five copper companies have benefited from LOI 1416--they are Atlas, Marcopper, Maricalum, North Davao and Batong Buhay. As of December 31, 1986, a total of P 1,801 million taxes had been deferred including P 940 million for Atlas, P 562 million for Marcopper and P 242 million for Maricalum. The taxes deferred under LOI 1416 are also starting to represent a major item on the balance sheets of Atlas and Marcopper. As of December 31, 1986, they represented 13% and 40% respectively of the liabilities of Atlas and Marcopper. As such they represent a considerable barrier, especially for Atlas, to attracting outside investors, which could facilitate a financial restructuring resulting in a viable company. xi. The best prospects for new investment in the mining sector are in small to medium size gold prospects. The Philippines has several promising gold areas. Some are already well covered by small-scale miners. Small-scale mining is potentially an important growth area requiring little, iS any capital investment. Small-scale mining can make an important contribution to increased gold production. Other areas will be best developed by mining companies who can also undertake more detailed exploration where warranted,  - iv - although the lack of strong interest by foreign companies is noteworthy. Given the high indebtedness of many companies in the sector, there is a considerable need for new equity to strengthen the sector. Philex has typically undertaken investments almost entirely with equity and hence avoided any debt obligations. Benguet is considering financing new projects predominantly with equity. However, the weaker companies have so far been unable to attract much interest from local or foreign investors. The obsta- cles to a more active interest by foreign minerals companies appear to include legal constraints on foreign ownership, uncertainties regardinig the political environment, and the unattractiveness of certain aspects of the mining code and mineral tax. xii. With regard to nickel, the prospects for the successful reopening and survival of tLe Nonoc nickel plant are uncertain especially given very weak 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 the Marcopper Tapian mine due to exhaustion of economically mineable ore. The best possibility for an increase in copper production in 1988 is the reopening of Atlas' open-pit operations (at Biga and possibly Carmen) on a limited life, "high grade (pit within a pit)" basis if copper prices increase above US$0.75-80 per lb and/or if Atlas can achieve a financia, restructuring. The best prospect for copper development from 1987-90 may be u major expansion at Maricalum's Sipalay mine if copper prices consistently average over US$0.70 per lb. In this event, the Bank could usefully assist the Government in reviewing the options for expanding Sipalay (prior to possibly privatizing Maricalum). However copper prices in real terms of over US$0.80 per lb are required 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 stuccessful disposal of the mining NPAs. The Government has established a basic policy direction, that wherever possible, NPAs should be returned to the private sector. The disposal of the mining operations, along with NPAs in other sectors, is to be undertaken by an Asset Privatization Trust (APT) which has been appointed by the Government to deal with NPAs. The APT has a three year period in which to dispose of over 300 NPAs including about a dozen mining operations. The APT's approach is to prepare brief prospectae to inform interested parties of assets beng made available for purchase. Once two or three parties show serious interest, an asset will be auctioned to the highest bidder. Little attempt is made by the APT to value or package the asset--it is 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 in the mining sector. While the APT has received some inquiries regarding mining assets there were no disposals as of mid-1987. Indeed, the disposal of some of the mining NPAs may not prove practical due to the large working capital and rehabilitation start-up costs required to bring them into operation. Possible new owners may consider the stakes too high and the risks too great even to bid modest sums. In such cases, the APT may be faced with the choic2 of shutting down and mothballing the operation--unless alternatives such as leasing, management contracts and even som.e type of joint ventures are considered.  