MESSAGE TO STOCKHOLDERS

 

Fellow Shareholders,

2016 was characterized by rapid shifts in the policy-making and business landscape, ushered in by changes in the political leaderships both here and abroad. It is also a story of how our Company, Philex Mining Corporation, withstood the challenges and prevailed over the odds to uphold our commitment to responsible mining.

At the onset, the industry welcomed the directive of then Secretary-designate for the Department of Environment and Natural Resources (DENR) to weed out the irresponsible players from the field, beginning with an audit on all mining operations, including our very own Padcal mine.

For our part, this was a unique opportunity to showcase what genuine, responsible mining is all about.  At the end of the two-week DENR audit, our efforts over the last six decades to create a functional community while managing the ecosystem around Padcal stood out, as we were one of a handful of companies who passed the audit.

However, the eventual closure orders for 23 mining operations and the issuance of show cause orders for the cancellation of 75 Mineral Production Sharing Agreements (MPSAs) due to their perceived harmful environmental impact sent alarming signals to investors and industry players alike and intimated the advent of a more restrictive regulatory environment for the mining sector.

While the country’s gross domestic product grew 6.8% last year, the mining industry’s gross value added contracted 0.3% and extended the 1.5% drop reported in 2015. The mining sector remained as the only industry in the Philippines with negative growth last year, as reported by the Philippine Statistics Authority.

Amid all these distractions, I am proud that our Company continued to fare well, notwithstanding the developments that affected the industry.

Financially, our Company posted a net income of P1.57 billion, which was more than double that of the previous year, and a core net income of P1.66 billion, 83% higher than 2015. This allowed us to pay out total cash dividends of P0.07 per share or equivalent to 21% of our core net income.

In fact, we were one of only five metallic mineral resource companies, among the 20 listed in the Philippine Stock Exchange’s (PSE’s) mining index, which generated a positive income in 2016.

The details of our financial results as well as our operating performance will be discussed in more detail by our President in his report and in the later Management’s Discussion and Analysis.

I am pleased that our accomplishments were appreciated by shareholders and other stakeholders as our share price rose 95% to P8.60 per share by the end of 2016 from P4.40 per share a year earlier, outperforming the market index. In addition, we received the PSE Bell Awards for Corporate Governance for two consecutive years from 2015 to 2016. We were likewise recognized by the Institute of Corporate Directors (ICD), based on the ASEAN Corporate Governance Scorecard (ACGS), as the top company in the country, which perfectly complemented our ranking in the 2015 ACGS.

Furthermore, we placed within the top five in Finance Asia’s 2017 Poll of Best Managed Companies earlier this year, in the corporate governance, corporate social responsibility, and management categories, which was a convincing follow-up to our strong showing in the same survey last year.

These awards, including the international certifications we have secured for our Padcal operations and our Silangan Project, reflect our organization’s strict observance of laws, rules, and regulations and adherence to a strong governance framework and best practices at all times.

To complement our regulatory compliance, we also provided a substantial amount to support nation-building, promote social development, and exercise environmental management. Last year, we paid P1.35 billion in the form of taxes, fees, and other charges, P447 million for environmental care under our Environmental Protection and Enhancement Program (EPEP), and P117 million for nurturing sustainable communities through our Social Development Management Program (SDMP). To put things in perspective, we contributed a total amount of P1.91 billion, which represented 122% of our reported net income of P1.57 billion for the period.

Indeed, 2016 was a story of how our Company constantly strived to uphold our commitment to responsible mining  by promoting the welfare of our host communities and managing the physical environment within and around our areas of operation and becoming partners of the government in its relentless task of nation-building.

Over and above the legality and validity of the various agreements we signed with the government, we believe that our ultimate responsibility is how to continuously serve, support, and sustain the families in our host and neighboring communities, with respect to their health, educational, livelihood, and infrastructure needs, during and, more importantly, even after our mines’ commercial operations.

While we still have significant obstacles to hurdle, including the possible impact of the newly-issued DENR DAO-2017-10 on our Silangan Project, we will march forward, with strong resolve and confidence, and continue to embrace the day-to-day challenges that we encounter, especially as the call for responsible mining has become even louder. Our resiliency has been tested time and again and I have faith that we will, as our storied past will show, continue to prevail and rise above the challenges.

Once again, we thank you, our employees, our Directors and Management, our business partners, all our stakeholders and shareholders for your uncompromising trust in and commitment to our mission and vision as a responsible and caring mining organization.

