GLNCY Glencore Plc (PK)

By Trefor Moss 

MANILA--Resources giant Glencore PLC's decision to quit the Philippines has deepened the sense of gloom in the country's mining sector, which company executives claim is being throttled by hostile government regulation.

While other resource-rich countries incentivized mining during the global commodities boom, the Philippines did the opposite, according to mining executives here, by imposing a freeze on new mining permits and threatening to hike mining taxes.

That means the Philippines missed out on billions in potential mining revenues and foreign investment, and may have to wait years before getting another chance to cash in, thanks to slumping commodity prices now. The Philippines was the world's top nickel producer last year, contributing nearly a fifth of global supply.

"Anywhere else [with such rich resources], mining would form a huge part of the economy," said one of several foreign mining executives who spoke on condition of anonymity. A mining sector flourishing during the recent boom could have propelled economic growth toward 10% a year, he estimated, compared with actual 6.1% growth in 2014, a significant boost for one of Asia's poorest countries.

For sure, big projects in other countries have been held back by red tape or political wrangling. Mining giant Anglo American PLC, for example, has suffered billions of dollars of write-downs on an iron ore mine in Brazil after years of delays due to regulatory issues.

But hostility to mining in the Philippines appears to have become systemic. Global mining professionals rated the country's mining policy framework the second-worst in the world, behind Honduras, in a recent poll conducted by the Fraser Institute, a Canadian think tank.

Even in a country with up to $1.4 trillion in mineral reserves by official estimates, the Tampakan copper-gold mine was once seen as an exceptional prospect--a trove of 15 million tons of copper and 17.6 million ounces of gold, according to Sagittarius Mines Inc., the company licensed to exploit the vast 23,571 hectare site on the southern Philippine island of Mindanao.

Yet last Friday Glencore confirmed it had sold its controlling stake in Sagittarius Mines to Alsons Prime Investments Corp., a local conglomerate. The sale of Tampakan and two other mines raised $290 million, Glencore said in a statement. The company didn't respond to questions.

Anglo-Swiss mining company Xstrata PLC assumed control of Tampakan in 2007, 15 years after Australia's Western Mining Co. had first identified its rich potential. Glencore acquired Xstrata in 2013.

Xstrata had planned to invest $5.9 billion in the project, creating over 12,000 local jobs and producing around $37 billion-worth of minerals over 20 years, according to the company. At full tilt Tampakan alone would have boosted Philippine GDP by 1-2%, said Nelia Halcon, executive vice president of the Chamber of Mines of the Philippines.

But Tampakan has instead become a byword for the Philippine mining industry's miseries. Fierce opposition, based on concerns about its environmental impact, led by the extremely influential Roman Catholic Church and prominent public figures was compounded by armed raids by Communist rebels. In 2010 open-pit mining was outlawed in South Cotabato province, where Tampakan is situated. Numerous provincial governments have also attempted to ban mining because the central government is too slow to give them their share of mining revenues, according to people within the industry.

Glencore may not have viewed Tampakan as a strategic asset, according to people familiar with the project. But Tampakan's travails, combined with the government's perceived anti-mining stance, likely helped convince Glencore to leave, they said.

Mining executives blame President Benigno Aquino III's administration for suspending new mine permits in 2012. The president also put forward a law to levy higher mining taxes, which the Philippine Congress is currently debating.

"The new mining tax law would be the last nail in the coffin," said one mining executive. "Maybe that's what this is all about--to kill the industry once and for all."

The Aquino administration isn't anti-mining, said Leo Jasareno, director of the Mines and Geosciences Bureau, a government agency. The Tampakan project would still succeed under local ownership, he predicted.

Glencore had cleared all regulatory hurdles and was free to start operations at Tampakan, Mr. Jasareno said. He said he had assured Glencore that the provincial mining ban had been declared unconstitutional by Manila, and could safely be ignored.

However, it was unreasonable to expect a foreign mining company to defy local government opposition, said Ms. Halcon from the Chamber of Mines.

Tampakan was one of only six foreign-controlled mining projects in the Philippines. Of the remaining five just one is operational -- the Dipidio gold-copper mine run by Australia's OceanaGold Corp.--with the others suffering protracted delays akin to Tampakan's. However, many of the 44 commercial mines operating in the country have foreign companies as minority partners, according to Mr. Jasareno.

Manolo Labor, a spokesman for Sagittarius Mines, said the company was sticking to its plans to develop Tampakan. Xstrata had previously deferred the start of production to 2019 to give the company more time to overcome local opposition.

The Philippines may have missed a once-in-a-generation chance to cash in on its resources, he feared. The price of copper has dropped 48% since its 2011 peak, while gold has dropped 37%. Nickel, the country's primary mineral product, has lost 80% in value since peaking in 2007, amid weakening Chinese demand.

The Philippines produced $3.1 billion-worth of metallic minerals in 2014, but could easily have managed two or three times that amount, according to Ms. Halcon. Foreign investment in mining was a disappointing $693 million last year, she added.

Foreign mining companies already operating in the Philippines now hope presidential elections in May 2016 will bring a more favorable administration to power.

Mr. Jasareno remained upbeat about Philippine mining's long-term prospects. "The minerals are still in the ground; we can mine them next time [the prices are high]," he said.

Write to Trefor Moss at Trefor.Moss@wsj.com

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(END) Dow Jones Newswires

August 19, 2015 00:20 ET (04:20 GMT)

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