Philippine Mining Industry’s Inevitable Rise

Philippine President GM Arroyo’s move to lend an ear to the Catholic Bishops to pave way for a “review” of the mining statute has elicited some concerns among some investors.

The Catholic Church has been openly opposed to the revival of the mining sector due to “environmental” concerns and this, in my view, has prompted several prelates to explicitly call for her resignation using the “legitimacy” issue as camouflage.

PGMA’s resolve to open communication channels with the influential Catholic Church is obviously a political ploy to “damage control” or reverse the declining tide of her political stock.

Nonetheless, considering the cash strapped position of the government plus the potential revenues it can generate, aside from broadening influence of resource-based geopolitics, the renaissance of the mining industry will unlikely be forestalled by the whimsical and baseless impositions of the myopic, self-righteous and socialist leaning Catholic Bishops.

The emerging risks in the mining industry has been on the aspects of “nationalization” (Venezuela, Bolivia, Zimbabwe), and/or increase in royalties or government share on mining revenues (Chile). While we have seen similar protests lodged by the Church in several Latin American countries, governments have not curtailed mining activities but instead increased its participation by either increasing equity on projects or demanding higher take on revenues. In short, it’s all about money.

In the Philippines, there is “nothing to nationalize” or nowhere to demand for an increase in shares of revenues simply because there is hardly an industry to speak of. In a speech delivered to the Asian Mining Congress in 2004 former Department of Environment and Natural Resources (DENR) Michael Defensor noted that there are ``only two (2) big mines in operation. Added to these are three (3) medium-scale chromite mines, four (4) medium-scale nickel mines and five (5) medium-scale gold mines with fifteen (15) cement plants and quarries at work.”

On the revenue side, when one speaks of generating US$61.4 million from excise taxes, and US$432 million in Corporate taxes annually, such magnitude makes the industry too compelling to ignore as to write it off for the sake of unjustified bugaboos (Mining admittedly has some negative environmental impacts but doesn’t “destroy life”~ pure bunk!). In essence, given the resource rich potentials of the country, no matter who sits as President (even a Prelate!) will be compelled to harness the revival of the industry for financial and economic purposes. The $64 question is, how it would be done (open to foreign investors, or government instituted).

Moreover there is the issue of geopolitics.

Rising commodity prices, which have been the outgrowth of investment and macroeconomic cycles compounded by the ramifications from collective government policies, is here to stay for sometime. Some market experts have even been suggesting that the present cycle could even last until 2050 based on the Kondratieff (Soviet economist Nikolai Kondratieff) rising long wave cycle count which spans from 45 to 60 years peak to peak! Analyst Martin Spring quotes Kenneth Rogoff, professor of economics at Harvard, “For at least the next 50 to 75 years, prices for many natural resources are headed up.”

This means that securing resources as oil, natural gas, copper, gold, silver, molybdenum to soft commodities (agriculture) will increasingly be the driving force behind geopolitics!

In the words of Dr. Marc Faber (emphasis mine), ``when markets are glutted and over-supplied, no one is going to fight in order to satisfy his demand. Conversely, when markets are characterised by acute shortages, people will fight and go to war in order to secure their required supplies, particularly when the shortages that might arise or that have already arisen threaten the physical and economic survival of the groups or countries involved.”

What this means is that there would be intense pressures from extraneous forces to revive our resource based industries such as the mining industry, (whether the Catholic Bishops like it or not). For example, I expect the Chinese government to ante up their presence towards shaping local politics (e.g. the aborted attempt to buyout UNOCAL by China’s CNOOC was a purported backdoor play to Asia’s energy resources, the current $400 million North Rail project from Caloocan to Malolos could be one of the icebreakers). To the extent that chronic shortages of a particular commodity could possibly pose as a casus belli (for an invasion)! In short, the revival the mining industry is simply inevitable for as long as current commodity dynamics prevail. Either we will open the industry and benefit from it through trade, or someone will eventually do it for us.

