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Southeast Asia May 26, 2006

Philippines' mining down in thedumpsBy David L Llorito

MANILA - These should be boom timesfor the Philippines' mining industry,given that the country has some of theworld's biggest under-exploited depositsof copper, gold and to a lesser degreenickel, and commodity prices are athistoric highs. Instead, a toxic spill at anAustralian-run mine has the entireindustry in turmoil, with powerfulpolitical interest groups calling for atotal ban on mining activities.

Mining opponents, including the CatholicChurch, nationalistic politicians and non-governmental organizations (NGOs),

have recently taken hard aim at atailings spill on Rapu-Rapu Island, whereseepage of toxic metals allegedlypolluted fishing waters. An independentcommission submitted a 169-pagereport to the government last Fridayurging it to stop all mining in the area,revoke Australian mining concernLafayette's Environmental Compliance

Certificate (ECC), and force thecompany to pay damages.

Philippine President Gloria Macapagal-Arroyo on Saturday declined thecommission's request to ban all miningactivities, though she has promised to

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study carefully the report's variousother recommendations, including areview of the 1995 Mining Act'sprovisions for foreign participation and

management. Lafayette has dismissedthe commission's findings as"unscientific and flawed", while otherPhilippines-based mining executiveshave questioned the ad hoc body'sindependence.

The whole affair has greatly underminedinvestor confidence in the Philippinemining-policy regime. Hundreds of

millions of dollars' worth of proposednew mining projects have recentlystalled because of foreign investor andbank reservations about the legal statusof their established and plannedinvestments.

Liberal on paper, restricted inpractice

On paper, the Philippines has some ofthe region's more liberal mining codes,including the Mining Act, which allowsfor 100% foreign-equity participationthrough so-called financial and technicalassistance agreements with localminers. Challenged by nationalistpoliticians, the Supreme Court upheldthe Mining Act as recently as December2004.

However, the lingering memories of the1996 Marcopper mining disaster onMarinduque Island, where toxic pollutionspoiled fishing waters and causedhealth problems among local villagers,

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still casts a long shadow over the entireindustry. So does the government's poorrecord of handling and distinguishingbetween minor and major

environmental incidents.

Manila has nonetheless actively soughtnew foreign mining investments,offering a wide raft of tax and non-taxincentives to potential investors andcreating the Mineral DevelopmentCouncil to help foreign investors cutthrough red tape and quickly begindigging. The government has said it

expects mining to generate betweenUS$5 billion and $7 billion annually inforeign exchange and to create as manyas a quarter of a million jobs over thenext six years.

It doesn't always work that way on theground, however. Strident, widespreadopposition from local-level activists and

the Catholic Church are underminingthe government's efforts to attract moreforeign mining-oriented investment.When local mining companies backedby Canadian, Australian and Japaneseinvestors recently started probingaround local communities forundiscovered deposits of preciousmetals, they were frequently confrontedby environmentalists, civil-societygroups, and the politically influentialCatholic bishops, who togetherrepresent a formidable political forceagainst miners.

The outspoken Bishop Dinualdo

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Gutierrez of South Cotabato recentlyaccused the Tampakan Gold and CopperProject invested by Australia's IndophilResources of "environmental

degradation" and "displacement" ofindigenous peoples - even though theproject was still in the exploration stage.(According to a study by Peter Walpole,an academician-priest who has studiedthe social impact of mining in thePhilippines, to date there have neverbeen any documented cases of peoplebeing displaced to make way for miningsites.)

Similar unsubstantiated complaintshave recently been leveled against, andcomplicated the workings of, the DidipioGold/Copper Project operated byAustralian Philippines Mining Inc, the

Teresa Gold Project operated byLepanto Consolidated Mining inMankayan, Benguet, and the Canatuan

Gold Project in Siocon, Zamboanga delNorte, backed by Canada's TVI.

Those complaints, regardless of theirscientific or technical veracity, can bringmining operations in the Philippines to ascreeching halt. In 2001, protests led byNGOs, left-leaning groups and Catholicpriests forced then-environmentsecretary Heherson Alvarez to cancelthe mining rights of the Mindoro NickelProject financed by Crew Minerals, aNorwegian company. President Arroyohas only recently reinstated Crew'smining rights, after more than five yearsof lost revenues.

