Message to Stockholders

(A message from the Chairman)  

To my fellow shareholders,

We concluded last year with a strong performance despite the continued decline in metal prices and the prevailing challenges facing the mining industry. Since 2012, prices of gold and copper have fallen by 22% and 25%, respectively.

During the year, our metals mining business experienced average metal prices falling 2% for gold and 9% for copper compared with the 2013 levels. Our oil business has seen average prices fall over 50% from 2013. In addition to these price reductions, our operational performance was further challenged by the natural depletion of the ore grade in our existing mine.

This situation was reflected in the overall performance of the mining and oil sectors in the Philippine economy. Copper mining•€™s gross value added (GVA) to GDP, measured in constant prices, fell to a 2.7% growth last year from 23.7% in 2013. Gold mining•€™s GVA was reduced to a 3.2% growth from 6.4% previously, with crude oil and natural gas sectors managing only a 1.5% growth.

While external developments are beyond our control, we have been able to make progress in respect of (i) the temporary lifting of the suspension order on our Padcal Mine, which allowed us to operate at full capacity in 2014 compared with just 299 days in 2013 and (ii) disposal of non-core assets and cost reduction - both of which enabled the business to post a Core Net Income of P1.1 billion, 4% better than 2013, and Reported Net Income of P703 million, which was more than double that of the previous year. This allowed the Company to declare and pay out a total cash dividend of five (5) centavos per share last year.

The difficult landscape we operate in, however, is not expected to recover in the near term. Even with such a scenario, the priorities we laid out in 2013 remain the same, and our progress along these fronts will shape the future of our Company. Allow me to quickly cite how we have performed vis-à-vis the objectives we set forth last year.

We announced that we will •€œmanage our costs properly•€ and last year, we were able to reduce our General and Administrative (G&A) expenses by 29%. We will continue in this direction, in the most efficient but least disruptive means possible, without sacrificing output and jeopardizing operational capabilities.

We said that we will •€œfocus on value-accretive projects that will offer the best returns in the shortest possible time•€. To this end, we reduced our total capital expenditures in 2014 but sustained our two most critical investments in Padcal and Silangan. These two properties comprised the bulk of our capital outlays over the last few years and 95% of the total last year alone. We shall continue to
prioritize these areas, which we believe will provide the best source of value for our Company.

We stated that we will •€œimprove the performance of our Padcal operations•€, with particular emphasis on extending the mine•€™s life. With respect to this, we identified new mining levels and declared 111 million tonnes of additional resources from these sections within our existing mine. This is a significant step in prolonging Padcal•€™s productivity and life, as well as building confidence for the challenges ahead. We remain aggressive in exploring the areas around Padcal for new ore bodies which would further extend mine life. With respect to Silangan, the project•€™s Pre-Feasibility Study was completed in July 2014 and presented to the Board in August 2014. Our goal this year is to complete the Definitive Feasibility Study (DFS), which will be a critical component in putting the Silangan Project into production.

Another welcome news was the approval of Silangan Project•€™s Declaration of Mine Project Feasibility (DMPF) received from the Department of Environment and Natural Resources in April this year, which, together with the DFS, will enable us to facilitate the fullscale development of the mine.
We also want to •€œimprove our liquidity and strengthen our capital base•€. In connection with this, we supported the capital raising of our subsidiary, Silangan Mindanao Exploration Co., Inc., through a bond issuance to finance the Silangan Project•€™s DFS. An equity raising exercise and a strategic partnership at the Silangan level will help the project secure the much needed funding for the capital requirements of the Silangan Project. We are in the process of evaluating potential partners and assessing market conditions for fund raising.

We also undertook to •€œstrengthen our commitment to sound corporate governance practices, not only to align with the best practices across the globe but more importantly, to create a stronger, fully-compliant and world-class organization•€. The recognition, both local and international, we received last year were a vote of confidence in our efforts and will inspire us further.

We also committed to be the •€œface of responsible mining•€ and serve as the beacon for the industry by widening our corporate social responsibilities, beyond mere compliance with regulatory conditions. Our investments on Social Development and Management Program, Community Development Program and Environment Protection and Enhancement Program will always remain an integral part of our capex as we continue to prioritize helping the communities and environment around the areas we operate in.

