Mining

in the
philippines:

DR. CARLO A. ARCILLA

Mining
in the
philippines:
PROBLEMS AND SUGGESTED
SOLUTIONS
DR. CARLO A. ARCILLA
 Copyright © 2017 by Albert Del Rosario Institute
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Stratbase ADR Institute
The Stratbase Albert del Rosario Institute (ADRi) is an independent international
and strategic research organization with the principal goal of addressing the issues
affecting the Philippines and East Asia.

Victor Andres “Dindo” C. Manhit

President, Stratbase-Albert del Rosario Institute (ADRi)

BOARD OF TRUSTEES
Ambassador Albert del Rosario
was the Secretary of Foreign Affairs of the Philippines from 2011 to 2016. He also served as
Philippine Ambassador to the United States of America from 2001 to 2006.

Manuel V. Pangilinan
is CEO and managing director of First Pacific Company Limited. He is also the chairman of
MPIC, PLDT, Meralco, and Smart Communications, among others.

Edgardo G. Lacson
is an honorary chairman of the Philippine Chamber of Commerce and Industry (PCCI). He
was the former president of the Employers Confederation of the Philippines.

Benjamin Philip G. Romualdez

is the president of the Chamber of Mines of the Philippines since 2004.

Ernest Z. Bower
is senior adviser for Southeast Asia at the Center for Strategic and International Studies
(CSIS). He is CEO of BowerGroupAsia (BGA), and a leading expert on Southeast Asia.

Renato C. de Castro, Ph. D

is a full professor of international studies at De La Salle University – Manila (DLSU). He
holds the Charles Lui Chi Keung Professorial Chair in China Studies.

Judge Raul C. Pangalangan, Ph. D

is a judge of the International Criminal Court. He was previously a dean of the University of
the Philippines College of Law and publisher of the Philippine Daily Inquirer.

Epictetus E. Patalinghug, Ph. D

is a professor emeritus at the Cesar E.A. Virata School of Business, University of the
Philippines (UP), Diliman.

Francisco A. Magno, Ph. D

is the executive director of the Jesse M. Robredo Institute of Governance and President of
the Philippine Political Science Association. He is a professor of political science at DLSU.

Carlos Primo C. David, Ph. D

is a professor of Geology and Environmental Science in UP Diliman. He heads the
Innovation Council of the Department of Science and Technology (DOST).
 CONTENTS

Executive Summary viii

Introduction 1

Knowing the Mining Cycle 2

Regalian Doctrine 2
Prospecting and Exploration 3
Environmental Compliance Certificate, Development
and Construction 3
Operation 4
Rehabilitation and Post Mining 5

Clearing Misconceptions 8

Up to 40% of the Philippines will be Mined 8

The Philippines is One of the Most Mineralized Countries
in the World 10
Mining Contributes <1% to GDP and Employment and So It Can
Be Stopped Without Harm to the Country 12
Small-scale Mining is Small 15

Moving Forward: Proposed Actionable Solutions 18

Using an Endpoint Perspective, Not Just NPV 18

Separate EMB from MGB 20
Revenue Sharing: An In-Depth Study Needed 21
Increase the Revenue Share of Local Governments and Allow
Mining Companies to Pay the LGUs Directly 24
Encourage Value-Adding and Vertical Integration of
the Mineral Industry 25
Exotic Elements and Black Sand: The Scandium Story 27

Conclusions 30
Acknowledgments

About the Author

 EXECUTIVE SUMMARY
Mining has invited significant attention in recent months, given the controversies
surrounding then Secretary Regina Lopez’s efforts to shake up the industry. As a
positive consequence of Ms. Lopez’s advocacy, the industry and its critics have had to
look deeper into the industry’s dynamics and find solutions to pressing issues. They
say that sunlight is the best antiseptic: as such, our hope is that the industry’s exposure
to scrutiny will result in more transparent, efficient, and safe operations.
This Special Study combines insights, drawn from personal experience and those
of industry and environmental stalwarts, with data collected over several years. It
aims to provide readers with a suitable background in the industry and clear up
popular misconceptions on the industry itself and its effects on the country. Mining
is important, as what cannot be grown must be mined, and mining products pervade
daily life.
Responsible mining is possible, but it will require self-policing among mining
companies and the full implementation of the mining law. As it is, mining occurs in
less than 0.3% of the total land area in the Philippines. While exploration applications
cover 40% of the country, many no-go zones and uneconomic mining conditions
prevent mining activities. Moreover, while mining contributes less than 1% to
national GDP and employment, its occurrence in less than 1% of the land area means
that where mining occurs, it is significant. Mining comprises the most important
economic activity in MIMAROPA and CARAGA, where its contribution is around
20% of GDP.
The real problem is in small-scale mining, which has become the face of the
industry. The vast majority of Philippine gold production is produced by small-scale
mining, which is plagued with the use of harmful mercury, the non-payment of taxes,
the employment of children, non-rehabilitation, and many fatal accidents. Resolving
the concerns with small-scale mining should include a combination of non-harmful
gold recoveries palatable to small-scale miners but also strong political will to stop
harmful practices. This is where a Duterte moment is needed.
This Special Study provides recommendations for the government, primarily
the Department of Environment and Natural Resources (DENR), and the industry
itself. There is room for improvement in how the DENR and mining firms
approach projects, in monitoring environmental compliance, and in national-
local revenue sharing. Moreover, government and industry should work to exploit
opportunities in exotic minerals and to produce higher-value mining products. Other
recommendations include the empowerment of the Mines and Geosciences Bureau
and the Environmental Management Bureau; the provision of further research
funding; the constructive use of the mining audit; and the possibility of paying taxes
directly to local government units.
Ultimately, the recent attention given to mining companies should force them
to cleanse their ranks, exceed compliance and visibly demonstrate how responsible
mining is possible.

viii
Mining in the Philippines:
Problems and Suggested Solutions
carlo a. arcilla, ph.d