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Another project, the Kalaya-an GoldProject, commissioned to the ManilaMining Corp, was stymied after a

vigorous campaign led by localcommunity organizations and militantleftist groups against fearedenvironmental degradation.

The situation for foreign miners hasbecome all the more precarious since

January, when the politically influentialCatholic Bishops Conference of thePhilippines (CBCP) issued a pastoral

statement denouncing mining as a"destroyer of life", and called for therepeal of the 1995 Mining Act and theclosure of big mining operations acrossthe country.

In their statement, the bishops echoedthe sentiments of militantenvironmental groups, claiming that

mining operations often displaceindigenous peoples, gives away controlof lands to foreigners, and destroy theenvironment. "The adverse socialimpacts on the affected communities faroutweigh the gains promised by[transnational mining] corporations,"the public statement said.

The Ghost of MarcopperThe opposition movement draws heavilyon one tragic mining accident to pushits agenda. In 1996, the plug in the

Tapian pit drainage tunnel operated bythe Marcopper Mining Corp onMarinduque Island failed, unleashing 1.6

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million cubic meters of toxic miningslurries and tailings into the Makulapnitand Boac rivers. The spillage causedhealth problems among local residents

and devastated the island's ecosystems.

Ten years later, the nationalgovernment still has not decided on howbest to clean up the social andenvironmental mess, even after thecommissioning and availability ofextensive scientific and technicalstudies of the incident. The executives

of Canada's Placer Dome, which thencontrolled the Marcopper Mining Corp,have packed their bags and returnedhome unscathed.

The lack of foreign-companyaccountability has not gone down wellwith the Philippines' active and vocalcivil-society, environmental and faith-

based groups. Now, the controversyover the tailings spill at the Rapu-Rapumine operated by Lafayette Philippinesand Lafayette Mining of Australia has,rightly or wrongly, conjured up the bittermemories of Marinduque.

Mining-industry sources say theircurrent headaches started last October,when a pump at the Rapu-Rapu minesfailed, causing the overflow of cyanide-laden tailings into nearby creeks, killingabout 2 kilograms of fish. About threeweeks later, a heavy six-hour raincaused the tailings pond to overflowinto the nearby Ungay and Hollowstone

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creeks, this time killing 15kg of fish.

"It was really a minor incident, a drop inthe ocean," said Benjamin Philip

Romualdez, president of the Philippines'Chamber of Mines.

A Mines and Geosciences Bureau (MGB)source said, "The total volume of thetailings released in the two incidents is

just about 20 cubic meters. It's justabout a truckload. It's nowhere near thescale of the Marcopper mine tailingsspill."

Regardless, the government hascontended that Lafayette Philippineshas violated some of the conditions ofits original ECC. On January 6, thePollution Adjudication Board (PAB)slapped the company with a P10.7million ($210,000) fine for threedifferent ECC violations.

To resume operations, PAB saidLafayette Philippines must submit anenvironmental-management system orISO 14001 certification, implement acomprehensive pollution-controlprogram, put up a surety bondequivalent to 25% of the total cost ofthe pollution-control program, and hirea full-time pollution-control officer.

The Rapu-Rapu incident occurred inOctober, notably at the same time thegovernment and Chamber of Mineswere actively pursuing new foreignmining investments as part of a state-

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led job-creation scheme. Arroyo at firsttried to ignore the Rapu-Rapucontroversy, but as the protests andmedia coverage became more

widespread, Arroyo finally acquiesced tothe political pressure.

On March 10, Arroyo announced thecreation of an allegedly "independentcommission" to investigate the healthand environmental impacts of the twintailings spills. The commission was to beheaded by Bishop Arturo M Bastes, awell-known opponent of the mining

industry. In a surprising move, Arroyo,politically embattled over allegationsshe had attempted to rig nationalelections, also announced acongressional review of the Mining Act,a statement that immediately sentshock waves through the foreigninvestment community.

"It's not good news for the Philippines asthere is a perception now that policy isgoing the other way," Ted Leschke,mining analyst with Shaw Stockbrokingbased in Sydney, was quoted as sayingin the Malaya newspaper. "From ageological standpoint, the Philippines isA-1. But if they keep changing things,miners will go to Mongolia orsomewhere else."