v xv. In the event that the APT is unable to dispose of NPAs sach as Nonoc, Batong Bubay, North Davao, Maricalum, Basay, etc., arrangements need to be made to ensure that the APT has suitably qualified support to provide expert 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 other alternative to closure and mothballing. It is recommended, therefore, in view of the size of the mining portfolio (value and numbers) and inherent complex- ity of mining/mineral projects, that a mining subcommittee be established to assist the APT. The subcommittee would draw upon suitable expert staff from agencies su'.h as BMGS and BOI as well as possible expert assistance from industry representatives which could be coordinated by the Chamber of Mines. At the same zime, it is recommended that thought should be given by the Ministry of Trade and Industry and the Ministry of Nariral Resources as to the most suitable and feasible place within the existing Government agencies to establish a group with strategic analytical and decision-making capability for the mining and mineral processing industries. xvi. The mining industry, like many other subsectors, is subject to a wide variety of laws, regulations, executive orders, presidential decrees, letters of instruction, etc., regarding taxation and incentives. However, in view 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 be maintained and how a more orderly taxationiincentive regime can be established. xvii. It is recommended that BMGS ensure that the ongoing review of fiscal arrangements and incentives for the mining sector is completed in a timely manner and that it include, in particular, the following four issues: (a) A review of the present tax policy for distressed copper companies. Without deferment of taxes, Marcopper, North Davao, Atlas and Sipalay would cease production (at least on a temporary basis). Yet, the deferment in the present market conditions is resulting in large overdue tax obligations to the Government without any likely resolution in the foreseeable future. This will result in serious difficulties especially for Atlas in cleaning up its balance sheet. It may also seriously impede attempts to eventually privatize Sipalay and North Davao. (b) Royalty Payments. The present royalty system has the effect of increasing the price/cost at which reserves are viable for recovery and hence turning potential recoverable ore into uneconomic waste (by increasing the cut-off grade). This is undesirable and should be reviewed. (c) Incentives to Encourage Foreign Investment. A major priority of the new Government is to encourage foreign investment. However, present regulations place strict limits on the degree of control and the level of income and profitability of foreign owners in local opera- tions. Given the inhe-:ent high risk characteristics of mining, work  -vi - is needed to establish a framework of suitable incentives to attract potential foreign investment. (d) Effect of Policy Framework on Tax Revenues and Foreign Exchange. More work is required to examine the implication of different policy options for tax revenues and foreign exchange earnings in both the near term (1-2 years) and medium term (3-5 years), It is possible that trade-offs exist between the level of taxation and the amount of fiscal incentives (in:luding possible eaemptions for deferred taxes) in the next 1-2 years in the light of the ability of companies to survive the present difficult market circumstances and eventually generate taxes at such time as market prices improve. This is a cemplex and politicaLly sensitive topic which requires urgent and careful work by qualified authorities. xviii. Small-scale mining offers a potentially important growth area for the mining sector. It is a very new area, greatly in need of improved and increased regulations and assistance. The expansion of small scale mining is a major priority and, appropriately so, for BMGS. Given the size of resources available 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 and safety regulations, infrastructure, transport, Rrocess t and marketing assistance, It is also recommended that BMGS continue to take the lead regarding_ 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 other mineral 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 islands and are often found in multi-product ore bodies. Important copper/gold/silver deposits are found in Northern Luzon (especially Benguet Province and Zambales Province), Marinduque Island, Cebu Island, Negros Island and Mindanao Island (especially Davao del Norte Province). There are several gold districts including Baguio (Northern Luzon), Paracale (Camarines, Luzon), Masbate (Masbate Island), Masara and Suriago (Mindanao Island) and south-western Negros Island, Nickel-cobalt deposits are found on Palawan Island, Nonoc Island 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 the Philippines. 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 relatively low by world standards. Other major producers (such as Chile, Zambia, Zaire and Peru) have copper ore grades of 1-3%. Of the major copper-producing countries 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. The precious 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 g gold 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 are found 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 mostly for export markets. The bulk ot the non-metallics are construction materials for domestic consumers.  - 2 - 1.4 The ore grade of gold deposits are slightly below average by world standards, with ore grades of 1-10 g per ton of ore in the PhiLippines compared with ore grades of 2-14 g/t (averaging 6 g/t) in South Africa and 3-12 glt gold in other major producing countries (such as Canada, US and Australia). The nickel ore grades are in the range of 1.0-1.4% which are relatively low compared with ore grades of over 2% for major prodi:cers such as Canada, Australia and New Caledonia. Production and Exports 1.5 In 1986, the Philippines ranked among the world's top ten mining countries for gold, copper and nickel mine production as shown in Table 1.1 below and in Appendix Table 1. Table 1.1: PHILIPPINES - MINE PRODUCTION 1986 Philippines World % of World Metal production production Ranking production (--- metal content) ------ Gold (t) 35.4 1,281 6 2.7 Silver (000 oz) 51.5 9,500 20 0.5 Copper (OOOt) 217.0 6,526 8 3.3 Nickel (OOOt) 12.7 506 5 2.5 Chromite (OOOt) 202.2 6,686 7 3.0 Cobalt (t) 92 25,811 - - Source: Bureau of Mines and Geo-Sciences (BMGS); World Bureau of Metal Statistics (WBMS); Mining Annual Review (MAR) 1.6 The total value of Philippine non-fuel mineral production (excluding cement 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). The production consisted of P 18.2 billion metallic minerals and P 2.0 billion non-metallic minerals; 86% of the value of production was accounted for b; two major 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 metric ton (DMT) of copper concentrate contained about 217,OOO t recoverable copper metal. The Philippines Associated Smelting and Re-ining Corporation (PASAR) produced and exported about 127,300 tons copper cathodes (by processing about 440,000 DMT copper concentrates). 1.7 Almost all of the metallic mineral production is exported whereas the non metallic production is largely for domestic use. According to the BMGS statistics, the value of metallic mineral exports in 1986 was P 15.0 billion (about US$741 million). By comparison, the value of non metallic exports was P 61 million (US$2.4 million). However, the BMGS "export" figures  - 3 - Table 1.2: PHILIPPINES - NONFUEL MINERAL PRODUCTION AND EXPORTS 1986 Production Exports Mineral Product Unit Quantity Value Quantity Value (P mln) P mln US$ mln Metallics Gold Meta'l /a t 35.4 8,395.6 35.:' 8,493.4 418.0 Silver Metal /a t '1.5 174.6 48.8 174.6 8.6 Cobalt Metal '000 t 0.1 33.4 0.3 95.0 5.0 Nickel Metal '000 t 1.0 83.5 3.5 235.9 12.5 Nickel Ore '000 OMT 504.9 238.4 339.3 156.3 7.7 Copper Concentrate '000 DMT 824.9 5,460.6 360.9 2,241.3 111.1 Copper Cathode '000 DMT 127.3 3,479.8 127.3 3,479.8 170.0 Chromite Refractory ore '000 DMT 72.0 141.2 81.4 141.8 7.0 Chromite Concentrate '000 DMT 70.6 119.0 - - - Chromite Other '000 DMT 59.6 69.2 13.3 15.3 0.8 Zinc Concentrate '000 DMT 3.0 10.6 3.4 11.3 0.6 Manganese 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 /b Salt - '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.  - 4 - include about 22 tons of gold (valued at about US$262 million) which were deposited with the Central Bank. Thus, actual traded exports were about US$479 million. Ic is estimated that about US$200-250 million foreign exchange was required by the mining sector (including PASAR) for operating expenditures (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 foreign debt service). 1.8 The decade of the 1970s was a period of high growth for the Philippine mining sector as shown in Table 1.3 and Appendix Table 2. From 1972 to 1980, the value of production increased from P 1.9 billion (US$284 million) to P 10.8 billion (US$1,435 million) with over half of the growth accounted for by two commodities--copper and gold. Since 1980, the value of production declined steadily from 1980 to 1986 in dollar terms (with the exception of a modest recovery in 1985). The decline from 1980-1986 largely reflects the fall in world metal prices and stagnating volumes of exports. Table 1.3: PHILIPPINES - VALUE OF MINE PRODUCTION 1972-86 1972 1975 1980 1981 1982 1983 1984 1985 1986 (P million) Gold 225 575 2,785 2,642 2,651 3,822 4,773 6,088 8,396 Copper /a 1,360 1,640 4,409 3,782 3t446 4,047 4,970 5,630 5,461 Nickel 4 263 1,437 1,109 577 400 466 1,713 322 Other metallic 186 305 1,146 539 468 506 595 961 549 Subtotal metallic 1 775 2 783 9 777 8 122 7 142 8 775 10 804 14 392 14 728 Non metallics /a '5i 1,803 ' Z,TIt54 1 ,TU3 169 Total 1,929 3,036 10,760 9,706 8,726 10,605 13,738 16,195 16,697 (US$ million) Gold 33 77 371 334 312 344 286 327 412 Copper 200 219 588 479 405 365 298 303 268 Nickel 1 35 192 140 68 36 28 92 16 Other 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 affected all minerals witnt the major exception of gold. Traditionally, copper has been the predominant mineral. In the early 1970s, copper accounted for about 70% of the value of mine production. Since then, copper's share has steadily declined as the production of gold, nickel and other minerals has increased relative to copper. 