Auditing of Mining Industry The mining sector can:

1.Create employment opportunities both directly in the mines

Overview:
and indirectly on services to the mines,
The mining industry sector is a major backbone of the 2.Provide education and health services,
Philippine economy. The long history of the industry has 3.Increase foreign exchange reserves, (reducing a country’s
been much affected by the vicissitudes of the
international market, as well as other domestic factors. foreign exchange deficit),
With the adoption of the 1986 Constitution, the concept 4.Improve infrastructure like roads and water supply, and
of awarding mineral rights has been drastically changed 5.Create other economic activities to support the mines
from leasehold to a system of contracts for various modes
of production. Such changes have, as expected, instead of importing all supplies from abroad.
temporarily unsettled the industry.

The preponderance of small-scale mining, the A working definition of mining according to the
growing public awareness on the environment, increasing United Nations Environmental Program (UNEP) could simply be
labor and energy costs are concerns which should be “the extraction of minerals from the earth”. The word
addressed. Amidst all these, and in the framework of very stiff “minerals” in this case would cover a wide variety of naturally
competition in the region for investments, new thrusts and occurring substances extracted for human use. Although this
directions, without compromising general stability, are definition is adequate for our purposes, mining can also be
urgently required for the overall development not only of the seen as a process that begins with the exploration and
industry but for the whole country. discovery of mineral deposits and continues through ore
extraction and processing to the closure and remediation of
The Philippines is the 5th most mineral-rich country worked-out sites.
in the world for gold, nickel, copper, and chromite. It is home
to the largest copper-gold deposit in the world. The Mines and Minerals are a non-renewable resource, so mining represents
Geosciences Bureau (MGB) has estimated that the country has a temporary use of the land. The mining life cycle during this
an estimated $840 billion worth of untapped mineral wealth, temporary use of the land can be divided into the following
as of 2012. stages: exploration, development, extraction, processing, and
mine closure.
About 30 million hectares of land areas in the
Philippines is deemed as possible areas for metallic minerals. In this section, we explain the various phases of mining, the
According to the Mines and Geosciences Bureau (MGB), about associated impact in each phase, and the suggested mitigation
nine million hectares of land areas is identified as having high or amelioration measures.
mineral potential. The Philippines metal deposit is estimated The figure below sets out the five physical stages of the life
at 21.5 billion metric tons and non-metallic minerals are at cycle of a mine.
19.3 billion metric tons, as of 2012.

Nature and Background of Specialized Industry

A country’s socio-economic development largely
depends on the extent and composition of its natural
resources. Examples of natural resources include forestry,
minerals, and commercial sources of energy (like coal, oil,
natural gas, and hydro power). Mining and mineral processing The Exploration phase of mining
are activities for extraction and processing minerals for Exploration activities encompass all actions in the
commercial use. field that precede feasibility studies. Exploration activities
include initial reconnaissance flights and geophysical surveys,
The mining sector is likely to contribute to the
stream sediment studies and other geochemical surveys,
development of the economy of any country through taxes
from large-scale mining companies and contribute to social– construction of access roads, clearing of test drilling sites,
economic infrastructural development within the area where installation of drill pads and drilling rigs, benching,
the mine is located. trenching/pitting, erection of temporary accommodation,
and power generation for exploratory drilling. Exploration
activities also include determining the location, size, shape,
position, and value of a body of ore using prospecting
methods.
The Development phase of mining The Philippines is one of the most highly mineralized countries
The development of a mine consists of several in the world with vast reserves of gold, silver, copper, nickel,
principal activities: conducting a feasibility study, including a and chromite. In 2018, the Philippines accounted for 6.4% of
financial analysis to decide whether to abandon or develop the world’s total estimated reserves of nickel.
the property; designing the mine; acquiring mining rights;
filing an Environmental Impact Assessment (EIA); and
preparing the site for production.

The development phase may include such activities as

➢ Overburden stripping and placing,
➢ Road/trail, building and/or helicopter transport,
➢ Drilling and trenching,
➢ Erecting treatment plants, preparing disposal areas,
and constructing services, infrastructure such as
power line or generating plants, railways, water,
supplies and sewerage, laboratories and amenities.

