Extractive Industries

82 N D PHALTRA NATIONAL CONVENTIONPICC, MANI LA

FEBRUARY 5 , 2015

FLORENCIO C. DINO I IOI C – REGIONAL DIRECTOR, BLGF IV

MEMBER, PRBRES

Current Issues and Concerns: Properties in the Extractive

Industries

Outline

Introduction The Philippine Extractive Industry Transparency

Initiative (PH-EITI)The Philippine Valuation Standard (PVS):

Guidance Note No. 14Local Finance Circular No. 2-09 (Aug. 20, 2009):

Prescribing the Guidelines Governing the Power of Provinces, Cities and Municipalities to Impose Local Taxes, Fees and Charges on Mining Companies Pursuant to the LGC (RA 7160) and its IRR

Conclusion

Introduction

Some statements in the Introduction and Conclusion of this presentaton were excerpts from the Keynote Remarks delivered by Manuel V. Pangilinan during the 61st Annual National Mine Safety and Environment Conference held at Camp John Hay Convention Center, Baguio City on November 14, 2014 with the Theme: “Responsible Mining and Nation Building”.

Introduction

The City of Baguio is known as the “Cradle of Philippine Mining”.

Benguet and the Cordilleras (are) lands rich with mineral resources.

The Spaniards saw this as early as 1572 – attracted by (its) cool mountains and fertile valleys – and of course, its gold.

The first roads the Americans built were as much to pave the way for mining – as to establish a summer city.

Kennon Road, carved from the Bued River canyon in 1904 is a proud witness.

Introduction

Mining and nation – building:If we choose not to participate in the global

supply chain for minerals by discouraging mining or worse, shutting down our mines – which can happen if our tax regime turns unfavorable – our need for mining products will not stop.

We would be importing the same minerals we refuse to mine.

We would then be paying the Indonesians, Malaysians, Australians – everybody else – for their riches.

Introduction

Mining and nation – building:We would giving them not only their profit,

but also the cost of protecting their environment.

This makes no sense at all – why pay somebody else to do the job we ourselves can and should do?

If we continue to stifle mining, the criticism that it promises much and delivers little will be self-fulfilling.

Introduction

Mining and nation – building:Yet, if we look elsewhere, mining has been a

significant driver of economic development.Here are some examples of mining’s annual

contribution to the economies of other countries:

1. Australia - $ 142 billion2. Canada - $ 37.5 billion3. United States - $ 1.9 trillion4. Brazil - $ 24 billion

Introduction

Mining and nation – building:We are far from capturing the implied value

of our reserves.Out of 9 million hectares regarded to be

geologically prospective for minerals, only 1.5% or 135,000 hectares have actual mining permits.

Hence, it is not surprising that the contribution of mining to GDP has stagnated to about 1%.

The PH-EITI

Philippine Extractive Industries Transparency Initiative (PH-EITI)

Initiate fiscal transparency in the extractive industry.

A report disclosing the revenues of extractive industries and government revenues from these industries will be published by December 2014.

The PH-EITI

The PH-EITI, spearheaded by the DOF, is one of the Administration’s good governance initiatives to improve transparency and citizen’s participation, specifically, improved access to information.

It is committed under the Open Government Partnership (OGP) and part of the Philippine National Action Plan 2013 – 2015.

Open Government Partnership (OGP)

“ Government institutions are strengthened when they are not merely open to the active participation of their citizens, but when they encourage the people to engage it by empowering them and garnering their trust.”

- President Benigno Simeon C. Aquino III- The OGP was established in 2011 with 8

member countries, including the Philippines. As of February 2014, it has grown to 64 countries.

- A unique feature of OGP is the Independent Reporting Mechanism (IRM).

The PH-EITI

It is a tripartite initiative among government, civil society and business to ensure greater transparency in revenues from extractive industries, specifically through the publication of a report that compares government and industry figures on government revenues in mining, oil and gas. This publication is verified by an independent and internationally accredited auditor.

