Philippine Resources February-April 2011

Philippine Resources Mining and Petroleum Journal February - April 2011

Nido drills Gindara after Tindalo flop

Down Under bonanza for Filipino

We’re a bad risk but getting better

Minefield of misinformation

Full speed ahead after CDC IPO

Current Resources February - April 2011 www.philippine-resources.com

Headlines in this issue 14

26

22

32

Resources Viewpoint

Renewable Energy Resources

Legal Resources

Mineral Resources

6 8

10

14

14 16 16 16 18 18

20

21 22 23 24 25 25

Facts vs misinformation

The precarious balancing act between RE and fossil fuel power A minefield of misinformation and changing rules of business

A minefield of misinformation and changing rules of business Nickel Asia heading for the major league Optimism growing at Taysan Nickel miners Nihao & ORVI expanding Leyte magnetite hunt ‘promising’ ENK fast-tracking Acoje after Turkey setback OceanaGold ‘back on track’ at Didipio

International Resources

Resources Investment

Oil and Gas Resources

Supply Resources

Risk Management Resources

Nido switches focus to Gindara after losing hope and money at Tindalo well Companies wary about changes in rules Otto on the move in Leyte, Palawan $1 billion more for Malampaya expansion Mining to oil: TVI takes over TG World China’s Canadian deal brings LNG to Asia EDC closing drill rig unit

4 Philippine Resources

26

27

29 30 31 32 32 35 36

Filipino miner finally strikes it rich with $145 million bonanza Down Under Philippines getting better but still among the worst BoI ‘upgrades’mining incentives Survey specialist expanding in Philippines JCLI ramps it up for Gold Fields MacDow: 50 years old and still growing Deep in the mountains of Benguet Don’t take risks on insurance and security Applying the VPs to the Philippines

Resources Viewpoint February - April 2011 www.philippine-resources.com

Facts vs misinformation

Philippine Resources Mining and Petroleum Journal February - April 2011

Philippine Resources Journal is published independently for executives in the Philippine mining and petroleum industry and associated business sectors.

Publisher Elizabeth Galura Charismatic (WA) Pty Limited Consulting Publisher Greg Brimble Consulting Editor Simon Halley Advertising Sales Cora A. Laureano Design/Production Edrick Bruel Contributors Mars Buan Patricia A.O. Bunye Fernando Penarroyo ___ Manila publishing office Paseo de Roxas Bldg, 3rd Floor 111 Paseo de Roxas Legaspi Village Makati, Metro Manila Philippines Phone +632 815 8836 ___ Individual contacts Greg Brimble greg@philippine-resources.com Australia: +614 172 20759 Manila: +63949 338 3664 Simon Halley edit@philippine-resources.com Phone +63917 833 1656 Cora Laureano resources.ads@myPH.com.ph +63928 251 7280

T

he past few months have busy ones at the Mines and Geosciences Bureau headquarters in Manila. Normally a peaceful corner of the government’s sprawling Department of Environment and Natural Resources compound in Quezon City, the MGB has been a hive of activity recently.

The reason for the buzz is that this is “ground zero” in an escalating battle between the pro-mining lobby and the anti-mining activists.

This is not a new battle, of course.

But for a while there it looked like a ceasefire would take hold, with the miners pledging to be good corporate, social and environmental citizens and the antiminers keeping their voices down.

Then came the murder of outspoken journalist Gerardo Ortega in Puerto Princesa, Palawan. A media frenzy erupted, linking the killing to politics, big business … and to mining, since Ortega was an anti-mining advocate. This also coincided with the launch of the “10 Million Signatures” campaign” by Ortega and the group Bantay Kalikasan, seeking the banning of mining operations.

Suddenly the ceasefire was over.

Armed with new ammunition, the antiminers – some well-intentioned but others simply greedy – took to the street and the media again. The government was sucked into the fray, starting with President Benigno Aquino at the top and then continuing down the chain of command to DENR chief Ramon Paje and then Leo Jazareno at the MGB.

Aquino has to balance national interests, the voting public and commercial realities; Paje has to think about his environmental constituency as well as politics and business; Jazareno is the reality point man, so he and the MGB have been busy getting facts and figures together,

Edrick Bruel luovoolagallina@gmail.com Phone +63905 2684656 ___

trying to sort the facts from the misinformation, and listening to both sides.

At one particularly large forum at the MGB headquarters in February, for instance, the cars of the participants overflowed the parkland surrounding the MGB. The forum lasted much longer than expected as mining companies and their lawyers tried to sort out what was really happening in the confusion and conflicting announcements about new mining licenses, possible suspension of open pit mining and other changes in the rules.

The so-called “10 Million Signatures” campaign is a classic example of hype vs helpful. People from all over the country, both knowledgeable and not-so-aware, have been getting pass-italong emails urging them to sign up. The email contents are big on emotion, small on facts and logic. But they’re winning signatures.

No less than Gina Lopez of the powerful ABS-CBN media and entertainment group joined the fray. Lopez has several commendable environmental causes to her name but she may have let her emotions get in the way this time. In one bizarre incident, ABS-CBN scheduled a forum on mining in Palawan to be broadcast live on “ANC Presents: The Nation Up Close.” Lopez arrived at the studio to find her fellow panelists would be MGB’s Leo Jasareno and Carlo Arcilla of the University of the Philippines National Institute of Geological Sciences.

A spate of unladylike language ensued and the show was abruptly canceled. Commented one person present: “During this dialogue (inside the makeup room), Gina Lopez was asking a lot of questions regarding mining in Palawan (and mining in general), which were answered by director Jasareno and Dr Arcilla, who came very well prepared. Gina Lopez does not have any idea on mining and metals, on tenements and permits, on taxation and foreign investments. She doesn’t even know that her gold dolphin pendant came from mining.” ■

Philippine Resources Journal is printed in Manila by IPrint.

Digital online edition www.Philippine-Resources.com

6 Philippine Resources

Philippine Resources consulting editor Simon Halley went to the Mines and Geosciences Bureau headquarters for the recent forum mining forum, trying to sort out what’s really up.

Simon Halley Consulting Editor

Renewable Energy Resources February - April 2011 www.philippine-resources.com

The precarious balancing act between RE and fossil fuel power

By Fernando Penarroyo

R

enewable energy stakeholders gathered in December 2010 – for the first time since passage of the RE Act back in 2008 – at the RE Conference and Expo Manila 2010. Organized by the RE Coalition and the government’s Department of Energy, the conference brought together about 350 stakeholders.

The DoE promised conference delegates it would speed up support systems for renewable energy development, admitting that progress in the power sector has been slow. DoE Secretary Jose Rene D. Almendras said implementation of the RE Act was hobbled by delays – for instance reconstitution of the National Renewable Energy Board (NREB) took a while because the DoE consulted stakeholders rather than just taking it upon government to decide the membership of the NREB, with the objective of find the most appropriate representation for each of the stakeholder groups.

Almendras said collaboration among the Renewable Energy Management Bureau and all DoE bureaus should be fine-tuned in early 2011. Within 2011, the DoE aims to come up with renewable portfolio standards (RPS) and feed-in tariff (FiT) rates upon the recommendation of the NREB, as well as connect the

Fernando Penarroyo (pictured during an aerial reconnaissance flight over an exploration prospect in Luzon) is the managing partner of Puno and Penarroyo Law Offices (www.punopenalaw.com). He specializes in energy and resources law, project finance and business development.

8 Philippine Resources

main grid to all operational renewable energy plants.

Formulation of RPS, which will set the capacity needed from each RE technology, is set for the second quarter of 2011; FiT rates that will provide guaranteed payment to RE investors through a universal charge is also scheduled for the second quarter; while connecting the main grid to all existing renewable energy plants is targeted for the third quarter. The green energy option program is also expected to be done within the same time frame.

The DoE is reportedly tapping the help of the World Bank to come up with globally accepted FiT rates and RPS for RE projects as well as seeking the support from all sectors, including non-government organizations to be able to draw up the best FiT and RPS. The RE Coalition has invited a resource person from the World Bank who has had experience on both policy directions and the DoE plans to invite the expert to sit with the NREB and the technical working group.

The DoE expects the share of RE in the Philippines’ generation mix will probably decline in the next five years from the present 52 percent as more coalfired facilities come on stream. Secretary Almendras hopes that by 2015 all new energy requirements will come from the RE sector.

According to Almendras, the government generated investment pledges of more than 80 billion pesos (US$1.8 billion) for RE projects over the last two years—but that is a pittance against at least $40.6 billion that will be needed to secure the country’s energy requirements until 2030. Almendras wants RE developers to put up 8,000 megawatts of generating capacity by 2030 – and in the near term to work to set up between 2015 and 2016, at least 2,000-3,000 MW of RE generating capacity. He also urged RE developers to look at the possibilities and build RE generating power plants in non-grid areas.

Based on estimates of the United States Department of Energy National

Renewable Energy Laboratory, the Philippines’ RE potential stands at 247,000 MW. The RE Coalition said that while the Philippines is a member of the community of more than 100 countries that have adopted policies promoting RE use and development and is the second largest producer of geothermal energy in the world, the growth of the local RE sector still trails behind that of other countries.

In the meantime, with a looming power shortfall, the Philippine government has been aggressively inviting prospective investors to build coal-fired facilities. On the upstream side the DoE has identified prospective coal areas that could yield 1.806 billion metric tons, as the government moves to fast-track the development of this resource to secure national energy supply. The DoE will start offering prospective coal areas under the next Philippine Energy Contracting Round.

An estimated 543.9 billion pesos will be needed to develop the country’s fossil fuel resources, mainly for coal and petroleum. The DoE is expecting 2,700 MW in additional capacity from coal-fired power generation facilities between 2013 and 2015.

As a consequence, the development of RE resources, particularly wind and solar power, might slow down relative to the development of coal resources until the country’s power supply stabilizes.

Cutting the cost of RE projects is a major challenge. Despite having minimum operating costs, emerging RE technology requires relatively high capital investment.

In the meantime, existing and prospective investors in RE are keenly awaiting the proposals of the NREB on the FiT and other standards. Coming up with the right FiT and RPS is a challenge not only for the DoE but for the whole industry. With the threat of a power crisis in the near term amidst instability of energy supply and a deteriorating environment, the Philippine government must seek a workable balance between the imperative of setting a long-term goal of sourcing majority of the country’s electricity from RE sources and the need to expedite the commissioning of shorter lead-time fossil fuel-based power plants. ■

Legal Resources February - April 2011 www.philippine-resources.com

A minefield of misinformation and changing rules of business

By Patricia A. O. Bunye

T

he mining industry has taken quite a beating in media in the first quarter of 2011. The approval of the government’s 2011 Investments Priority Plan to include mining as one of 13 priority sectors (up from the previous 11)–thereby extending incentives to mining projects that are not granted under the Mining Act – has been overshadowed by publicity about a populist signature campaign against mining in Palawan as well as news claiming that President Benigno Aquino himself has heeded calls to stop the processing of mining applications in Palawan.

That the arguments and grounds for opposition of the critics of mining in Palawan are anchored on misinformation and a lack of understanding of the legal framework deserves a separate discussion.

In any event, President Aquino’s well-publicized comments that “(W)e will support whatever is the position of the communities. While they stand to economically benefit from mining projects, they are also the ones to suffer if anything goes wrong,” coupled with news reports that new mining applications will no longer be accepted or that pending applications will no longer be processed, have created the misimpression that these are again uncertain times

for the mining industry.

