MESSAGE TO STOCKHOLDERS
O u r S h a r e h o l d e r s :
The year 2019 turned out to be another eventful year for the mining industry. The global economy recorded its weakest growth since the 2008 financial crisis, as uncertainties from trade and geopolitical tensions weighed on global economic confidence. Manufacturing production and exports slowed, with major exporting economies in the Asian region caught in the fallout.
These external factors caused volatility in metal prices, with copper — known as a barometer of economic health because of its use in homebuilding and commercial construction — falling to its lowest level since 2017. An indicator of market uncertainty, demand for gold went up, as it is viewed as an investment safe haven. Mining companies also bore the brunt of reduced dollar revenues as the market uncertainties caused a ripple effect on the foreign exchange market.
The Philippine economy managed to post a full-year GDP growth of 5.9% in 2019, albeit slower than the 6.2% in 2018. In addition to the economic headwinds, the local mining industry was also buffeted by the ambiguity in the fiscal regime and other regulations that does not encourage investor confidence in the sector. In particular, the industry is still hobbled by the moratorium on new mining permits that has been in place since 2012 under Executive Order 79 and the ban on open pit mining.
These developments, however, were still far better off than the major headwinds that took place in the first three months of 2020 alone. After just a quarter, the whole world now faces the bleak prospect of a complete reversal of fortune. Whatever economic gains achieved in 2019 have now been upended by the global coronavirus (COVID-19) pandemic.
M a n a g i n g t h e I m p a c t o f t h e P a n d e m i c
Inherent in the nature of our business is anticipating crises and disasters so we immediately activated our Business Continuity Plan (BCP) to manage potential business disruptions from the COVID-19 outbreak. We managed to minimize the impact of the pandemic to the mining and mill operations as we were able to eliminate disruptions in our supply chain. This also paved
the way for the implementation of strategic sourcing initiatives by tapping alternative supply sources at the start of the government enforced Enhanced Community Quarantine (ECQ).
When the Philippine government enforced ECQ on March 16, 2020, our company’s response was swift. As a right and principled miner, protecting the health and safety of our employees and the local communities where we operate has always been our paramount concern. We ensured that health and safety protocols and precautions are in place in our areas of operation, taking measures to reduce physical contacts between people and follow hygiene, self-protection, and selfmonitoring.
We recognized our civic duty to comply with the protocols instituted by the government to help slow down the spread of the virus.
We have also re-allocated Php14 million of our Social Development and Management Program (SDMP) funds for our COVID-19 relief operations. These included the purchase of personal protective equipment, health supplies and goods, relief goods, and food packages as well as cash assistance to affected communities within our areas of operation. As the situation is changing rapidly, trust that we will continue to extend assistance to our stakeholders and keep our business strong and resilient.
O p p o r t u n i t i e s i n t h e ‘ N e w N o r m a l ‘
When the National Capital Region and Region IV-A were placed on lockdown, many businesses, including Philex, faced supply chain bottlenecks. Our Silangan Project was also hampered when the local government of Surigao del Norte enforced an ECQ.
Prior to the global pandemic, we were already gearing up for the development of our Silangan Project and anticipating to mine our first ore from our Boyongan deposit by 2022. This confidence sprung from the feasibility studies we completed in July 2019, which showed the promise of the Silangan Project as one of the three big-ticket projects that can catapult the country as a major global source of copper.
The pandemic, however, has clouded the horizon. It has not only caused global stock markets to drop, commodity prices to tumble, and mine production outputs globally to take a severe hit, the health crisis has also dampened the sentiment of potential investors in lucrative merger and acquisition deals such as the Silangan Project. The recovery of base metal prices will also hinge on economic stimulus policies to encourage consumer demand and trade.
On the other hand, we see several silver linings:
• Our socio-economic contributions: Mining companies play a critical role in creating jobs, protecting the health and safety of employees and the community, and meeting community needs such as electricity and water supply. Large-scale mining operations also generate dollar receipts that could potentially cushion the blows from reduced overseas workers’ remittances and business process outsourcing revenues as a result of the pandemic. To nurse the economy back to health, the government must first recognize that the mining industry is its vital ally in the recovery. It must lift major policy roadblocks such as the moratorium on new mining permits. It must also provide a tax regime that is competitive, progressive, and beneficial to the sector and the government. The
mining industry which is located in the countryside could aptly support the “Balik Probinsya” Program of the government.
• Shift to digital. As countries imposed lockdown measures to curb the spread of the virus, many citizens resorted to digital platforms such as their mobile phones to meet their demands. This digital pivot is now being seen as part of the so-called “New Normal” as people began to make physical distancing part of their way of living. Analysts see this digital transition leading to demand for metals and minerals, and thus a great opportunity for the mining sector.
