Last April 14, President Duterte signed Executive Order No. 130, lifting the moratorium on new mining agreements which former President Benigno Aquino III put in place in 2012. This development is definitely good news for mining companies, as this could help pave the way for the industry’s faster long-term growth. According to the Mines and Geosciences Bureau (MGB), more than a third of the Philippines’ total land area has been identified as having “high mineral potential,” but less than 5 percent of the mineral reserves was estimated to have been extracted so far.
However, the lifting of the ban is only one of the many factors needed for mining firms to boost earnings growth and for their share prices to sustain their strong performance.
The most important factor is commodity prices. High commodity prices are critical for mining companies to earn higher profits. It also improves the feasibility of developing new mining projects.
Note that even without the lifting of the 9-year moratorium, shares of some mining companies such as Atlas Mining performed strongly, thanks to the significant increase in copper prices. Last year, miners such as Nickel Asia benefited from the significant increase in nickel prices, driven by the global economic recovery and excitement over the growing demand for electric vehicles.
High commodity prices are even more important now given that the government plans to increase taxes on new mining agreements.
The lifting of the moratorium on new mining deals will also have varying impacts on mining companies. Those with existing mining claims will benefit the most.
Note that while most listed companies already have existing mines that are operational, not all of them have mining claims on new sites.
Now that the government is willing to grant new mining agreements, the value of mining claims will increase. Consequently, the share price of listed companies that own mining claims can go up if they can unlock the value of their claims by either developing the new site or selling them to bigger companies that have the financial muscle to develop their sites. Note that once a mining company obtains a mining agreement from the government, it will still take several years before it can develop its mine, extract minerals, and generate profits. As such, even if a company’s share price goes up initially due to excitement over its new project, its share price will most likely go down again and stay quiet for a while until its new project starts contributing to the bottom line.
The prevailing ban on open pit mining also remains a major obstacle for some mining companies. While there are various methods to extract minerals, open pit mining is the cheapest. Employing other methods to extract minerals might not be feasible unless commodity prices go up sharply and stay elevated. However, investing in a mine’s infrastructure on the assumption that commodity prices will be in an uptrend is very risky given the large amount of capital involved and the long-term nature of mining projects. Although the lifting of the moratorium on new mining agreements is only one of many factors needed to grow the mining industry, it will undoubtedly help in developing and encouraging new investments in the industry. Going forward, the mining industry is definitely an industry worth keeping an eye on. INQ