Short-Term Risk Assessment Analysis

Political Risk Assessment

Navigating Political Risk in the
Philippines Mining Sector
Prepared by the Leadership & Democracy Lab, Western University
Published December 2018

Leadership & Democracy Lab, University of Western Ontario Page 1

Table of Contents

Executive Summary 4

Background 5

Regulatory Risk 6

Community Risks 7

Significance 8

Mitigation Strategies 9

Citations 10

The Leadership and Democracy Lab publishes democratic analysis and leadership profiles
throughout the year. The Lab is focusing on industry, regional, and leadership democratic
transitions and will reporting short but substantial publications relating to key areas of issue with a
specified approach. These reports are intended to give corporations and individuals a short-term
risk assessment by exploring the probability of a variety of outcomes to a variety of political conflicts.

Navigating Political Risk in the Philippines Mining Sector Page 2

 Leadership and Democracy Lab
Western University
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Generated By London, Ontario Canada, N6A 3K7
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http://www.democracylab.uwo.ca/
Democracy Lab Faculty Director
Dr. Peter Ferguson Published December 2018. All rights reserved.

Page 3 Navigating Political Risk in the Philippines Mining Sector

Executive Summary
Currently referred to by many as the next
‘economic tiger’ of Asia, the Philippines has rebounded
from previous periods of chronic instability, notably during
the 20-year rule of Ferdinand Marcos that ended in 1986.1
Since then, despite several coup attempts, and struggles
with corruption and low-level violence, reforms have
resulted in growth even throughout the global financial
crisis. Notably, the country has seen a surge in foreign
direct investment and GDP growth over the last decade,
evidenced by a further 6.7% increase in GDP in 2017,
making it one of the strongest performers in the
Association of Southeast Asian Nations (ASEAN) and
among major East Asian developing economies including
China, Indonesia, Thailand, Malaysia and Vietnam.2

Yet, when mining investors study the Philippines,

they often make note of its wealth of untapped mineral
reserves. In fact, while the Philippines is the fifth most
mineral-rich country in the world and among the top
producers of gold, the sector makes up less than 1% of the
country’s economy, based on data from the Philippines’
Mines and Geosciences Bureau (MGB). 3 Indeed, mining
has proved to be a deeply contentious issue in the
Philippines, and the last few years have been particularly
difficult for the mining industry as the country has been
negatively impacted by mining disasters and large scale
reforms brought by the administration of Philippines’
President, Rodrigo Duterte. To a greater or lesser degree,
all infrastructure projects are at risk from governments
legitimately changing regulations or policies which may
increase the operating costs of a business, reduce the
attractiveness of an investment decision, or change the Figure 1: Mine/Project Location Map
competitive landscape of an industry. However, the
growing global demand for gold means that mining
companies cannot shy away from challenging operating
environments amid political and regulatory risk.

Therefore, as one of the fastest growing gold producing companies in the world, it is not only important for B2Gold
to be fully aware of the political risks that they face in the Philippines, but they should also understand what causes these
risks and how they can be mitigated. Particularly, with B2Gold’s Masbate Gold Project located on Philippines’ Masbate
Islands being the Philippines’ largest operating open-pit gold mining project and one of the company’s largest revenue
and production sources,4 challenges resulting from political and regulatory risk can present significant operating and
revenue constraints.

This report highlights the top two political risks, each of which impact mining firms investing in the Philippines:

– Regulatory Risk: Conducting mining operations in a country with an unpredictable mining jurisdiction with
significant changes to policies and regulations.

– Community Risk: Controlling actors and issues such as community opposition mainly due to environmental
concerns associated with mining.