• Greater collaboration: As the crisis is likely to cause significant delay on several mining operations, there may be areas for greater levels of collaboration in the industry, especially where issues such as health are concerned. Philex Mining is keen on taking a leadership role in defining and setting the standards for the levels of health screenings and healthcare adopted in mine sites, and how we can contribute to the solutions required to deal with the pandemic.
While we continue to work on key project requirements in preparation for the eventual transition to Silangan Mine, we are determined to maximize the remaining mine life of our Padcal Mine gold-copper operation beyond 2022.
We will address the complexities of the diminishing ore state of Padcal through various operational
enhancements. We will also sustain our commitment to look after our stakeholders in these communities, ensuring the protection of the environment, and the promotion of a healthy ecosystem.
M o v i n g A h e a d
They say crises fuel innovation and create the conditions for creativity and problem solving. For an old industry such as mining, we see this crisis as an opportunity for new ways of thinking to emerge. There may be geopolitical uncertainties, societal changes, and new regulatory regimes that we will have to face around the world under the “New Normal,” so making our business more resilient has never been more important.
Fortunately, Philex Mining has always been a resilient company. Our people care about each other and we are all focused on doing the right thing. The health, safety, and well-being of our people and those who depend on our business will always be our priority. We remain focused on our strategy to sustainably grow our business while operating as a right and principled miner.
Manuel V. Pangilinan
Chairman of the Board
While trade disputes and geopolitical tensions in developed economies continued to dampen trade
and investor confidence, there was marked quarterly improvement in tonnage, metal outputs, and sustained metal prices in 2019. This sparked our optimism that 2020 will provide us a window of opportunity to pursue our business expansion plans and undertake a debt reduction program as we optimize the remaining ore resources of our Sto. Tomas ore body in Padcal Mine.
Thus, towards the end of 2019, we unveiled our business focus for 2020, dubbed “Bridging the Gap.” This aimed to sustain and maximize the potential of Padcal Mine operations while we continue to search for additional mine assets that can be developed within or at the vicinity of the Padcal Mine area. We also trained our sights on finding a strategic partner for the development of the Silangan Project in Surigao del Norte after obtaining all required regulatory permits and forging a partnership with our financial advisors.
The first half of 2020, however, posed unprecedented challenges to our operations.
As if the prevailing regulatory environment in the local mining industry were not tough enough, the global pandemic from the coronavirus (COVID-19) happened. When national authorities enforced an Enhanced Community Quarantine (ECQ) or nationwide lockdown as a response to the health crisis, many local businesses were ordered to suspend operations and implement strict protocols such as observing physical distancing in workplaces to prevent the spread of the virus.
Being an export-oriented company, Philex was allowed to remain operational during the ECQ subject to conditions related to work arrangements for employees. This enabled the Company to deliver on its commitments on copper concentrate shipments, as well as on its regular commitments to other stakeholders such as suppliers, contractors, and most importantly, to its employees.
However, like in many other areas affected by the lockdown, we also faced limited disruption in our
supply chain, particularly during the first two weeks of the implementation of the ECQ in the National Capital Region and in Region IV-A where most of our supplies originate. We immediately mitigated the operational risk by finding alternative supply chain sources. This quick response enabled us to post a core net income of Php103 million in the first quarter of 2020, a complete
turnaround from a core net loss of Php112 million a year ago, mainly due to higher metal output and higher realized gold prices during the period. We also generated a 15% increase in operating revenue to Php1.860 billion from Php1.613 billion during the same period.
2 0 1 9 F i n a n c i a l P e r f o r m a n c e
Prior to the ECQ, Philex was already poised for a stronger financial rebound. Favorable metal prices that peaked at $1,508 per ounce for gold and $2.96 per pound for copper contributed to the encouraging quarterly growth of our revenues and core net income starting in the
second quarter of 2019.
Our core net income grew to Php156 million by the end of the last quarter of 2019 from Php39 million posted by the end of the third quarter. Our full-year gross revenues stood at Php7.399 billion in 2019, slightly lower than the Php8.314 billion in 2018. The decline was mainly due to lower tonnage milled and slightly lower ore grades as we continued to optimize the remaining mineable reserves of Padcal Mine.
Tonnage milled improved on a quarterly basis — from 1.832 million tonnes in the first quarter of 2019 to 2.174 million tonnes in the fourth quarter — to end the year with 8.113 million tonnes, just slightly lower than 8.517 million tonnes in 2018. We continued to improve our production processes during the year and acquired additional mine equipment in the second quarter. These efforts led to an uptick in metal production output beginning in the second quarter, with the last quarter registering the highest gold and copper output. Throughout the year, gold and copper
production growth was sustained. However, production output was still lower compared with 2018 levels due to a reduction in tonnage and ore grades during the first two quarters of 2019 as we continue to manage our ageing equipment. Full-year gold output reached 53,064 ounces
from 61,977 ounces, while copper reached 25.737 million pounds versus 26.575 million pound, year-on-year.