The moves by the government Mines and Geosciences Bureau to “cleanse” mining applications are not new. The MGB has always been vocal that at least half of the pending applications are not moving, justifying the need for “cleansing” and making the covered areas open to applications by other serious and legitimate applicants. Recent announcements on this initiative, however, have not been put in their proper context and have a resulted in a misunderstanding that there has effectively been a clampdown on mining.

In mid-February, the MGB met mining stakeholders to discuss the Department of Environment and Natural Resources’ Memorandum Order No. 2010-04 dated March 12, 2010 [“DMO 2010-04”]; DENR Administrative Order No. 2010-13 dated May 5, 2010; and DENR Memorandum Order No. 2011-01 dated January 18, 2011. Similar issues were discussed at another forum in early March held at the monthly meeting of the Philippine Mineral Exploration Association.

DMO 2010-04, entitled “Reforms in the Department Mining Tenement System,” states that a maximum time interval of 30 days between letters-notice shall be strictly followed in the implementation of the “three letters-notice policy” in complying with the requirements for

Atty Patricia A. O. Bunye is a senior partner at Villaraza Cruz Marcelo & Angangco (website www.cvclaw. com). Her areas of specialization are mining and natural resources, power and energy and intellectual property (particularly IP commercialization).

She may be reached at po.bunye@ cvclaw.com.

10 Philippine Resources

the grant of mining tenements. Failure to observe this is a ground for denial of mining applications.

The same memorandum order provides that rejection of a request for Free and Prior Informed Consent (FPIC) by the rightful indigenous peoples concerned, as certified by the National Commission on Indigenous Peoples (NCIP), shall be a ground for denial of a mining application, provided that such rejection is carried out in accordance with the NCIP’s procedural guidelines on securing the FPIC. Subject to the NCIP guidelines, the mining applicant concerned shall be allowed a maximum of two attempts to secure the FPIC from the indigenous peoples concerned.

Mining applications that have not complied with any of the following requirements shall also be denied:

• Securing the NCIP Certificate of Non-Overlap within one year and NCIP Certification Precondition within three years from the date of the NCIP’s receipt of the pertinent letter-request from the MGB;

• Securing the proof of consultation with the Sanggunian concerned within two years from the date of acceptance of the mining application;

• Completion of the publication, posting and radio announcement requirements within one year from the date of acceptance of the mining application.

With respect to mining contracts, these may be cancelled due to:

• Failure to implement the threeyear development/utilization work program or exploration work program for two consecutive years;

• Expiry of the exploration permit for five years or more.

The criteria for cleansing are found in internal memoranda of the MGB dated August 9, October 4 and October 15, 2010:

• Denial of aging mining applications [systematic cleansing based on the Continued on page 12 >

Legal Resources February - April 2011 www.philippine-resources.com

A minefield of misinformation and changing rules < Continued from page 10 age of the applications];

• Final action on 1,113 aging applications for calendar year 2010;

• Final action on 50 percent of all pending applications by December 2010.

• A moratorium on new applications over areas covered by the denied applications.

As of February 2011, the MGB reports that 53 percent of the 2,180 applications aged 10-15 years have been reviewed. Of this number, 903 have been denied and 247 have been approved/endorsed, for a total of 1,150 applications acted upon.

To further implement DMO 201004 and ensure zero backlog by December 2011, the MGB issued Memorandum Circular 2011-2 dated February 8, 2011 containing the following directives to all MGB regional directors:

• The deadlines set under Section B.3 of DMO No. 2010-04 in connection with compliance with requirements of the National Commission on Indigenous Peoples, local Sanggunians, and the posting, publication and radio announcement requirements are fixed and non-extendible. Any order issued giving mining applicants additional time to comply with these requirements is a violation of DMO No. 2010-04 and is deemed void and without effect.

• Both large-scale and small-scale mining applications are covered by the moratorium on applications covered by Item 2 of the MGB’s October 15, 2010 internal memorandum. Thus, small-scale mining applications will not be accepted in areas previously covered by denied large-scale mining applications pursuant to DMO No. 2010-04.

• Only mining applications with complete requirements will be endorsed

to the MGB Central Office in Manila.

In addition, in its Memorandum Circular No. 2011-1 dated January 18, 2011, the DENR ordered the suspension of acceptance and processing of new mining applications by all MGB regional offices.

For purposes of this issuance, “mining application” covers “any and all applications for Exploration Permit, Mineral Production Sharing Agreement, Financial or Technical Assistance Agreement and Industrial Sand and Gravel Permit.”

The mining stakeholders have made it clear that they hope the MGB, in implementing the “cleansing” process, will not only be guided by the age of the applications and the deadlines to comply with NCIP and Sanggunian requirements, but will also consider legitimate issues that mining companies may have with the NCIP or the concerned Sanggunians.

The more controversial MGB initiative is the establishment of so-called mineral Reservations and the imposition of a five percent royalty on gross revenue of mining operations on top of the two percent excise tax.

According to MGB director Leo Jasareno, there are three approaches to the establishment of the mineral reservations:

• Automatic establishment – covering all mining companies in the operating phase, upon commencement of production/approval of a Declaration of Mining Feasibility;

• Clustering approach – covering areas with clustered applications (there are approximately 15 areas across the Philippines); and

• Regular approach – pursuant to procedure under the implementing rules and regulations of the Mining Act – i.e. the MGB director recommends to the DENR secretary, the DENR secretary recommends to the Philippine president, the president issues a proclamation.

The proposed increase in royalties by five percent on revenue, while seemingly small, has potentially huge effects.

12 Philippine Resources

This proposal, while allegedly made to optimize the government’s benefits from mining, was unfortunately without consultation with industry stakeholders or consideration of its potential adverse effect on the profitability and viability of mining projects in the Philippines.

The Chamber of Mines and the Joint Foreign Chambers of Commerce have already raised their concerns to the Aquino administration, stressing particularly that a change in the financial model, particularly for mining projects in advanced stages of development, will certainly impact the overall viability of these projects. They say these projects take many years of development, with much of the required financing coming from banks and other financial institutions – and thus the proposed increase in revenue royalties not only dramatically impacts project viability, but also makes it more difficult for mining companies to attract funding.

The Chamber of Mines, in particular, has commissioned the consultancy firms SGV and KPMG to prepare a comprehensive study on the proposal to ascertain whether the structure to be implemented is realistic and competitive when compared to other jurisdictions. Certainly, the proposed increase in royalties by five percent on revenue, while seemingly small, has potentially huge effects. An accepted rough rule of thumb in mining is that every one percent of royalty is equivalent to 5-10 percent in profit. A reduction of 25-50 percent in profit would significantly impact the viability of most projects. In the long run, government will likely lose out on significant tax revenue and receive no royalties from those projects.

The 2009-2010 Fraser Institute survey of mining companies ranks the Philippines at the tail end of its policy potential index. Even without the proposed five percent royalty, the Philippines’ ranking is already pulled down by issues concerning the administration, interpretation and enforcement of existing regulations. The country is also not considered sufficiently competitive in terms of its taxation regime, ranking 46 among 72 countries. This ranking is expected to further plummet if the proposed five percent royalty on minerals is implemented. ■

Mineral Resources February - April 2011 www.philippine-resources.com

Full steam ahead for CDC after IPO

A

fter successfully raising £40.7 million in its listing on the London Stock Exchange, Copper Development Corporation is now “moving full steam ahead” with drilling at its two copper projects in the Philippines.

At its Hinoba-an in Negros, CDC now has six drill rigs at work and by early March had completed five drill holes representing about 1,800 meters of the 18,665 meters planned for this year. At its Basay project site, about 25 kilometers southeast of Hinoba-an, CDC has four rigs and is boosting its drilling program there by 50 per cent for a total forecast of 18,615 meters this year.

Several of the Hinoba holes have already been drilled beyond their planned depth, as pyrite and chalcopyrite minerals are present at these deeper levels that previous drilling did not test, with a view of determining whether this mineralization occurs at economic grades. Core samples are being analyzed and CDC anticipates announcing results in the second quarter of 2011. This drilling is part of the Hinoba-an project’s bankable feasibility study, which is on schedule for completion in mid-2012.

The work program for the Basay copper project is focused on upgrading historic resources to modern JORC code standards and exploring major potential extensions to the known mineralization.

CDC has a 70 percent interest in Basay with Solfotara Mining Corporation holding the remaining 30 percent. CDC’s interest in the project is dependent on the company achieving specific milestones including sole-funding a minimum of US$5 million in project expenditure and completing a pre-feasibility study and feasibility study.

“We are moving full steam ahead at both sites,” said CDC chairman and chief executive Mitch Alland, “with the aim of accelerating the completion of the Hinoba-an bankable feasibility study and of confirming the continuity of mineralization between the known deposits at Basay, which we believe will become a major world-class copper project.”

CDC owns 92.5 percent of the Hinoba-an venture, which it has earmarked as ideally located to serve the Chinese copper market, the world’s largest user and importer of refined copper. A mid-2010 scoping study at Hinoba-an proposed open pit

mining and processing in a conventional crushing, grinding and flotation circuit to recover copper concentrate and potentially other by-products. The study estimated Hinoba-an to have a post-tax net present value of US$485 million and an internal rate of return of 38.5 percent (based on a copper price of US$3 per pound or $6,614 per ton) and an annual throughput rate of 15 million tonnes a year.

CDC is funding the work program with the proceeds of its listing on the London Stock Exchange AIM last December in which the company placed 116,182,857 new ordinary shares at 35p per share, raising gross proceeds of £40.7 million (about US$65 million) and thereby capitalizing the company at £78.7 million. ■

The existing 30-year-old open pit at CDC’s Basay copper project, where the company has just started drilling in earnest.

Nickel Asia heading for the major league

F

ast growing miner Nickel Asia is confident of becoming the world’s seventh biggest producer of refined nickel, and maybe bigger, within two years. After going public in late 2010, it has now set its sights on annual production of about 52,000 tones in 2013.

The company’s second refinery, under construction in Claver, Surigao del Sur, is expected to go on stream with an annual capacity of 32,000 tons. Its existing refinery in Rio Tuba, Palawan, already turns out 20,000 tons of refined nickel a year.

Nickel Asia is essentially a holding company that owns four nickel firms – Rio Rio Tuba Nickel Mining and three others in Surigao at Taganito, Cagdianao and Taganaan.It's headed by chaiman Manuel Zamora and president & CEO Gerard Brimo, son of the late Philippine mining pioneer Henry Brimo.

After going public in a very successful debut last November, Nickel Asia reported how its profit ballooned 470 per14 Philippine Resources

cent 1.34 billion pesos in the nine months to September 2010, driven by both higher volume and soaring nickel prices.

Revenue from the sale of nickel ore during the period increased to 5.87 billion pesos with the company selling 5.78 million wet metric tons, a substantial increase over the 4.84 million wet tons sold the previous year.

Nickel has a majority interest in the Rio Tuba Nickel mine in Palawan and the Taganito mine in Surigao del Norte, while it owns 100 percent of the Hinatuan mine in Surigao del Norte and Cagdianao mine on Dinagat island. The company also has a minority stake in the Coral Bay nickel high pressure acid leaching facility, which is largely owned

by Japan’s Sumitomo Metal Mining.

The miner raised 4.57 billion pesos from its initial public offering, of which 3.98 billion pesos are earmarked for the Taganito high-pressure acid leach plant.

In November 2010, the company spent US$102.4 million on a 22.5 per-

cent interest in the country’s second downstream nickel processing plant, the Taganito nickel facility, also in partnership with Sumitomo. When this new plant starts operating in mid-2013, it will source all its limonite ore requirements from the Taganito mine.

