Chinese Companies Skirt Filipino Mining Laws

Chinese mining companies are evading the Philippines' stiff mining laws to go after the country's US$1 trillion in untapped reserves of copper, gold, zinc and other minerals, according to a new report by the Manila-based Pacific Strategies and Assessments.

A potent cabal of environmentalists, nationalists, politicians and the Catholic Church have largely stymied multinational investment in extractive industries in the Philippines, which in the 1980s were among the world's biggest. As Asia Sentinel reported in December, a local official ignored a federal government law to invoke a local environmental ordinance to close down the country's richest copper and gold project, being explored by the LSE-listed Xstrata Plc.

In many ways, Xstrata's decision to walk away illustrates many of the drawbacks to multinational investment in the Philippines. Total foreign direct investment for 2010 was an anemic US$1.71 billion, falling by nearly 13 percent from a still-paltry US$1.96 billion for 2009. Last year, FDI hit a net inflow of $1.71 billion, falling by nearly 13 percent from $1.96 billion the previous year, with investors discouraged by corruption, red tape, erratic bureaucracy and nationalism. While President Benigno Aquino III has placed the mining industry at the top of his agenda, the national government has often been unable to overrule provincial authorities to allow investment to proceed.

The Chinese, however, appear to have found a way around the red tape and other drawbacks to mining investment, according to the 11-page PSA report, which is made available to paid subscribers by the country-risk firm. Although more than a score of Chinese mining concerns have made major investments in mining operations, including Baosteel, China Metallurgical Construction, Jiangxi Rare Earth & Metals Tungsten and others have made major investments, some are actively using the act protecting small-scale mining to their advantage.

"Specifically," the report says, "Chinese firms continue to exploit and abuse the People's Small-Scale Mining Act of 1991 by hiding under the cover of domestic small-scale miners to bypass Philippine mining laws as well as avoid the large capital requirements, fees and taxes associated with large-scale mining."

Chinese companies, according to the report, find a Filipino proxy who buys a US$227 small-scale mining permit from local government units. Environmental permits from local governments cost another US$340.

In an effort to feed its burgeoning manufacturing industries, China has become the world's top consumer of copper, second in aluminum, third in nickel and fourth in gold. It is also among the world's top consumers of tin, zinc, petroleum and steel.

PSA's sources say there are more Chinese mining investors in the country than official permits and licenses can account for, with Chinese companies operating under the names and licenses of their Filipino counterparts. The report cites Oriental Synergy, which is partnered with Macau Quanta in a mineral production sharing agreement assigned to a Filipino partner, Minahang Bayan ng Mamamayang ng Dinigal Island Cooperative. Jianxi Rare Earth and Rare Minerals is partnered with a Filipino company operating under the mineral production sharing agreement of Mina Tierra Gracia, Inc.

"While the Mining and Geosciences Bureau asserts that permits are non-transferable, large mining companies have learned to co-opt domestic small-scale miners to serve as the official claimant," the report says. "Meanwhile, the better-resourced Chinese firm serves as the actual mine site operator."

A number of mining projects, particularly small-scale operations, are being operated entirely by Chinese companies in violation of Filipino laws, the report states. It cites chromite mining operations in Cambayas Mining in Eastern Samar and magnetite operations in Leyte. While both have their own mineral production sharing agreements, in fact media have reported that the Chinese company Peng Cheng Metallic Resources actually is now or soon will be operating both.

"Chinese firms reportedly engage in small-scale mining to circumvent circuitous Philippine mining laws, stringent safety and environmental standards, large capital and operating funding requirements and costly fees and taxes that come with large-scale mining in the Philippines," the report continues.

That has the potential for disaster. As the report notes, in China itself, mining is enormously dangerous. In 2009, 2,631 miners died in accidents, perhaps the world's worst accident record despite the fact that in 2004 the central government demanded a crackdown on illegal mining, confiscating many operations. However, across China many of the mines are owned illegally by local government and Communist Party officials, who have ignored the central government's edict.

For instance in the Philippines there is information, according to the report, that some Chinese companies operating in Zambales, Zamboanga Peninsula and Camarines Sur are using heavy equipment and explosives to extract ore in contravention of national mining laws. In Camarines Sur, in February 2011, a Chinese national, Chen Te Hao, an engineer for Prime Rock Mining, a Chinese company, was killed after a huge boulder crushed his head. The permit for the mine was issued under the name of Benito Saladanan of Bicol Chromite. Prime Rock was already under investigation for using explosives in its mining operations, which is prohibited.

The result, as in China, is large-scale violation of environmental standards. "There have been reports of fast-rising floods during heavy rains, landslides, poisoned water bodies, soil erosion, deforestation and even a decline in farm output in areas where there has been a surge in questionable small-scale mining operations."

In Zambales Province, where three Chinese firms operate at least three small-scale mines, local residents have complained of "blood-colored water" breaching river banks and inundating rice fields since mining began, killing crops.

"Locals also accuse mining companies of denuding their forests and operating in watersheds, adding that some of those supposed small-scale miners even bulldozed their way through government restricted community forest management areas."

In 2008, the Philippines Department of Environment and Natural Resources acknowledged that an estimated 3 million metric tons of mineral ores processed in China were unaccounted for by the government in Manila. There are additional concerns that Chinese companies are increasingly setting price trends on the sale of minerals.

Philippines exports to China posted a 94.32 percent increase from 2009 to 2010, reaching US$5.7 billion, pushing China into fourth place among the Philippines' export markets, accounting for 11.09 percent of exports. "The surge was largely attributed to China's increasing demand for minerals and metals such as iron ore, copper and nickel."

If Hong Kong were added in as an export destination, Hong Kong and China would become the top export market, accounting for almost 20 percent of total Philippines exports.