The EITI Standard

A national multi-stakeholder group (government, industry & civil society) decides how their EITI process should work.

The findings are communicated to create public awareness and debate about how the country should manage its resources better.

The EITI Standard

Licenses

& contract

s

Monitoring

production

Tax collection

Revenuedistribution

Expendituremanagement

As companies disclose payments, government discloses receipts.

The EITI Report shall contain:Licensing informationState ownershipContract transparencyBeneficial ownershipState – owned enterprisesTransfers to local governmentSocial and infrastructure investments

The EITI Standard

The EITI Standard has two core elements:1. Companies publish what they pay and

governments publish what they receive in an EITI Report.

2. This process is overseen by a multi-stakeholder group of governments, companies and civil society.

The EITI Standard

EITI Requirements:1. Effective oversight by the multi-stakeholder group.2. Timely publication of EITI Reports.3. EITI Reports shall include contextual information

about the extractive industries.4. EITI Reports shall include full government disclosure

of extractive industry revenues and disclosure of all material payments to government by oil, gas and mining companies.

5. Credible assurance process applying international standards.

6. EITI Reports that are comprehensible, actively promoted, publicly accessible and contribute to public debate.

7. The multi-stakeholder group take steps to act on lessons learned and review the outcomes and impact of EITI implementation.

The EITI Standard

The EITI Standard is an international standard that ensures transparency around countries’ oil, gas and mineral resources. It is developed and overseen by a coalition of governments, companies, civil society, investors and international organizations. All these groups are represented in the EITI Board which is supported by the EITI International Secretariat.

The EITI Standard

The EITI Standard has robust yet flexible methodology, which countries adopt to address the specific issues they are facing. When implemented, the EITI ensures more transparency in how the country’s natural resources are governed, and full disclosure of government revenues from its extractive sector.

The PVS: Guidance Note No. 14

DOF Department Order No. 37-09 (Oct. 19, 2009): “Prescribing the Philippine Valuation Standards (1st Edition) – Adoption of the IVSC Valuation Standards under Philippine Setting”.

Guidance Note No. 14: Valuation of Properties in the Extractive Industries

Extractive Industries, include:1. Minerals industry2. Petroleum industry


Extractive industries are characterized by the extraction from the earth of natural resources, which may pass through a series of ownership, processing and measurement stages.

Valuers shall distinguish the real property, personal property and business interests involved in the stages.

Valuations in the extractive industries rely heavily on information provided by:

1. Technical experts2. Accredited specialists specific to the industry


A peculiar characteristic of the extractive industry is the depletion or wasting of natural resources that can be replaced by in their original state by natural action only in special cases.

Examples of depleting or wasting natural resources:

1. Metallic mineral deposits2. Non-metallic deposits3. Construction materials4. Petroleum deposits


Mineral industry:1. Surface mine (open pit, open – cast, open cut, quarry) 2. Underground mine3. Wells (sulphur extraction)4. In-situ leaching (solution mining of various salts and

uranium minerals)5. Dredging the floors of water bodies (for gravel, mineral

sands, diamonds and alluvial gold)6. Extraction of mineral products from water (such as halite or

common salt and magnesium) Petroleum industry:

1. Wells drilled into the earth’s crust2. Open pit mining methods for oil sand and oil shale3. Oil and gas extraction by pumps and valves


Difference Between the Mining and Petroleum Industries

Mining Industry Petroleum Industry

Extraction

Once extraction is completed, no known economically recoverable asset remains in place at that time except when extended through mineral reserve additions.

At the conclusion of the initial (primary) extraction phase, secondary and/or enhanced recovery methods are often applied to recover more oil and natural gas.

Land Surface Requirement for Processing Plant and Infrastructure

Often requires a larger land area for stockpiles and disposal of waste material.

Relatively little surface area is required for oil or gas well operations.

Transport

Mined product is generally transported to market or port by rail or truck

Crude oil, natural gas and refined petroleum products are often transported to market or port by pipeline.