On behalf of the Board, the employees and the entire PMC organization, we would like to extend our deepest gratitude to you, our shareholders, to our business partners, and all our stakeholders, once again for your support over the past twelve months. Your commitment and support will continue to serve as our reason and motivation for consistently thriving in this industry throughout the years, whatever the circumstances may be.

Yours cordially,






(A message from the President & CEO)  

To our shareholders,

The year 2014 marked the resumption to normal operations of our  Padcal Mine after the Mines & Geo-Sciences Bureau (MGB) lifted its  suspension order on August 27, 2014. All in all, it was another good  year for our Company as we continued to gain headway in improving  our financial performance, enhancing our operational efficiency,  rationalizing our organizational structure and strengthening our  image as a conscientious mineral resource company.

We reported a higher net income last year compared with 2013 as  
we were able to operate at full capacity for one year, enabling us  to cushion the combined impact of weak global metal prices and  decreasing ore grades at Padcal. Average gold prices declined 2%  and copper prices fell 9% from the previous year, while ore grades  were lower by 13% for gold and 10% for copper.

Specifically, the mine operated for 359 days against 299 days in  
2013, which allowed us to mill 9.5 million tonnes of ore against  7.7 million tonnes in 2013. Similarly, we produced 105,008 ounces  of gold and 35,391,154 pounds of copper, which contributed P5.9  billion and P4.6 billion in revenues and were 6% and 1% higher  year-on-year, respectively. Revenues from our oil and gas business  rose 45% to P345 million as a result of increased production at  the Galoc oil field Phase II project. These largely comprised the  consolidated revenues of P10.9 billion in 2014, which was 4% more  than the previous year.

Meanwhile, our total costs and expenses rose 13% to P8.4 billion  
but this pace was slower than the 20% rise in operating days  and 23% increase in tonnage, courtesy of our cost streamlining  initiatives across the organization. Specifically, this included the  postponement of non-critical capital expenditure items, optimization  of headquarter expenses and implementation of a manpower  rightsizing program. These measures were also responsible for  bringing down our general and administrative expenses by 29%  from 2013.

Admittedly, the prospects of declining metal prices and the depletion  
of resources in our mine prompted us to undertake a manpower  right sizing program. It was a difficult process to implement but we  believe that the long-term benefits of this program far outweigh its  short-term impact. From a financial standpoint alone, this exercise  would generate approximately P290 million in savings annually that  can be plowed back into operations. For the organization as a whole,  this should translate to a leaner and more productive workforce.

As a result, our core net income was recorded at P1.12 billion, 4%  
higher than P1.08 billion, excluding insurance gains, we posted  in 2013. Our net income also more than doubled to P703 million  from P312 million the previous year. The details of our financial  and operating performances are available on the Management•€™s  Discussion and Analysis portion which can be found in the  succeeding part of this report.

In terms of capital expenditure, we spent 4% less as we focused on the  
Silangan project and other mining projects within the vicinity of Padcal.  Our capex for Silangan continued to be significant and increased 11%  year-on-year to P3.8 billion, comprising 65% of the total.  Padcal capex increased slightly to P1.8 billion from P1.7 billion in  2013, as the increase in operating days necessitated additional  investments and capacity to accommodate 15 months of broken ore  reserve inventory from 12 months in 2013.

We continue to make progress in our Silangan Project as planned.  On August 6, 2014, we presented the results of the pre-feasibility  study to the Board. This paved the way for the Definitive Feasibility  Study (DFS), which is currently being undertaken together with  our consultants and is expected to be completed before the end  of this year. In relation to this, our subsidiary Silangan Mindanao  Exploration Company Inc. (SMECI) issued P7.2B worth of convertible  bonds in December 2014 to specifically fund the DFS.

Equally important was the approval of Silangan Project•€™s Declaration  of Mine Project Feasibility (DMPF) received from the Department of  Environment and Natural Resources this April, which authorizes  our subsidiary Silangan Mindanao Mining Co., Inc. to proceed with  the working terms of the respective Mineral Production Sharing  Agreement.

Outside of operations, our Company believes that responsible  mining goes beyond compliance with established mining and  environmental laws. In fact, we constantly extend a hand to care for  the environment and look after the welfare of our host communities  and business partners, most especially our workforce, even in  business-threatening situations.