Navigating Political Risk in the Philippines Mining Sector Page 4

 Background
Since his election to the Presidency in 2016,
President Duterte has been unorthodox in seeking to
institutionalize government reforms and enact a populist
agenda. Given these expectations, Duterte has been
nicknamed “The Punisher,” as he sought to swiftly combat
some of the country’s extensive problems, including
widespread corruption and elitism, inefficiency in the
bureaucracy, income inequality, and establish law and
order.5

Most recently, the Philippines’ mining industry has also

been targeted by President Duterte’s administration which
has had a negative view on the effects of mining in the
country, in which the President highlighted the ‘predatory’
nature of mining firms, and argued that it was an injustice
that the ‘true winners’ of the industry were the elite instead
of local communities.6 Notably, President Duterte first
appointed environmentalist Regina Lopez as Secretary of
the Department of Environment and Natural Resources
(DENR), an indicative sign of his determination to change
the industry. The office is currently held by Roy Cimatu, after
the rejection of Lopez by the Commission on Appointments
amid issues over her controversial policies and alleged Figure 2: Risk and Mitigation Table
incompetence in May 2017.

Page 5 Navigating Political Risk in the Philippines Mining Sector

Regulatory Risk
ENVIRONMENTAL REGULATION
Arguably, the most pressing political risk facing the
Philippines’ mining industry is conducting mining operations
in a country with an unpredictable mining jurisdiction with
significant changes to policies and regulations, and the last
few years have been especially difficult for the Philippine
mining industry. Unlike other industries, the government
holds significant leverage in mining jurisdiction since it
ultimately owns the rare and finite mineral resources.
While the previous administration tried to attract
investments in mining, President Duterte’s government
indicated soon after his election that mining will face tough
scrutiny, sending a signal to foreign investors that policies
and contract agreements under one government may no
longer be valid under the next. Since 2016, the industry has
been under a mining crackdown led by the executive branch
of government, where former Secretary Lopez announced a
nationwide audit of all mining projects, backed by a newly
formed task force of police and army units. 7 Lopez
repeatedly adopted an anti-mining rhetoric, accusing foreign
mining companies of earning “blood money” on the backs of
local communities.8 “You kill the watershed, you kill life. You
.
Figure 3: President Rodrigo Duterte and Former Secretary of the Department of Environment and Natural Resources, Regina Lopez
Navigating Political Risk in the Philippines Mining Sector
kill the river, you kill agriculture, you kill the drinking
water,” Lopez stated during a press conference, adding
the country did not want projects that are "raping" them.9
Almost immediately, ten companies had their permits
revoked due to environmental and law violations.
Subsequently, the DENR implemented a ban on all new
open-pit mining operations and closed operations on
environmental and social grounds on more than half of
all operating mines in the country (23 of 31) in February
2017, and also cancelled contracts for 75 mining projects
still in their exploration stages.10 As a result of these swift
actions, many mining firms once accustomed to the
government’s previous support suddenly saw their
benefits taken away or even their operations suspended.
Moreover, the DENR’s audit has targeted some of the
most established miners and internationally accredited
companies, whose standards of operation and
environmental management even exceed those required
by the law, including Australia’s OceanaGold and
China’s Sinosteel, as well as local miners, Benguet,
Lepanto Consolidated Mining, and Marcventures Mining
and Development.11
Page 6
 Figure 4: Local protesters at a rally outside the Philippines’ annual mining conference.
Community Risk
LOCAL OPPOSITION TO MINING
In addition to opposition from the government and risk
of regulatory changes, the mining industry in the Philippines
also faces significant opposition from many in the community
including churches, environmental groups, NGO’s, and other
activists. Specifically, activists have been vocal in opposing
mining and energy operations which they say have
threatened the environment and would displace tribal
communities from their land.12 Similar to rhetoric expressed
by the government, large foreign mining corporations risk
being perceived as reapers of wealth while leaving host
communities to sustained poverty and adverse
environmental and health impacts brought about by large-
scale mining . While this is a community risk, it can also
become a political risk if political backlash by opposition
groups force political leaders to adopt stricter mining
regulations and policies. For example, residents of local
communities in mining towns across Philippines have
Page 7 Navigating Political Risk in the Philippines Mining Sector
previously lobbied and protested the DENR to dramatize
their opposition to mines in their community. Indeed, as
just one of many cases, mining on Manicani Island was
suspended in 2002 after complaints filed by local people,
including leaders of the Catholic Church. 13
In fact, the Masbate Gold Project is no stranger to
community backlash, having gone through intense
protests where thousands of local villagers in the Masbate
province halted initial operation of the mine in 2009 when
as many as 4,000 villagers barricaded themselves in front
of the mine site.14 While B2Gold has since made strides to
work with the local population, the situation for local
communities will continue to deteriorate as the mine
continues operation given that open-pit mining requires
large areas of land being flattened, trees and crops being
bulldozed, and constant construction.
Significance
While the DENR recently lifted the ban on accepting,
processing and approving applications for new open-pit
mining projects in July 2018 that was put in place by the
