gold mining industry

j a nua r y 2011

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In this issueFeature

2 Profitableandsustainablegold mining

JoviC.DacanayKristinaCastellanoJohannDaleDiazRachelleFloresInigoTaojo

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ApublicationoftheSchoolofEconomics,UniversityofAsiaandthePacific,Philippines

I S S n 0 1 1 7 – 1 7 9 8

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Profitable and sustainable gold mining

Jovi C. dacanaySenior Economist

and

Kristina CastellanoJohann dale diazrachelle Floresiñigo taojoIndustrial Economics Program UA&P School of Economics

Gold mining generates billions of revenues for both public and private sectors. Is there a way to manage extraction rates to sustain both profits and resources?

Miningactivitiesexactaheavytollontheenvironment.Thoughenvironmentalimpact isminimizedwhenoperationsareefficient,well-designed,andfullycompliantwithregulations,itisundeniablethatminingaffectstheenvironment

negatively.

Someofmining’senvironmentaleffects:Erosion and sedimentation Watererosiontransports

large quantities of sediments, especially whendisturbance of surface materials is significant, asin the mining process. The degree of erosion andsedimentationdependsontheprevalenceofvegetativecover, type of soil, slope length, and degree of theslope. Erosion and sedimentation have the largesteffectonsurfacewaterandwetlands.Erosionaffectssocialorganismsandvegetation; revegetationeffortsarehinderedbecausethetopsoilanditsnutrientsarediminished,makingithardertogrowplants.

Fugitive dust emissions Dustfromminingactivitiescontain toxicmetals suchasarsenicand leadwhichcontaminate the air and the surface water, causingsedimentationandturbidityproblems.Inlarge-scaleearthwork—involving ore crushing, conveyanceof crushed ore, loading, blasting, mine and motorvehicletraffic,useofhaulingroads,wasterockpiles,andwindblowntailings—dustemissionsarelarge.

Habitat modification Gold deposits are usuallyfounddeepinthemountainswheremanyorganismsrelyonforsurvival.Terrestrial(grasslands,forests)andaquatic (lakes, ponds, rivers) habitats are disruptedand disturbed by the large consumption or releaseofwater,manipulationoftopography,andreleaseofchemicals.

Surface and groundwater Mining firms requiremassivequantitiesofwaterfortheiroperations.Thiskindoflargeconsumptioncausesadrawdownofthegroundwater table (aquifers) which in turn reduceswater available for recharging wetlands and surfacewaterbodies,onwhichmanyorganismsdepend.

Cyanide and other chemical releases and acid mine drainage formation areeffectsofpollutionfromgoldoreprocessing.

With all these environmental costs, studying thebehaviorofmining extractionsbecomes imperative.To be specific, we ask the following questions: (1)Are there trends in extraction rate for specific time

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intervals?(2)Whendoestheextractionrateincreaseor decrease? (3) What events affect the behavior ofgoldminingextractionrates?(4)Inthelongrun,canaspecificextractionratebesustainable?

Significance of the studyGold mining is an important industry in thePhilippines, especially in the regions of Mindanaowhere not all lands are arable. Rich in mineralsandores, lands thatwouldotherwisebe idlecanbeexploredasminingsites.

AnotherreasonisthatBangko Sentral ng Pilipinas (bsp) needs equivalent gold reserves for the moneythey print. The bsp buys gold from different localproducers, including abc Mining Corporation,1 thesubjectofourstudy.

table 1 • revenues from gold supply (�007-�009)

�007 �008 �009

Total supply (tonnes) 3,920 3,862 4,147

Value, P billion 108.3 111.0 110.8

Value, US$ billion 2.35 2.50 2.33

Source: Business Monitor International

Objectives, scope, and limitationsabc Mining Corporation is a medium-scale miningcompany based in Tagum, Davao Del Norte,Mindanao. When the other big mining companiesin the country shut down during several financialcrisesinthecountry,abcsawitasanopportunitytoinnovateandraiseproductivity.Thecompanyhiredtop engineers and updated its equipment, buildingskills andoperational capacity to gain leadership intheindustry.

Dataused indiscussions includepricepergram,goldproducedandsold,andrateofextraction.Thecompanyisaprice-takerandsellsonlytothebsp.Ourregressiononlycovers fouryearsofgoldproductionoutput,from2007to2010,andonly2010forgoldextraction rates. Monthly data is used to get moredatapointsandsoastogeneratedetailedtrends.Thispaperaimsto:

a. Quantitatively explain the rate of extractionthrough time by utilizing regression processes and

1Notthecompany’srealname.

equations and find an optimal level of extractionusingcomputableequilibriummodels

b. Explore a model which can compute foroptimalcostsofmining

Background GoldhasbeenpartofFilipinoculturesinceancienttimes. In fact, the Ayala Museum in Manila holdssome of the oldest and most intricate gold jewelrymadeinAsia,longbeforeothercountriesintheregionwereproducinggoldjewelry.