1.10 The value of mineral exports and the share of mineral exports in total exports also declined sharply from 1980-1986. According to figures from the Central Bank Department of Economic Research (DER), the share of mineral exports declined from about 21% in 1980 to about 11.5% in 1986 as shown in Table 1.4. It should be noted, however, that these data appear to exclude gold delivered to the Central Bank (valued at US$113 million, US$172 and US$262 million in 1984, 1985, and 1986 respectively, according to BMGS). Table 1.4: PHILIPPINES - SHARE OF MINERALS TO TOTAL EXPORTS (US$ millions) Year Mineral exports Total exports % Share 1980 1,235 5,788 21.3 1981 1,025 5,722 17.9 1982 727 5,021 14.5 1983 550 5,005 13.2 1984 516 5,392 9.6 1985 594 4,629 12.8 1986 557 4,842 11.5 Source: DER 1.11 The decline in value of production since 1980 of copper and nickel represents the effects of two main factors, namely international market prices and production levels. The two are closely related. 1980 was a boom year for most 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 be noted that price trends have been strongly influenced by exchange rate changes between the major currencies and especially the US dollar and other curren- cies. For example, the London Metal Exchange (LME) price for copper indicated a rising trend from 1980-85 if measured in pounds sterling terms but a decline if measured in US dollar terms.  -6 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$ioz 125 148 193 307 613 460 376 426 360 317 368 Copper /b US$/lb 0.64 0.59 0.62 0.90 0.99 0.79 0.67 0.72 0.63 0.64 0.62 Copper 7T b/ton 782 750 711 934 942 866 846 1,049 1,031 1,103 930 Nickel 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 declined in the 1980-1986 period in the face of the deteriorating world market condi- tions. Silver production also declined modestly. In contrast, the 1980s has been a period of significant growth in Philippine gold production as shown in Appendix 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 35.4 Silver t 57.5 50.4 60.7 61.7 56.7 49.0 52.4 51.5 Copper Conc./a 000 t 213.7 225.8 304.5 292' 271.4 233.4 237.7 217.0 Chromite Ore 000 DMT 268.3 423.0 378.6 208.. 155.1 148.5 177.9 202.2 Nickel 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 by incorporated mining companies. In 1986, the Philippine Chamber of Mines reported an employment of 44,452 to the BMGS. In addition to the employment reported by mining companies, there has been a major boom in small scale mining in the Philippines especially in the past five years. Most of this boom 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 to US$613 per oz in 1980). Although gold prices have since declined to the range of US$300-500 per oz, such prices have made small scale gold-panning a very attractive activity. In 1984, BMGS estimated small scale mining employment at 200,000--making small scale mining extremely important from an employment standpoint. 1.14 The employment provided by the mining companies is an important source of income in the regions where mining activities are located. According to a socio-economic survey of mining communities conducted by BMCS in 1983 of eight major mining operations, the per capita income of mining households was three to seven times higher than the per capita GDP for the region where the mine was located. The regional per capital GDP estimates ranged from P 1,009 to P 2,069 compared with the mining household per capita incomes of P 5,436 to P 10,060 (in 1983 terms). The value-added contribution of the mining industry (including coal and cement) is estimated to have declined from 2.24% of GDP in 1980 to 1.92% in 1985 according to the National Accounts Staff, National Economic Development Authority (NEDA). Many of the deposits are found in relatively remote locations. Thus, in many cases, mine development has also included infrastructure development. For most mines, the infrastructure requirements have included new port facilities, road (or road improvements) to connect the mine site to the port, community and township developments and, frequently, power generation facilities also. The isolation of the mines increases the importance of the employment benefits (if the mine closes often, th& local economy can no longer sustain itself and most people must leave the area to find other means of amployment) as well as requiring that the mines have a high degree of self sufficiency regarding maintenance and other technical capabilities. 1.15 The technology of the Philippine mining industry compares well to that-elIewhere in the world. Open-pit mines use 120t and 170t dump trucks and 10-20 m shovels. These are appropriately sized for the operations concerned and 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 maintenance operations. One company, Atlas, even has its own foundry facilities. The underground 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 remote locations, 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 based diesel generating unit (33 MW) in the world. Discussions with the companies indicate that safety and environmental standards appear broadly in line with international practices. However, there is some community concern regarding the environmental effects (especially fo; fishing) of coastal disposal of tailings. Some companies will be faced with the need to provide new tailings disposal facilities in the near future. It is important, both for the companies and the communities, that standards be well-established so that companies can make the necessary investment decisions and the communities can be assured of satisfactory environmental conditions.  - 8 - l.l6 In addition to the mining operations, there are two major mineral prccessing plants in the Philippines--the Nonoc nickel refinery and PASAR copper smelter. The International Finance Corporation (IFC) was involved in financing both these projects. In both cases, foreign technology was obtained from international suppliers. The Nonoc plant which started up in the mid 1970s has suffered from a long series of technical problems, including design deficiencies, and its achievable production capacity is reported to be no more than 70% of original design capacity. The PASAR smelter started up in 1983 and has been able to reach its targetted production levels--although with somewhat higher init production costs than anticipated. Further discussion of both plants is provided later in the paper. 1.17 Productivity is generally measured in terms of output per man hour or man vear. In the case of mining operations, the production of ore per man year is one such measure. Comparative data are available for different mining operations around the world. However, the interpretation of the data must be treated very cautiously since there are many factors which influence the productivity achievable. For open pit mines, these include ore to waste stripping ratio, scale of equipment, selection of haulage system (in particu- lar conveyor versus truck), length of haulage from the pit face to the crusher and from the pit to the waste disposal ore. For underground mines, the factors include the type of access (drift versus shaft mines), seam size, seam conditions, 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 groups also indicate different labor/capital intensities often reflecting the higher real wage rates found in industrialized countries relative to developing countries. 1.18 Bearing in mind these caveats, data for open-pit mines prepared by Brook Hunt Associates Inc. (BHA) indicates that in 1985, output was 4,500 tons of ore per man year and 7,600 tons of ore per man year for the Dizon and Tapian mines respectively in the Philippines--which compared reasonably well with estimates of 1,000-8,000 tons per man year for other major open pit copper mines in Latin America and Africa. However, al'L these figures were well below the reported performance of several North American mines which were in 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 300 tons ore at Lepanto and 2,100 tons per man year at Philex in 1985. By comparison, other underground mines in Africa, Canada, Latin America, Europe and 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 in the range 3,000-5,000 tons of ore per manshift.  - 9 - 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 industry production and revenues--Atlas, Benguet, Lepanto, Marcopper, Marinduque and Philex. All of these companies were listed on the Manila Stock Exchange andp with one ext-eption, all were predominantly managed and operated by local staff. The one major exception was Marcopper, in which Placer of Canada has an important minority shareholding and for which Placer provides part of the core 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 5 and summarized in Table 2.1. Table 2.1: PHILIPPINES - FINANCIAL PERFORMANCE OF SIX MAJOR MINING 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 Philex 7i 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 the Marcopper operation. The mine started operation in 1971 ane had earned suffi- cient profits to pay back the initial investment in 1973. For most of the 1970s, the mine generated large profits, dividends for shareholders and taxes for the GCovernment as shown in Appendix Table 6 and summarized Table 2.2.  - 10 - 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 320 464 515 517 666 785 Costs (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 into the early 19809. Several major new mines were opened by the major producers including Atlas (Carman copper mine and Masbate gold mine), Benguet (Dizon copper 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 for new ventures), attractive fiscal incentives (investment tax credits, etc.) for new mining ventures, and the ready availability of financing for equipment (trucks and shovels, etc.) and plant (crushers and concentraters) needed for the 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 gold and silver.  - 11 - 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 mining companies /a 80 254 452 454 6 395 Marinduque 26 285 331 1,088 2,594 /b Atlas 119 158 270 539 478 306 Four New Copper Projects _c - - 139 688 292 30 Total 225 697 1,193 2,769 5,468 731 1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 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 mines increasing from 12 in 1975 to 18 in 1979/80. However, many of the new projects were unable to survive the downturn of the copper market following the 1979/80 boom (as shown in Table 1.5) and the early 1980s saw a prolonged series of copper 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.  - 12 - Table 2.4: PHILIPPINES - CLOSURE OF COPPER MINES 'a Maximum production and year (tons of Year of First year of copper contained DBP/PNB Closure Company (Mine) production in concentrate) Involvement 1980 Ino .980 7,620 (1979) PNB 1981 Acoje (Barlo) pre-1975 3,330 (1979) - 1981 Consolidated Mines 1978 7,600 (1979) PNG 1981 Aarinduque (Bagacay) pre-1975 4,370 (1975) DBP (also PNB) 1981 Kennon (Black Mountain) pre-1975 3,450 (1976) DBP 1981 Sabena (Camanlangan) 1981 Santo Nino pre-1975 6,060 (1980) DBP 1981 Zambales 1978 400 (1979) PNB 1982 Hercules (Bully Bueno) 1982 1,490 (1981) PNB 1982 Western Minolco pre-1975 14,430 (1980) DBP 1983 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 the Development Bank of the Philippines (DBP)--played an especially important role in that they provided guarantees for the foreign debt and provided most of the local debt for many of the new projects and, in some cases, effectively provided part of the equity. The two Government banks have a substantial exposure in many of the copper mines listed above. However, their largest exposure is in the Nonoc nickel operation which was foreclosed in 1983; subsequently reopened in 1984 but closed again in 1986. (A section of the next chapter is devoted to Nonoc). In addition, DBP and PNB have exposures in a number of failed noncopper mining projects as shown in Table 2.5 below:  - 13 - Table 2.5: PHILIPPINES - CLOSURE 01 NON-COPPER MINES Capacity DBP/PNB Company Mine Product (tpd ore) Involvement Sabena Batoto Gold 200 DBP Vulcan Marian Gold/Silver 500 PNB Golden River Golden River Gold 9,000 PNB Filipinas Marble Romblon Marble 400 m3/mth DBP Philippine Eagle Longos Gold/Silver 500 DBP Trident Mining Trident Chromite 750 PNB Source: BMGS 2.6 DBP/PNB's exposure in mining sector nonperforming assets (N?As) is very substantial. Major exposures in order of magnitude terms include Marinduque (Nonoc and Maricalum) P 18 billion, Basay P 1 billion, North Davao P 5 billion, Batong Buhay P 6 billion. Following the collapse of so many projects, mining investments form the largest single subsector of the NPAs of PNB and DBP. The original value of the investment in the mining NPAs was about US$1.3 billion. Outstanding accounts, including penalties and foreign exchange losses are estimated to be on the, order of P 35 billion (US$1.9 billion equivalent) at the end of 1985 for PNB and DBP combined. 2.7 Inadequate concern for cost competitiveness, combined with depressed market conditions, have been significant elements in the failure of these mining NPAs. Other contributing factors included inadequate appraisal capabilities for mining projects on the part of DBP and PNB, imprudent gearing ratios, inadequate project preparation and inexperienced or ill-qualified project management. In some cases, it is also alleged that commercial and technical soundness was weakened by corrupt practices. Investors and lenders tended to placed too much emphasis on price projections, which proved overly optimistic, and too little emphasis on cost competiveness art technical soundness. Mining projects are technically very complex and very risky. Several of the failed projects also suffered from technical problems due to inadequate project preparation or inadequate management. In particular, the Western Minolco, Batong Buhay and Ino copper projects all faced severe difficulties due to inacequate exploration and geological work. Design inadequacies have caused major problems at North Davao and Nonoc. Some of these projects have also experienced long delays in establishing adequate access and infrastructure (such as roads and power), e.g., Ino, Batong Buhay and 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  - 14 - lb,3/ By comparison, average world cash production costs were US$0.49 per lb. Thus, the Philippine producers were well in the lower half of the world cost curve. In 1974, (a copper "boom" year), world copper prices averaged US$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, the Philippine industry had a very good financial performance. From 1975 to 1980, average cash production costs for Philippine producers increased to US$0.59 per lb--whereas average costs for all world producers remained almost unchanged--at US$0.50 per 1'b. Thus the Philippines moved into the top half of the world cost curve. However, in 1980, copper prices averapRd US?0.99 per lb and the Philippine industry was still in good financial shiapt 2.9 Since 1980, however, the average cash costs for Philippine producers have 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 1985 Philippines had the highest avera_e cash production costs of major producing countries as detailed in Appendix Table 9 and summarized in Table 2.6 below. Table 2.6: COMPARISON OF AVERAGE PHILIPPINES AND WORLD CASH PRODUCTION 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 /b costs costs costs costs credits costs Philippines 1975 42.8 4.6 1.5 49.1 11.3 37.8 1980 86.0 8.9 9.3 104.2 20.6 59.0 1985 /c 80.6 7.4 32.2 120.2 34.3 85.9 1985 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 48.9 1980 87.0 17.0 4.8 108.7 58.8 49.9 1985 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 is taken from Western World Copper Costs 1985/86 Edition, Brook Hunt Associhtes.  - 15 - 2.10 However, two important qualifications must be made to the Brook Hunt Associates data for 1985 cost estimates for the Philippines. First, marginal producers are presently able to apply to the Government and have all tax payments deferred. Such deferred tax payments account for about 8% (US$0.07 per 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 power generation), the defe:red taxes are estimated at US$0.17 per lb in 1985. For Atlas, they are estimated to be US$0.11 per lb in 1985. Second, the interest payments include very large interest liabilities of North Davao to DBP and PNB which are not being paid. If North Davao's interest costs were to be excluded, the average production cost for the entire copper industry would be reduced by US$0.18 per lb. Thus, if these two items are excluded in 1985 the Philippine industry had average cash costs of about US$0.60 per lb compared with world average costs of US$0.51 per lb and a 1985 copper price of US$0.64 per lb. 2.11 The comparative cost data for the Philippines and average world producers indicate some important structural changes in the cost structure of the Philippine industry. In 1975, Philippine average costs were about $0.10 per lb below world average costs. Philippine producers had mining advantages which resulted in the production costs being US$0.20 per lb lower than the world average--but other producers benefitted from bi-product credits being US$0.10 per lb higher than for the Philippines. From 1975 to 1980, the mining advantage of the Philippines was reduced by $0.10 per lb. While data is not presently available foe a definitive judgment, it is believed t0at this was partly because the 1979 OPEC oil price increasA impacted the Philippine indus- try more strongly than other copper producers due to the relatively heavy reliance of Philippine copper mines on oil-fired power generators. (Year by year costs are given in Appendix Table 10). Direct and indirect production costs in the Philippines also increased because new projects had higher costs than existing projects. Furthermore, the heavy borrowing of the Philippine industry (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 further deteriorated. 1980-85 has been a period of extreme austerity and cost cutting in the worldwide copper industry. High cost producers have been forced out of business, costs have been cut to the bone, pits have been redesigned to improve 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 indirect costs have been reduced by only US$0.04-0.05 (excluding deferred taxes) or US$0.11 per lb (including deferred taxes). Fortunately, for the Philippine producers, however, the apparent decline in mining competitiveness has been largely offset by a large improvement in the value of bi-product credits relative to other producers. The bulk of the copper bi-product credits in the Philippines are for gold--where prices in the 1980s have been much higher than in the 1970s. In other countriest metals such as nickel, cobalt, molybdenum, lead and zinc are also important bi-product metals for copper. The price of these other metals have been generally depressed in the 1980s.  - 16 - Gold Production and Small Scale Mining 2.13 In contrast to the copper sector, gold production has increased substantially 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 9,800 tons in 1986 with increases from several operations. Co-product and bi- product gold production increased from about 12,800 tons in 1980 to about 14,200 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 9,835 Co/Bi-Product 9,654 12,836 15,488 14,113 14,641 15,449 14,155 Small-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 world standards. BHA estimates - indicate Philippine cash mining costs are slightly below average western world mining costs for open pits (US$12.3 per ton of ore versus US$13.0 per ton of ore in 1985) and well below average western world mining costs for underground mines (US$31.3 per ton of ore versus US$37.1 per ton of ore in 1985). However, Philippine gold deposits tend to have somewhat lower ore grades than elsewhere. Gold yields in open pit gold mines in 1985 were reported by BHA to be 1.80 g/ton compared with about 2.2 g/ton for the average western world. For underground mines, the 1985 figures were 3.70 g/ton (Philippines) and 6.6 g/ton (average western world). 2.15 Philippine gold production costS are in the upper range of the world cost curve. BHA reports that average Philippine cash costs were US$280 per oz in 1985 compared with average western world costs of US$232 per oz (and a prevailing price of US$317 per oz). However, the primary gold producers in the 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 Gold Mines,P?oduction and Costs 1975-1990, 1985 Edition, Brook Hunt Associates.  - 17 - average production was at only a cash breakeven and several producers in a loss-making situation. Gold production costs for co-producers (calculated by pro-rating costs between gold and copper production) were estimated to be somewhat lower (US$260/oz). At 1986 prices (which averaged US$368 per oz compared with US$318 per oz in 1985), the financial situation of most primary producers was greatly improved. 2.16 While production by primary and co-producers is well documented, the full extent of production by small-scale (alluvial) producers is uncertain. For 1985, snmall-scale gold production was estimated at 13 tons by Consolidaced Goldfields PLC (CC) in their publication (Cold 1986) compared with, about 9 tons as reported by BMGS. The following accour.t is given by CC which provides a flavor of the small-scale mining. (See, Gold 1986, Page 20.) The (Central Bank) authorities competed much more effectively to buy gold production from the ever-increasing number of non-mechanised operations. This third sector of the industry in the Philippines has increased its production from an estimated 8 tonnes in 1983 to at least 13 tonnes in 1985, and the Central Bank buying offices were able to secure 8 tonnes of chis by paying a premium of up to 3% above international prices. This compares with official purchases from the panners of little more than half a tonne in 1984. While this rate of growth in production from surface deposits is not expected to be maintained, that will depend to a large extent on politital and economic developments within the country, which will determine the alternative employment opportunities available. The Philippines contains more than 20 active gold mining areas where the gold occurs in placers and in weathered rock, from which it can be extracted by relatively simple methods. The greatest coixcentrations of activity are at Davao del Norte in the southern island of Mindanao 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 with bands of armed insurgents who exact a tribute in the form of unrefined gold in return for allowing the mining operations to continue. 2.17 While any production figures for small-scale mines must be viewed as speculative, the CG report indicates that small-scale gold production has increased sharply in response to several factors including the devaluation of the peso in the 1980s, a liberalized purchasing policy for gold by the Central Ban'; since 1984, promotional efforts by BMGS and new legislation supporting small-scale mining (PD 1899, 1984). BMGS estimates that in 1987 the number of small-scale miners in the Philippines had .ncreased to about 200,000--with each miner having an average of four dependents who also directly benefit from small-scale mining. 2.18 The improvement, promocion and regulation of small-scale mining is one of the top priorities of BMGS over the next several years. This is a most important activity. Small-scale mining offers considerable employment bene- fits far rural areas as well as small, but potentially important, foreign exchange benefits for the national economy. BMCS can play an important role  - 18 - regarding the provision of adequate mechanisms and procedures for establishing and documenting mine claims, maintaining reasonable safety and environmental standards, improving the technical capabilities of small-scale mines and supporting the development of processing/marketing channels. These are difficult tasks which may require significant effort to implement and achieve satisfactory results. 2.19 Recently, BMGS has developed rules and regulations to govern small- scale mining operations. The government has also launched a program for the enhancement of small-scale mining. The objectives include (a) rationalizing laws and regulations for small-scale mining; (b) formulating and providing a comprehensive assistance package to support the development of the small-scale mining industry; (c) alleviating depressed, rural socio-economic conditions by providing viable and labor-intensive means of livelihood through small-scale mining; (d) attaining increased small-scale productivity and mineral resources; (e) providing on-site technical, marketing, financial and other basic services, including infrastructure development to small-scale miners. The program also seeks to increase the incomes available to small-scale miners. The program will support small-scale mining efforts, in particular, for six minerals found throughout the Philippines--namely gold, fertilizer minerals (guano, rock phosphate, limestone for agri-lime), building stones (marble, adobe, perlite), clay, beach sand and chromite. In addition, the Natural Resources Development Corporation, the corporate arm of the Department of Natural Resources9 has slated five small-scale mining projects for development (including marble, chromite, iron and gold-processing projects). 2.20