Similarities Between the Minerals and Petroleum Industries

Both are major global industries.

Their products are essential in all modern economies by provision of raw and refined materials for downstream industries, such as;

Energy generationConstruction

ManufacturingTransport

Communications

Both are high risk activities – considerable work and study must be undertaken to determine the technical and economic viability of production.


The value of an extractive industry natural resource property is the projected net earnings derived or potentially derived which may vary from year to year – depending on;

1. The type of natural resource commodity.2. The cyclical nature of the commodity

markets, and3. The prices and variations in production rate

and costs.


The quantity and quality of mineral and petroleum natural resource properties may vary over time due to changing economic and technical advances, as well as exploration success and are valued primarily based on;

1. Presence of reserves, 2. Presence of resources, and3. Potential for discovery of resources.


Scope of GN14: Valuation of Properties in the Extractive Industries supplements;

GN 1: Real Property Valuation GN 2: Valuation of Lease Interests GN 3: Valuation of Plant, Machinery and Equipment GN 4: Valuation of Intangible Assets GN 6: Business Valuation GN 8: The Cost Approach for Financial Reporting –

(DRC) GN 9: Discounted Cash Flow Analysis for Market

Valuations and Investment Analysis


Definitions:1. Extractive industries – involved in the finding,

extracting and processing on natural resources located on, in or near the earth’s crust composed of the minerals and petroleum industries, including extraction of geothermal fluid for its energy content, but excluding the water industry sector.

2. Exploration property or area – a mineral or petroleum real property interest that is being actively explored for deposits but for which economic viability has not been demonstrated.


Definitions:3. Feasibility study in the extractive industries –

a comprehensive study in which all geological, engineering, operating, economic, marketing, environmental, regulatory and other relevant factors are considered in sufficient detail which serve as the basis for a final decision by a proponent or financial institution to proceed with or finance the development of the prospective property for mineral or petroleum production.


Definitions:4. Mineral – any naturally occurring material

useful and valued by mankind found in or on the earth’s crust.

5. Minerals [as defined in Sec. 3(aa) of the Philippine Mining Act of 1995 (RA 7942)] – refers to all naturally occurring inorganic substance in solid, gas, liquid or any intermediate state excluding energy materials such as coal, petroleum, natural gas, radioactive materials and geothermal energy.


Definitions:6. Mineral lands – [as defined in Sec. 199(p) of the Local

Government Code of 1991 (RA 7160)] – are lands in which minerals, metallic or non-metallic, exist in sufficient quantity or grade to justify the necessary expenditures to extract and utilize such materials.

7. Mineral reserve [as defined by the Combined Reserves International Reporting Standard Committee (CRIRSCO)] – the economically mineable part of a measured and/or indicated mineral resource. Mineral reserves are subdivided in the order of increasing confidence into – probable mineral reserves and proved mineral reserves.


Definitions:8. Mineral reservations [as defined in Sec. 5(bb) of the

Philippine Mining Act of 1995 (RA 7942)] – refer to areas established and proclaimed as such by the President upon recommendation of the Director through the Secretary, including all submerged lands within the contiguous zone and exclusive economic zone.

9. Mineral resources (as defined by CRIRSCO) – a concentration of occurrence of material of intrinsic economic interest in or on the earth’s crust in such form and quantity that there are reasonable prospects for eventual economic extraction. Mineral resources are subdivided in the order of increasing geological confidence into – inferred, indicated and measured categories.


Definitions:10. Minerals industry – entities involved in exploration,

mining, processing and marketing of minerals (GN 14 is NOT designed to cover assets downstream from the metals refineries or minerals processing plants, such as assets involved in the distribution of refined metals to metals fabricators, or mineral products to retailers or the final market.

11. Mining area (as defined in Sec. 3(ae) of the Philippine Mining Act of 1995 (RA 7942)] – a portion of the contract area identified by the contractor for purposes of development, mining, utilization ant sites for support facilities.