The gold rush in the Philippines started in the1980s. Gold extraction methods were less efficient,and use of harmful chemicals like cyanide was acommon practice. Gold prices rose to more thanUS$800 per ounce in 1979, dropped to less than$500/ozin1983,andclimbedbackuptomorethan$1400/oztoday.Inefficientproductionprocessesandthehighvolumeofextractioncreateda lotofwastethatpollutedrivers.Uncontrolledoperationscausederosionanddestructionofthemountains,depletinggold stores and eventually leading to the closure ofminingfirms.

Anumberofminingfirmshavebegunefforts tomake their operations much more sustainable, notjustfortheirownprofitsbutalsoforthepreservationof mining resources and the environment. Newextraction methods that use less toxic chemicalsproducelesspollutants,andinnovationsinextractionprocesses mean higher output from lower intensityactivities.

Related literatureGoldhaslongbeenconsideredanessentialcomponentof official reserves for national banks, and is thusespecially marketable. However, it is particularlyvulnerable to depressed prices, perhaps especiallyover the next decade. As the long-term price trendis downwards, mining technology has enabledextractionfromlowgradedeposits,andfurthergoldsales by central banks are likely (Green, 2001). Asto the importance of gold mining in productivity,Weber(2001)claimstheshareofgoldminingfromemerging economies is almost 70%—third only tocopper and ironoremining.Goldmininghoweverisonthelistofnext-generationsectorsatriskwhichhavenonperformingloans.

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The World Commission on Environment andDevelopment (1987) defines sustainability as“development that meets the needs of the presentwithoutcompromisingtheabilityoffuturegenerationstomeettheirownneeds.”Theinitialassumptionforany mining resource is that minerals are unevenlydistributedand,unlikeagriculturalresources,cannotbereproducedorreplaced.Sustainabilityintheminingcontext retains the idea that a particular mineralhas a finite quantity and that continual productionwilleventuallydepletetheresourceastheyarenon-renewable(Mudd, 2007).

Increasingproductionleadstoexhaustionoccurringearlier than if production were held constant. Theminingofanon-renewablefiniteresourceisthereforeargued as clearly unsustainable because a miningcompanymustdiscoveradditionalreservesoracquirethemtokeepprofiting(Mudd, 2007).Onthepositiveside,miningprojectsboostemploymentandgenerateeconomic rent paid to governments, enablingreinvestmenttofurtherdevelophumanandphysicalcapital, improve living standards, and provide themeansforabetterfuture(United Nations, World Bank 2002).Linsetal.(2007)summarizesonbothaccounts:miningisaninherentlyunsustainableactivitysinceitisbasedontheextractionanddevelopmentofnon-renewableresourcesbut,ontheotherhand,miningcompanies as production agents have the ability toturn non-renewable resources into rents, a flow ofwealthaboveandbeyondprofit,whichcanbeusedtogeneratesustainabledevelopmentinthecountriesandcommunitieswheretheyoperate,giventherightincentives.

In the life-cycle of a mine, there are five phasesofminingoperations:Thefirstisprospectingwherethedirectmethodsofdiscovery,normallylimitedtosurface deposits, consists of visual examination ofeitherexposureofthedepositortheloosefragmentsthat have withered away from the outcrop. Thesecond is exploration where the land is surveyed asmineral deposit or an ore body, which includes anestimation of the mineral deposits in the area.Thethirdisdevelopmentandplanningforminingsafetyand permanence of passage for workers, machines,ore, waste, air, water and utilities. The fourth isexploitation where the mining method is decidedbased on technology, environmental concerns, and

economics, including whether to engage in surfaceminingwithmechanicalexcavationsorundergroundmining or caving. Finally, the fifth is reclamation,whichisimportantintermssustainabilityormeetingeconomic and environmental needs of the presentwhilestillprovidingforthefuture.Essentially,itisthiscontinuallyevolvingcycleofdepositsdiscoveredanddeveloped versus the known prospects or resourcesremainingwhichisakeyissuesurroundingresourcedepletionoravailability(Mudd, 2007).

Theprocessthatdeservesemphasisintheviewpointof sustainability is that of exploitation, first in lieuof extraction of a finite resource and second in theprocessingofrawmaterialswhichcreateeffluenceintheenvironment.Theproductioncycleofextractionincludesoperationssuchasdrilling,blasting,loadingandhauling, and the trend inmodernmining is toeliminateorcombinefunctionstoincreasecontinuityofextraction.Extractioncostsprimarilyconsiderthedepthof thedeposit,where low-cost operations areminedfirstfollowedbytheharderminedeposits.Xose(2009)claimsthatchangesingeologiccharacteristicscanlimittheproductivityandeconomicgrowthofamining operation. According to Green (2001), twocosts have to be taken into consideration.The firsttypeofcostiscurrentextractioncosts;thesecond,thelossoffuturenetreceipts,reflectsthefactthatasthemine is depleted, society loses a potential source offutureincome.

Effluence levels in theenvironment fromminingoperationshavebeenattractingpublicattention.Linset al. (2007) mention that mining companies havesought to reduce emissionsof carbon,nitrogenandsulfurdioxidesgeneratedinsmeltingandcombustionprocesses.Inthecaseofgold,whichrequiresmixingcyanideinwatertoseparatethemetalfromtheore,thesafedisposalof tailings—themixtureofwastewater,chemicals and ore left over from the extractionprocess—isatissue.

