THE IMPACT OF THE PHILIPPINE ELECTIONS ON THE MINING INDUSTRY

Assessment of the implications of the 10 May elections for the mining sector

Philippines Snapshot

• The is one of the world’s greatest mining provinces, and one the hardest for foreign mining companies to access and thrive in.

• The country’s underexploited mineral wealth has an estimated value of more than US$840 billion, an amount if realised and well-invested in hard and soft infrastructure that could help transform the Philippines and act as catalyst for a national renaissance.

• In order to achieve anything approaching such an outcome, the state and much of the population will have to demonstrate a willingness to encourage and retain the foreign investment and technology required to exploit and eventually process the nation’s mineral bounty.

• The outcome of the election has major implications for the Philippines economy and all its component sectors, in particular the country’s mining industry. Allan and Associates has assessed the implications for the mining industry according on the basis of the known policies and priorities of an administration led respectively by any one of the three leading contenders.

Political risks facing the Philippines mining sector

There are nine candidates in the Philippine presidential elections. The three leading contenders are Senator Benigno “Noynoy” Aquino III of the Liberal Party; Senator Manuel Villar of the and former President of the Puwersang Masa Party (PMP). Former Defence Secretary Gilberto Teodoro, the standard bearer of outgoing President Gloria Macapagal-Arroyo’s party, Partido Lakas-Kampi, is a distant fourth.

Five other candidates - Senator Richard Gordon of Bagumbayan, Senator (independent), evangelist of , City Councillor JC De los Reyes of , and environmental activist of Pangmasa - are all considered distant outsiders.

As of 11 May the elections appeared to have been generally well conducted, barring some violent incidents and a number of other poll related disruptions and offences. The speed of the count and its outcome is the next phase that could lead to instability, particularly if the early results suggest that Aquino’s status as the most favoured candidate to win the presidency is under threat. A clear indication of the outcome should be ready by 15-16 May, though speculation over and expectations of the winner will be evident immediately.

1 Allan & Associates Press Release 11 May 2010

Aquino presidency

Senator Benigno “Noynoy” Aquino III, 50, is the son of the murdered national hero Benigno ‘Ninoy’ Aquino and the recently deceased former president Corazon Aquino. He lived with his mother until her death and is unmarried. He is the favourite to win the presidential election.

In 1998, ‘Noynoy’ Aquino ran for a seat in the House of Representatives and won, serving as Congressman of the second district of Tarlac until 2007. He served on numerous committees as a member of Congress and as deputy speaker from November 2004 to February 2006. In May 2007, he won a seat in the Senate and was placed sixth in the national elections. At the Senate, he chairs the Committee on Local Government and is also the vice-chair of the Committee on Justice and Human Rights.

Aquino had a relatively poor track record as a legislator in his three terms as a congressman and one term as a senator. He has authored only nine bills, two of which remain pending. However, he is extremely popular among the electorate, heading almost all the credible opinion polls. The public perceives him as an extension of his parents, an honest official and a fighter against corruption, if not nepotism.

Aquino’s popularity contrasts with his lack of a political hinterland that can translate his policy agenda into material reality. This raises the prospect that an Aquino presidency would rely heavily on popular support – echoes perhaps of the 1986 ‘People Power’ revolt that toppled the authoritarian leader from power and propelled his mother Corazon into the presidency – rather than pursuing coherent strategies intended to provide long term economic and social stability.

This perception is reinforced by the close links Aquino has with ‘progressive’ elements within the Catholic Church and civil society groups, such as non- governmental organisations (NGOs). There is some concern his links within the more radical members of either group can result in an anti-mining administration that would pass laws hostile to foreign businesses.

According to a Green Electoral Initiative (GEI) survey led by EcoWaste Coalition and in February 2010, Aquino was quoted as saying:

“We should review the Mining Act and its implementation, particularly the fiscal incentives, in order for us to maximize the economic benefits of the extractive industry.”