M ining has invited a lot of attention in the past months, given Secretary
Regina Lopez’s exposés on the industry. A positive consequence is that the
good Secretary’s advocacy has prompted the industry and critics to look deeper
into the industry’s dynamics and to find solutions to pressing issues. According
to an old adage, sunlight is the best antiseptic: it is our hope that the mining
industry’s exposure to scrutiny will result in more transparent, truly efficient, and
environmentally safe operations.
Although this paper does not claim to have an exhaustive view of mining, it
summarizes personal insights and research data collected over a number of years,
and it borrows heavily from the wisdom of industry and environmental stalwarts. To
provide readers with a suitable background of the industry, it begins by describing
the main steps of the mining cycle—from getting permits, to exploration, to
extraction, and to rehabilitation. This information helps to clear up some popular
misconceptions of the mining industry and its effects on the country, which are
discussed in greater detail in the subsequent section.
Finally, this paper outlines recommendations for the government, primarily
the Department of Environment and Natural Resources (DENR), and the industry
itself. There are improvements that can be made in the way that the DENR and
mining firms approach their projects, in the monitoring of environmental
compliance, and in national-local revenue sharing. Moreover, government and
1
2 MINING IN THE PHILIPPINES

industry should work to exploit opportunities in exotic minerals and to produce

higher-value mining products.
Mining is needed for civilization: “Whatever is not grown has to be mined.” The
challenge for the Philippines is in how to make the mining process environmentally
and socially responsible, as well as acceptable. This article presents ideas for how
this can be made more possible.

Knowing the Mining Cycle

Knowledge of the mining cycle is of fundamental importance in evaluating the

contributions and unique characteristics of the mining industry.

Regalian Doctrine

Mining activity is framed based on the Regalian doctrine, which holds that all
mineral wealth is owned by the State. Under this doctrine, any person or institution
PROBLEMS AND SUGGESTED SOLUTIONS 3

extracting minerals is a service contractor of the government, unless the government

does its own mining. For this reason, mining is governed by the rules of tenements,
sometimes known as mining claims and, in current law, as mineral production
sharing agreements (MPSA), mineral processing permits (MPP), and Financial or
Technical Assistance Agreements (FTAA). Analogously, mining operations could
actually use a label, “Do Not Delay, Government Project.”
This doctrine implies that mining companies must strictly follow legal guidelines,
such as the terms of sale, because the companies do not own the minerals.
Consequently, mining companies are subject to supervision by the DENR Mines
and Geosciences Bureau (MGB) for mineral tenements and operations, and the
Environmental Management Bureau (EMB) for environmental compliance.

Prospecting and Exploration

The mining cycle begins with the Exploration Permit, obtained from the MGB,
which lists and documents the tenement holders to prevent overlapping claims.
Each exploration permit comes with fees and requirements, including duties to
‘use it or lose it.’ All expenses incurred in exploration are to the account of the
contractor. Should there be no economic minerals discovered, these expenses are
written off. The government risks nothing in giving out exploration permits, as it
cannot afford to conduct its own extensive exploration work because of the costs
involved. The risks inherent to mineral exploration put in perspective how the
previous Benigno S. Aquino III (P-Noy) government effectively adopted an anti-
mining stance. In a span of 6 years, the Aquino administration granted fewer than
ten exploration permits, most of them renewals.

Environmental Compliance Certificate, Development

and Construction

If the tenement holder encounters significant mineral deposits, they can then
apply for an MPSA for development. To obtain an MPSA, the tenement holder
performs substantial work to estimate resource blocks, often involving expensive
4 MINING IN THE PHILIPPINES

drilling and analyses. Once the ore body is delineated, a mining plan is prepared
and summarized in a document called the Determination of Mining Feasibility.
The feasibility study is vital because it incorporates the amount of estimated mining
reserves, the method of mining, the mining plans, the Environmental Compliance
Certificate (ECC), and the business plan. The business plan must show that the
MPSA (development) is economically feasible, in addition to showing agreement
with indigenous peoples and all levels of local government. Thereafter, the
MPSA for development is converted into an MPSA for operation, and the mining
extraction begins.
The ECC requirement is not trivial, as it comprises a holistic environmental
assessment and evaluation of risks, including a mapping of biological and
sociological impacts when mining operations begin. The ECC also requires several
stages of public hearings on the nature and potential impacts of mining operations.
A strict implementation of the ECC parameters should force the mining company
not to incur environmental violations.

Operation

The process from exploration to operation could take years, even decades, during
which all expenses are risked by the contractor. The length of time involved
underscores an important point: since years of tremendous expenses are risked
in mining, even before extraction is done, only a stable set of policies will allow
investors to risk upfront huge amounts of time and resources. Changing rules
midway is fatal to the mining industry and, unsurprisingly, this was one of the
main objections levelled at then Secretary Regina Lopez during her short stint as
DENR head.
For instance, her blanket prohibition of open pit mining for prospective (and
even active) mines, which is permitted under the Mining Act of 1995 (RA 7942),
was illegal and ran counter to international practices. No other country that permits
mining has forbidden open pit mining; this is because most deposits can only be
mined using open pit methods. Making the industry face concerns about tailings
disposal (common to both open pit and underground mining) and rehabilitation is
a more reasonable way of addressing issues related to open pit mining. The decision
PROBLEMS AND SUGGESTED SOLUTIONS 5

had the effect of quashing potential investments. This was the case for the Silangan
project in Surigao del Norte, which had costed PHP 17 Billion in development prior
to the open pit mining ban. If the government cannot be consistent in its policies,
it has no business handing out mining permits.
A small, but “powerful”, permit that has been abused is the tree cutting permit.
It has happened that several mining companies who have completed all the needed
permits (ECC, local permits, etc.) could not start operations because their tree
cutting permits were delayed, and their issuances were reserved for the highest
officers of the DENR. The needless delays in granting the tree cutting permits have
been occasions for corruption at the highest levels, which need to be investigated.