Giventheconsiderationsthatneedtobetakenintoaccount,miningisextremelyrisky.Accordingtotheun andwb report(2002),ageologicalreservehasnoguaranteeofbeingsuccessfullydevelopedwhatwithlegalandpoliticalrequirementsforenvironmentalandsocialimpactassessments,pre-operatingexpenditure,borrowing costs and commodity prices, and giventhat mining companies are essentially price-takers

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inthemarketplace.Mudd(2007)isoftheviewthatminingisinextricablylinkedtoeconomicsandsocialissuessuchaslanduse,givingrisetomoreexplorationas prices rise due to preceived shortages in supply.Mineralpricesarehighlyvolatile,andhavegenerallynotkeptpacewithinflation.Theminingindustryhasgenerated low return on investment, and marginalreturns lead to many mines being closed suddenlybeforetheorebodyisdepleted(Green 2001).

Linsetal.(2007)suggestthatvariousfactorsmustbetakenintoaccount,includingpublicinvestmentsandpaymentsmadetothegovernmentinadditiontothetraditionalfactors,suchasnetsales,paymentsanddebts.Oneofthefundamentalquestionspositedbytheunforminingindustriesconcernswhatinformationfinancial institutions and financial markets need toproperly assess the risks associated with any projectsoastosufficientlyincorporatethoserisksintotheirfinancialcosts.

Aninitialsuggestionbytheunwastogo“backtobasics”onbenefit-costanalysistoensurethatallcostsare included, aswell as apublic-privatepartnershipwheretheprivatesectordeterminesthepaceofmineraldevelopment and the government provides policiesand regulations that ensure accuracy and integrityof information disclosed by the mining companies.Green (2001) states that sustainability impliesrequiring proponents to go beyond minimizingdamage, with mining companies contributing toimprovingecologicalandcommunityconditionsforthelongterm,andthatdurablenetgainsshouldbemaximized.Intermsofintergenerationalequity,thismeans ensuring that the capital future generationsinherit,bothnaturalandhumanmade,isnolessthanthecurrentcapitalstock(Green, 2001).

Moreempiricalframeworkshavebeenputforwardbyother authors.Xose (2009) for example explainsan index for economic sustainability in mining interms of corrected total factor productivity, whichincludes technical change, subequilibrium, scale,allocativeinefficiency,andresourcedepletion.Linsetal.(2007)reportsthatframeworkssuchastheGlobalReporting Initiative (gri) 2002 includes specificperformanceindicatorsaswellasprinciplesforgoodreporting, such as completeness and materialityemphasizing on a specific time span. gri guidelinesare periodically updated to include new criteria of

importance to stakeholders, such as intangible or“external”factorsthathavenotbeenpreviouslyusedtojudgeacompany’svalue(Lins et al., 2007).Mudd(2007) studied the production history of mines bylookingatchangesinoregradeforvariousmineralsandmetalsaswellasquantifyingproductionwasteswhere possible. “Life cycle assessment” attempts toassess the total cost toproduceaunitquantityof aparticular metal, accounting for water and energyconsumption, toxicity, and the effects of recyclingwithtrendsoforegrades,amountofwastematerials,and the extent and successof rehabilitation (Mudd, 2007). Following the assumptions of Greenspan(2001) mentioned earlier, to determine sustainableincome,netrevenueisdividedintoanincomestreamandausercoststream.Theprincipleisthattheusercoststreamwouldbebasedontheamountthatneedsto be reinvested to provide a permanent incomestreamoncetheorebodyisdepleted.Eggert(2001)suggests calculating upfront costs of mine design,construction,andequipmentpurchase;ongoingcostsofoperation,maintenance,new-reservedevelopment,and environmental remediation; and final costs ofclosure with an application of valuation for futurecostsandbenefits.

Experience however has shown that proposedframeworksforthesustainabilityofminesareeitherilldefinedorarehardtoimplement.Afundamentalflawinapproachestosustainabledevelopmentistheydonotrecognizethateconomiesmustbeconstrainedwithinecologicallimitsandwherethereissuchrecognition,the limits are not explicitly identified, nor aremeasuresputinplacetoensuretheyarenotexceeded.According to the un (2002),financialmarketshavefailed to distinguish between mining projects thatpresent better or worse risks, thereby under-pricingbadrisksandover-pricinggoodrisks,andiffinancialmarketsweregiventheabilitytodistinguishtheserisksmorerealistically,betterinvestmentdecisionscouldbemade,therebyincreasingtheavailabilityoffinancingforwellrunprojects.Adaptivemanagementintermsof resource extraction is subject to a wide variationin interpretations, and is often misinterpreted as“usinginformationasitbecomesavailabletomodifydecisions” or as an excuse for flexible management(Green, 2001).Green,ontheotherhandrecognizestheproblemsinvolvedinvaluingcapital,inparticular

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natural capital, and in determining the conditionsunderwhichtotalcapitalstockiskeptintact.