At a projected cost of $1.3 billion, Nickel Asia said the construction of the country’s second downstream nickel processing plant represents “the single largest investment in the Philippines mining sector to date.” ■

Nickel Asia’s very suggessful debut at the Philippine Stock Exchange was celebrated by (from left): Nickel Asia president and chief executive officer Gerard H. Brimo, Nickel Asia chairman Manuel Zamora, PSE president and CEO Val Antonio Suarez and SEC commissioner Juanita Cueto.

Mineral Resources February - April 2011 www.philippine-resources.com

Optimism growing at Taysan

R

esource estimates following drilling by Crazy Horse Resources at its Taysan copper-gold-silver porphyry project in Batangas indicate a very large interval of mineralization – with a bonus in the addition of magnetite and significant silver grades into the mineral mix.

According to the latest figures, the Taysan project is forecast to produce 3.1 billion pounds of copper, 1.5 million ounces of gold, 7.4 million ounces of silver and 18.5 million tonnes of magnetite over the 24-year mine life. Annual average production for years 1-4 is estimated at 173 million lbs of copper and 79,400 ozs of gold. Average annual production over the life of mine is 129 million lbs of copper, 62,000 ounces of gold, 308,000 ounces of silver and 807,000 tonnes of magnetite (commencing year 2).

The inferred resource estimate was prepared by Ian Taylor of Mining Associates as the basis for an upcoming

N143-101 compliant resource report. It was based on an initial 10-hole confirmatory drill program completed between October and December 2010 to confirm the tenor of historic drilling at Taysan.

Crazy Horse president Johan Raadsma commented: "We remain bullish on the copper price and these positive results clearly show the tremendous economic upside potential of the Taysan copper-gold-silver project. The addition of magnetite provides for further benefits and we will study the benefits of incountry beneficiation during the feasibility stage."

Crazy Horse has now approved the next stage of the Taysan feasibility study which will take an estimated 18 months to complete. Five diamond drill rigs continue in-fill drilling of the resource.

Drilling is being carried out by Quest Exploration Drilling using Edson 3000 and LF70 drill rigs and a triple tube diamond core drilling system.

Nickel miners Nihao & ORVI expanding

N

ihao Mineral Resources International has acquired additional shares in Oriental Vision Mining in a fund-raising move. In a disclosure to the Philippine Stock Exchange, publiclylisted mining firm Nihao confirmed it has bought 6,000 more shares in ORVI, paying a total of 60 million pesos.

ORVI has boosted its capital stock from 40,000 shares to 400,000 valued at 400 million pesos. Nihao now owns 63,000 shares or 30 percent of ORVI, the same stake it held in the company before the increase in ORVI's outstanding capital stock.

ORVI is a Filipino-owned, multimineral mining venture headed by Salvador Zamora. Nihao has nickel mining claims in the provinces of Zambales, Misamis Oriental, North Cotobato and Antique.

ORVI is currently developing and operating three nickel projects in Dinagat island, Surigao del Norte and Isabela 16 Philippine Resources

province. Among these is the Palhi nickel project in Mount Palhi, Tubajon, Libho and Cagdianao, Surigao del Norte comprising 2,314 hectares containing deposits of chromite, nickel and other associated mineral deposits.

Also containing nickel and chromite is ORVI's 1,225 hectare Sangay nickel project in Carmen, Loreto, Surigao del Norte and the 2,390 hectare Dinapigue nickel project in Dinapigue, Isabela.

The move follows Nihao’s late-2010 raising of a total of 348 million pesos in a combination of private placement of shares and a stock rights offering to fund acquisition of more mining rights.

"Proceeds of the share issuance shall be used to fund business expansion that the company plans to undertake in 2011, including acquisition of mining tenements and mining rights together with incidental expenses for due diligence and research and development," Nihao said at the time. ■

The project comprises two mining exploration permits and three mining exploration permit applications over five contiguous claim blocks covering a combined total area of 11,254 hectares. It is in southern Luzon in a well-developed mining province and readily accessible by road. It is 20 kilometers east of the provincial capital and deep-water commercial port of Batangas City. ■

Crazy Horse has started analysis of drilling results in the Taysan feasibility study stage.

Leyte magnetite hunt ‘promising’

I

n another expansion of mining exploration activities in Leyte, the firm Northern Access Mining has earmarked 600 million pesos for exploration spanning five Leyte towns. Half this initial budget is in the program for 2011 and the more expenditure is anticipated depending on initial exploration results.

Northern Access has a mineral production sharing agreement covering 50 blocks in the Leyte municipalities of Tanauan, Tolosa, Dulag, Julita, and Tabon Tabon. Early results of exploration in Dulag and Tolosa are “promising,”

In the Tolosa area, which accounts for 25 percent of the firm’s overall area, forecasts suggest about three million tons of magnetite concentrate.

In the late 1960s through to the mid1970s, a magnetite mine and processing plant in Tolosa produced up to 750,000 tons of magnetite yearly for iron makers in Japan before ceasing operations.

Northern Access hopes to use its Leyte venture as a springboard for exploration elsewhere in the Philippines. ■

Mineral Resources February - April 2011 www.philippine-resources.com

ENK fast-tracking Acoje after Turkey setback

D

irect shipping ore operations have resumed at European Nickel's flagship Acoje project in the Philippines after ENK entered into a new mining agreement with strategic partner DMCI Mining Corporation.

Under the pact, DMCI undertakes all the financial risk, operations and marketing associated with the mining and sale of the nickel laterite ore and pays ENK a royalty fee on each shipment made. The royalty is based on the London Metal Exchange nickel price and grade of ore sold.

Ore below 1.8% nickel will be stockpiled for a proposed heap leach operation or sold on a case by case basis if economically attractive. DMCI has indicated it intends to undertake one shipment per month initially.

The restart has been welcomed as positive news for ENK after earlier setbacks. The company switched its attention to the Acoje project in December after it suspended the development of its Çaldag project in Turkey. The company had reached an advanced stage with Çaldag with project financing arranged and the only thing holding up proceed-

ings being the re-issue of a forestry permit. ENK decided in December to put the project on “care and maintenance,” suspending development until the permit issue is received, and in the meantime to fast-track Acoje.

The group has also signed a deed to assign its Abogado exploration permit in Sultan Kudarat, southern Philippines, to Mineral Development Corporation. In exchange, it receives US$500,000 in cash, $2 million in shares and a 1 percent net smelter royalty worth $10 million if reacquired by MDC.

Investment analysts say the group is focused on generating additional cash to enable further progress of the Acoje property, particularly completion of a heap leach trial and feasibility studies.

In associated moves at ENK, Simon Purkiss has resigned as executive deputy chairman and director of the company although he continues with ENK in a consulting role through the Acoje feasibility study. ENK's chairman, David Whitehead, has announced he will step down from the board by the next annual general meeting expected in August 2011.

Ric Burns has been appointed chief operating officer based in the Philippines. The Çaldag technical team have been transferred to the Acoje project.

ENK managing director Robert Gregory noted in his latest report that “there is significant potential to extend the ten-year mine life by converting the JORC Inferred resources at Acoje and Zambales Chromite Mining Corporation (ZCMC) to JORC Indicated status, as well as the opportunity to add presently undrilled ore to the resource. This includes the untested saprolite horizon of the ZCMC tenement.” The Acoje and ZCMC drilling programs are scheduled to commence in late May 2011.

Gregory made it clear the key focus at Acoje now is the ongoing heap leach trial which ENK hopes will be completed by mid-2012. The facility is a 2,500 tonne heap leach and integrated downstream nickel and cobalt recovery process plant that will allow various nickel and cobalt flow-sheet options to be tested and compared. Initial tests show that it may be possible to increase nickel and cobalt recoveries and to produce a higher value end-product than previously assumed. ■

OceanaGold ‘back on track’ at Didipio

T

he Australian mining firm OceanaGold has confirmed it committed to pursuing commercial production at its Didipio gold-copper project in the Philippines by early 2013, after declaring compliance with all local laws.

OceanaGold asserts is has upheld "ethical, responsible and sustainable" mining, in reaction to a recommendation by the Philippine Commission on Human Rights that the government take back Oceanagold's mining rights for violating rights of indigenous people.

Chief executive officer Mick Wilkes said: "The company is firmly committed to building strong and enduring relationships with our community in the development and ongoing operations of the Didipio project for the benefit of all stakeholders."

This came after Loretta Ann Rosales, head of the human rights commission, said the commission found OceanaGold

18 Philippine Resources

had violated indigenous people's right to adequate housing, freedom of movement and to manifest their culture and identity.

The Didipio mine in northern Nueva Vizcaya province has a reserve life of 20 years and holds 1.41 million ounces of gold and 169,400 tonnes of copper, based on a report released last year by OceanaGold. Proven and provable reserves are at 29.7 million tons, averaging 1.48 grams a ton of gold and 0.57 per cent copper, it said.

Late last year OceanaGold suggested it would restart work on the project in the first half of 2011, with initial capital cost estimated at US$140 million. The firm has not given a final capital spending estimate but says it is now on target to begin production by 2013.

It originally halted construction in late 2008 because of high cost estimates for Didipio's development, initially seen

reaching $320 million.

The proposed development comprises four years of open-pit mining, followed by at least 11 years of subsequent underground sub-level caving operations, totaling an expected minimum 15 years of processing operations.

Additional mine planning has focused on accelerating recovered metal to improve cash flow from the open cut with better sequencing of the open cut and underground interface and production.

The Australian engineering company Ausenco has been awarded a “create phase” contract for Didipio. Ausenco's role in the project, due for completion

by October 2011, involves the provision of $7 million of engineering and procurement services for the mine's process plant and power station. Ausenco was involved in the Didipio project before it was put on “care and maintenance.” ■

Oil & Gas Resources February - April 2011 www.philippine-resources.com

Nido switches focus to Gindara after losing hope and money at Tindalo well

O

il and gas sector interest in the Philippines is again focused on the Northwest Palawan Basin, where drilling is starting on the potentially major Gindara prospect. Nido Petroleum and Shell Philippines Exploration, known as Spex, are the key participants in the Gindara drilling program under Service Contract 54B. The first well is currently anticipated to spud in about May 2011.

Gindara is being described by analysts as one of the select few major exploration wells this year capable of attracting significant investor and industry interest. It is targeting a very large structure in a proven hydrocarbon basin with oil heavyweight Shell as partner.

The NW Palawan Basin is already the Philippines’ top producing basin. It contains the Shell-operated Malampaya field, the largest discovery made in the Philippines to date – and the Gindara prospect is about 50 kilometers south and along trend from Malampaya. Thus, a gas discovery there could potentially be monetized through the Malampaya production facilities.

The Gindara-1 exploration is expected to take about a month to reach its target depth of around 3,200 meters.

Shell and Nido say if the well is successful, and depending on the size and type of discovery, a future appraisal program prior to a decision to develop would be necessary and could comprise several wells including production testing. The companies say results of this would then enable the booking of reserves, an important component in demonstrating project value to potential buyers.

In technical terms, the Gindara prospect is a large, 3D seismically defined, four-way closure at what is known as the Top Nido Limestone reservoir.

Gindara has an estimated mean potential of 634 mmbo at the Nido Limestone level (the same reservoir as Malampaya) making it a substantial exploration target.

The companies say a large oil discovery could potentially justify standalone development.