Sean Georget, executive director of theCanadian Chamber of Commerce of thePhilippines, told Asia Times Online thatthe Philippine Mining Act comparesfavorably with similar mining legislation

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in Canada, Australia and the UnitedStates. "What is there to review? If yousay you are going to review the law, youare putting uncertainty into the policy

landscape."

Foreign banks exposed to the industry,including NM Rothschild & Sons(Australia), ABN AMRO Bank NV(Australia), Australia and New ZealandBanking Group Ltd, Investec Bank(Mauritius) Ltd, and Standard CharteredFirst Bank Korea Ltd, have alsoreportedly been shaken by the

possibility of a policy flip-flop.

The growing uncertainty surroundingPhilippine mining comes as the industrywas clearly re-emerging from theMarcopper Marinduque Island debacle.A total of 17 metal mines wereoperating across the country in 1997,but because of the fallout of the

Marcopper incident, that number wasdown to seven by 2002, according tostatistics provided by the PhilippineEmbassy in Washington.

Since then, however, mininginvestments have steadily increased,reaching $345 million and employing7,000 workers by the end of 2005.Romualdez said that as of this month,total "on the ground" investments havereached about $500 million, and thatanother $2 billion in so-called"announced investments" are in thepipeline.

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The Chamber of Mines also said in a recent statement that by

continuing to allow foreign investments in mining, the industry

would in the coming years ensure the inflow of $10 billion into the

economy through the expansion of existing projects and the

operation of new ones. However, with a pending congressionalreview of the Mining Law, many of those promised projects have

stalled or have failed to secure the necessary foreign financing

needed to commence operations, according to MGB officials.

Political mine shaft

Last Friday, Bastes presented his report to Arroyo at a closed-door

meeting in the presidential palace. Sources inside the Bastes

Commission said the final report echoed the PAB's findingsagainst Lafayette and, in an extreme measure, called for the

cancellation of Lafayette's ECC. The report also reiterated calls for

a congressional review of the Mining Act, especially the provisions

allowing for greater foreign-equity participation.

Cancellation of Lafayette's ECC would mean that the company

could not resume operations and would be forced to close shop -

an outcome that industry sources contend would scare offresident and potential new foreign investors.

"It's really up to the Department of Environment and Natural

Resources [DENR] now. But how could 17kg of dead fish force the

closure of a multimillion-dollar project that is benefiting more than

a thousand workers and the community in terms of social

development projects?" asked one mining executive. "All [the

fact-finding commission] had in the report are pure allegations.They haven't built a case against the company."

Indeed, in a statement this week Lafayette challenged the

scientific accuracy of the Bastes Commission's allegations that

the company caused mercury contamination of coastal water

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areas, saying that, in fact, the company does not use any mercury

in its production processes.

Still, the threat of closure compounds the company's daily losses

suffered by their padlocked operations. The firm claims it hasalready hired an independent group of mining and engineering

experts to help it comply with the requirements of the PAB.

Since early this month, Lafayette's managers have repeatedly

asked the government to allow it to conduct test runs and

eventually resume normal operations. The DENR, however, did

not act on the company's request because at the time it was still

waiting for the results of the Bastes Commission's investigation.It's still altogether unclear what the department will do next now

that the report is in hand.

"If the restart of the project is subjected to further delays, despite

having completed all the required remedial measures, [it] may be

forced to close," said Lafayette's Manny Agcaoili. He claims that

the company is bleeding about $2.7 million each month in

overhead costs and about $13 million in forgone revenue.

"Investment losses would amount to $259 million in terms of bank

loans, shareholder advances, and bank hedging exposures. Loss

of employment ... would be approximately $1,000 ... Now the

company fears that its creditors might foreclose on their dormant

operating assets." Not exactly the sort of financial result that

Lafayette had in mind when it signed up, at the government's

invitation, to tap the Philippines' rich bounty of natural resources.

David Llorito is a researcher at the BusinessMirror, a Manila-

based daily newspaper. He has more than a decade of experience

in socioeconomic research, policy analysis, and business-

economy journalism in the Philippines.