Further prospects in sustainability have beenexplored, however, and some findings providedirectional, if not conclusive, insight. Xose (2009)statesthattechnologicalchangeshowsthemostpromiseand its effects on growth have amply compensatedfor the effects of reservesdepletionon said growth.Giurco et al. (2009) back up this claim by statingthattechnologyisexpectedtoassist inreducingthecostoflaborthroughautomationandinreducingthecurrentcostsofidentifying,extracting,andprocessingmaterials. Another area where technology plays arole is in the measure of ore grades and extraction.Mudd (2007) argues that the excavation, transport,andmanagementofwasterockpresentsasignificantcost givenby the ratioofwaste rock toore as rockdumpscoverasignificantareaandthereforerequiremajor costs in rehabilitation. Again, Giurco et al.(2009) support this claimby stating that impactofincreasedscaleiscompoundedbydecliningoregrades,meaningmorematerialsarebeingexcavatedtoextractresources,withconsequentgreateramountsofwaste,aswellasgreaterdemandforwater,energyandotherlocal resources for processing lower grade ores. Formanycommoditiestheextentofwasterockminedfarexceedstheoremined,especiallyinthecaseofcopper,goldandblackcoal,wheresulphidesarelikelypresentintailingsandwasterock,leadingtosignificantriskslikeacidminedrainageinthefuture(Mudd, 2007).Giurcoatal.(2009)summarizesthat“metaluse”mustbe decoupled from mineral extraction to overcomethecommonpolicyofcountrieswhichpromoteusingvirginmaterialstomeetdemand,insteadofutilizingmineral stocks which are already circulating in theeconomy.

Lins et al. (2007) proposed that researching thesocial, environmental, and economic impacts ofdecision-makingbeforecommittingtonewventuresisimportantasawaytodefinebestpracticesbutalsofor companies to solicit feedback from stakeholdersandworktoensuretheiroperationscontinuetosatisfythesestakeholders.Green(2001)proposedthatoneofthekeymeasuresrequiredtoachievesustainabilityisthatdepletionquotasfornonrenewableresourcesbesetbygovernmentandauctionedtothehighestbidderwhowouldthenhavetherighttoextractandsellthequantityofmineralscoveredbytheirquotaamount.

Lastly,Eggert(2001)makesthefollowingforecastsontheminingindustry:First,theboomorexpansioninmining is likely to be temporary. Second, the costsofadjustingtoboomsandbustsinminingarehigh.Third,therearesignificantexternalbenefitsassociatedwiththeshrinkingofothernon-miningsectors,suchashavingmorehighly educatedworkforce availableforthemanufactureofmetalsandminerals.

Gold productionGoldproductionisastep-by-stepprocess.Afterfindingthedepositandgettingaccesstoit,thegoldismined,transportedandplacedinprocessingchamberswhichconvertlargerocksintosmallparticles2(see Figure 1).

The quantity of gold resources can be measuredintermsof itsmass(ounces)orweight(grams)andpricedaccordingtomarketvalueperunitorthepriceat which the gold extractor (producer) is willing tosell.Theamountofgoldthatcanbeextractedfromacertainminingspotdepleteseveryyear.Althoughgoldisrenewableoverthelongterm,therateofextractionshould be controlled because supply is finite in theshortrun.

Since the rate of extraction can either beincreased or decreased, technological change is amajordeterminant inspeedinguporslowingdownproduction. Operations of mining firms may becontrolled by imposing requirements during andbeforetheprocess,includingthesatisfactionofcertaincriteriabeforepermitsareissued.

Figure 1 • Conceptual framework

Technological change

Capital accumulation

Rate of extraction

Quantity

Time

Gold resources

Production pattern

Consumption pattern

Environmentalsustainability

2AngloGoldAshantiAnnualFinancialStatements,2009.

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Capital accumulation is also a driving force ofextractionrate;thehigherthecapital,thegreaterthelikelihoodthatthecompanywillpurchaseadditionalmachineryandlabor.

Production pattern refers to the behavior ofthe output from a given level of capital and input.The amount of gold ores extracted is dependenton the extraction rate and the firm’s average goldproduction.

Sincegoldoreisextractedfromnature,itdoesincurcoststotheenvironment.Environmentalsustainabilitymaycategorizedintoeitheroutputorinput.3Intermsofgoldresources,therateofharvestingoresshouldbemanagedtoallowsufficienttimeforrenewal.

Socialcostsaretheeffectsonsociety(externalities)causedbyminingactivitiesthateitherharmorbenefitthe community. Positive and negative externalitiesdetermine whether there is a need for governmentintervention. Increasing negative externalities couldleadtomarketfailure.

Empirical methodTo determine the optimal periodic productionextraction path, we use Hotelling’s rule for efficientdepletion of non-renewable resources.4 In thistheory, it is assumed that there are zero extractioncosts,competitivemarkets,fixedconstantrealrateofinterest,andpriceisexogenoustoeachminingfirm.Usingquantity, time andprice variables, discountedmarginalprofitmustbeequalineachperiod.Thatis,

WheredP = changeinprice dt = changeintime P = initialprice R = rateofextraction r = rateofinterest

3 Daly (1973, 1974, 1992, 1996, 1999) and Daly and Cobb(1989).

1. Output rule: Waste emissions from a project or action beingconsideredshouldbekeptwithintheassimilativecapacityofthelocalenvironment, without unacceptable degradation of its future wasteabsorptivecapacityorotherimportantservices.