20 Philippine Resources

Nido is understood to rate the Gindara prospect as having a 40 percent chance of containing hydrocarbons, which is a very high rating for an exploration well. Shell’s farm-in and technical endorsement has added further credibility to the prospect’s chances of success, in assessment of potential size and associated risk.

Under the farm-in deal, Nido and partner Kairiki Energy – both Australialisted companies – signed an agreement with Shell Philippines Exploration giving Shell a 45 percent interest in Service Contract 54 Block B) by: Contributing 75 percent of the Gindara-1 exploration well cost up to a maximum well cost of US$24m; paying US$2.5 million towards past seismic costs; and paying its pro-ra-

As the lights go out at Tindalo, Nido Petroleum has switched its attention to the potentially major Gindara prospect, with the Atwood Falcon semi-submersible rig (upper photo) replacing the Noble Phoenix drill ship.

ta share of the 2010 and 2011 work program.

Nido remains operator of SC 54B for the drilling of the Gindara-1 exploration well. On completion of Shell’s farmin, Nido and Kairiki will have respective 33 percent and 22 percent participating interests in SC 54B.

The switch in focus to the Gindara prospect comes after Nido and Kairiki abandoned oil production at their Tindalo operation – after raising and spending a lot of money on Tindalo.

Nido is also eyeing drilling exploration wells in the Aboabo discovery (Service Contract 63), Balyena prospect (SC 58); Kalapato site (SC 63) and the Lawaan discovery (SC 54A).

According to Nido executives, the Balyena prospect may be the most promising of the five, with oil-in-place estimates of more than 1.3 billion barrels – compared to the Gindara discovery’s forecast of about 1 billion barrels. The Kalapato prospect is projected to hold 239 million barrels of oil; Aboabo 222 million barrels, and Lawaan 21 million barrels.

At the Gindara prospect, Nido, Spex and Kairiki have replaced the Noble Phoenix deep water drill ship with the Atwood Falcon semi-submersible rig to spud the Gindara-1 well. The Falcon has been operating for Shell in Malaysia until its move to Palawan, and also helped drill two wells for Shell in the Philippines last year.

For the Yakal and Tindalo projects under Service Contract (SC) 54A, Nido told the Australian Stock Exchange it has deferred development of the Yakal oil field pending further study and has plugged and abandoned the Tindalo project because the influx of water into the oil output there made the operation uneconomical.

Nido is “undertaking a complete review of the Tindalo development with the view to applying the lessons learned from this campaign to any future inboard developments that the joint venture may wish to pursue.” ■

Oil & Gas Resources February - April 2011 www.philippine-resources.com

Companies wary about changes in rules

M

ajor changes are likely in the government rules affecting the oil and gas business in the Philippines, mostly centering on taxation and profit-sharing issues. A “win-win situation for both the investors and the government” is promised by the Department of Energy, but oil and gas explorers and producers remain wary.

The proposed changes are currently on their way around the congress and senate circuit and are targeted for implementation by end-2011. In the meantime, however, there is doubt whether new oil and gas exploration ventures are on hold after the DoE formally postponed public contracting on oil and gas pending resolution of a tax dispute that is at the heart of the issue.

Government Energy Undersecretary Jose Layug told a recent briefing the proposed bill would give more incentives to prospective investors. “This year, what we plan to do is to pass an exploration bill to be a law, which will serve to address all the

issues and provide more incentives to exploration companies," Layug said. “It is targeted to come up with new incentives and validating what we have now. It should be better in the sense that it will be a win-win situation for both the investors and government."

Layug described the existing law – Presidential Decree 87 enacted during the Marcos years to promote the discovery and production of indigenous petroleum products – as “antiquated.” It basically authorizes incentives to oil producers including exemption from all taxes except income tax, payment of income tax from the 60 percent government share, and recovery of costs with limitations.

Layug said the DoE is looking at whether there is “a need to enhance” the current revenue sharing between the government and the project contractors. He said the 60-40 percent government-contractor revenue sharing after cost recovery "could be enhanced or modified, but cer-

tainly without impairing the existing service contracts. There are several models for production sharing and we are looking at the best models for that," Layug said.

"It's very important for the prospective foreign investor that the state respects the contracted entered into with. We cannot adjust it, there is non-impairing clause in the constitution," he added.

The moves to rewrite the oil and gas law follow a major dispute about taxation involving the consortium operating the big Malampaya natural gas project off northern Palawan. The government Commission on Audit alleged the Malampaya consortium — consisting of United States-based Chevron, Anglo-Dutch Shell Exploration and PNOC Exploration of the Philippines – owed 53 billion pesos in taxes because of its questionable division of oil proceeds.

The commission said corporate income taxes of the service contractors were Continued on page 22 >

Philippine Resources 21

Oil & Gas Resources February - April 2011 www.philippine-resources.com

Otto on the move in Leyte, Palawan

O

tto Energy stepping up the pace with its oil and gas exploration activities in the Philippines, with new drillings in Leyte and northern Palawan following a series of financial moves with its partners.

At Service Contract 51 in northwest Leyte, spudding is expected in April 2011 at the Duhat-1 exploratory well, the listed Australian oil and gas exploration firm told the Australian Stock Exchange in a disclosure statement.

The Duhat-1 well is targeted to reach a depth of 1,000 meters. It will test the hydrocarbon potential of the San Isidro anticline where a potential of 1 million to 62 million barrels of recoverable oil

has been identified. The company said the Duhat-1 well drilling was approved by the Service Contract 51 joint venture and the Department of Energy and will satisfy the work commitment under the third sub-phase of the service contract.

Otto, through its unit NorAsian Energy Philippines, operates Service Contract 51 in partnership with Trans-Asia Oil and Energy Development Corporation, Alcorn Gold Resources and PetroEnergy Resources. The consortium holding the service contract has allocated US$6 million to $8 million for the drilling of the exploratory well.

The SC 51 service contract area consists of two blocks – an onshore-offshore

Otto Energy is hoping for more and greater success with its new drillings, as it has enjoyed at its existing Galoc operation where the production, storage and offtake vessel Rubicon Intrepid easily topped its 2010 production target.

area across northwest Leyte and a largely deep-water block in the Cebu Strait between the islands of Cebu and Bohol.

The drilling comes after Otto Energy signed an agreement with joint venture partner Trans-Asia to increase its equity in two core exploration permits in the Philippines, one in the Visayas and another off Palawan.

In Service Contract 55, offshore southwest Palawan, Otto is boosting its equity by 8.18 percent to 93.18 percent and will carry Trans-Asia’s residual equity interest through the drilling of a second deep-water well in the permit area.

As part of the current farm-in arrangement, Otto will carry Trans-Asia through the drilling of the first well.

In the Visayas, Otto will increase equity in Service Contract 69 by nine percent to 79 percent for the following consideration: Payment to Trans-Asia for sub-phases 1 and 2 expenditure relating to the assigned interest (currently around US$308,000); payment of 50 percent of Trans-Asia’s remaining equity share of six percent of expenditure in sub-phase 3 comprising the 3D seismic survey expected to be conducted in the second quarter of 2011; carry of TransAsia’s remaining six percent equity share of a well that is to be drilled in either sub-phase 4 or 5.

In both transactions, if Otto does not elect to drill the required well the assigned equity will be reassigned to Trans-Asia.

Otto managing director Paul Moore said the increase in equity in these core exploration permits is part of the continContinued on page 24 >

Companies wary about changes in rules < Continued from page 21 deducted from the government’s 60 percent share of the net proceeds from the sale of natural gas and condensates from Malampaya. This, it claimed, effectively relieved the contractors of the task of paying income taxes.

If the Commission on Audit’s findings are upheld, they would extend to other oil 22 Philippine Resources

and gas explorers, producers and contractors in the country.

Malampaya consortium member Shell Philippines Exploration has disputed the commission’s findings, saying taxes were calculated based upon the existing Presidential Decree 87 which authorizes incentives to the contractor including exemption from all taxes except income tax, income tax paid from the 60 percent government share, and ability

to recover costs under certain limitations.

Spex maintains this division in proceeds has been a standard feature and incentive in all Philippine petroleum and geothermal service contracts, not just the Malampaya field.

This has provided stability that has been protecting the contractor from increases in taxes that were not foreseen when the contracts were signed, said Spex. ■

Oil & Gas Resources February - April 2011 www.philippine-resources.com

$1 billion more for Malampaya expansion

T

he Malampaya consortium is to pump in at least US$1 billion in new investment for expansion of the $4.5 billion deep-water gas-topower operation. The fresh investment is being shared by the Malampaya consortium partners – Royal Dutch, Shell and Chevron with 45 percent each and Philippine National Oil Company with 10 percent.

The five-year expansion involves extracting additional gas from the Malampaya field sufficient to run a new 300-megawatt power plant for about 25 years. New well drilling is not envisaged at this stage.

Also in the budget is refurbishment work on the existing well to ensure gas supply reliability for the three existing gas sale purchase agreements, of which committed supply is now fueling 2,700 megawatts of capacity for the electricity needs of the Luzon grid.

On its part, the Philippine government-owned PNOC Exploration Corporation plans to increase its stake in the Malampaya project and says it has 10 billion pesos in credit available to do this. PNOC-EC chief executive Gemiliano Lopez says five banks have pledged 2 billion pesos each in credit lines.

In a disclosure to the Philippine Stock Exchange, PNOC-EC said it will exercise its right of first refusal if controlling shareholders Shell Philippines Exploration and Chevron Malampaya decide to sell all or part of their stakes.

If the Malampaya shares of Shell and Chevron are not for sale, Lopez said PNOC-EC may tap the funds to explore for more oil and gas.

This confirms a recent shift in government attitude. Previously, its long-standing intention was to sell the government stake in Malampaya to

help ease the widening deficit in the national budget.

PNOC-EC is also looking to increase its public float to comply with the rules of the stock exchange, which require publicly listed firms to reach at least 10 percent public ownership within the year.

Its 10 percent stake in Malampaya is now a major earnings source for PNOC-EC, contributing gross revenue of 4.8 billion pesos in 2010, compared to its take of 4.48 billion pesos in 2009.

The company is forecasting continuing profit growth. “We continue to expect some improvements. We are eyeing that our gross revenues from Malampaya will go up further,” Lopez said.

In the next three years, the company is budgeting $100 million on the anticipated cash call for the phase 2 of the Malampaya project. ■

Philippine Resources 23

Oil & Gas Resources February - April 2011 www.philippine-resources.com

Mining to oil: TVI takes over TG World

T

VI Pacific and TG World Energy have finalized a deal in which TVI Pacific has acquired all the outstanding TG World common shares, making TG World now a wholly owned subsidiary of TVI Pacific.

Under the arrangement, TVI Pacific has acquired each of the outstanding common shares of TG World not already owned by TVI Pacific, in exchange for 0.458 of a TVI Pacific share. TVI Pacific has issued approximately 61.5 million shares to acquire ownership and control of the 134.3 million TG World common shares not owned by TVI Pacific, representing just under 82 percent of the issued and outstanding TG World common shares.

TVI Pacific, listed on the Toronto Stock Exchange, is primarily focused on the production, development, exploration and acquisition of resource projects in the Philippines. The company's interest in the Canatuan mine and its

other Philippine mining assets are held through TVI Resource Development (Philippines). TVI also indirectly has interests in oil and gas assets in the Philippines, Alaska and Niger.

TVI's principal assets are its interest in the producing Canatuan copper-zinc mine in Mindanao, its stake in the Balabag epithermal gold-silver deposit also in Mindanao, and interests in a broad array of prospective mining tenements in the Zamboanga peninsula, Philippines.

