Amid the market rally

Last Friday, the market logged a single-day advance of 114.14 points, or 2.39 percent—a daily performance record not seen since the bull market of 2007.

The market, too, broke the last record high of 4,822.08 established on Feb. 2, after closing 57.63 points higher last Friday to close at 4,880.71.

That advance may very well be just the first of a string of advances that may happen following heightened investment activities, which can be attributed to local and foreign confidence and interest in the local economy.

New mining policy concerns

Of the six sectors comprising the whole market, the mining and oil section registered the largest gain last Friday, with mining taking the lead in the push—advancing by 424.85 points, or 1.72 percent.

But behind this impressive performance of the market is the brewing dispute over alleged policy changes to be effected in the mining industry.

The Philippine Constitution of 1987 (Constitution) and the Philippine Mining Act of 1995 (Mining Act) govern the exploration, development, processing and utilization of mineral resources in the Philippines.

The implementing rules and regulations (IRR) of the Mining Act and related laws governing investments in the mining industry, on the other hand, define and delineate the processes and arrangements for the exploitation of mineral resources in the country.

Recently, the Philippine Mining and Exploration Association, Inc. (PMEA) and the Joint Foreign Chambers (JFC) expressed “concerns” over changes the government may impose in the mining industry based on a supposed draft of an executive order on the matter.

Under the Mining Act, the acquisition of mineral rights begins with the acquisition of an “exploration permit.”  If the exploration efforts reveal the presence of mineral deposits that can be economically mined, the contractor or private investor may file a “declaration of mining project feasibility within the term of the exploration permit, which is two years, renewable for another two years but cannot exceed a total of six years.”

Approval of the “declaration of mining project feasibility” grants the exclusive right to a “Mineral Agreement or Financial Technical Assistance Agreement (FTAA)” over the permit area and the “exclusive right to conduct mining operations and to extract all mineral resources found in the contract area.”

Upon approval by the Secretary of the Department of Environment and Natural Resources (DENR), the contractor or private investor may convert the mineral agreements into either a Mineral Production Sharing Agreement (MPSA), Co-Production Agreement, Joint Venture Agreement or FTAA.

The MPSA is “an agreement under which the Philippine government grants the exclusive right to conduct mining operations within a contract area.”  The contractor or private investor “provides the financing, technology management and personnel necessary for the implementation of the MPSA.”

The DENR Secretary approves all MPSA applications. Pending approval, the MPSA applicant can request for the issuance of a “Temporary Exploration Permit (TEP).”  The TEP is valid for a period of one year, which will be deducted from the exploration period of the MPSA. The MPSA is valid for 25 years and renewable for another 25 years.

If the MPSA application is disapproved, the TEP is deemed automatically canceled, too.

In addition to related taxes, the government “takes a share in the gross output of the mining operation equivalent to 2 percent based on the actual market value of the annual gross output at the time of removal” on the following products: gold, chromium, copper, other metallic minerals and nonmetallic minerals and quarry resources.

A Co-Production Agreement is “an agreement wherein the Philippine government provides inputs to the mining operations other than the mineral resource area” and receives an agreed share from production.

In a Joint Venture Agreement, a joint venture company is organized. The government “takes equity and a share from equity earnings as well as the gross output of the mining operation.”

The FTAA is “for large-scale exploration, development and utilization of mineral resource.”

Under the Mining Act of 1995, an FTAA can be granted to 100 percent foreign-owned corporations. The contractor or private investor must make a minimum investment of $50 million or its peso equivalent for Philippine entities.

The FTAA is granted for the exploration, development and utilization of gold, copper, nickel, chromite, lead, zinc and other minerals. It is not granted for cement raw materials, marble, granite sand and gravel and construction aggregates.

The PMEA and JFC claim that the proposed new policy undermines large-scale mining. The government is increasing its royalty share by 50 percent (from 2.0 to 3.0 percent) while supposedly removing incentives for large-scale mining. It is reducing potentially good mining areas by enlarging otherwise described areas for agriculture and ecotourism that may favor small-scale mining but lacking force on unregulated mining.

Equally disturbing, “the government is replacing the ‘first-come first-served’ system to competitive public bidding.” This may disregard earned credits on previous work and financial resources spent. The new policy may as well entail added risk capital by requiring the contractor or private investor to “conduct total economic valuation in mining areas before approving mining applications and mining activities are allowed.”

These potential changes, they argue, will not only fan dismay in the mining industry but foreign interests in the country, in general.

In turn, the government avers that the new policy being crafted is only directed: to “optimize” current environmental standards in the industry; to demand an otherwise higher but fair share in revenues; to have “mining rights auctioned rather than awarded” as it is the more efficient system to mineral exploitation; to precisely resolve the issue of small-scale mining; to align national and local mining regulations to bring about better government supervision and control.

The government assures the market, as well, that when the new policy is finished, “it would please all concerned.”

Bottom-line spin

Hopefully, the government will deliver on its promises to foster a good investment climate. Like its intended new policy for the mining industry, it should “please [rather] than draw discomfiture from investors,” as claimed.

As of last Friday, the market was teasingly 620 points away from the popular target of 5,500 for 2012 and was, as well, 508.75 points higher than its level at the start of the year. The market took less than two months to hit 4,880.71 and it has at least 10 months more to beat the 2012 target.

To think that the market took 12 months to achieve a 172.65-point advance for the period covering the year 2010 to 2011, it is not difficult to imagine how hard the fall will be for the market if the initiatives of government to attract investments will backfire this early.

(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)