2 Allan & Associates Press Release 11 May 2010

He also noted that mining can be sustainable and that the law should guarantee the exploration, development and utilization of mineral resources primarily benefit the Filipino people. Mining, Aquino continued, should also provide viable and sustainable livelihood options for communities, ensure gains are maximised for the benefit of the nation without compromising the environment and that local communities are actively involved in decision-making regarding site development while being protected under human rights legislation.

This response belies the fact that Aquino has no history of involvement in the anti- mining movement. Further, the Catholic Bishop Conference of the Philippines (CBCP’s) Matrix Of Presidentiables on Key Issues issued on 2 May 2010 (see below) indicates Aquino is against a review of the Philippine Mining Act of 1995, which the CBCP and some NGOs have sought to repeal. Aquino’s stance on mining may also be evident in the support his campaign has received from the Makati Business Club - which includes major mining interests - on the basis of his supposedly pro-business economic platform.

Estrada presidency

Joseph Estrada, 72, is a popular movie actor whose political career began with his election as the mayor of San Juan before becoming a senator, vice president and finally national president. As senator Estrada opposed the presence of US military bases in the Philippines, while as vice-president he served as chairman of the Presidential Anti-Crime Commission (PACC). During his short tenure as president (1998-2001) Estrada sought, and failed, to inflict a military defeat the Moro Islamic Liberation Front (MILF) in Mindanao. After being accused of involvement in an illegal gambling scandal, he was toppled from power by a further display of ‘People Power’ in 2001 and detained until his trial in 2007, when he was sentenced to life imprisonment – only to be pardoned by President Arroyo a few days after being convicted.

Estrada claims adherence to the political, economic and social platforms of his , which emphasises social and economic policies intended to benefit the poor majority and bring peace and stability to country. An election victory by Estrada could represent the beginning of a new wave of populist and nationalistic sentiment.

This would almost certainly have a negative impact on foreign mining interests as it would represent a radical realignment of political forces and increase the political, regulatory, social and environmental risks for companies looking to explore, invest and operate in the Philippines.

3 Allan & Associates Press Release 11 May 2010

Although Estrada did not responded to the GEI survey, while president in 1999 he began the process of cancelling 1995 Mining Act and recalling the Presidential Administrative Orders that had permitted mining firms to operate in tribal domains. As Estrada was ousted from office before any attempt to reverse mining legislation was brought before parliament, it is unclear whether his moves represented a determined effort to curtail the country’s mining industry or was political theatre intended to boost popular support when under growing pressure from his opponents.

Villar presidency

Born in ’s working-class district of Tondo, self-made billionaire Manuel Villar, 61, made his fortune in property development and his company, Vista Land, is one of the country’s leading house builders, Villar was elected to Congress in 1992 as representative for Las Pinas City and Muntinlupa and served for three consecutive three-year terms. In 1998, he was chosen to become the Speaker of the House of Representatives and had a major role in the impeachment of President Joseph Estrada on corruption allegations in November 2000. In July 2006, he was chosen to become Senate President, a position he held until November 2008 when he resigned after having been accused of involvement in an alleged fraudulent land scheme.

Villar’s impressive track record as a legislator, business manager, political pragmatist and alliance builder – he has brought together individuals from the left and right of the on to his ticket - makes him the most tested pro-business candidate among the three leading presidential contenders. Villar’s political programmes to promote poverty alleviation and entrepreneurship - and such radical advocacies as support for the re-opening of the mothballed Bataan Nuclear Power Plant, could provide a dynamic economic boost to business, including the extractive sector.

However, Villar’s extensive business interests and involvement in alleged legal anomalies could present conflicts of interest. Some observers are also concerned that he may choose to use his presidential powers in support of his own commercial advantage or that of his allies and supporters. Although Villar is independently wealthy, he has spent heavily on the elections and has developed extensive and high-maintenance commercial and political alliances.