Our full-year operating costs and expenses increased slightly by 1% to Php6.917 billion from Php6.821 billion in 2018 due to the recognition of higher non-cash charges under depletion, depreciation and amortization. All other cash operating costs and expenses in 2019 were lower than that of 2018 combined as a result of the lower tonnage.
Philex Mining continued to generate positive cash flow from its operations despite its reported net loss in 2019, mainly attributable to the one-time non-cash impairment provisions for mining assets. This enabled the Company to declare a cash dividend of P0.01 per share to shareholders on record as of March 13, 2020 and payable on March 27, 2020.
While our business continues to face several headwinds such as Executive Order No. 79 (which provides that no new mineral agreements shall be entered into until a legislation rationalizing existing revenue sharing schemes and mechanisms shall have taken effect) and the use of the open-pit mining method, the Company remains steadfast in its commitment to be a right and principled miner.
We sustained our corporate social responsibility, setting aside at least 1.5% of our total operating costs for our Social Development and Management Program (SDMP) that benefits our host and neighboring communities.
In 2019, we spent Php95 million for our SDMP. Through our Health, Education, Livelihood, Public Infrastructure, and Socio-cultural programs (HELPS), we were able to bring quality health services closer to communities where we operate. Our scholarship program not only helps families augment their household income, but also nurtures student-scholars who become role models in their own communities. We also create economic opportunities through livelihood projects and other kinds of assistance on agro-forestry activities that complement our environmental protection initiatives.
HELPS also supports the development and provision of needed infrastructure, water systems, electrification, and various farm equipment and farm-to-market road improvements.
While development of our Silangan Project has yet to commence, we have already started implementing CSR programs through our subsidiary, Silangan Mining Mindanao Mining Co., Inc. (SMMCI). These programs focused on education, livelihood, and the promotion of socio-cultural activities within our host communities of 11 barangays and four municipalities in the province of
Surigao del Norte. SMMCI has also started to regularly conduct an extensive and comprehensive information, education and communication (IEC) program with affected stakeholders as part of the Environmental Impact Assessment process for the Silangan Project. The IEC promotes awareness and transparency of the plans, programs, and activities of SMMCI, including the direction and latest site developments of the Project. We take pride that as of the moment our social license to
operate is still supported by our host communities.
O u t l o o k B e y o n d t h e P a n d e m i c
The COVID-19 pandemic has disrupted workforces, supply chains, capital markets, and the prices of various commodities worldwide. The mining and metals sector is no exception, and companies involved in mineral exploration and development such as Philex Mining now face a host of challenges, despite being allowed to continue operation during the lockdown. These include the health and safety of our workforce, which remains our top priority, and a sustained supply chain source.
While our operation has continued in strict compliance with government-issued guidelines particularly related to work arrangement of employees during the lockdown, we were able to maintain the uninterrupted flow of critical materials and supplies, spare parts, and equipment needed in our operation. In addition, we were also able to identify and implement alternative sources of strategic materials and supplies as we feel the impact of limited options with many businesses heavily affected by the pandemic.
Given the prospect of an economic fallout from the pandemic, many companies around the world are now in survival mode and assessing their business models, operations, and capital deployment strategies. This impacted our ability to attract potential investors or strategic partners to our Silangan Project, which was envisioned to start before Padcal Mine ceases operations by end 2022. We will continue to pursue other options and strategies to get the Silangan Project started, as we continue our search for strategic investors. We will continue to study the extension of Padcal’s mine life in our Sto. Tomas ore body and explore other business opportunities having been in operation for more than 60 years, as well as the exploration of other prospects situated close to the Padcal Mine.
While there is much reason to view 2020 and the coming years with trepidation and uncertainty because of the pandemic, the altered economic landscape also offers a glimmer of hope for the mining industry.
In recent months, we have seen the price of gold rising dramatically, and this creates an opportunity for investors to take advantage of potential mergers and acquisition deals. In a very uncertain economic environment, investors in the mining industry tend to prefer large companies that have demonstrated grit and resilience over the years. This Philex Mining on a good footing, as it has built a solid track record of operating Padcal Mine for the last 62 years, one of the longest operating mines in the country.
If there is anything that we have learned from this pandemic, it is to be ever more mindful of our impact on the world, not just on the places where we operate. As COVID-19 has shown us, one small virus can bring down even the most powerful and developed nations of the world to their knees.
This crisis also served as a platform for our people to demonstrate their hard work and dedication. Thus, I want to thank all of our employees for their continued commitment to pursuing a higher purpose and improving the Company each and every day. I am also grateful for the continued support from our shareholders, and for the valuable input of our engaged Board of Directors. Thank you all for your unwavering belief in the future of Philex.
Eulalio B. Austin Jr.
President and CEO