Rehabilitation and Post Mining

After the mining operations cease comes the phase that is least understood: final
rehabilitation. The government, learning from the numerous cases of legacy mines
and related disasters, requires the rehabilitation of mined-out areas and mandates
the contractor to allot funds for this sole purpose. The proposed use of rehabilitation
funds for other purposes provides another example of the misguided efforts of the
former DENR secretary. To use funds for other purposes, even worthy ones, would
have been illegal.
We should note that mining, especially open pit mining, is an ugly process:
trees have to be cut, mountains reshaped (flattening is not economical), a lot of
dust raised, and so on. Although an active mining operation is not pretty, it is a
temporary use for the land, and the mining cycle should only be judged afterward,
if rehabilitation was done properly on disturbed areas. Mining is not complete until
rehabilitation is finished. In fact, progressive rehabilitation is the best practice.
Concurrent rehabilitation costs may be cheaper than rehabilitation done at the end
of a mine’s life.
Analogously, any construction site is ugly and shows disturbed soil, cut trees,
poor drainage, etc. However, after the building is finished, no one remembers
how ugly the former construction site was. A good example of nickel mining that
has had a positive record of rehabilitation is the Rio Tuba mine of Nickel Asia
Corporation, which has operated for 40 years now and whose mining areas and
tailings disposal areas are good examples of responsible mining.
6 MINING IN THE PHILIPPINES

The photo above, taken from the Rio Tuba mine of Nickel Asia, shows active mining area in the foreground, the “ugly”
side, and rehabilitated areas in the background.

The media has been flooded, however, with images of open pit mining areas,
especially along the environs of Surigao and Agusan, and these images are what
remain in the memories of the public. Even open pit mining of nickel ore can
be done properly, but the operations for this type of ore are relatively recent and
thus have little to show for rehabilitation. Drainage management of mining areas
is absolutely essential to prevent siltation in nickel mining areas: these include
creation of silt ponds, check dams, etc., before any mining is done, and active
drainage maintenance must be done during mining. Because of the high-clay
nature of nickel laterite mines, mining cannot be done during the rainy season, but
this means that the mining company must still have heavy equipment on the ready
to mitigate siltation.
A mine’s ‘ugly’ presence in an area has made it a scapegoat for any environmental
disaster. One example is the siltation in Zambales, which has been blamed on the
nickel mining companies in the area, despite all of them being closed. A one-year
study conducted by the Environmental Monitoring Laboratory of University of the
Philippines’ National Institute of Geological Science (UPNIGS) showed otherwise.
The study demonstrated quantitatively that mining contributed less than 10% of the
siltation, and it was the erosion of previously deforested areas that was responsible
for the sedimentation. The summary of these sediment studies is presented:
PROBLEMS AND SUGGESTED SOLUTIONS 7

Unfortunately, there are a number of non-compliant mining companies who

do destroy the environment and do not rehabilitate, reinforcing the many negative
images thrown against the mining industry as a whole. In this regard, the legitimate
and compliant mining companies should police themselves so that they do not
get tarred with the same brush as irresponsible miners. Irresponsible miners will
also cease to exist if current laws are strictly implemented and corrupt regulators
brought to prison. Key to improving implementation is for the government to
provide adequate salaries and incentives to the geologists, mining engineers and
environmental inspectors in the DENR, who are the police of the mining industry.
Needed too are amendments to the mining law that will update the amounts
of penalties prescribed for mining violations – the current amounts (e.g., a few
thousand for siltation, etc.) are ridiculously low and must be proportionate to the
damage done. The inclusion of penal/criminal punishments for violators, including
prison terms, will certainly reduce environmental violations.
8 MINING IN THE PHILIPPINES

Clearing Misconceptions

Up to 40% of the Philippines Will Be Mined

If one listens to the news and social media, one would think that mining is so
pervasive in the country. Contrary to popular belief, mining only occupies a very
small portion (<0.3%) of the total land area of the Philippines. Mining is only
pervasive in the media, because in reality, actual mining occurrence is small, as
shown in Figure 2.
PROBLEMS AND SUGGESTED SOLUTIONS 9

It is safe to say that most Filipinos have not seen an actual mining area, but have
instead been bombarded by negative publicity about mining. The total mining area
in the Philippines comprises less than half of 1% of the country’s total land area. To
compare, the actual area of islands and nearby seas devastated by illegal dynamite
and cyanide fishing in the Cuyo group of islands in the Sulu Sea is much bigger.
One graphic shown consistently by anti-mining groups shows that 40% of
Philippine land area will be mined (Figure 2, left). This gives avenues for comparison
with places such as Nauru, where 75% of the area was mined for phosphate,
leaving it a barren wasteland. This comparison leads to the argument that the
Philippines, being an island ecosystem, cannot afford to have mining activities.
This misconception is cleared up by restating the fact that the first procedure for
mining in the Philippines comprises an application for an exploration permit, and
that the Philippines is subdivided into 81-hectare blocks wherein one has to apply
for exploration. The total area where exploration has been applied for is probably
close to 40%.
What is not explained is that the exploration permits are subject to many no-go
rules where mining cannot occur. For example, areas that are populated, that are
agricultural, that are protected, or meet other standards, are automatically excluded
from mining. The reality is this: the areas that have active mining tenements only
comprise less than 3% of the total area of the country, and of these MPSA-covered
areas, less than half a percent (0.3%) are being actively mined.
Contrast this with the decline of the forest cover of the Philippines over the
years (Figure 3). The loss of forest cover has many causes, but illegal logging and
kaingin (slash and burn clearing) are probably the main reasons. This type of
environmental degradation has not received the same negative coverage as mining,
despite mining directly affecting a much smaller area. This is not to apologize for
the sins of the mining industry (which exist), but to put the issues into proper
spatial and temporal perspective. We could be shouting loudly at a cause while
being blind to the deeper problems that plague our environment.
On a personal note, I recently toured the many islands in the Cuyo Islands in
Palawan, located in the Sulu Sea, and noted with a lot of sadness that many of the
islands I visited were nearly devoid of corals. The locals said that the corals were
destroyed by dynamite and cyanide fishing that only stopped recently. All of the
area occupied by the mining companies in the Philippines would fit into the area
occupied by the Cuyo group of islands.
10 MINING IN THE PHILIPPINES