former Secretary, many of the same anti-mining sentiments
against mining are still shared by the government, and it is
also likely that Lopez was merely following orders from
President Duterte.15 Ultimately, this rhetoric comes from a
strict regard for environmental protection by the DENR,
given that the country has previously seen many mining
disasters, from toxic leaks, mudslides, land-grabbing, to
smuggling. Moreover, many investment disputes in the
Philippines and elsewhere have originated with grievances
from the local community, which in turn have created
problems with the government. Therefore, a project that
operates in a challenging political environment is far more
likely to be successful if the local community benefits from
the project.
Navigating Political Risk in the Philippines Mining Sector
Furthermore, although B2Gold was not one of the
companies affected by the ban as it was found to be in
compliance with the DENR’s environmental standards,
many firms have expressed frustration with the new
orders and the way in which they have been carried out,
arguing that their supposed violations have not been
made clear and that they were not given the chance to
address any issues. Nevertheless, uncertain
environmental standards remain a significant operating
risk for B2Gold, and the prospect of any future mining
ban or contract terminations weaken B2Gold’s ability to
expand its Masbate Gold Project. This risk is further
amplified given the large extended operating and return
periods of mining projects, so exposure to an uncertain
political climate and mining jurisdiction can be especially
risky, and in the worst case, result in project termination
or a mining ban in the country.
Figure 5: Masbate Mine in Philippines
Page 8
 Mitigation Strategies
REGULATORY AND ENVIRONMENTAL
To mitigate the risk of uncertainty in mining jurisdiction
and potential audits or bans on mining due to severe
environmental regulation, it is important that B2Gold work
closely with the DENR to maintain compliance with
regulations and continue to promote improved quality of life
and promote community development in Masbate and the
local communities where the mine is operated in. As a
result, B2Gold should continue committing to achieving
industry-wide best practices and ensure that the Masbate
mine continues to comply with the terms of the DENR’s
environmental regulations. Moreover, given B2Gold’s
current industry leading standard of environmental
protection, B2Gold can work with the DENR to adopt
Canadian standards and leverage B2Gold’s experience as
industry leader to set industry benchmarks and standards.
In these cases, it is best to work with local partners and
experts who have close links to the political elite, enabling
them to help navigate the complexity of Philippines’
bureaucracy and political environment. Furthermore, in
addition to maintaining a strong environmental protection
and enhancement program for the Masbate Gold Project,
B2Gold should ensure they have rehabilitation and
decommissioning plans to ensure environmental
protections beyond the end of life of the mine.
Furthermore, to reduce the risk of a total ban on mining
and the repeal of the Philippine Mining Act in the future,
B2Gold should form alliances with other mining companies
that comply with the DENR’s environmental regulations and
industry associations to directly lobby the DENR and
executive branch. By lobbying the government, the aim is to
collectively convey to that there are still mining firms who
are committed to sustainable development and
environmental protections, and that responsible mining can
contribute to the economy of a nation and to the welfare of
mining communities. In this case, B2Gold may need to
invest in the advancement of mining technology and
develop an information, education, and communication
program for greater public awareness and understanding of
responsible mining.
Page 9 Navigating Political Risk in the Philippines Mining Sector
COMMUNITY OPPOSITION
In order to reduce and mitigate opposition risk from
mining operations in a local community, one potential
strategy is resource sharing, by sharing as much of a
project’s infrastructure as possible with the local
population. For example, many successful mining
projects have shared their employee resources with their
local communities, and in some cases, power lines built
for projects have helped illuminate the surrounding
towns.16 While these kinds of goodwill actions may
increase operating costs marginally, they ultimately go a
long way to reducing the political risks that can arise in a
hostile environment.
Alternatively, if the Masbate Gold Project does
not allocate any revenue sharing to the local community,
then the project will certainly come under increased
pressure to provide education, health and social
programs to the community. Therefore, it is also
recommended that B2Gold use Corporate Social
Responsibility (CSR) programs such as educational,
social and environmental initiatives, to not only create a
lasting positive impact on the community, but also act as
an effective way to mitigate project disputes. For
example, employment opportunities are the most
obvious benefit to the local community, and mining
companies should hire locals whenever possible and
consult with local community leaders while staffing their
projects. Furthermore, locals can provide invaluable and
early political feedback, and can also be the eyes and
ears on the local political climate.
Finally, it is important to maintain constant
engagement with locals, and it is recommended that
B2Gold hold meetings, either semi-annually or quarterly
with the local community in Masbate to provide feedback
on any prevailing issues. In these cases, local, regional
and national stakeholders should be invited and senior
management should be represented so issues can be
heard and addressed directly, instead of through third-
person.
Citations
1 “East & Southeast Asia: Philippines,” The CIA World Fact Book, https://www.cia.gov/library/publications/the-world-
factbook/geos/rp.html.
2 “World Bank national accounts data,” The World Bank Group, 2017,