Definitions:12. Petroleum – any naturally occurring

hydrocarbon, whether in a gaseous, liquid or solid state. Raw petroleum products are primarily crude oil and natural gas.

13. Petroleum industry – entities involved in exploration for petroleum and the extraction, processing, refining and marketing of crude petroleum and associated gases (GN 14 is NOT designed to cover assets downstream from refineries and processing plants, such as assets involved in the distribution of refined petroleum products to retailers).


Definitions:14. Petroleum reserves [as defined by the

Society of Petroleum Engineers (SPE) and the World Petroleum Congress (WPC)] – those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward; classified as either proved or unproved. Proved reserves can be categorized as developed or undeveloped, while unproved reserves are sub-classified as probable or possible.


Definitions:15. Petroleum resources – GN 14 only considers petroleum

reserves and contingent resources. Contingent resources, as defined by the SPE/WPC, in conjunction with the American Association of Petroleum Geologists (AAPG), are “those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from known accumulations, but which are not currently considered to be commercially recoverable.

16. Pre-feasibility study in the extractive industries – a study of a mineral or petroleum deposit in which all geological, engineering, operating, economic, environmental and other relevant factors are considered in sufficient detail to serve as the reasonable basis for a decision to proceed to a feasibility study.


Definitions:17. Royalty or royalty interest in the extractive industries –

the landowner’s or lessor’s share of production, in money or product, free of charge for expenses of production. An overriding royalty is a share of mineral or petroleum produced, free of the expense of production, paid to someone, other than the lessor, over and above any lessor’s royalty.

18. Technical expert in the extractive industries – a person who is responsible for all or part of the technical assessment that supports an extractive industry valuation.

19. Technical assessment in the extractive industries – a technical document prepared by a technical expert/s that supports the extractive industry valuation and is appended to or forms part of a valuation report.


The Philippine Mining Act of 1995 (RA 7942)Sec. 5 (par. 2). “A ten per centum (10%) share of all

royalties and revenues to be derived by the government from the development and utilization of the mineral resources within mineral reservations as provided under this Act shall accrue to the Mines and Geosciences Bureau to be allotted for special projects and other administrative expenses related to the exploration and development of other mineral reservations...”

Sec. 26. Modes of Mineral Agreement Mineral production and sharing agreement Co-production agreement Joint venture agreement

Composition of the Extractive Industry

Extractive Industry

Resources/ Reserves

Proved Unproved

Mineral

Resources/ Reserves

Proved/Probable

Petroleum

Developed Undeveloped Probable Possible Inferred Indicated Measured

Local Finance Circular No. 2-09

Local Finance Circular No. 2-09 (August 20, 2009)Subject: Prescribing the Guidelines Governing the

Power of Provinces, Cities and Municipalities to Impose Local Taxes, Fees and Charges on Mining Companies Pursuant to the Pertinent Provisions of RA 7160, Otherwise Known as the Local Government Code of 1991 and its IRR.

To clarify the rules on the taxability of mining companies to ensure the proper and effective exercise by provinces, cities and municipalities of their taxing powers under the LGC. Secs. 138, 143, 147, 150, 151, 205d and 234e, LGC Art. 287, Rule XXX of the IRR, LGC The Philippine Mining Act of 1995 (RA 7942)


Business Tax on Mining Companies (levied on gross receipts for the preceding calendar year)

a) Extraction of minerals (metallic or non-metallic):

Not exceeding 2% (Sec. 143h, LGC), or as imposed by local ordinance.

b) Processing of extracted minerals to finished products:

Not exceeding 37 1/2% of 1% (Sec. 143a, LGC), or as imposed by local ordinance.


Situs of the tax.a) All sales transactions made in a locality;

With branch office – to the locality where such branch is located.