The Philippines is One of the Most Mineralized Countries in the World

An old adage says that clear accounting preserves friendships. There is the oft-
repeated statement that the Philippines is one of the most mineralized countries
in the world, and that there are trillions of dollars of resources in the ground
just waiting to be dug up. These projections do not take into account the cost of
recovering these mineral resources. The problem of this misconception is that it can
give rise to the mistaken thinking that since we have mineral wealth, investors will
be lining up to mine it. Under this assumption, we can let investors wait because
our country controls the disposition of the highly valuable mineral goods. Another
way of looking at this approach is to not to let anything be mined until such time
that the rules of mining, markets, and acceptability have reached equilibrium levels.
First, while it is true that a large portion of the country is mineralized, due in a
large part to our location within the “Ring of Fire”, the quality of our ore deposits
is not better than other deposits elsewhere in the world. The deposit quality of
PROBLEMS AND SUGGESTED SOLUTIONS 11

Philippine copper ores, for example, pales in comparison to those of Chile or Peru.
The Philippine cut-off grade of 0.2%, versus 1.2% for Chile, means that every tonne
of ore mined in Chile produces 5 times more copper than ours, translating to lower
costs. The grades of copper, gold chromite and even nickel ores in South Africa are
much better than that those in the Philippines.

In the Philippines, the chances of ore prospects (exploration targets) becoming

actual mines is less than 10% (data from MGB). This means that mining firms take
risks with exploration. Should exploration move up into drilling and development,
the associated costs could run into the hundreds of millions of dollars without
guarantee of success. Exploration and development are high-risk, high-capital
ventures, which very few Philippine companies can afford.
The costs involved imply that (a) we need investors if we are to exploit our
mineral resources and (b) investors will only stay in an environment with stable and
12 MINING IN THE PHILIPPINES

predictable rules governing the mining business. In a talk, the Chilean ambassador
once said that Chile’s most attractive quality as a mining destination is that its rules
are predictable and do not change mid-stream. Moreover, the recent debacle in
Mongolia is an important lesson: one of the largest and richest porphyry copper
deposit, Oyo Tulgoi, has been hamstrung by changing rules of mineral extraction
by its government.
In this context, the declarations of then Secretary Lopez to close mines because
they are located in alleged watersheds were damaging to business. Her declarations
did not only reflect a change in policy, they ran counter to the law: the Mining
Act does not prohibit mining in “proclaimed watershed forest reserves.” For it to
have been done correctly, the President should have made a formal proclamation
delineating additional critical watersheds. Additionally, no mining operation
would be allowed to deprive agricultural lands or communities of water. This issue
is addressed during the environmental studies leading to the grant of the ECC.
Exploration permits to define these mines required a lot of expenses, and these
contracts, especially the subsequent MPSAs (assuming there are potential deposits
among the many failed, expensive ones) take years to perfect. The watershed
definitions are already imbedded in the contracts (critical and proclaimed), and a
sudden redefinition devoid of scientific merit will not only expose the government
to lawsuits and future arbitral awards to be paid for by taxpayers, they would
discourage any future investments in the mining industry.

Mining Contributes <1% to GDP and Employment and

So It Can Be Stopped Without Harm to the Country

It is true that mining contributes only <1% to the GDP and employment, and
it would seem logical to just cancel this segment of the industry because of the
pollution it is causing. First, the industry has not been allowed to grow, as there
has been a moratorium on new mining permits for the last five years (four years
under the Aquino administration and one year under the Duterte administration).
Despite this, only 0.3% of the country is actually being mined—and this small area
alone contributes 1% to the GDP and employment. Moreover, the 1% contribution
arises because the GDP contributions from areas without mining are included
PROBLEMS AND SUGGESTED SOLUTIONS 13

in the averaging, thus diluting the contribution of mining. However, when we

consider the economies of regions where mining is actually occurring (e.g., Caraga
Administrative Region [CARAGA] and MIMAROPA Region [MIMAROPA], see
figures below), mining contributes at least 20% of the regional or local government
unit’s GDP. For this reason, local officials from these regions are against the sudden
suspension of mining activities. These points are clarified in Figures 5-8.
A corollary misconception is that mining causes poverty. Mineralized areas will
have higher metal contents, and will therefore be a priori detrimental to agricultural
activities. For example, some areas in the CARAGA, particularly Surigao del Sur,
have soils with iron contents over 40%, making profitable rice growing almost
impossible. As one test, the question can be asked whether there was poverty before
or after mining activities began.
Mining-intensive areas are not the poorest places in the Philippines. The poorest
areas in the Philippines are in the Autonomous Region of Muslim Mindanao
(ARMM), and in fact, the CARAGA areas are among the fastest-growing; this was
correctly pointed out to Secretary Lopez by Senator Juan Miguel Zubiri during the
Commission on Appointments (CA) hearing in March 2017. The municipalities of
Bataraza, Palawan, where there is a large mine and processing plant, and Claver,
Surigao del Norte, where there are a number of nickel mines, are both first class
municipalities, and first in terms of income, assets, and cash balances in their
respective provinces.
14 MINING IN THE PHILIPPINES
PROBLEMS AND SUGGESTED SOLUTIONS 15

Small-scale Mining is Small

Small-scale mining is the biggest problem of mineral extraction in the Philippines.

Small-scale mining refers to operations that, in theory, should not exceed 50,000
tonnes per year and should not use heavy equipment. Many small-scale mining
operations do not have permits, although some can be obtained from local
governments, which have varying degrees of discipline in the disposition of these
permits. In actual scale, small-scale mining for gold comprises over 70% of the total
gold production, greatly exceeding the combined output of all the large gold mines.
This happens because some gold deposits, especially those in Diwalwal and
Compostela Valley, are high-grade and accessible via shallow tunneling by artisanal
miners. According to some exploration geologists, the grade and tonnage of
the Diwalwal deposits could be comparable with some of the best in the world.
Estimates of the number of artisanal miners vary, but they could easily exceed
16 MINING IN THE PHILIPPINES

hundreds of thousands. Solutions to the issues arising from small-scale mining can
only be multi-faceted and will require the cooperation of both local and national
government, with the help of civil society.