A Senate Committee Report that claims Villar had failed to avoid conflict-of-interest accusations by not divesting himself of his shareholdings or interest in Adelfa Properties Inc adds to this perception.

According to the GEI survey on mining led by EcoWaste Coalition and Greenpeace in February 2010, Villar Aquino was quoted as saying:

‘It is imperative to review the present legislation on the mining industry and fine-tune contentious provisions to put in place a mining policy that is pro-people, ensures the protection of the environment and promotes national growth.’

4 Allan & Associates Press Release 11 May 2010

The CBCP’s Matrix Of Presidentiables on Key Issues issued in early May confirms Villar’s public stance not to definitive position on the 1995 Philippine Mining Act. His hesitancy this issue may represent an accommodation for his supporters within leftist groups that oppose mining, although Villar has not been personally involved in the anti-mining lobby.

Matrix Of Presidentiables on Key Environmental Issues

Delos Estrad Gordo Teodor Aquino Reye Madrigal Perlas Villanueva Villar a n o s

Review of Mining Act of D A Repeal - Repeal A - A A 1995

Define wider, Specific limits for forest lands and national parks A A D A A A A A A and implement massive reforestation Reintroductio n of Nuclear - D - - - D - D - Power as Energy

Strictly Adhere to the D D D D D Constitution A A Change D Change ConCo Change D ConCon over Charter Needed Needed n 2013 Needed Change

A - Agree, D - Disagree, - Position not Available

Source: Catholic Bishops' Conference of the Philippines (CBCP)

If the political risks associated with mining in the Philippines are unlikely to alter much under the next president, the security threat remains more problematical.

Security risks facing the Philippines mining sector

The principal security threat to mining operations in the Philippines comes from the communist New People’s Army (NPA) guerrilla group. The NPA are active, to varying degrees, in all regions of the Philippines. While the archipelagic geography the Philippines and the NPA’s preference for bases in often remote areas hampers cooperation between the numerous ‘fronts’ that serve as the guerrillas’ operational and political formations, centrally issued orders are reflected on the ground. 5 Allan & Associates Press Release 11 May 2010

The NPA stepped up its opposition to the mining sector following the December 2004 decision by the Philippines’ Supreme Court to uphold the constitutionality of the Mining Act of 1995, which for the first time permitted foreign investors to fully own local mining concessions under so-called Financial or Technical Assistance Agreements (FTAAs).

Attacks against mining-related targets – such as remote exploration site, heavy equipment or the poorly trained mine guards who often serve as little more than de facto armouries for the NPA – are either linked to extortion (‘war taxes’) or in support of local communities opposed to mining (‘mobilisation’).

Raids against foreign mining interests tend to follow cycles that reflect a number of factors, ranging from heightened local nationalist or xenophobic sentiments linked to a specific incident to gain tactical advantages through distracting and dispersing military units. Attacks against foreign mining interests have fallen sharply over the past two years, but could resume as and when the NPA chooses. A retired Philippines Army general noted in May 2008 that ’mines are the milking cows of insurgents,’ offering some context as to why raids against mining companies rarely lead to a devastating levels of damage or high casualties.

The 2007-08 attacks against foreign mining companies in the Philippines

• 6 March 2008 At least 50 NPA guerrillas raided the Anglo-Norwegian owned Apex Mines site in Barangay Masara, outside Maco township in Compostela Valley province, southeast Mindanao. The attack on the exploration site lasted around two hours, was carried out by NPA fighters wearing military- style uniforms and mounted on dump trucks. The raiders disarmed at least 13 security guards, taking five M-16 rifles as well as shotguns, handguns and personal radios, and burned five specialised mining vehicles. Local media reported that the new management had ended the practice of paying ‘war taxes’ to the NPA. No casualties were reported in the attack. The same site was also raided by NPA guerrillas on 30 October 2005, when three weapons were seized from the security guards.