TG World is a Calgary-based, junior international oil and gas company with exploration, development and production operations in the Philippines as well as in Alaska and Niger in Africa.

TG World (BVI) Corporation, a wholly owned subsidiary of TG World, is partnered with operator Nido Petroleum, Kairiki Energy and Trafigura Ventures in a joint venture for Service Contract 54A in the northwest Palawan basin in the Philippines.

TG World Petroleum Ltd, another a wholly-owned subsidiary of TG World, is partnered with operator CNPCIT, a unit of the China National Petroleum Company, in the Ténéré block oil and gas concession in Niger.

TVI says the acquisition of TG will “allow TVI to leverage its extensive relationships in the Philippines by entering the Philippine oil and gas sector,” providing TVI with access to a second cash flow stream that would help to offset TVI's exposure to base and precious metals commodity pricing risk.

TVI chief executive Cliff James said the company’s directors believe this transaction will allow TVI to capitalize on broader development opportunities opening up in the Philippines; have a second resource base which will include additional assets in the Philippines; and have an attractive mix of production, development and exploration stage resource assets. ■

Otto on the move in Leyte, Palawan < Continued from page 22 ued strategy of focusing on high potential permits. “We are proud to be working with our joint venture partner Trans-Asia in these permits and maturing the exploration towards drilling activities in both permits.”

Earlier, the Philippine Stock Exchange received a disclosure from TransAsia that the Australian company Swan Oil and Gas had formalized an amended deal with the equity holders in the Visayas involving the farm-in agreement with Otto Energy.

The amended farm-in agreement was pursued to split Service Contract 51 into northern and south blocks, giving acquiring firm Swan Oil a significant working interest in the southern block.

In Palawan, meanwhile, Otto Energy says it has commenced a significant exploration campaign.

It says interpretation of more than 2,400 square kilometers of 3D and 760 km of 2D seismic data indicates the presence in Palawan of an active petroleum 24 Philippine Resources

system coupled with a series of large to very large Nido carbonate structures that supplement the Hawkeye prospect. The company says this provides “a diverse portfolio of potential future drilling targets.”

Otto’s Paul Moore said: “In addition to conducting the exciting Visayan drilling and seismic programs, Otto will also be progressing our prospects and leads inventory into drill-ready status in our core Palawan Block SC55, ahead of entering the next subphase in August 2011, with a decision from BHP Billiton also due on exercising their farm-in option.”

The BHP Billiton farm-in involves acquisition of a 60 percent stake in SC 55 and funding of the drilling of two deep-water exploration wells within the service contract area.

Otto Energy currently has an 85 percent working interest in and is the operator of SC 55, while the remaining 15 percent is held by Trans-Asia Oil and Energy Development.

Service Contract 55 covers a total area of 9,000 square kilometers. The Marantao

prospect, part of SC 55, is said to contain an estimated 1.8 trillion cubic feet of gas and 567 million barrels of oil. ■

Trans-Asia income slumps

Trans-Asia Oil and Energy Development Corporation’s net income plunged by 95 percent to 14.7 million pesos in 2010, with the company blaming the slump on lower generation revenue and higher operating costs incurred. Consolidated revenue declined to 894.3 million pesos in 2010 from 1.1 billion pesos in 2009, following a 64 percent drop in generation revenue to 55.6 million pesos.

The bad year was not unexpected, after Trans-Asia ended operations of the power CIP II Power Corporation power plant in mid-2009 and Manila Electric Company took over the concession with the developer of the Carmelray Industrial Park in Calamba, Laguna.

Trans-Asia also incurred a foreign exchange loss of 31 million pesos from its foreign currency denominated financial assets in 2010, much higher than the 13 million forex loss incurred in 2009.

Oil & Gas Resources February - April 2011 www.philippine-resources.com

China’s Canadian deal EDC closing drill rig unit brings LNG to Asia

E

nbridge's bid to bring oilsands oil to the Canadian west coast appears close to running aground under the weight of aboriginal and environmental opposition. But with PetroChina's US$5.4 billion buy–in to EnCana Corporation’s Cutbank Ridge shale gas play in northeast British Columbia, natural gas has leapfrogged oil in the race to the Pacific at Kitimat. Instead of oil tankers, it could be highly pressurized liquefied natural gas ships soon plying the pristine waters of BC's northern coast.

On its own, the PetroChina deal represents the biggest investment of any kind by a Chinese state–controlled firm in Canada. But it's just the latest in a series of trans–Pacific joint ventures involving BC's gas fields, and probably not the last. Last year EnCana inked a

$1.1 billion pact with Korea Gas, while Japan's Mitsubishi entered into an $850 million agreement with Penn West Energy. Nexen is looking a partner for its BC shale too.

The linchpin to these developments is almost certainly a planned gas export terminal at Bish Cove, near Kitimat. Back in 2005, when the fallout from Hurricane Katrina drove North American gas prices over $15 per million British thermal units (MMBtu), the terminal was one of several around North America proposed to import LNG from stranded fields in places like Qatar, Indonesia and New Zealand.

Since then, evolving shale extraction technology has more than doubled North American gas reserves and driven the price below $5 per MMBtu. ■

E

nergy Development Corporation is shutting down its well drilling group in a move that the company says is in line with an international industry trend towards outsourcing this type of activity.

EDC, which is part of the big Lopez conglomerate in the Philippines, says it is closing the division to align itself with “global best practice.” The company “shall continue to own its fleet of drilling rigs to insulate it from global price volatility and availability issues… we will outsource services and tools as we deem appropriate," said EDC president Richard B. Tantoco.

EDC’s net income rose by 446 percent to 7.58 billion pesos in the nine months to September 2010, up from 1.39 billion pesos in the same 2009 period. ■

Philippine Resources 25

International Resources February - April 2011 www.philippine-resources.com

Filipino miner finally strikes it rich with $145 million bonanza Down Under

S

ix years ago, Rudy Gomez put his savings on the line to drill two holes looking for copper. In a fairytale ending for the metallurgist, who started as a laborer in a gold mine aged just 16, Gomez has just sold the project for US$250 million, with his share $145 million.

The project in South Australia’s far north has been bought by OZ Minerals, which owns the Prominent Hill copper and gold mine 130 kilometers southeast of Coober Pedy. Gomez's initial investment to drill the holes was $340,000 $100,000 of which came from the state government. OZ hopes to develop Gomez's Carrapateena discovery into an underground copper, gold and possibly uranium mine, although it will be at least four or five more years before ground is broken on any project.

Gomez self-funded the Carrapateena drilling, with help from some associates, after three mining companies pulled out of the project. The state government's Plan for Accelerating Exploration, which co-funds high-risk exploration, also contributed money.

One of the holes found a 70-meters section of copper with a grade of 3.03 per cent, which was described as "phenomenal" at the time. Further drilling, funded

by Canadian company Teck, has gone on to delineate a copper deposit that is about 1000 meters thick. But the top of the deposit starts at 470 meters below the surface, meaning underground mining techniques will need to be employed to exploit the resource.

The mine is expected to produce between 50,000 and 150,000 tonnes of copper a year for a "significant" period, putting it on par with the Prominent Hill mine, which cost more than $1 billion to bring into production. Due to its depth, it is likely Carrapateena will cost more than $2 billion to develop, although there are no firm figures at this stage.

OZ Minerals chief executive Terry Burgess said: “In acquiring this exciting project we are significantly adding to the growth potential of OZ Minerals. We have a successful operation at Prominent

26 Philippine Resources

Rudy Gomez stubbornly spent years finding, drilling, testing and finally proving the mineral samples from his South Australian bonanza.

Hill, which is located 250 kilometers to the northwest, and clearly synergies will be available to us as we move to develop this quality copper-gold asset.

“This is one of the largest undeveloped copper projects in Australia today.

It is also a project which fits our stated parameters - it is copper-gold, in a very favorable jurisdiction and has the potential to produce copper at between 50,000 and 150,000 tonnes per annum for a significant mine life.”

This marks Oz’s largest acquisition since the global financial crisis. It could more than double the Oz Minerals’ resources of copper and gold and consolidate its land holdings in the Gawler Craton.

Gomez owns 58 per cent of the project and can earn up to $188.5 million if Carrapateena goes into production. The consideration for the purchase is $250 million, with a $10 million deposit paid immediately and the remaining $240 million payable on transfer of the asset. A further $50 million will be paid when

copper, uranium, gold or silver is first produced, and a final $25 million on first production of rare earths, iron or other commodities.

The associates and friends who backed Gomez's original drilling operation kept an 8 percent stake, which means they are sitting on a return of about $20 million.

Gomez is shy of publicity and little is known about him outside mining business circles. He is understood to have gone to Adelaide from the Philippines in 1957 to study extractive metallurgy at the University of Adelaide under the Colombo Plan promoting economic development in the Asia-Pacific region. He married an Adelaide woman and completed his master’s degree, before starting his career helping to set up mines in the Philippines.

Ironically however, Gomez did receive some media attention in February this year, after Australian Electoral Commission records showed he gave $79,191 to the South Australian Labor Party. ■

Resources Investment February - April 2011 www.philippine-resources.com

Philippines getting better but still among the worst

T

he Philippines remains very low down in the line-up of countries around the world ranked in terms of their attractiveness for mining investment. This year it is ranked in 66th place out of 79 countries in the authoritative Fraser Institute annual survey and 2010/2011 policy potential index for mining companies.

However, this does represent a marginal improvement over its placing in the previous index, at 70th out of 72 countries. And it improved its index â&#x20AC;&#x153;scoreâ&#x20AC;? to 27.3, out of a maximum of 100, up from 14.0 last year.

The Fraser Institute policy potential index measures overall policy attractiveness based on indicators like taxation, infrastructure, political stability, labor issues, security, environmental and other regulations, and native land claims.

The survey shows that, for the Philippines, indicators which are considered either "mild" or "strong" deterrents by more than 40 percent of respondents are: uncertainty over disputed land claims; uncertainty over which areas will be protected as wilderness, parks or archeological sites; uncertainty over the administration, interpretation and enforcement of existing regulations; quality of infrastructure like roads and power; trade barriers (including tariff and non-tariff barriers, restrictions on profit repatriation, currency restrictions); socioeconomic agreements/community development conditions (including local purchasing, processing requirements, or supplying social infrastructure such as schools or hospitals); security situation; regulatory duplication and inconsistencies between the national and local governments and inter-departmental overlap; and legal processes that are fair, transparent, non-corrupt, timely and efficiently administered.

Other indicators for the Philippines include: policy/mineral potential, "assuming no land use restrictions in place and assuming industry best practices," which 68 percent of respondents said encourages investments; political stability, which 38 percent and 23 percent cite as a "strong" and "mild" deterrent respectively, but which 27 percent said is "not a deterrent"; labor regulations, employment agreements and labor militancy/ work disruptions, which 39 percent of respondents believe are not a deterrent, but which 22 percent cite as a "mild" deterrent; and taxation regime, which 38 percent said is not a deterrent while which 27 percent described as a "mild" deterrent.

The survey results and index are based on responses to a poll of executives and exploration managers in 494 mining and mining consulting firms worldwide from between October 19 and December 23 2010.

Internationally, Alberta is the top-ranked place in which mining and exploration companies can do business, according to the Fraser Institute survey. While Canadian provinces occupies three of the top four rankings, Nevada comes in second, followed by Saskatchewan and Quebec, which was previously ranked first for three consecutive years. Quebec's decline has been attributed to tax increases announced in last spring and Continued on page 28 > Philippine Resources 27

Resources Investment February - April 2011 www.philippine-resources.com

Philippines getting better but still among the worst

< Continued from page 27

plans to rewrite its mining laws.