The problems associated with small-scale mining include, but are not limited to,
the following:

1. Use of Mercury. Many of the artisanal miners use mercury, one of the most
toxic substances available. Mercury recoveries from small-scale operations are very
low (estimates suggest <50%) and the unconfined tailings are still concentrated
with mercury. This mercury will eventually flow into the ocean, where it could
become methyl mercury, the cause of mercury poisoning (Minimata syndrome).

Photo shows mercury-laden tailings from artisanal gold operations in Camarines Norte.

2. Severe Environmental Degradation. Many small-scale mining areas employ

no mining professionals, resulting in the use of unplanned and dangerous methods,
unconfined mine tailings, frequent accidents, and no rehabilitation. Sadly, many
people think that small-scale mining is synonymous with the mining industry.
PROBLEMS AND SUGGESTED SOLUTIONS 17

3. Non-payment of Taxes. The estimate of large production from artisanal

gold miners comes from the Bangko Sentral, which established buying centers in
the gold areas (e.g. Baguio, Tagum). When a tax was levied on artisanal miners,
the gold sales dropped close to zero. The small-scale gold miners do not pay any
taxes, especially to the local governments, who will have to bear the brunt of their
environmental degradation. Small-scale mining operations also do not set aside
rehabilitation funds to restore the mined-out areas at the end of mine life, unlike
large-scale mining companies.

4. Abuse of Small-scale Mining Permits. Since most permits are given by

local governments, some unscrupulous mining operators, in connivance with
corrupt local government officials, have gotten around getting permits from MGB
by misusing local permits. Local permits, unlike large mining tenements, do
not come with ECC, prior and informed consent from indigenous peoples, and
other monitoring requirements. Some foreign (mostly Chinese nationals) mining
operators have used this route in order to illegally mine black sand and high-grade
minerals using local dummies. Examples of these are seen in the following photos.

Mineral processing plant, owned by Chinese operators somewhere in Luzon, with only local
LGU mining and environmental permits contrary to law.
18 MINING IN THE PHILIPPINES

Stockpile of chromite mined illegally by Chinese operators somewhere in Luzon, with permits
given by local LGU despite a valid MPSA granted by national government to another mining
company.

Moving Forward: Proposed Actionable Solutions

1. Using an Endpoint Perspective, Not Just NPV

The idea for the approach comes from a speech delivered in May 2017 by DENR
Undersecretary and concurrent MGB Director Mario Luis Jacinto, who has had
the unique experience of being a regulator in the MGB and a proponent for host
communities in Mindanao. It is a profound insight wherein both the government
and the mining company look at mining projects not just from the beginning,
but from the end or post-closure perspective. This means visualizing the final
PROBLEMS AND SUGGESTED SOLUTIONS 19

mine rehabilitation; the disposition of water, waste and tailings; and sustainable
communities. This perspective, also shown by David Brett in a talk on Responsible
Mine Tailings Disposal, will employ exhaustive proactive methods in the beginning
of operations (e.g., thorough mineralogical characterization of ore and waste),
rather than playing catch-up later on, when the costs of mitigation and remediation
will then be prohibitive.
This shift would mean that it should not only be financial considerations that
should determine whether mining projects should proceed. In contrast, mining
feasibility is more often viewed largely from a net present value (NPV) point of
view.
Perhaps this view is most easily seen in the disposition of mine tailings. A mine
tailings disaster would make all NPV calculations useless and would erase all
goodwill generated by mining activities—the Marcopper disaster comes to mind.
Using this approach, one can already visualize that a former pit filled with water
with a drainage pipe underneath is a disaster waiting to happen. A continuous
hydraulic force, even if resisted by a tunnel, could weaken altered clay-rich rocks
and eventually cause failure. Hence, even if a pit were to be used for a tailings pond,
a simultaneous sealing of the drainage tunnel should have been done.
As another example, a proactive, forward-looking characterization of the
mineral components of a deposit, including waste materials, would reveal if there
will be substantial sulfide-bearing minerals in the tailings that could cause future
acid mine drainage. Knowing in advance about a large amount of non-economic
sulfides in the deposit, the company should make proactive adjustments in the
milling process to isolate and contain the sulfides and reduce their content in the
tailings. If tailings cannot be properly managed, then the mine should not even
start operations, no matter the NPV.
Herein is the root difference between quarrying and metal open pit mining:
quarrying does not entail tailings disposal because almost all of the quarried
materials are used in construction. In contrast, metal mines only use 1% or less of
the ore and the 99% of the materials are ground into powder, mixed with water and
impounded in tailings ponds. While both operations are truly open pit, quarries
leave holes but open pit metal mines leave holes and tailings dump impoundments
with substantial sulfides; the latter is much more difficult to manage in the long
term.
20 MINING IN THE PHILIPPINES

This ‘backward’ approach should help in the evaluation of very large and
controversial projects such as the touted USD 6 Billion Tampakan project. This
deposit is one of the largest and potentially rich deposits in the world, and its
mining tenements traverse the boundaries of several provinces. While a local ban
on open-pit mining was a significant hurdle in its development, several sectors
point out that there are technical issues that need to be resolved if this project is
truly feasible, as suggested by its mining feasibility study. The first issue is the extent
and scale of its tailings dump, and another is the elevated content of arsenic in
its ores. The tailings dam/dump issue is of great concern as the structure will be
huge, and there will be numerous communities downstream which will be affected
should a failure happen.
We are assured by the technical staff in the Tampakan project that many models
and simulations have been made to show that the tailings dam will not fail. But how
does one assure people downstream that such water-logged structure will remain
stable decades after final mining operations have ceased? I found myself remarking
that if the mine managers truly believe that this dam is impregnable, then they
should build their residences at the base of the dam, to graphically demonstrate
their trust in this structure.
The approach outlined above dictates that perhaps an approach with a lower
NPV, but with more manageable and realistic tailings management option, would
be a good compromise. The arsenic issue is not only a metallurgical but also a
marketing concern, and a solution for the arsenic deportment and management
must be firmly established before operations commence.