Without branch office – to the locality where the principal office is located.

b) All sales transactions recorded in the principal office of mining companies with project offices/mining areas shall be allocated to the locality with;

Principal office – 30% Project office/mining area – 70%


Situs of the tax.c) In cases where project offices/mining areas are

geographically located in 2 or more localities, the allocation of the business tax imposed by LGUs shall be decided by the “Committee” which will be composed of the affected LGUs subject to Sec. 150, LGC. (70% shall be prorated among the localities concerned).

d) In case of transfer or relocation of the principal office or branch office, the mining company shall give due notice to the LCE concerned within 15 days after such transfer or relocation is effected.


Termination or transfer of office.a) Transfer of business to other location (same

LGU) – no additional tax required during the period if the business tax has already been paid.

b) Termination of business – in case of total stoppage or complete cessation of mining operations,

Sec. 145, LGC shall apply.


Liability to the real property tax.Any person, grantee or concessionaire of mining

operations, whether;1. Exploration2. Development3. Commercial utilization

Real property owned by RP, its instrumentalities and political subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease (Sec. 205d, LGC).


Mayor’s permit and other regulatory fees.Shall be collected before the start of mining

operations (Secs. 147 and 151, LGC as enacted by local ordinance)

Incentives for pollution control devices.Exempted from RPT (Sec. 91, RA 7942

amending Sec. 234e, LGC).Mine wastes and tailings – not exempted from

regulatory fees.


Mobile equipment used in mining operations – dump trucks, excavators, bulldozers, payloaders, etc.

Personal properties, not subject to RPT.• Quarrying for sand, gravel and other quarry

resources.Not considered a mining activity.Subject to Secs. 138 and 151, LGC.• Time of tax payment.1st 20 days of January or of each subsequent

quarter, unless otherwise fixed in the local ordinance.


Examination of books of accounts and pertinent records of businessmen by local treasurers.

Done once for every tax period.To ascertain, assess, and collect the correct

amount of tax, fees and charges.BIR records shall be made available to the

local treasurer.


Definitions:1. Branch office – an extension of the principal office;

display areas where no stocks or items are stored for sale shall not be considered as a branch.

2. Contract area – land or water body delineated for the purpose of exploration, development or utilization of minerals.

3. Gross receipts – total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding discounts if determinable at the time of sales, sales return, excise tax and VAT.


Definitions:4. Principal office – the head or main office of the

mining company indicated in the SEC documents; the city or municipality mentioned in the Articles of Incorporation and official registration papers as the official address of said “Principal Office” shall be considered as the site thereof.

5. Pollution control devices and facilities – the infrastructure, machinery and/or improvements used for impounding, treating or neutralizing, precipitating, filtering, conveying and cleansing mine industrial waste and tailings...

Conclusion

It is important to expand the extractive industry so it can contribute significantly to nation – building.

In the 60’s and 70’s, mining companies were pre-eminent in our national life;

1. They were major companies in the stock exchange, and2. They were substantial foreign exchange earners.

We cannot have forward linkages simply because our mines are too small to make downstream smelters and refineries commercially feasible.

Conclusion

There is a need to improve the capacity and competence of regulation. The private sector can help government regulators raise its supervisory capabilities through funding of scholarships and training here and abroad, and the hiring of requisite personnel.

There is a need for a revised taxation scheme which can provide government with a more appropriate share of the benefits from the resources it owns.

And the benefits from mining between host LGUs and the National Government should be shared more equitably.

Conclusion

“Mining is not the enemy. Poverty is.” (MVP)The lack of the most basic necessities, the

lack of opportunities, the lack of choices – these pernicious deficits have plagued our people for far too long, in far too many places.

The Australians, Indonesians, Canadian, Brazilians have made their choice. If they can do it and succeed, why can’t we?

Conclusion

More than a year ago, Pope Francis put on a hard hat as he visited a coal mine in Italy.

There, the Holy Father declared, “Where there is no work, there is no dignity.”

This was greeted by shouts from the coal miners of “Lavore! Lavore! – Work! Work!”

Indeed, there is a lot of work to be done, if only to make the extractive industries work for us.

Thank You! Maraming Salamat Po!

PHALTRA National Convention

PICC, Manila

Feb. 5, 2015

Government & Nonprofit

Extractive Industries