No nation scores first in all categories. Chile is the only jurisdiction outside of North America that consistently ranks in the top 10, which includes Alberta, Nevada, Saskatchewan, Quebec, Finland, Utah, Sweden, Chile, Manitoba and Wyoming.

The bottom ranked jurisdictions for mining are Indonesia, Zimbabwe, Wisconsin, Madagascar, India, Guatemala, Bolivia, DRC, Venezuela and Honduras, which is the lowest ranked mining jurisdiction.

The survey respondents were also asked to rank current mineral potential assuming current regulations and land use restrictions. Chile ranks number one in the category, followed by Quebec, Saskatchewan, Nevada and Greenland.

Ironically the worst jurisdictions in this category are Wisconsin, Washington State and Venezuela.

In another category which asked for ranking in terms of uncertainty concerning the administration, interpretation and enforcement of existing regulations, Chile is ranked the best, followed by Sweden, Burkina Faso, Botswana and Greenland. The worstranked country in this category came as no surprise to Venezuela watchers, followed by Washington State, California and Wisconsin.

The survey respondents expressed overall optimism about metals prices and regarding renewed investor interest in the mining industry. Of those surveyed, 364 companies said they expect exploration budgets to increase this year.

When asked what commodity is assigned the largest proportion of a company's budget, 43.38 percent of those responding favor gold, followed by 16.88 percent who have budgeted for copper.

Of those surveyed nearly 60% said they rated mineral potential over policy factor.

Good news and bad around the world

Individual comments by mining executives polled for the Fraser Institute survey included: 28 Philippine Resources

Australia

One exploration company vice president said the Australian policy environment “has clearly got a lot worse.”

The CEO of another mining company declared, “Victoria is anti-development, regulation and red tape.”

The manager of a consulting com-

‘You can spend millions developing a property in the Philippines, only to have it swept away by peasants, lobby groups, churches. The land return system is worthless’ pany called South Australia, “Pleasure to do business with. Encourages and seeks investment.”

United States

“Make everyone do without any mining products for a month or a year in Wisconsin,” declared a senior manager of a mining company with more than US$50 million in revenue. “Outlaw all mining materials.”

Meanwhile, an exploration company president asserted, “Capricious application of midnight tax deals cost Nevada dearly and proposed changes in Chile and Peru could do the same.

Nevada is going to have a long haul to convince the industry its tax and regulation is stable to regain its position of prominence.”

However, an individual consultant felt Nevada “is still encouraging the actual opening of new mines, something that is becoming extremely rare in most jurisdictions.”

An exploration company president had one word for California: “Hopeless.”

The president of a consulting company complained that the environment for Alaska mining has become so adversarial “there are already three law suits designed to stop a project that is still in the exploration phase.”

Another consultant was fed up with

the eight-month permitting procedure required to clear a 10x10-meter area of brush in the Tongass National Forest in Alaska. It eventually required the signature of the US Secretary of Agriculture.

“Totally absurd,” the consultant said.

Nevertheless, the president of an exploration company apparently loves doing business in Utah, which offers “a strong mining history, experienced regulators with an understanding of mining, and not as much federal land as Nevada (where the uncertainties and lengthy time lines associated with permitting on federal land have led me to downgrade Nevada).”

Canadian provinces

“British Columbia suffers from land claims issues, environmental uncertainties, permitting problems, political problems on several fronts, and a history of defaulting to a dictatorial Supreme Court,” asserted an exploration company vice president.

Another exploration company vice president wondered if “Saskatchewan’s opposition to BHP and ultimate federal response to BHP takeover bid of Potash Corporation may impact the investment climate in Saskatchewan and Canada.”

The company president of a mining company with more than US$50 million revenue called Alberta “a resource friendly government” with “good infrastructure, and generally competitive taxation.”

Canadian territorial governments

“In the Yukon mining is the culture,” declared a consulting company president.

Meanwhile, an exploration company manager complained, “The Northwest Territories has too much federal government involvement and a water board that is just totally inefficient and cannot approve anything is a reasonable timeframe.”

Latin America

“Venezuela: ‘Thank you for finding this valuable gold deposit. You may leave now,’” said a consultant.

Continued on page 29 >

Resources Investment February - April 2011 www.philippine-resources.com

< Continued from page 28

The president of an exploration company called Ecuador “the best example of how to kill a mining boom.”

Another exploration company president accused Ecuador of creating “an overall policy which disincentivizes foreign investment in mining and exploration.”

Europe

“Greece is the worst,” declared an exploration company president.

“Spain is no longer an easy country for mining investments,” said the vice president of a copper project in the country. “It’s a headache due to bureaucrats with no under-

standing or experience.”

Meanwhile, an individual consultant revealed: “The Russian mafia has threatened people I know personally, who tried to operate in Magadan and were forced out due to death threats for refusing to deal with them.”

The manager of a mining company with more than US$50 million in revenue observed, “In Ireland, if you obey the regulations, spend what you said you’d spend, and report in a timely fashion, you keep your ground. Period.”

An exploration company president advised, “Finland has found a balance between the development of natural resources and the implementation of regulations designed to

safeguard the environment and indigenous people.”

Asia

“You can spend millions developing a property in the Philippines, only to have it swept away by peasants, lobby groups, churches. The land return system is worthless,” declared the president of a mining company with less than $50 million revenue.

“Indonesia: From central governed regulations to regional governed regulations, then back to central governed regulations in 10-year period,” observed a consultant.

“China no access to land for exploration; no ability to acquire tenure,” said an exploration company president. ■

BoI ‘upgrades’ mining incentives

T

he Philippine government’s Board of Investments is planning a cosmetic change for mining in this year’s list of projects qualified for tax incentives. Mining is likely to be listed under the “preferred activities” category instead of its usual placement within the “mandatory” category of the Investment Priorities Plan.

This would underline the government’s interest in mining projects, said BoI executive director Efren V. Leano. “The incentives will be the same,” Leano acknowledged, “but we want to show that we want to help mining investors, that we want to promote it.”

Mining was in the “mandatory” list of the 2010 Investment Priorities Plan, because the Mining Act of 1995 compelled the BoI to grant incentives such as income tax holidays and the duty-free importation of equipment for projects involving the “exploration, development and utilization of mineral resources.”

If mining is moved to the “preferred activities” list, it would join agriculture, creative industries, shipbuilding, mass housing, energy, infrastructure, research and development, green energy, tourism, strategic projects and publicprivate partnership projects, based on a draft Investment Priorities Plan issued recently for public consultation last month. ■ Philippine Resources 29

Supply Resources February - April 2011 www.philippine-resources.com

Survey specialist expanding in Philippines

S

urtech International, the Jakartabased airborne and land survey specialist, is widening its wings with a new operation in the Philippines, where it is focusing its expansion on the minerals and resources sector.

Surtech has teamed up with Logistics Marketing Philippines, which similarly specializes in mining, energy and resources. Surtech directors Greg Neubecker and Jim Walsh were in Manila recently to finalize arrangements and also to explain the company’s specialty services to local mining executives.

Surtech specializes in the use of high technology in surveys, for instance in the fields of 3D laser scanning and LiDAR. The company is a leader in the field in Australia, India, Indonesia, Oman, Singapore, Saudi Arabia and the United Arab Emirates.

“We’re dedicated to reducing the risk inherent in all projects by tailoring services to focus on specific client need.

Our aim is always to meet or exceed client expectations,” explained Greg Neubecker. Between them, Neubecker and Walsh have over 50 years’ experience in managing survey projects in different business sectors and locations throughout the world. The pair say they are “hands on” overseeing a team of skilled professionals.

They are also “fully aware we have an obligation to ensure our activities have minimal impact on the environment and that we are sensitive to the many different cultural environments in which we operate,” Neubecker said.

In addition to the standard land surveying services, Surtech is particularly proud of its 3D laser scanning and airborne laser scanning capabilities.

3D laser scanning and modeling is designed for companies which require solutions for the accurate capture and documentation of existing facilities. Using high speed/resolution 3D laser scanners together with specialized processing software, Surtech can measure complex facilities or structures in high detail and deliver 3D digital point or solid CAD model data sets.

With a measuring rate of up to 500,000 points per second, the laser scanners rapidly provide a three-dimensional

30 Philippine Resources

representation of the scanned surfaces with high density measurements taken over the visible surfaces of the target structures.

Individual laser scans taken from different positions can be consolidated to generate dimensionally accurate Surtech LiDAR manager Warwick Hadley at work. digital models of a complete plant, building or any solid tal models of planet Earth’s surface. It object. Depending on the methods used is a highly effective survey method for and the work processes employed in the remote locations, large scale areas and field, overall accuracy can be within five dense vegetation project sites. It provides terrain detail inaccessible through millimeters.

Applications of 3D laser scanning in- conventional surveying methods such as clude refineries, offshore platforms, photogrammetry and ground survey.

Airborne laser scanning is achieved power stations, brownfield upgrades or revamps, as-built of existing facilities, in- by measuring the time delay between dustrial design and reverse engineering, the transmission of a laser pulse and the fabrication construction and verification, return reflection signal from the object plant visualization and 3D model and 2D scanned. The position of the aircraft is referenced by using integrated GPS-INS drawing extraction.

The benefits of 3D laser scanning technology. The equipment will detect include reduced site visits, rework and multiple returns from each emitted pulse design times; elimination of hotwork allowing it to record the top of vegetaand rework, the risk and costs associated tion canopy as well as the ground surwith hotwork, construction rework, and face below the vegetation. During post greatly reduced field fit-up welds; elimi- processing Surtech can remove all laser nation of safety hazards of traditional strikes returned from vegetation and to field data capture and up-to-date facility retain points from the true ground surdocumentation to facilitate maintenance; face. This true ground data is then used and reduced project risk by enabling de- to produce digital terrain models.

The products that can be obtained cisions based on having the best avail- from a LiDAR survey include: able current information.

• True ground surface – created

Airborne laser scanning - common- ly referred to as LiDAR – is technology when only the laser points that have hit for collecting large areas of elevation the ground are retained providing an irdata. Surtech’s advanced LiDAR allows regular series of spot heights; • Contours – derived in a DXF forthe collection of millions of points over a survey area without the need for exten- mat from the triangulated digital terrain sive ground access. The aircraft-mount- models; • Digital surface model – created ed system collects up to 5,000 hectares per day independent of the type of ter- when the above ground features such as rain or vegetation. The collected data is vegetation, building structures and powpost processed using the TerraSolid pro- er lines are required for a project; • Orthophoto maps – when the cessing suite to produce digital terrain collected images are orthorectified and models and digital orthophotos.

LiDAR is an active, optical remote mosaiced to create detailed maps of the sensing technology used to create digi- survey site. ■

Supply Resources February - April 2011 www.philippine-resources.com

JCLI ramps it up for Gold Fields

P

roject and construction management services specialist JCL International is moving quickly with its new focus on the mining and resources business.

In the northern Philippines, Manilabased JCLI has handed over the second phase of the mining exploration camp and basic infrastructure which it is building for the Gold Fields group’s project in Lepanto town, Benguet – completing the

job in just three months from green-field stage to operation. This phase includes an 80-man camp, canteen and other amenities. A third phase is now under way with additional offices.

Further south in the Philippines, JCLI has been signed up for additional work for Asian Arc Mining after its initial costing analysis for the feasibility study on the Taysan mine project in southern Luzon.