2. Separate EMB from MGB

Within the current structure of the DENR, the agency responsible for giving and
supervising mining tenements (MGB) and the agency responsible for managing the
environment (EMB) report to one Secretary. Thus, while mining projects require an
ECC, it only becomes one requirement among several others before a mining project
goes forward. As the Secretary of the DENR is typically a political appointee, it is
possible to have a situation wherein a project with poor environmental credentials
still goes ahead if the mining proponents have political clout.
PROBLEMS AND SUGGESTED SOLUTIONS 21

Having an independent EMB analogous to the Commission on Audit

strengthens the protection for the environment: if a project is found, ab initio, not
to be environmentally responsible, then it cannot advance even with a very positive
NPV. If a mining company employs the ‘backward’ approach outlined earlier, then
it will emphasize acquiring a genuinely effective ECC. This system will only work,
however, if the EMB management comprises genuine scientists and not simply
environmental advocates with no rigorous scientific background and training.
Too often, after an ECC is obtained, not just for mining companies but for all
institutions, there is little follow up from the government to check if the original
conditions outlined in the ECC are being strictly followed. The EMB should not
only be an ECC giver but also an effective monitor.
There must be a need to update the value of fines levied on mining companies
for environmental violations. Some serious violations are meted only a few
thousand pesos, which is a travesty. Serious environmental violations should merit
suspension or cancellation of mining permits or ECCs, including even prison terms
for the violators.

3. Revenue Sharing: An In-depth Study Needed

An overriding principle in revenue sharing is transparency, so as to reduce

discretion given to regulators that could be a potential source for corruption. One
important recent initiative is the Extractive Industries Transparency Initiative
(EITI), which aims to make mining and other resource companies transparent
in declaring financial and resource values. Requiring all mining companies to
participate in EITI is a big step. As it is, many sectors claim that the current 2%
excise tax on mineral products (and 5% on those in mineral reservations) is too
little, considering that the State owns the minerals. Mining companies, on the other
hand, contend that they pay many other taxes, such that the sum total of their taxes
make them heavily taxed.
At the root of this problem is that mining companies can have very different
business models. Most nickel companies, for example, ship their ores directly;
gold companies process their metal completely; and copper miners process them
into concentrates and export the concentrates (except those selling to Philippine
22 MINING IN THE PHILIPPINES

Associated Smelting and Refining Corporation-PASAR). The varying levels of

integration suggest that different approaches should be taken, but this is not so
straightforward. One version calls for a simple increase in taxes after net income.
An exhaustive study that considers these complexities and strikes a balance in
imposing taxes is needed—too many taxes will kill the industry whereas too little
gives windfalls. But in fact, such windfalls do not often consider the costs borne by
the mining and exploration companies during exploration and development that
need to be recovered. An important comparison in studying this issue is the Service
Contract concept employed by the Energy Department, which has been a stable
vehicle in granting resources in oil, gas, geothermal, and coal. Perhaps a variation
can be adopted for the minerals sector.
As one example, the terms for the FTAAs should be laid out completely. FTAAs
allow foreigners almost 100% equity, similar to Service Contracts, because of
the level of investments needed. Confidentiality should not be a factor because,
first, the tenements cannot be stolen and transferred, second, the state owns
the minerals and should be given its rightful share and, last, the people must be
informed of the proceeds, much like a government project is required to publicize
details of its financial transactions. There are only two FTAA contracts in operation
(OceanaGold and FCF Minerals Corporation), so their financial arrangements can
be models for future projects.
In addition, since mining companies are often given tax holidays, the MGB and
Department of Finance (DOF) should ascertain that these companies do not high-
grade the richer ores during the tax-free times, otherwise there will be little left
for the government when the lower-grade and revenue ores are mined during the
implementation of taxes post-holiday. The use of income tax holidays as a policy
should be studied; few other countries provide this incentive and it may tempt
mining companies to selectively mine high-grade ores during the tax-free period.
Finally, even as the government is trying to secure its rightful share of revenues
from mining, it must also investigate losses due to underreporting and transfer
pricing. Such may be the case in direct-shipping nickel ores where the pricing is
arbitrary, unlike trades involving pure metal, which are governed by the London
Metal Exchange (LME) prices.
Insights into the occurrence of transfer pricing come from presentations made
by George Bjutor, illustrated in the following figures:
PROBLEMS AND SUGGESTED SOLUTIONS 23
24 MINING IN THE PHILIPPINES

The Philippines earns less from its mining exports because many are not
processed. If one only sells ore, the payability (the amount paid as a percentage
of the pure nickel price) is low simply because the ore is unprocessed. Copper
concentrates or gold doré are already considered semi-processed. In the case of
copper, the grade of a typical copper mine in the country of, say, 0.3% is concentrated
to 25-30% in the concentrates. That, therefore, calls for a higher payability of the
copper in the concentrate.

4. Increase the Revenue Share of Local Governments and

Allow Mining Companies to Pay the LGUs Directly

Although mining only occurs in only 0.3% of the country while contributing
1% of the GDP, the government has done very little for the mining areas simply
because they are hard to reach. Very often in mining communities, the mining
and exploration companies provide the roads, schools, and health centers for their
PROBLEMS AND SUGGESTED SOLUTIONS 25

workers and local communities that were not or could not have been provided by
the government.
Revenues from excise taxes should be shifted substantially towards the LGUs
(more than 50%) and away from national government. The LGUs bear the brunt of
the impacts of mining and they should proportionately share more in the sharing of
tax revenues. This is an application of subsidiarity in the distribution of needs. The
sharing itself, even more importantly than the actual percentages, must be done
immediately, so as to have temporal cadence in the disturbance of mining and its
benefits to the people most affected.
It has been documented that the LGU share of the excise taxes often takes years to
be remitted, giving the impression that mining does nothing for the local residents
and, politically, for the local leaders who have to answer to their electorates. An
exemption should be studied and granted to mining companies similar to that
granted to firms in special economic zones that are allowed to pay taxes directly
to the local government units. A solution, hopefully done by executive order, is to
permit mining companies to directly pay LGUs their share of the excise tax and
also to increase the LGU share of the excise tax.