2.Inputrule:Harvestratesofrenewableresourceinputsmustbekeptwithinregenerativecapacitiesofthenaturalsystemthatgeneratesthem.Depletionratesofnon-renewableresourceinputsshouldbesetbelowthehistoricalrateatwhichrenewablesubstitutesweredevelopedbyhumaninventionandinvestment.

4Hotelling(1931).

Inessence,weexpectnotasinglerateofextractionbut a time-path schedule of extraction where theslope is the rate of extraction at any given t. If thecomputed rate of extraction is less than the rate ofinterest r, then the conclusion is it pays to reduceextraction. If it is less, it will be better to increasetherateofextraction.Oncebothareequal,thenthefirmbecomesindifferenttoincreasing,decreasingorkeepingtheirextractionrate.

Anotherempiricalmethodthatwillbeusedisregres-sionanalysis.Thiswillconsistmainlyoftheamountofgoldper gramsproduced and sold, theprice of soldgoldpergram,andothervariablesderivedfromthesesuchasrevenueandrateofextraction(see Figure 2).

Heat market price and quantity sold

Figure � • market price vs. quantity sold

Source: abc Mining corporation

There will be two different regressions: First,for the price of gold, using price as the dependentvariable and time and supply or production as theindependentvariables.

log(P) = c+log(t)+log(s)

WhereP = price t = time s = supply/production

Thesecondwillbefortherateofextraction.Themodel uses rate of extraction as dependent variableandthegrowthratesofgoldprice,goldsupply,andrevenueasindependentvariables.

log(R) = c+pgr+sgr+rgr

WhereR = rateofextractionpgr = pricegrowthratesgr = supplygrowthratergr = revenuegrowthrate

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Rule for efficient depletion of nonrenewable resources After solving for the rate of extraction using theformulaprovidedaboveaswellastherateofinterestusingtheformulabelow,weconcludethatabcMiningCorporationdoesnotadheretoHotelling’stheory.

Wherer = rateofinterest

Pt

= initialpriceP

t+1= succeedingprice

AsshowninTable2,theirrateofextractioniseitherlessthanorequaltotheirrateofinterestwhichleavesthemroomtoincreasetheirextraction.However,theydonotalwaysdoso.

table � • Actual gold extraction rate (�010)

rate of

extraction (%)

rate of interest (%)

Actual gold extraction rate

jan -3.3 < -3.2 95.077

feb -1.4 = -1.4 97.810

Mar 3.5 < 3.7 95.425

Apr -1.3 = -1.3 96.316

May 18.0 < 22.0 97.469

jun -0.8 = -0.8 94.959

jul -11.3 < -10.2 95.625

Aug -3.4 < -3.3 95.544

Sep 2.5 < 2.6 96.316

Oct 7.5 < 8.1 97.469

nov -2.7 = -2.7 95.272

Dec 4.4 < 4.6 95.698

Source: abc Mining corporation

Instead of Hotelling’s theory, they consider theselling price of gold. In May 2010, although thecomparison shows that abc is indifferent aboutincreasingordecreasingtheirrateofextraction,theyincreasedtheratebecausethepriceofferofP2,001.81/gramforthatmonthwasthehighestforthatyear.

Regression analysisForthepricemodel,thelogofsupplyhasanegativecoefficient of -0.162 while the log of time has apositive coefficient of 0.356. Both have less than 1elasticitieswhich indicate thatgoldprice is inelastic

with the production of one company (in this case,abc)overtime.

Lookingatthep-values,theyareallverycloseto0whichmeansthatallvariablesaresignificantat1%.Also, with a relatively high r-squared of 0.83, thisindicates that the independent variables explain thedependent variables well. Lastly, the high f-statisticof92.799suggeststhattheindependentvariablesarejointlysignificant.

table � • Price model

Coefficient p-value

const 7.6177 <0.00001

logs -0.162784 0.00011

logt 0.3561 <0.00001

R-squared 0.830053

f (2, 38) 92.79932

Fortherateofextractionmodel,ontheotherhand,the growth rate of supply has a negative coefficientof-0.145whichindicatesthatitisnegativelyrelatedwithrateofextraction.Therefore,assupplydecreases,the rate of extraction increases. Meanwhile, boththe growth rates of price and revenue have positivecoefficients,whichmeans theyarepositively relatedtothedependentvariable.Thisimpliesthat,aseitheror both independent variables increase, the rates ofextractionbytheircoefficientsalsoincrease.

table � • rate of extraction model

Coefficient p-value

const -0.151246 0.00012

pgr 0.812342 <0.00001

sgr -0.145134 0.00014

rgr 0.14816 0.00017

R-squared 0.992848

f (2, 38) 1573.271

Similartothepricemodel,allthep-valuesarealsoclosetozero,indicatingthatallindependentvariablesare significant at 1%. Also, the r-squared of 0.99meansthatalltheindependentvariablesexplainthedependentvariableverywelland thatall are jointlysignificantasthef-statisticshows.