We invested over P500 million in the Social Development and  Management Program, the Community Development Program and  Environmental Protection and Preservation Program. The amount  we spent last year was above what the government mandates and  reflects our commitment to ensure the continued development of our  stakeholders within our areas of operation. I encourage you to read  more of our Corporate Social Responsibility (CSR) initiatives across  this entire Annual Report.

We also took care of business beyond our scope of operations by  cleaning up and freeing the Company of its regulatory commitments.  In May 2014, we settled P200 million for local business tax claims  with the municipalities of Tuba and Itogon, This was followed by  the payment of P188.6 million to settle the environmental obligation  claims by the Pollution Adjudication Board (PAB) in June as we  continue to be catalysts for the development of communities in  which we operate.

These were part of our efforts to strengthen our organizational  backbone and elevate our business stature, which resulted in a  number of accolades and compliments received from prestigious  organizations. Among these are the •€œBest Corporate Governance  Company of the year•€ and the •€œMost Promising Corporate Governance  Company•€ awarded by the Asia CEO Awards and Corporate  Governance Asia, respectively. We also received an Integrated  Management System (IMS) Certification from TUV Rheinland in  April 2015 that allowed us to restore our environmental ISO 14001  Certification and affirmed our adherence to strict environmental  protection and safety protocols across our operations. The rest of  the recognitions we received last year are listed on page168 of this  Annual Report.

All these developments provided a strong impetus for us to chart our  long-term course and pursue our plans for the future as we continue  our journey towards being a responsible and sustainable mineral  resource company. As we set our sights on 2015 and beyond, our  immediate and medium-term objectives are as follows:

1. Increase Operational Efficiency at Padcal
2. Extend Padcal•€™s Life of Mine
3. Commence Mine Development of Silangan
4. Explore Strategic Partnerships and/or Acquisitions
5. Enter into Farm-in or Farm-out Agreements
for other Mining Tenements

Over the next five years, we will be targeting to increase the production at Padcal to a daily throughput of 28,000 metric tons (MT), equivalent  to an annual tonnage of 10 million MT, from the current level of  26,500 MT daily. To achieve this, we are implementing measures  that will improve our systems and enhance our efficiencies. This  included modernizing the equipment to accelerate the overall pace  of operations and upgrading the milling process to increase recovery  of metals. Already, the 2% improvement in daily throughput last year  was a welcome development. Moving forward, we shall intensifyour process re-engineering programs, aimed at a more efficient ore  extraction process, to minimize costs and maximize output.

In addition, we will be aiming to prolong the life of the Padcal Mine.  It is indeed encouraging that we blocked additional ore resources  below our current mining levels, which increased total resources in  Padcal by 71% and could potentially extend its life. We are equally  aggressively exploring areas in the Padcal vicinity to unlock new  sources of minerals that will augment resources and upgrade the  quality of ore in our existing mine.
In the short term, the approval of Silangan Project•€™s DMPF will  facilitate the ground works for the engineering and procurement  aspects of the mine while the completion of the DFS by November will  be a critical component in commencing full scale mine development  and bringing the project to its production stage. In addition, we shall  secure suitable financing and possibly seek a strategic partner, for  the full-scale development of the project. We are also on the verge  of updating the original mineral resource estimates of the Silangan

Project and if everything turns out as scheduled, we could start  production by 2018, at the earliest.  In as much as our efforts are focused on Padcal and Silangan, our  exploration group has been on the constant look-out for potential  partners to develop our other mining tenements in the Visayas and  Mindanao regions. We shall continue to explore ventures with  strategic partners, through farm-in or farm-out agreements, or  acquisitions that will add value to our Company. In this way, we  can maximize our existing assets and, at the same time, capitalize  on our initial efforts and investments. We will remain active and  leave no stone unturned, even during these times that the industry  landscape remains challenging and metal prices continue to be  bearish.

The past twelve months have indeed been very exhausting yet  exciting for our Company and the industry as a whole. We are  glad to have you by our side during these difficult times and are  most certain that our journey together will not be as rewarding  without your presence and commitment. To our Board, our Executive  Officers, shareholders and stakeholders, business partners and  most especially to our employees, allow me to extend my deepest  appreciation for your contributions during the past years and in  2014. We look forward to your continued support and enthusiasm for  the journey ahead as we create an even stronger Philex organization  together.

Yours sincerely,