Finally, we should let the market speak for itself. While the present developments may give an investor anxiety over the consistency of policies adopted by the present regime, the financial markets will tell us whether these concerns are treading on valid grounds based on the collective psychology of investors represented by price values. Since the announcement of PGMA to “review” the Mining Act, the performance of local mining companies listed abroad has been mixed, Sur American Gold soared 26.67%, Mindoro Resoures down -3.66%, Philex gold surged 37.5%, TVI Pacific fell 6.67% while Pearl Asian Mining slumped 33.33%.

Figure 1: Philippine Mining Index

Meanwhile the Philippine Mining & Oil Index posted a hefty 7.86% advance this week, the best performer among sectoral indices in the Philippine Stock Exchange as shown in Figure 1. As far as the markets are concerned, there are certainly no strains of a policy reversal.

PricewaterhouseCoopers on Potentials of the E7

``The entrepreneur always searches for change, responds to it, and exploits it as an opportunity."- Peter F. Drucker

Unless the country tacks into the fold of a Cuba or North Korea, as suggested by some xenophobic but influential segments of the society, (aside from the politically fixated minds), the seismic changes unfolding amidst the macroeconomic and geopolitical front is truly a wonder to behold if the trend should persists. Aside from Goldman Sachs, an investment firm that predicted the rise of economic powers of the ``BRIC: Brazil Russia India and China” to supplant the major western powers, now we have PricewaterhouseCoopers predicting on the same plane that (emphasize mine) ``By the year 2050, what the report calls the ‘E7’ economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will have outstripped the current G7 (United States, Japan, Germany, UK, France, Italy and Canada) by between 25%, when comparing Gross Domestic Product (GDP) using market exchange rates, and 75%, when using purchasing power parity (PPP) exchange rates.”

The two tables from PricewaterhouseCoopers (United Kingdom) shows of the following: Table 1 (projected growth rates from year 2005) and Table 2 (projected size of economies relative to the United States).

Table 1: Projected real growth in GDP, income per capita and working age population: 2005-50 (%pa)

Country	GDP in US $ terms	GDP in domestic currency or at PPPs	GDP per capita at PPPs	Working age population
India	7.6	5.2	4.3	0.9
Indonesia	7.3	4.8	4.2	0.4
China	6.3	3.9	3.8	-0.4
Turkey	5.6	4.2	3.4	0.6
Brazil	5.4	3.9	3.2	0.5
Mexico	4.8	3.9	3.3	0.4
Russia	4.6	2.7	3.3	-1.1
S. Korea	3.3	2.4	2.6	-0.9
Canada	2.6	2.6	1.9	0.2
Australia	2.6	2.7	2.0	0.4
US	2.4	2.4	1.8	0.4
Spain	2.3	2.2	2.2	-0.7
UK	1.9	2.2	2.0	0.0
France	1.9	2.2	2.1	-0.3
Italy	1.5	1.6	1.9	-0.9
Germany	1.5	1.8	1.9	-0.5
Japan	1.2	1.6	1.9	-0.9

Source: PricewaterhouseCoopers LLP GDP growth estimates. Working age population growth from the UN.

Table B: Projected relative size of economies in 2005 and 2050 (US = 100)

Country (indices with US = 100)	GDP at market exchange rates in US $ terms		GDP in PPP terms
	2005	2050	2005	2050
US	100	100	100	100
Japan	39	23	32	23
Germany	23	15	20	15
China	18	94	76	143
UK	18	15	16	15
France	17	13	15	13
Italy	14	10	14	10
Spain	9	8	9	8
Canada	8	9	9	9
India	6	58	30	100
Korea	6	8	9	8
Mexico	6	17	9	17
Australia	5	6	5	6
Brazil	5	20	13	25
Russia	5	13	12	14
Turkey	3	10	5	10
Indonesia	2	19	7	19

Source: PricewaterhouseCoopers LLP estimates (rounded to nearest percentage point)

Of course these are nothing more than assumptions with immense probabilities of deviations from the embedded very long-term forecasts, akin to those institutions or buyers of sovereign 50-year bonds (whom are projecting more of the past and present to the future).