Manage extraction rates by predicting price Therateofextractionisaprimaryconcernofmanymining firms, first because they impose not onlyaccounting but environmental costs as well, and

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secondbecausetheycontributetotheprofitabilityofafirmbothintheshortandlongrun.Becauseofthis,thereisaneedtoregulatetheextractionratesofmanyminingfirms.

abc Mining Corporation data shows that it stillhas room for improvement in terms of becomingeconomicallyefficientinoreextractionrates.FollowingHotelling’sruleofefficientdepletionofnon-renewableresources,abc’soptimalrateofextractionshouldbeequaltotheirrateofinterest.But8outof12monthsfortheyear2010,thefirmhasalowerextractionratethaninterestrate,andhenceshouldincreasetheirrateofextraction.Atthesametimehowever,theyshouldconsiderthecurrentandfuturespotpricesofgoldintheworldmarkettobalanceprofitswithcost.

In the regression model of price, we have seenthattherearetwosignificantfactorsthataffectprice:supplyorproductionofgoldandtime,withnegativeandpositiveeffects respectively.Sincethevaluesarelogged,bothcoefficientsshowinelasticrelationships:A16%decreaseinsupplywillincreasepricesby1%.A36%increaseintime(i.e.,after10-11days)followingthecurrenttrend,willlikelyseepricesincreasingby1%.ThispricingmodelcanbeofgreathelptoabcMining Corp. in their consideration of prices andevenfutureprices.

The next regression model shows that threesignificantfactorsaffectextractionrates:pricegrowthrate(positively),supplygrowthrate(negatively),andrevenuegrowthrates(positively).Thegreatesteffectcomes fromconcurrentprices;a1-point increase inpricegrowthrateincreasesthefirm’srateofextractionby81%.A1-pointdecreaseinsupplyorproductiongrowth rate increases the firm’s rate of extractionby 14%. A1-point increase in revenue growth rateincreasesthefirm’srateofextractionby14%.Again,spotpriceshave themost significant effecton abc’srateofextraction.

Finally, since prices have the largest effect onextraction rates, the group recommends bettermodelling and forecasting for gold prices to helpfurtheroptimizeabc’srateofextraction.

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Fleming,C.A.(2000).Gold Extraction Technology Developments and their Implication to Profitability and Sustainability.LakefieldResearch.

Giurco, D. Evans, G. Cooper, C. Mason, L. Franks, D.(2009).MineralFuturesDiscussionPaper:SustainabilityIssues,Challenges,andOpportunities.InstituteforSustainableFutures:University of Technology, Sydney. Retrieved 26 March 2011fromhttp://www.csiro.au/files/files/pzmc.pdf

Goodland, Robert (2002). Sustainability: Human, Social,EconomicandEnvironmental.WorldBank,WashingtonDC.FromEncyclopedia of Global Environmental Change.Copyright2002JohnWiley&Sons,Ltd.

Green,T. (2001). Mining and Sustainability:The Case ofthe Tulsequah Chief Mine. Environmental Mining Councilof British Columbia. Retrieved 26 March 2011 from http://riverswithoutborders.org/home/wp-content/uploads/2007/04/greenreport.pdf

Industry Forcast - Philippines - 2010. (12 May 2010).Retrieved25January2011fromBusiness Monitor Internationalhttp://www.businessmonitor.com.libproxy.nlb.gov.sg/cgi-bin/request.pl?SessionID=636101720712275&view=articleviewer&article=348610&service=17&iso=PH&metaid=190,197

“Introduction to Mining.” Retrieved on 26 March2011 from http://media.wiley.com/product_data/excerpt/11/04713485/0471348511.pdf

Stark, Jeffrey J. L. (2006). Environmental Safeguards and Community Benefits in Mining: Recent Lessons from the Philippines.FoundationforEnvironmentalSecurityandSustainability.

Lins,C.Horowitz,E.(2007).“SustainabilityintheMiningSector.” Brazilian Foundation for Sustainable Development.Accessed 26 March 2011 from http://www.fbds.org.br/fbds/IMG/pdf/doc-295.pdf

Mining in the Philippines: Concerns and Conflicts(2006).FactFindingMission.

Mudd,G.(2007).“TheSustainabilityofMininginAustralia:KeyProductionTrendsandTheirEnvironmental.”Departmentof Civil Engineering, Monash University and Mineral PolicyInstitute.Retrieved26March2011fromhttp://nowandfutures.com/d2/SustMining-Aust-aReport-Master.pdf

UnitedNationsandWorldBank.(2002).“Finance,MiningandSustainability.”UnitedNationsEnvironmentProgramme,The World Bank, The International Finance Corporation.Mining, Minerals & Sustainable Development. Retrieved26 March 2011 from http://siteresources.worldbank.org/INTOGMC/Resources/financeminingsustainability.pdf

Weber,M.(2001).“Mining,SustainabilityandRisk:WorldBankGroupExperiences.”GlobalMiningDepartment:WorldBank Group. Retrieved 26 March 2011 from www.pdac.ca/pdac/publications/papers/2001/.../Weber-Fahr(T-8).pdf

Xose, R. (2009). “A New Productivity Index to MeasureEconomic Sustainability of the Mining Industry.” NationalUniversityofColombia.Retrieved26March2011fromhttp://redalyc.uaemex.mx/redalyc/pdf/496/49615575003.pdf

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domestic air traffic to double in less than 10 yearsDomestic air traffic in the Philippines is expected tomorethandoubletoover40millionpassengersinlessthan10years,oneofthecountry’smajorairlinessaid.