Yours cordially,

MANUEL V. PANGILINAN

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PRESIDENT’S REPORT

To our shareholders,

The past twelve months or so has not been smooth sailing for our Company and the mining industry in general. Our Chairman, in his message, gave a concise but fair account of what transpired last year. As such, I would like to focus my report on how we, as a company, effectively confronted the challenges and converted them into opportunities.

Our Padcal Mine milled 9.4 million tonnes of ore, 2% more than the previous year, and produced 73,107 dry metric tons (DMT) of copper, which was our highest output since 2008. This yielded 35.0 million pounds of copper, as head grades slightly improved to 0.206%. Gold output, on the other hand, totalled 103,304 ounces as grades registered a lower average of 0.417 grams per tonne against 2015. These quantities translated to P10.3 billion in revenues, which was also boosted by improved metal prices, 9% higher for gold and 3% more for copper, coupled with the Philippine Pesos depreciation against the US Dollar.

Amid the increased tonnage, we managed to reduce our costs and expenses by 2% to P6.9 billion, with general and administrative expenses (GAE) declining 10% percent to P373 million. In fact, from 2013 to 2016, our GAE declined by an average of 25% annually due to our relentless pursuit to constantly improve operational efficiencies
through innovation, cost rationalization, and manpower development. As a result, our core net income and net
income came in 83% and 102% higher, respectively, from the previous year at P1.66 billion and P1.57 billion, while Net Income Attributable to Equity Holders of the Parent Company rose 77% to P1.59 billion. The improved profitability also delivered better margins, with EBITDA margin improving to 38% from 30% and operating margin rising to 24% from 15% in 2015.

Our financial results, however, did not reflect the challenging regulatory environment we endured last year.
Immediately after being appointed by the country’s newly-elected President, the Secretary of the Department of Environment and Natural Resources (DENR) reiterated the call to cleanse the industry of irresponsible mining, which initially earned praises from both responsible players and environmental advocates. However, the immediate closure order on erring mines, followed by the audit of all other existing operations, instantly rippled across the industry and sent jitters among players and investors.

We showed our full support nonetheless by closely coordinating the audit conducted in Padcal and when the results came out, we were one of the few which passed the stringent process. More significant than the rating we received, it was our successful demonstration of Padcal Mine as a model for responsible mining in the country that was
of greater significance.

After the DENR completed the audit of all mining operations, the agency issued arbitrary closure and show cause orders for 23 mining companies and 75 Mineral Production Sharing Agreements (MPSAs), respectively,
and subsequently released DAO-2017-10 banning the open-pit mining method in the country, which weigh heavily on the industry’s prospects and our Company’s long-term plans.

For our part, we sent our replies to the show cause orders on our affected MPSAs, Padcal Mine excluded, highlighting the legality and validity of our agreements, which were secured following strict procedures and rigorous
processes, signed with the government. Amid these regulatory challenges and a tainted public perception of mining, we continue to sustain our responsible mining advocacies.

For one, we have secured international certifications for our sound environmental practices and decades-old corporate environmental programs, which we currently employ at Padcal Mine and are replicating it in our Silangan Project.

To recall, in 2015, we received an Integrated Management System (IMS) Certification from TUV Rheinland for Padcal, covering both ISO 14001:2004 for environmental management system (EMS) and OSHAS 18001:2007 for
occupational health and safety, which confirms not only our environmentally-compliant practices but our occupationally-safe operations as well.

Last year, our subsidiary Silangan Mindanao Mining Co., Inc. was certified by Certification International Phils., Inc. to operate an EMS conforming to ISO 14001:2004 standards for the provision of pre-mining development activities at the Silangan Project. Arguably the first non-operating mine to be ISO-certified in the country. In fact, the Silangan Project won the Platinum Achievement Award in 2016 and the Presidential Mineral Industry Environmental
Award, the highest award conferred in the Exploration Category for excellence in overall environmental protection, safety and health management, and social/community development, for two consecutive years in 2015 and 2014. These distinctions define our fervent pursuit for environmental care and community engagement even prior to
commercial operations.

Earlier, in April 2016, we likewise secured the final approval of the Amended Mining Project Feasibility Study for a surface mining method, in connection with the Silangan Project’s previously approved Declaration of Mining Project Feasibility (DMPF) using an underground mining method. This was in addition to acquiring the Environmental
Compliance Certificate, which is a requirement of the DMPF, and Tree Cutting Permit for Silangan.