However, the essential point driven by PricewaterhouseCoopers is that the critical sources of the largest growth potentials come from Emerging markets rather developed ones, characterized by the confluence of a large dynamic growing populations, are resource rich and have been capitalizing from the ongoing wealth and technology transfer as the global division of labor gets to be highlighted, on the backdrop of increasing trends of globalization, or economic growth on more trade and financial integration (unless subverted by protectionist policies).

Investors looking for YIELD outperformance should therefore seriously look at or consider the prospects of investing in emerging markets as ours. It is probably one reason why foreign investments constitute a majority of the activities in the Phisix despite the mephitic political atmosphere. If the Indonesia can get noticed, why shouldn’t we? Or simply, how can the Philippines be NOT a part of the growth dynamics of its sizzling hot neighbors unless it adopts “curtain wall” policies?

Bullish Signals from the Recent Rally

``To profit from good advice requires more wisdom than to give it."- Wilson Mizner (1876-1933), US Screenwriter

One thing inspiring about the present rally is that internal sentiment and some technical indicators appear to have turned bullish.

As figure 4 shows, two patterns seen in the Phisix chart formed for about a year manifests of two bullish formations, particularly the ascending triangle coupled with a “rounding bottom”.

Since both bullish formations have been at work for about a year, this can be reckoned as “intensively” bullish, which means that if a breakout ensues, the pattern can lead the Phisix to test 2,530 levels! The estimate is arrived from measuring the bottom of the chart to the present resistance levels applied on the upside from the resistance levels.

Indeed such outlook can be quite exciting, however, one should be reminded that charts can only be used as a guidepost to measure the psychology of the investors/market and are NOT foolproof! Second is that if indeed a breakout follows, it means that the Phisix may test the estimated level for a period of time, similar to the duration of its formation, which may span from one year or even possibly more.

Now of course, such an outlook means adopting the right strategies when and if the Phisix does break the 2,172 resistance levels. Past performance is no guarantee that the future outcome will be similar, as in the case of PLDT, measuring its ALPHA (measurement of stock performance beyond its Beta) through Figure 5, shows that PLDT during the initial stages of the Phisix run in 2003-2004 had greatly outperformed the Phisix.

Figure 5: Measuring PLDT’s Alpha

Today, PLDT still outperforms the Phisix but much to a lesser degree, as shown by the angles of the two disparate trend lines. This means that either PLDT will pick up its momentum and lead the Phisix anew or a coming breakout would come from a broader participation from other heavyweights.

As mentioned in the past, outperformance comes with “speculative issues” as local investors turns optimistic, the tendency is to pile on broadmarket issues rather than on the heavyweights.

And signs are on the wall. During the past attempts of the Phisix to the resistance levels, most second or third tier issues that were having an upside momentum have been stalled by sellers waiting at the wings at each of the issue’s resistance levels. In short, most issues failed to fulfill a breakout.

Last week, I have noted of several ‘successful’ breakouts on the broadmarket which could mean that local investors could be indeed turning bullish, such as Cebu Holdings Inc. (+15.78%), Keppel Philippine Marine (+28.57%), Steniel Manufacturing (+59%), MRC Allied (+65.85%), Filinvest Development Corp (+27.16%), International Exchange Bank (+7.5%) and Paxys Inc. (12.328%).

Finally as a matter of market internals, the breadth had a marked substantial improvement with advancing issues dominating daily activities (even on Friday’s decline). Moreover, as initially stated, foreign capital flows remained significantly positive at P 888.835 million, with inflows seen in the broadmarket while foreign transactions represented about 61% of cumulative turnover.

Obnoxious politics aside, the Phisix is now about 40 points away from its resistance and may consolidate first or move ahead to test its one year high soon. Of course, if the political equation changes (with a violent overthrow of the present government), and if any exogenous blowouts occur (abovementioned risks)...all bets are off. Momentum for the moment is in favor of the bulls.