Both projects also bring in JCLI’s sister company Building Construction Maintenance Service (BCMS) and the contract is through the GXD Supply, a geological, exploration and drilling supplies group.

In Ilocos Sur, JCLI has won a new contract for management services at the AC Bakun 70 MW hydroelectric plant, involving tunnel lining for its rehabilitation by Aboitiz Power. ■

JCLI took just three months from green-field to completion at its mining camp project for Gold Fields in Lepanto, Benguet.

Philippine Resources 31

Supply Resources February - April 2011 www.philippine-resources.com

MacDow: 50 years old and still growing

T

he engineering and construction group McConnell Dowell celebrated its 50th birthday earlier this year but is showing no signs of middle age. Its order book is growing and widening in scope, revenue has topped the $2 billion mark and it’s plainly adapting well to the changing times.

The company was founded in New Zealand by two young civil engineers, Malcolm McConnell and Jim Dowell. Its operations have since grown to include all of Australasia, the Pacific Islands, South-east Asia and the Middle East. Its focus has widened with new divisions and companies although power, mining, oil and gas remain a mainstay, accounting for just over half of work in hand and revenue.

In the Philippines, MacDow, as the company is widely known, began operations in 1997. Colin Jenner came to Manila to open the first office – and he’s still here as chief executive.

His first project was the 1,000 MW Santa Rita gas turbine power plant in Batangas. This led to a significant share in the Malampaya gas project’s Batangas on-shore facilities, including the Philippines’ first natural gas pipeline.

Another successful project was the upgrade of aviation fuel facilities at Manila’s Ninoy Aquino International Airport.

More the recently the company has been busy at work on a massive project involving rehabilitation of the Ambuklao and Binga hydro-electric power stations, 19 kilometers apart in a remote, rugged,

McConnell Dowell’s biggest challenge in the Philippines has been its ongoing massive project involving rehabilitation of the Ambuklao and Binga hydro-electric power stations in Benguet.

mountainous corner of Benguet province. This has probably been MacDow’s biggest challenge in the Philippines. The dams and power stations were built 50 years ago and have suffered under the weight of millions of tons of silt. Siltation caused Ambuklao to be shut down in 1999. Whilst Binga is still operating, without rehabilitation it was due to follow the same fate as Ambuklao.

The Ambuklao and Binga contract is with SN-Aboitiz Power, a joint venture between SN Power of Norway and local company Aboitiz Power. Here, after earlier separate failed attempts by Chinese and Korean investors, the Norwegian solution with MacDow as constructor is

well on the road to success. The plan is to get the power plants fully operational with increased power generation output.

The total bill there is forecast to climb into the hundreds of million of dollars.

In all, MacDow Philippines has up to 650 people on the project and has clocked up a total two million man hours loss time injury free.

Over the years, MacDow has garnered considerable experience in a broad range of mining infrastructure projects – in South-east Asia alone, the group has been involved in scores of major mining and energy projects. This is one area that Colin Jenner is particularly interested in for the Philippine operations. ■

Deep in the mountains of Benguet

Insights into the McConnell Dowell project involving the Ambuklao and Binga hydroelectric power schemes come from MacDow’s Kevin Hasler, on the spot in the mountains of Benguet:

T

he Ambuklao and Binga dams and power stations were built over 50 years ago and are suffering from millions of tonnes of silt that have built up in the two dams over the years. Here the new owners of the hydro schemes, the Norwegian Filipino joint venture of

32 Philippine Resources

SN Power and Aboitiz Power, engaged McConnell Dowell as their civil works contractor to rehabilitate their investment.

Many of the local people in the communities around the dams are the heirs of people who were displaced by the original construction of the dams.

These people felt they were never adequately compensated by the government at the time and still hold strong resentment. However, client-sponsored CSR programs and the employment that we

have been able to provide have led to a softening of past sentiments.

The Ambuklao power station was closed in 1999 after an earlier major earth earthquake struck the area, resulting in a massive inflow of debris into the dam which over time choked the underwater intake. The rehabilitation project involves the construction of a new intake structure feeding into a new 140- meter drop shaft which in turn connects to a Continued on page 34 >

Supply Resources February - April 2011 www.philippine-resources.com

Deep in the mountains of Benguet < Continued from page 32 new 7-meter diameter, concrete-lined headrace tunnel and on into the existing underground power station.

Whilst still operating, Benga with its rising silt levels would soon have reached

“early retirement.” However, the new intake and associated tunnels currently under construction will enable Binga to continue to provide much needed power to the Luzon grid for the next 25 years.

The project survived Typhoon “Pepeng” which was absolutely horrendous for the local area. Over 100 people were killed in nearby Baguio City and La Trinidad on account of landslides that washed buildings away. The area looked like a war zone with the landscape scarred by thousands of landslides. The site’s main access routes were blocked for nearly two months while major slides were cleared.

The government Department of Public Works and Highways doesn’t have the budget and resources needed to deal with events like this. Our team chipped in and assisted in reopening roads and managed to get enough supplies in to keep the project running using remote staging areas and small trucks.

In its former days, Ambuklao generated 75MW. Soon, once the rehabilitation is complete, this will increase to 105MW. Binga will increase its output from 100 34 Philippine Resources

MW to 120 MW.

The site has other aspects that may not be encountered in the average tunneling job. For the May 2010 Philippine elections, the site was secured by a detachment of the Armed Forces of the Philippines to ensure we were not sub-

residents can mix and relax in comfortable environment. Often Filipino camp residents will break out the guitars and a sing along just sort of happens – they are people with a natural talent for music and song. More special occasions are celebrated in local traditional style where the gongs are played and native dances are performed, and the occasional expat is encouraged to join the dance that is significant to the Ibaloy people (it looks like the flight of the Philippine Eagle).

Life on this project means a change in the way we may think about our work-

MacDow combines safety expertise with an appreciation of local culture – for instance it has redesigned the Filipino jeepney that it uses as staff transport so that the seats face forward, which is a safer configuration than the traditional benches along each side.

jected to insurgent activity.

The Filipino community we work within are colorful people, steeped in culture and a simple way of life. In sympathy with their cultural beliefs, we have participated in many rituals where, for example, a pig is sacrificed to bring safety and peace to the project.

This is a project filled with unique personalities who blend in harmony (well, most of the time) in order to achieve the outcomes required. The MacDow and clients expatriate team is like a mini United Nations with staff having been born in all corners of the globe, including Australia, New Zealand, Norway, Canada, England, Scotland, South Africa, Sri Lanka and Nepal. Camp life is enhanced by Bruno Tirrizzi’s recreation room built in true Filipino nipa style that provides a space where all the camp

ing environment, to live in a beautiful rustic environment where the nearest city (Baguio) is only 38 kilometers away but getting there often involves a trip of over an hour on tight winding roads subject to multiple landslides, extreme heavy rains and very muddy sections.

We are committed not only to the project but also to the village communities. We undertake CSR projects such as school safety campaigns, provision of a new water scheme including the installation of a new electric pump and power supply, the donation of garbage bins and containers, assistance in first aid training for the local schools, career guidance, journalism seminars, assistance to the civil communities during emergencies, as well as up-skilling our employees with skills that they will have long after we have finished and will benefit the community in which they live. ■

Risk Management Resources February - April 2011 www.philippine-resources.com

Don’t take risks on insurance and security

I

nsurance is a key part of risk management in the mining business, but miners sometimes cut corners to save money when taking out insurance, underestimate their potential liabilities, and often overlook insurance and security for critical areas of their operation.

This was the consensus among experts at a recent Manila forum organized by the risk and insurance group Marsh, focusing on the mining sector in the Philippines. The forum brought together seven international experts – Ian W. Brown, Lionel K. Mintz, Paul Pryor, Paul Forster and Tony Waller of the Marsh group, Phil Lomax of the Kroll security group, and Graham A. Copland of John Foord International, with Philippine Mines and Geosciences Bureau director Leo L. Jasareno.

They discussed mining industry risks, valuation of projects, security risk profiling and vulnerability, insurance placement and environmental risk management.

Environmental insurance

In one session, Lionel Mintz told forum participants how – contrary to perception among some businessmen under most general liability insurance, pollution coverage is third party, off-site focused and is limited to events that are “unexpected, unintended, sudden and accidental taking place in their entirety at a specific time and place.”

In terms of environmental exposure, this means that under general liability insurance there is no gradual pollution coverage, no cover for first party

This dam collapse at Akja in Hungary last October swamped nearby towns in a sea of toxic alumina sludge. The ongoing clean-up will cost tens of millions of dollars and the bill is expected to go much higher with pending liability claims.

clean-up costs, no cover for business interruption losses unless physical loss or damage occurs to the insured property, and no statutory liability cover involving clean-up action by a regulator.

Mintz reminded forum participants that Philippine mining law and environmental pollution laws require mining operators to protect the environment.

Specifically, the mining regulator can suspend mining if an environmental event occurs, and all events must be reported with failure to do so deemed an administrative sanction. In addition, the Writ of Kalikasan now focuses on protection and advancement of the legal right of the people to a safe and healthy environment.

Mintz cited several case studies including the Lafayette mine disaster in the Philippines involving a cyanide spill from mine site into the sea. The mine was closed by the government for over 12 months, income loss was over US$100 million and was uninsured – and the mine went into liquidation in 2007.

He noted that mining environmental events tend to be significant and can definitely affect the balance sheet.

However, he said, a general liability policy provides very limited environmental coverage if any, the business interruption exposure is potentially as important as coverage for the clean-up costs, and no matter how well the risk is managed, fortuitous environmental events can still occur.

Mintz suggested an environmental insurance solution in the shape of a pollution legal liability policy, which has the ability to cover the potential environmental liabilities of mining companies by providing cover for on-site cleanup of new and unknown pre-existing conditions (known conditions are excluded), third party bodily injury and property damage, defense costs, business interruption and statutory liability.

He said environmental insurance cost is not expensive compared to the potential exposure. For a gold mine in Asia that has been in operation for over 10 years and is well risk-managed, for example, with a coverage limit of US$20 million and an excess of $100,000, the cost is $125,000 per year.

Placement strategies

Bowring Marsh executives Paul Forster and Tony Waller had some “good news” for forum participants about the mining insurance market. They explained how market conditions are improving as softer conditions for general business impact on the mining sector, and reductions in premium rate are now being achieved – except in cases of poor loss record or poor risk engineering.

Quality and depth of underwriting information is vitally important, they said, in enabling insurers to structure the best and most cost-effective programs.

Generally, mining is considered a hazardous class for insurance. The global premium pool is approximately $500 million; with global loss estimates at $3 billion, this represents a loss ratio of 600 percent.

Against this background, there is a limited number of recognized insurance leaders, fewer underwriters relative to other classes, the markets are very reactive, and mining is often excluded from reinsurance treaties, particularly underground exposures.

Bowring Marsh’s recommended insurance placement strategy revolves around:

• Planned timelines, because the more time available, the stronger the negotiating position;

• Provision of comprehensive underwriting information including full surveys from accepted mining specialists, management of all incident data, demonstration of ongoing commitment to improving risk management practices, and underwriter- client relationships.

Security risks

Turning to the security aspect of risk management by mining companies, Kroll Security’s Phil Lomax discussed risk profiling, vulnerability and impact analysis for the mining industry.