Theriseoflow-costcarrierssuchasCebuPacificAiralready sawdomestic air traffic jump sharply tomorethan 17 million passengers last year, said the carrier’svicepresidentforcommercialplanning,AlexReyes.

Citing industry figures, Reyes said Philippine aircarrier fleets would rise to 67 narrow-bodied jets thisyearcomparedwith47in2008,leadingtomorepressureforlowerfares,whichcoulddrivepassengertrafficevenhigher.

But Reyes warned surging traffic would requiremassive investments in passenger terminals, runways,andmoreairportpersonneltohandletheextraload.

ReyessaidCebuPacific,thecountry’slargestbudgetcarrierandnumber-oneairline intermsofpassengers,will run out of space at its assigned Manila airportterminalnextyear.

Cebu Pacific is in talks with the government toexpandthecapacityofnaia’sTerminal3,whichhandlesbothdomestic and international traffic, to20millionpassengersayearfrom13million,hesaid.

Source: Manila Bulletin Online, 22 January 2011

BPo

BPo sector seen posting $11B revenue this yearBusinessprocessoutsourcing(bpo)industryplayersaresettoimplementvariousinitiatives,includingaggressivemarketingofthecountry’soutsourcingservicestomorecustomersinkeymarkets,toachievearevenuegrowthof20%in2011.

OscarSañez,Philexporttrusteefortheinformationtechnology (it) services sector, said theywill continuepromoting the bpo sector in markets where moreinvestmentsareexpectedtocomefrom,liketheUnitedStates,Europe,andAustralia.

Sañezsaidtheyalsointendtoimprovethequalityofrecruitsthroughscholarshipprogramsforthenear-hiresand the implementation of the k+12 program whichaddstwoyearstobasiceducationinthecountry.

Apartfromtheseinitiatives,Sañezalsounderscoredtheneed for thecountry topass important legislationforthebposector.

Source: the PhiliPPine Star Online, 5 January 2011

ELECtroniCs

record investments for electronics sector Investmentsinthecountry’selectronicsindustryreachedarecord$2.318billion(B)orP102.5Bin2010.

seipi president Ernesto Santiago said the 2010investment figure was the highest in the Philippinesemiconductor and electronics industry’s history. For2011, Santiago said that they are looking at a 10%growth.

AccordingtoSantiago,lastyear’sinvestmentis380%higher than the 2009 figure of $484 million, making2010 the seventh time the industry has breached the$1Bmark.Thelasttimewasintheyears2007,2000,1997,1996,1995,1994.

Santiagoalsoreportedthatduringseipi’smeetingwithPresident Aquino,the industry expressed its desire todoubleexportsfrom$22Bin2009to$50Bin2016.

The industry isbullish for2011and reported thattheelectronics sectorwillcontinuetobe thedriverofgrowthofPhilippineexports.


Food And BEVErAGE

AsEAn coffee federation in the worksCoffeeenthusiastsintheregionareformingafederationtoaddressthegrowingpopularityofthebeverageamiddwindlingproduction.

PhilippineCoffeeBoardchairNicholasA.Mattisaidindustryassociations inIndonesia,Laos,Malaysia, thePhilippines, Singapore, andThailand recently met inPattaya,ThailandandPakse,LaostoorganizetheaseanCoffeeFederation.

Designedtohaveacommonplatformfordialogue,thegroupalsoendeavorstopromotecoffeesfromaseancountriestothegrowingAsianmarketforthebeverage.


GArmEnts

Chinese garment makers to move here due to labor advantageOverwhelmed with the high cost of labor, Chinesegarment manufacturers are looking at the Philippinesas its relocation site because of its reliability in termsof skilled manpower, prompt delivery, flexibility anddesigncapabilities.

Wei Lin, vice-president of the China NationalGarmentAssociation,saidlaborcostinChinaisgetting

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veryexpensivebutthePhilippines’highlyskilledlabormakesitcosteffectiveforChinesegarmentmanufacturerstooutsourceinthePhilippines.

HesaidChinesegarmentfirmsarenotonlylookingatthePhilippinesasanoutsourcingdestinationbutasalocationforinvestments.

Weihasalsonotedgovernmentpolicydirectionsthatwouldensure thecompetitivenessofChinesegarmentmanufacturers,aswellassecurityissuesforinvestors.

LawrencedelosSantos,presidentoftheConfederationofGarmentExportersofthePhilippines,furthercitedPhilippine operations for their reliability, flexibility,stabilityandquality.


PHArmACEutiCAL

Health department mulls new round of drug price cuts TheDepartmentofHealthwilldeliberateearlythisyearwhetheritwillimplementanotherbatchofdrugpricecutsundertheCheaperMedicinesAct.