As an organization, we also received various citations from prestigious organizations that speak well of our strong governance platform and enforcement policy. This included the back-to-back PSE Bell Awards in 2015 and
2016, the recognition as one of the Top 15 companies in the Philippines, based on the ASEAN Coprorate Governance Scorecard following our top country ranking in 2015, advocating good corporate governance practices, and consistent high ranking in Finance Asia’s 2016 and 2017 Poll of Best Managed Companies, amongst the corporate
governance, corporate social responsibility, and management categories, among others.

By themselves, though, these accolades are meaningless if not backed by actual outlays and concrete actions.
To this end, we contributed P447 million to our Environmental Protection and Enhancement Program (EPEP) initiatives last year. This included the reforestation of 52 hectares of new land, maintenance of 150 hectares of
existing plantations, care over 75 hectares of agro-forestry areas, and planting of around 180,000 new seedlings of various species.

The cost also included expenses incurred for reinforcing and further strengthening existing pollution-control devices to ensure air freshness and safe quality of water resources at all times as well as to maintain proper waste
management within and around our mine sites.

Since 1967, we have planted approximately ten million trees in upland and coastal areas and reforested a total 3,922 hectares, compared with a total disturbed area of 1,608 hectares, across the different areas where we
are present.

In terms of our support to nation-building, we paid P937 million in taxes paid and due to the national and local governments and another P414 million for various fees, withholding taxes and other charges. These amounts
helped our host communities, Tuba and Itogon, to become two of only four first class municipalities in the province of Benguet. Physically, these contributions also translated to hundreds of kilometers of farm-to-market and access roads and various facilities that improved basic health, education, and social services in these areas.

Furthermore, we also sustained our own provision of health services, educational assistance, livelihood opportunities, and critical infrastructure through our Social Development Management Program (SDMP)
to maintain the physical, mental and overall well-being of residents within our host and neighboring communities. For this purpose, we incurred P117 million for SDMP-related corporate social responsibility (CSR) initiatives and an aggregate sum of P454 million over the last five years to further our goal of inclusive economic growth and progressive social structures within our areas of operation.

This included free dental and medical missions and health services from the Sto. Nino Hospital in Padcal; free elementary education to our employees’ dependents and our host and outlying communities, heavily subsidized
high school program, and scholarship grants to college students; livelihood opportunities through financial and technical assistance for farming, livestock, and food processing ventures; free electricity and potable water, and a host of other amenities and benefits that shape the dreams and enrich the lives of families living within and around our mining communities.

In the coming years, we will continue to be challenged by the volatility in metal prices as they continue to be affected by global uncertainties and an unpredictable regulatory environment. Against this backdrop, we will continue to pursue our priorities to realize our CSR objectives, value-creation goals and long-term plans for sustainable growth.

The Silangan Project’s definitive feasibility study (DFS) is expected to be completed by 2017 and we shall proceed with its full scale development, upon clearance from the government and pending the completion of the project’s funding program. In relation to this, we also strategically divested from PXP Energy Corp. (PXP), formerly Philex Petroleum Corporation, through the distribution of our PXP shareholdings as property dividends last year, to allow us to focus our resources on Silangan and enable PXP to pursue its energy business with greater financial flexibility.

In terms of extending Padcal’s life of mine, our exploration team has been working aggressively to complete the auxiliary works and conduct various tests that will validate and further strengthen the initial findings in our Bumolo Project last year. This is on top of our other exploration work, which we are relentlessly pursuing, within our other
approved tenements around the Padcal vicinity with the objective of prolonging the life of Padcal.

As we undertake these initiatives, we are simultaneously exploring complementary business opportunities in the background that will diversify our portfolio and further enhance shareholder value-creation. We are likewise
carefully looking into and evaluating several proposals that have been presented to us for our other properties amid the developments in the sector.

To the entire Philex organization, I urge everyone to practice inquiry over advocacy and promote progress rather than perfection. We have learned a lot from our more than half-a-century of operations and I am confident that, as long as we operate as a team, in the end we shall overcome the odds. 

To our Board of Directors, the entire Management Team, employees, business partners, stakeholders, and all shareholders, thank you very much for constantly having complete faith and trust in our organization. As long as we keep believing we will hurdle all the challenges. No matter how tall and insurmountable they may seem.

Yours sincerely,

EULALIO B. AUSTIN, JR.