Unlike services such as power and transportation, mining does not form part of most countries’ critical infrastructure, Lomax said. This means that Continued on page 40 > Philippine Resources 35

Risk Management Resources February - April 2011 www.philippine-resources.com

Applying the VPs to the Philippines

By Pete Troilo

A

s globalization continues to take hold and evolve, global conduct and performance standards for private industry are becoming increasingly important. Generally, the formalization of global standards confirms that the sharing of best practices, guidelines, and frameworks can actually benefit all industry or sector stakeholders, even those in competition or with different objectives. Such standards can also establish the boundaries for what industry behavior is expected and acceptable.

The development and rollout of global conduct and performance standards is critical for facilitating foreign investment and operations in developing countries, particularly in the natural resources or extractive industry. Over the years, these standards have become more focused and practical. For example, the International Finance Corporation’s Policy and Performance Standards on Social and Environmental Sustainability have become globally recognized good practice in dealing with environmental and social risk management. The IFC applies these standards to all of its investment projects to minimize their impact on the environment and on affected communities.

Additionally, the Swiss government in partnership with other key governments, non-government organizations, humanitarian organizations and other stakeholders has developed the International Code of Conduct for Private Security Service Providers. The code is compliant with human rights and international humanitarian law and provides a commonly agreed set of principles for the private security companies typically sanctioned by multinational extractive companies.

The Voluntary Principles on Security and Human Rights (VPs) is another global conduct and performance standard that is gaining traction across the globe. Established in December 2000, the VPs are a set of non-binding principles that help extractive companies secure their operations within a framework that respects human rights. The initiative is supported by various public and private

36 Philippine Resources

stakeholders including the IFC, various governments such as Canada, the United States, Norway, the United Kingdom and the Netherlands, extractive multinational corporations and NGOs – all with an interest in human rights and corporate social responsibility.

While the VPs can be applied to any operational context in the world, the Philippines serves as an excellent ex-

The ability to assess accurately risks present in a company’s operating environment is critical to the security of personnel, local communities and assets. ample to highlight why and how the VPs should be employed. Indeed, the VPs fall into three interrelated categories – (1) risk assessment, (2) relations with public security, and (3) relations with private security – and all three are critical considerations for extractive companies operating in the Philippines.

Risk assessment

The VPs state that: “The ability to assess accurately risks present in a company’s operating environment is critical to the security of personnel, local communities and assets; the success of the company’s long term operations; and to the promotion and protection of human rights.” The VPs risk assessment process is compatible with the ISO 31000 risk management standard and is easy to align with most company risk management approaches and methodologies.

While some VPs risk assessments

are relatively simple, however, others require collection and analysis from different sources such as other natural resources firms already operating in country, national and local government leaders, security officials, civil society groups, indigenous peoples groups, NGOs, the diplomatic community, and various multilateral institutions. A comprehensive and effective VPs risk assessment should consider the following factors: identification of security risks borne from political, economic, civil or social factors, potential for violence, human rights records, rule of law, conflict analysis, and equipment transfers.

A thorough risk assessment is critical for any firm planning to implement the VPs in the Philippines. Despite some positive legislation and proclamations of government support, there exists a significant and robust opposition to the extractive industry throughout the Philippines which heightens the country’s risk climate dramatically. Critics of the foreign-invested natural resources industry, including the Catholic Church, leftist socio-political and civil society groups, communist and Islamic rebel groups, and local officials and governments, argue that foreign extractive firms damage the environment, exploit local communities, and reap illegitimate financial gains.

Frequently and sometimes clandestinely, these groups make strange bedfellows and launch coordinated opposition campaigns that hold major security and human rights implications and even the potential to derail a project. Foreign firms are commonly singled out and targeted. The formal identification and rationalization of these risks is the best way to mitigate them over the course of any project.

Public security

The VPs state that: “Companies have an interest in ensuring that actions taken by governments, particularly the actions of public security providers, are consistent with the protection and promotion of human rights.” Generally, VPs related to public security encourage cooperation Continued on page 38 >

Risk Management Resources February - April 2011 www.philippine-resources.com

Applying the VPs to the Philippines < Continued from page 36 between the companies and deployed public security officers as well as consistent consultation with stakeholders on what impacts site security arrangements might have on the community. More controversially, the VPs suggest that companies must address human rights abuses committed at the hands of public security and report only credible allegations and the violation of international humanitarian law to the host government.

As investigations into corruption and other abuses continue to hound the Armed Forces of the Philippines (AFP), extractive companies are right to enhance cooperation with public security forces deployed to their area of operations. In the Philippines, Citizen Armed Force Geographical Units (CAFGUs) and Special CAFGU Active Auxiliary (SCAA) serve as an auxiliary force of the AFP and are assigned to protect private companies, particularly natural resources firms.

For decades, the Philippine Government has maintained that these units are necessary to advance national security, achieve peace and order, and counter internal security threats. More importantly, the AFP has acknowledged their practical necessity, noting the impossibility for the Philippines military to secure and maintain stability across the country in

light of current manpower and budgetary constraints. CAFGUs and SCAAs are under the direct control and supervision of the commanding AFP officer assigned to a specific region. These dynamics are common across many other emerging markets and high-risk areas.

While firms have had mixed experiences with CAFGUs and SCAAs and are confounded by the choice to employ them, some firms have gotten it right.

The most successful SCAA operations employ one or two appointed and experienced full-time military commanders from outside the locality. In line with the VPs, many members are nominated and selected from the immediate area and are thus representative of the local community. Mindful that local personnel could be unduly influenced and exploited, private firms encourage, advise, and oversee a government-led due diligence of all local SCAA members.

Companies operating in the Philippines are also well-served by establishing an official Memorandum of Agreement with government security forces prior to deployment which very specifically defines roles, functions, timelines, limitations, and other deployment standards.

The MoA should also include specific clauses on the suspension or removal of government forces during times of misconduct which can range from persistent tardiness and neglect to major human rights abuse allegations. While companies admit challenges in fully documenting the VPs within these agreements, they have managed to weave in various provisions that are effectively aligned with the VPs.

Private security

Pete Troilo is Manila-based director of business intelligence with Pacific Strategies & Assessments, a leading business risk consultancy providing security consulting, crisis management, business intelligence, investigations and background screening services. Website: www.psagroup.com.

38 Philippine Resources

The VPs state that: “Where host governments are unable or unwilling to provide adequate security to protect a company’s personnel or assets, it may be necessary to engage private security providers as a complement to public security. In this context, private security may have to coordinate with state forces, to carry weapons and to consider the defensive use of force.”

Private security VPs promote proper due diligence on private security agencies to accurately determine professional

qualifications and competency and if firms have been implicated in human rights abuses in the past. Private security firms deployed to secure extractive operations should observe and abide by the policies and standards of the contracting company, the laws of the host country, international humanitarian law, and industry best practices. Furthermore, private security should never assume activities that would normally be in the domain of public providers such as offensive operations or arrests.

Physical security services are big business in developing countries, including in the Philippines where it is one of the largest sources of employment. Indeed, the Philippine market is flooded with private security guard force companies and some are simply better than others. Conducting thorough due diligence assessments of potential private security partners is crucial in the context of the Philippines. Whether conducted internally or by a third party, companies should investigate the following factors during the private security due diligence process:

• Personal and business reputation

• Management style and ethics of key executives

• Litigation history

• Undisclosed or misrepresented assets, losses, and projections

• Operational history

• Compliance with health, safety, and environmental regulations

• Conflicts of interest

• Corporate culture

• Other liabilities and risks

Adherence to the VPs should be a central consideration in selecting a private security provider and this should be communicated to all bidders prior to any contract award. Following the selection of a private security provider, the VPs should be written into the official contract and service level agreements between a company and its private security providers. Lastly, any extractive company operating in the Philippines would be wise to establish a rigorous and ongoing VPs training program for all private security practitioners. ■

Risk Management Resources February - April 2011 www.philippine-resources.com

Don’t take risks on insurance and security < Continued from page 35 although there is an element of regulation, it is not as stringent as that associated with critical services provision, and whatever happens within the mining industry does not affect the general public.

Lomax noted that mining is a purely profit-driven operation, subject to global market forces, and extraction costs do not generally dictate selling price but do drive the profit margin – which means that:

• Cost-cutting on manpower is commonplace;

• Safety costs money and is often bypassed;

• Environmental protection is often sacrificed in the interests of cost reduction.

As well, mining is generally isolvvated in remote locations – thus industry regulation is on a local level which is often corrupt and has a vested interest in keeping the mines operating, while security and risk conditions are more difficult to control in more remote areas.

Lomax underlined the downstream impact of security risks, primarily reputational risk, associated with global media and information dissemination, in rela-

Cost-cutting on manpower, expertise and proper training, especially in use of expensive equipment, is common in the mining business as these cost money.

40 Philippine Resources

tion to:

• Inappropriate relationships involving bribery and corruption and international name and local influence peddling;

• Inappropriate labor relations involving child labor, lack of training of employees and inadequate independent oversight;

• Incidents relating to unsafe working conditions including acceptance that safety slows down operations and costs money, lack of responsibility acceptance, lack of safety training, and lack of incident response measures;

• Lack of due care in respect to environmental protection involving denuding forests and release of toxic waste.

Lomax discussed security incidents that mining companies should be aware of:

• Theft - A recent South African mining study revealed that "The theft of gold, platinum, copper and diamonds has taken on alarming proportions within the mining industry. For example, in respect of gold alone it is conservatively estimated that in one year some 35 tons of gold to the value of approximately R2 billion is stolen.”

He recommends that rather than be reactionary, miners should anticipate incidents and prepare in advance by carrying out loss risk analysis, identifying credible loss scenarios, identifying vulnerable aspects of the operations, and implementing mitigation measures in the form of physical security controls, technical security measures and security policies and standards.

• Kidnap and ransom - Apart from the obvious upheaval for the families of the victims, on a company level, insurance premiums increase, employees demand more for traveling to these destinations and good people often simply not go there. In addition, there is very intense media focus on how the company deals with the situation, and this can have a significant impact on the publics perception of the company.

Lomax said mining communities are typically in remote locations with little or no border control to prevent kidnappers moving victims from one jurisdiction to another making it virtually impossible to track them. Thus, kidnap and ransom

situations are often very complex and difficult to manage.

Avoidance is the key and for this, the operating company must have good connections on a local level and within local law enforcement; inexperienced employees must only travel with good local operatives who have been with the company a long time; travel plans should only be known to a few key individuals; travel risk analysis must be carried out in advance and points of vulnerability dealt with and primary and secondary exit strategies need to be in place.

Lomax warned miners to be careful with kidnap and ransom insurance. “If K&R insurance is in place, make sure it remains confidential to senior management only. Having K&R insurance can make the employee a target.”

He also warned about the danger of security providers as a potential liability.

“Manpower security providers are often seen as ‘enforcers’ doing the bidding of operators, forcing locals to submit to corporate requirements – land grabbing, forced waste disposal situations etc. They tend to work in the ‘gray’ areas with local communities,” he said.

Noting that it may not always be the choice of the company whether private security or state security is used, Lomax said the company it should be aware that an uncontrollable security force “is extremely dangerous to operations e.g. lazy (at best), violent or criminal.”

The use of state security forces could be forced into the contract to provide local employment opportunities – the company should consider insisting on extra training and be willing to fund this itself if need be, he said.

Security operatives are often among the lowest paid employees in developing countries and can be extremely corrupt in order to make gains from their duties, he noted.

Lomax recommended that private security must be chosen carefully since price is not everything; that thorough due diligence on the security company itself is essential; that background searches on its personnel are carried out to their fullest extent; and should make sure that training is up-to-date and in keeping with international standards. ■