https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=PH.
3 “Philippines' Duterte orders reforestation, threatens open pit mining ban,” Reuters, April 9, 2018,

https://www.reuters.com/article/us-philippines-mining/philippines-duterte-orders-reforestation-threatens-open-pit-mining-
ban-idUSKBN1HG1EP.
4 B2Gold, Masbate Mine – The Philippines, http://www.b2gold.com/projects/producing/masbate/.
5 “Philippines' Duterte orders reforestation, threatens open pit mining ban.”
6 Robert Veldhuizen, “Green dreams: Duterte and the Philippine mining industry,” Global Risk Insights. November 7, 2016,

https://globalriskinsights.com/2016/11/green-dreams-duterte-mining-industry/.
7 Andreo Calonzo, “Duterte’s Mining Crackdown Is Keeping the Metals World in Suspense,” Bloomberg, March 26, 2018,

https://www.bloomberg.com/news/articles/2018-03-27/philippines-starts-review-of-26-suspended-or-closed-mining-sites.
8 John Chalmers and Manolo Serapio Jr, “Eco-warrior lays waste to Philippines’ mining industry,” Reuters, February 9, 2017,

https://www.reuters.com/article/us-philippines-mining-minister/eco-warrior-lays-waste-to-philippines-mining-industry-
idUSKBN15O337.
9 “Saying mining is 'raping' us, Philippines minister continues crackdown,” Deutsche Welles, February 14, 2017,

https://www.dw.com/en/saying-mining-is-raping-us-philippines-minister-continues-crackdown/a-37540240.
10 Claire Jiao, “What’s stopping the Philippines from mining its riches?” South China Morning Post, March 19, 2017,

https://www.scmp.com/week-asia/business/article/2074698/whats-stopping-philippines-mining-its-riches.
11 Ibid.
12 John Ahni Schertow, “Philippines: Thousands Protesting Open Pit Gold Mine,” Intercontinental Cry, March 23, 2009,

https://intercontinentalcry.org/philippines-thousands-protesting-open-pit-gold-mine/ .
13 “Residents of Philippines mining town protest reopening of coal mine,” CRUX, November 20, 2017,

https://cruxnow.com/global-church/2017/11/20/residents-philippines-mining-town-protest-reopening-coal-mine/.
14 John Ahni Schertow.
15 Joel Adriano, “Mining ban raises risks in the Philippines,” Asia Times, March 1, 2017,

http://www.atimes.com/article/mining-ban-raises-risks-philippines/.
16 Jim Thomas, “Political risk in the mining sector: Understanding and mitigating the perils,” Zurich Insurance Company

(2014), 3, https://www.zurichcanada.com/_/media/dbe/canada/knowledge/docs/english/credit-political-
risk/political_risk_mining_eng.pdf.

Page 10 Political Risk Assessment: Mitigating Foreign Investment Risk in Uzbekistan