• 6 February 2008 Up to 30 NPA guerrillas were involved in an attack a gold processing plant operated by JB Management and Mining Corp. in Monkayo township in Compostela Valley province in southeast Mindanao. Two of the company’s security guards were killed in the attack and their firearms seized. In October 2005 at least five people were killed and up to 12 injured in an explosion in mine operated by JB Management and Mining Corp. Local media reported that there had been numerous killings in the region over disputed mining claims in the region since the 1980s.

6 Allan & Associates Press Release 11 May 2010

• 1 January 2008 Up to 100 NPA guerrillas raided the Tampakan mine site of Swiss-Australian owned Xstrata Plc, located in southern Mindanao’s South Cotabato province. The attackers burned down an administrative building and a sub-contractor’s office in the pre-dawn raid. The chief security office was briefly held, and some weapons and office equipment seized. According to an NPA statement the attack was meant to end Xstrata’s operations in the area. The Tampakan site, which will cost more than USD5.2 billion to develop, has been subject to exploration activity by foreign mining companies for more than a decade. The development has also been opposed by a broad coalition of local groups, ranging from environmentalists to the Catholic Church. The NPA warned that it would take further action if the site remained operational.

• 3 October 2007 Up to 40 NPA guerrillas raided the Australian-owned El Dore Mining Corp. site in Camarines Norte province's Labo town, 210km southeast of Manila. The attackers set fire to heavy equipment and vehicles and seized the weapons and mobile telephones of the security guards. No injuries were reported at the mine exploration site, which had operating for about a year. The NPA said the raid was intended to warn El Dore to end its operations, which it claimed damaged the environment, displaced local people and exploited resources that should benefit .

• 3 April 2007 Up to 50 NPA guerrillas raided a gold mine site being developed by Australian-owned CGA Mining Ltd. in Aroroy, central Masbate province in the Bicol region. The guerrillas set fire to five buildings and some heavy equipment in the raid, leaving behind a number of home-made bombs to hinder the security forces. A police officer who pursued the attackers was killed.

Operational risks facing the Philippines mining sector

The main operational problems facing mining companies in the Philippines are opposition from the myriad community, special interest groups and NGOs that are active across the country. These groups are often supported by the country’s principal religious orders and local politicians seeking electoral support.

The problem for mining companies is that such a dense network of opponents can counter many of the strategies they employ to secure local acceptance and cooperation in what may become a decades’ long project. This can lead to endless attrition tension generated by the near impossibility of meeting all the expectations of communities affected by the project, creating in turn a level of opposition that can cause a company endless delays, disruptions and reputational damage far beyond the mine site.

7 Allan & Associates Press Release 11 May 2010

Conclusion

Outgoing president Gloria Macapagal-Arroyo’s government had sought during its term of office to attract investment worth at least US$6.5-billion in exploration and mining projects. Despite surging metal prices and the growing interest of China and India in the Philippines’ natural resources, the mining sector has failed to attract anything approaching the foreign investment required to fulfil its potential.

Persistent legal challenges, opposition from community, environmental and other groups, as well as security risks serve to deter newcomers or exhaust those who try and navigate these obstacles.

An Aquino or Villar presidency is unlikely have any material impact on the status quo in the mining sector. This is a negative outcome for foreign miners seeking to diversify or offset what may become a broad trend towards high taxation in the mature mining provinces.

While both candidates have emphasised the need for foreign investment as part of the country’s wider needs to address issues of social and economic inequality, neither have offered any specific or costed policies that may encourage or achieve this outcome.

Given the political influence and often monopolistic instincts of the domestic business lobby – including much of the mining sector – foreign interests are unlikely to seen as a priority for the incoming administration.

For general release 11 May 2010

Allan & Associates is a Hong Kong based security risk management consultancy that provides security risk management advice to companies involved in extractive industries across the Asia-Pacific region. To learn more about Allan & Associates please visit our website at www.allan-assoc.com

For further information please contact Bradley Allan in Hong Kong + (852) 2987 7926.

8 Allan & Associates Press Release 11 May 2010