ThelastroundofpricecutstookeffectfromMarch31toAugust1,2010.Itcoveredsome100drugsclassifiedasanti-cholesterol,antihypertensive,medicinesforbladderand prostate disorders, antidepressant, anti-psychotic,anticancer,anti-asthma,anticoagulant,eyepreparations,anti-hepatitisB,antiviral,antibiotic,antibacterial,anti-inflammatory,painreliever,anddialysates/solutions.

ThefirstroundtookeffectasearlyasAugust2009and as late as September 2009 and covered over 100drugs or pharmaceutical formulations. The CheaperMedicines Act or Republic Act 9502 authorizes thehealth secretary to recommend to the President themaximumdrugretailpricebasedonratesthataresubjecttoregulationinthePhilippinesandinothercountries;availablemarketsupply;andcosttothemanufacturer,importer,trader,distributor,wholesalerorretailer.

Source: BuSineSS WOrld, 3 January 2011

PoWEr And EnErGy

Wind power company to invest $1��m more in rE projectSubicWindPowerGenerationInc.(swpgi)will invest$125million(M)fortheexpansionoftheirrenewableenergyproject in theFreeport,according to theSubicBayMetropolitanAuthority(sbma).

sbma chairman Feliciano Salonga said the Subicagencyhasapprovedtherequestofswpgitoexpandits

businessandincludetheestablishmentandoperationofasolarenergyprojectontopofitsoriginalproposaltoestablishandoperateawindfarm.

swpgi, a subsidiary of the China-based SunnewInvestments Ltd., committed $75M last year for theestablishment of a 25-wind turbine farm that wouldgeneratesome50megawattsofpower.

However, after ocular surveys and initial datagatheringinSubic,thefirmdecidedtoalsobuildasolarenergyprojectthatwouldyield100–200megawattsofenergy,Salongasaid.

Theexpandedprojectwillbeworth$125M,coveringsome300hectares of land at Subic’sMountSta.Ritaand Redondo Peninsula, and will generate 150–200megawattsofpower.Itisalsoexpectedtoemployabout150 workers, and earn the sbma some $816,000 inannualleaserentals.

Salonga said that swpgi’s renewable energy projectwillnotonlybringtheSubicFreeportattheforefrontofthegreenenergymovement,butwillalsohelpstabilizepowersupplyintheLuzongrid.


sHiPPinG

new shipping line strengthens subic’s position as maritime hubThedevelopmentoftheSubicBayFreeportasamajormaritimehubintheAsia-PacificregionhastakenanewtackwiththeentryofTigerLinesasthethirdshippinglinethatwillmakeregularcallsontheportofSubicBay.

In their presentation, Tiger executives notedthat Subic was once a us military base that has beensuccessfullytransformedintoafinanciallyindependentauthorityandindustrial/exportfreeportzone.

Amongthestrategicadvantagestheycitedwerethemodern port with its 600,000 teu capacity and fourbrandnewcranesthatcanprocess100teusperhour,quickturnaroundtime,lowtariffrates,andthepresenceofnumerousindustriesintheSubicandClarkfreeportzones that import raw materials and export finishedproducts.

They also noted that the presence of the modernSubic-Clark-Tarlac Expressway, convenient feederroads, and lackof truckbansopena largemarket fortheirbusinessinneighboringprovinces.

TigerLineshopesthattheestablishmentandefficientoperationofanewcontainerlineoutofsbict willleadtothefullutilizationoftheSubicBaycontainerport.


Aside from employing around 150 workers

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Grossvalueadded(GVA)infinancialintermediationbyindustrygroupQ12008toQ42010(currentprices)

Unit:Pmillion

2008 2009 2010

Industry/industry group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Banking institutions 58,608 54,740 56,213 51,451 65,261 62,196 64,053 59,664 74,612 71,029 74,630 70,817

Non-banks financial intermediation 31,322 58,038 31,872 44,475 32,207 55,461 38,847 47,218 36,835 59,,957 45,455 54,307

Insurance 20,591 19,115 19,103 24,432 21,787 21,075 20,972 23,149 23,369 22,680 25,511 27,609

Activities auxiliary to financial

intermediation 6,680 7,984 6,559 8,743 7,438 8,680 7,661 8,856 7,968 9,056 8,800 9,769

GVA in financial intemidiation 117,201 139,876 113,747 129,102 126,694 147,412 131,534 138,886 142,784 162,722 154,396 162,502

GVAinfinancialintermediationbyindustrygroupQ12008toQ42010(constant2000prices)

Unit:Pmillion

2008 2009 2010

Industry/industry group Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Banking institutions 39,380 35,255 3,4945 32,559 41,730 39,145 40,014 36,094 45,859 42,388 44,655 42,348

Non-banks financial intermediation 21,191 37,605 19,990 28,122 20,303 34,761 24,190 29,329 22,379 36,161 27,393 32,402

Insurance 13,896 12,365 11,950 15,493 13,658 13,122 12,986 14,599 13,968 13,855 15,348 16,534

Activities auxiliary to financial

intermediation 4,545 5,207 4,138 5,582 4,702 5,452 4,788 5,55 4,852 5,435 5,297 5,844

GVA in financial intemidiation 79,462 90,431 71,023 81,756 80,393 92,481 81,978 85,477 87,058 97,838 92,692 97,127

Source: National Statistical Coordination Board

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