5. Encourage Value-Adding and Vertical Integration

of the Mineral Industry

Since minerals are part of the national patrimony, the State must employ means
to maximize the benefits from resource exploitation. This could mean giving
incentives for firms to produce higher-value mining products.
Some have highlighted the absence of an indigenous steel industry, whose
potential is evident in the example of Japan. At the beginning of the 20th century,
Japan had been an exporter of raw ore. It decided to produce its own steel and
copper by constructing its own smelters and quickly became a world power. To
produce stainless steel, the main ingredients are iron, nickel and chrome—the
Philippines possesses these elements in abundance. The Philippines is the largest
source of nickel in the world at the moment (while Indonesia completes its nickel
processing plants) and also possesses extensive chromite deposits. Its substantial
black sand deposits could be a source of iron.
26 MINING IN THE PHILIPPINES

The ingredients are only one part of the puzzle: one must wonder why Australia
and Brazil, who are the are top exporters of iron ore (in the billions of dollars)
to China, also sell unprocessed ore. It may have to do with what economists call
comparative advantage. China has cheap power and relaxed environmental rules,
and for as long as they can get iron ore from a number of sources, it will be difficult
for Australia, as one example, to grow its steel industry and compete. Value adding
should also be financially feasible.
For the Philippines, the main hurdle for an indigenous steel industry is the cost
of power. With our cost of power among the highest in the world, producing local
steel would make it more expensive than importing from China, which has a glut of
steel production. Moreover, for the Philippines to produce its own steel, it will have
to make adaptations to supplement technical issues, such as using black sand as
iron ore and sourcing coking coal (which will have to be imported). Perhaps we can
learn from Taiwan, which has its own successful steel industry despite importing
all its raw materials.
George Bjutor illustrates well the need for value-adding in the following graph:
PROBLEMS AND SUGGESTED SOLUTIONS 27

6. Exotic Elements and Black Sand: The Scandium Story

Our research at UPNIGS has highlighted some possible additional elements that
could be derived from Philippine ores given the right procedures.
Because of the rise in the market for nickel laterites, some research in the past
decade has highlighted other elements that could be accompanying nickel, whose
occurrence in these ores range from 0.8% - 2%, and are imported mostly by China
as feed for their blast furnaces. Foremost among them is the element scandium, a
rare-earth element. The pure metal price of scandium at $170/gram makes it more
expensive than gold, but this is probably because there is so little of the pure metal
produced. The technology is just starting to catch up on more extensive applications
of scandium in high-performance batteries, aircraft construction, etc.
Pioneering work in the Philippines by Dr. R. Santos and Japanese colleagues
showed the potential of scandium in nickel laterite ores, and we have extensively
studied the mineralogy and geochemistry of these ores. The Department of Science
and Technology (DOST) has funded research aiming to quantify scandium and
all other rare and precious elements in exported nickel ores, which reach up to 30
million metric tonnes per year. The main objectives of our study were to determine
the baseline concentrations of scandium in most nickel mines in the country
and, based on these concentrations, give the supporting data to metallurgists and
materials scientists to figure out the best and economic way of recovering the metal.
Because most of the exported nickel ores to China are used in blast furnaces, there
is little reason to believe that the Chinese are recovering scandium from our nickel
ores. However, preliminary findings (e.g., K. Sanematsu, personal communication)
suggest that in acid dissolution experiments, the scandium is correlated to iron
contents. These preliminary data suggest that the high-pressure acid leach (HPAL)
method currently employed by two plants in Palawan and Surigao, by companies
affiliated with Nickel Asia and Sumitomo Metal Mining, have the best chance of
recovering Scandium alongside Nickel in their operations. It remains to be seen
whether scandium can be mined and recovered on its own, so its present economic
feasibility is providing an additional income stream to an HPAL operation. Some
other materials science approaches for scandium recovery are being undertaken
(e.g., L. Abad, PNRI) but these are still in the nascent stages.
If scandium were to really become an important element in the mining
28 MINING IN THE PHILIPPINES

industry, a potential hint where it could be enriched could be in the high-iron,

low-nickel ores, which are often considered waste material in nickel operations.
Another element present in nickel ores, and being recovered, is cobalt, which is
an element with a bright future because of its extensive use in high-tech batteries.
Cobalt is recovered by the two nickel processing plants in the country because they
process the nickel ores through HPAL, which allows them to create special streams
for cobalt recovery. This method can also be used to recover scandium from the
nickel ores. Even if capitalization is high, HPAL or related processes should be
encouraged for nickel ores in the Philippines because through it, iron, scandium
and even cobalt can be recovered, in addition to nickel. These trace elements should
add to firms’ income streams and serve as a reward for value-adding.
Data on actual black sand production in the country are sparse because most
black sand mining operations are undertaken with permission from LGUs.
Moreover, oftentimes black sand miners call their operations “dredging” when
in fact the occurrence of magnetic separators in vicinities where black sand
mining occurs strongly suggest that magnetite mining is being undertaken. The
PROBLEMS AND SUGGESTED SOLUTIONS 29

mining statistics for black sand is spotty at the MGB because the majority of black
sand mining permits are issued by local governments who do not impose strict
reporting and environmental compliance. Black sand is predominantly magnetite,
which can be used in steel manufacture. We have also undertaken a survey of black
sand occurrences in the country and, with the exception of the Cagayan Valley
area where we could not sample because of security issues, the samples suggest that
black sand could be a substantial source of raw material for iron. This is shown in
Figure 13.
30 MINING IN THE PHILIPPINES

Conclusions

Mining is important, as what cannot be grown has to be mined. Mining products

pervade our daily lives and cannot be avoided without a lifestyle (very abrupt!)
change. Responsible mining is possible, but it will require self-policing among
mining companies and vigorous and complete implementation of mining law by
government agencies.

1. Mining occurs in less than 0.3% of the total land area in the Philippines.
While exploration applications cover 40% of the country, many no-go zones and
uneconomic mining conditions prevent mining activities. The Philippines is not
comparable to Nauru, where mining occupied up to 75% of their land area.

2. While mining contributes less than 1% to national GDP and employment,

its occurrence in equally less than 1% of the land area means simply that where
mining occurs, it is very significant. Mining comprises the most important
economic activity in MIMAROPA & CARAGA, where its contribution is around
20% of GDP.

3. The vast majority (up to 80%) of gold production of the country is produced
by small-scale mining, which is plagued with the use of harmful mercury, non-
payment of taxes, employment of children, non-rehabilitation, many fatal accidents,
and is perceived as the face of mining. This is the real problem in mining that needs
resolution. Its resolution should include non-harmful gold recoveries palatable to
small-scale miners but also strong political will to stop harmful practices. This is
where a Duterte moment is needed.

4. All the minerals in the Philippines are owned by the state. The current
sharing of revenues needs review in view of different metals requiring different
mining methods, different levels of integration, and different marketing methods.
MGB, EMB, and DOF need to be empowered to understand deeply the nuances of
mining so as to assess the right revenue mix.

5. The share of mining revenues must shift in favor of the majority going
PROBLEMS AND SUGGESTED SOLUTIONS 31

to the local governments because they host the minerals, and their remote access
means they were not cared for properly by government until mining operations
began. Mining companies must also be allowed to pay taxes directly to LGUs to
establish cadence between the impact and rehabilitation and its earnings.

6. Eventually MGB and EMB need to be separated, but both have to be

staffed with the best and best-paid people. An independent EMB can guarantee
that environmentally, non-viable projects do not even begin, unlike the current
situation wherein only one Department and Secretary run contradictory functions
of permit-giving and policing.

7. Research funding must be maximized in order to address the following

subjects:

a. Determining the occurrence of other valuable elements such as

scandium in directly exported ores;
b. Developing the processes needed to vertically integrate downstream
processes that add value in mining operations;
c. Reducing environmental impact; and
d. Studying the health effects of mining operations.

8. Use the current mining audit not only to determine compliance of

mining companies, but also to determine cases of collusion and corruption within
regulatory agents and, especially, to look into allegations of transfer pricing in the
sale of nickel ores.

9. The recent attention given to mining companies should force them to

cleanse their ranks, exceed compliance and demonstrate visibly that responsible
mining is really possible.
32 MINING IN THE PHILIPPINES

The views in this paper are the sole responsibility of the author, but I must
acknowledge “mining” ideas from Roger Laraya, George Bjutor, Glenn Noble, Louie
Jacinto, David Brett, Prof. Dr. Carsten Drebenstedt, Guillermo Balce, Rolly Pena, and
many others.
This study was not funded by mining companies nor by the Chamber of Mines,
and a lot of the data gathering came from our own funded research. The Department
of Science and Technology (DOST) funded our research on black sand and scandium,
and is gratefully acknowledged. The Senate Office (Blue Ribbon Committee) of
Senator Richard Gordon has also granted supplementary research funding for our
trace element work, for which we are thankful.

- Dr. Carlo A. Arcilla

 ACKNOWLEDGMENTS

The Stratbase ADR Institute gratefully acknowledges all those who have extended
their support, cooperation, and commitment in the development of this project.
This publication would not have materialized without their help.

We are fortunate to engage with insightful persons from different sectors, namely:
the academe, public and private sectors, as well as civil society organizations, who
have shared their expertise and have actively contributed to discussions in various
fora.

We would also like to thank Prof. Victor Andres ‘Dindo’ Manhit, President of
the ADR Institute, for his leadership, vision, and guidance in making this endeavor
possible.

Last but not the least, we would like to thank the following for their hard work
and dedication, and for working tirelessly towards the completion of this project:

Deputy Executive Director for Research, Ms. Angelica Mangahas and Senior
Research Associate, Ms. Weslene Uy, who both served as editorial staff.

Our design consultant, Ms. Carol Manhit, for the publication lay-out and cover
design;

And the rest of the ADRi team headed by Executive Director, Atty. Katrina
Clemente-Lua, Deputy Executive Director for Programs, Ms. Ma. Claudette
Guevara, Program Associate, Ms. Vanesa Lee, and External Affairs and Social
Media Associate, Ms. Krystyna Dy.
 
 ABOUT THE AUTHOR

Dr. Carlo Arcilla is a licensed geologist and professor

of earth sciences at the National Institute of Geological
Sciences, University of the Philippines. He is a product
of public schools, from elementary schooling in Virac,
Catanduanes, to the Philippine Science High School
in Diliman. He earned his BS in Geology (cum laude)
from the University of the Philippines and obtained a
Fulbright scholarship to complete a Masters and PhD
in Geotechnical Engineering and Geosciences from
the University of Illinois at Chicago.

Dr. Arcilla worked for Atlas Consolidated Mining and

Development Corporation as a geologist but has also contributed significantly in
environmental work, notably as the Chief Scientist for Makati that documented the
worst pipeline spill in the country. He has been called to testify as amicus curiae of
the Supreme Court in several environmental cases. He was also Philippine expert
witness in the arbitration case of the Philippines versus Baggerwerken filed at
the World Bank in Washington, DC; this case referred to the cancellation of the
fraudulent contract to dredge the Laguna de Bay.

He has conducted pioneering research in carbon sequestration by mineralization in

the Philippines, in cooperation with Japanese and European scientists. This research
demonstrates the substantial trapping of carbon dioxide by natural processes in
areas in Tarlac, Pangasinan, Zambales and Palawan.

Dr. Arcilla also built the Earth Materials Science laboratory at UP NIGS to be one of
the most modern analytical laboratories in the country. This laboratory has trained
dozens of students and works in the service of government and private agencies.

He has been consulted by several mining companies for their mineral and economic
geology work in connection with listing on the Philippine Stock Exchange. He is
one of the few Competent Persons in Geology accredited by the Securities and
Exchange Commission to evaluate mineral projects under the Philippine Mineral
Reporting Code. He was considered Most Outstanding Geologist by the Philippine
Regulatory Commission and also received the PRC’s highest award, the Eric Nubla
medal for the Most Outstanding Philippine Professional, in 2014.