Overview, Updates, Statistics of the Specialized

Industry in the Philippines

The extractive sector in the Philippines makes a

relatively small contribution to the national economy. The
latest disclosure (2018 EITI Report) shows the mining sector The main taxes levied on the mining sector are
contributes the most in the sector with 0.89% to GDP and corporate income tax, excise tax on minerals and royalties on
5.99% to total exports. mineral reservations, while the major oil and gas levies are the
However, there is considerable anti-mining sentiment government’s share in oil and gas revenues, corporate income
in the country especially at subnational levels where tax and withholding tax on profit remittance to principal.
environmental impact and displacement of indigenous peoples
caused by mining operations have been the focus of much The Bureau of Internal Revenue (BIR) is the main
debate. Small-scale mining is also contentious, due to poor body responsible for collecting taxes paid to central
regulations and overlapping policies between central and local government, while the Mines and Geosciences Bureau of the
government. Department of Environment and Natural Resources and the
Department of Energy collect sector levies for mining and
The Philippines is a leading producer of mineral coal, oil, and gas respectively. Local government units (LGUs)
commodities such as nickel, gold and copper. While mineral are responsible for collecting subnational payments.
production volume increased slightly in 2018, production has
gradually decreased since 2015 -2017. Nevertheless, the Oil and gas service contracts (PSCs) are awarded
country is only behind Indonesia as the world's leading through competitive public bidding, while mining permits are
producer of nickel. Other commodities being produced in the awarded through direct negotiation. Several moratoriums on
Philippines include chromite, zinc, iron, silver, crude oil and the issuance of mining licenses implemented in previous years
natural gas. from 2012 to 2017 have affected the number of mining
While the mineral sector slightly picked up in 2018, projects in the country.
coal saw a slight dip in production compared to its 2017 value. As of February 2021, there were 309 Mineral
Domestic oil production follows a similar trend as coal - Production Sharing Agreements, 5 Financial or Technical
declined from 3 million barrels of oil in 2014 to only 1.1 Assistance Agreements and 13 existing Exploration Permits
million barrels in 2018. Exploration activities in mining are for the mining sector.
spread nationwide, while coal production is focused in the
province of Antique. Oil and gas exploration is focused
offshore.
 Beneficial Ownership (BO) disclosure and Politically ➢ Reclamation costs: Takes place at the end of a mine’s
Exposed Persons (PEP) reporting in the Philippines has been a life; accrued for accounting purposes but not accrued
significant aspect of transparency in the Philippines. in a cash flow model.
The multi-stakeholder group identifies tax evasion, ➢ Depreciation: A percentage of production bases over
money laundering, and compliance with the Constitutional the entire life of the mine
provisions on the nationality of mining companies as the ➢ Taxes: Can often be complicated with mining
national issues that their work on beneficial ownership aims to companies operating in several countries; mining
address. It faces constraints, however, in terms of data privacy specific taxes and royalty agreements need to be
restrictions. considered
➢ Changes in working capital: Changes in accounts
The Philippines EITI previously published a Beneficial receivable, inventory, and accounts payable should be
Ownership (BO) roadmap on 15 December 2016. Several factored into a cash flow model
milestones of the Roadmap have been accomplished by the
beginning of 2021, including the integration of BO in the Challenges in Mining Industry in the Philippines
mainstreaming efforts of PH-EITI, the increased coordination ➢ Responsible Mining under Philippine Mining Act
with the SEC and the pilot disclosure of BO information. ➢ Circumvention of Permits
According to the 2018 EITI Report published in ➢ Interfacing with LGUs
December 2020, 41 out of 65 covered companies/projects ➢ Delays in the declaration of Indigenous Peoples
fully or partially disclosed beneficial ownership information. (institutional issues with National Center for IPs)
A total of 128 name entries were declared as beneficial owners. ➢ Impact of COVID-19 pandemic

Securities Exchange Commission (SEC) Memorandum High-Level Questions About Revenues from the Extraction of
Circular (MC) No. 15 (issued in July 2019) enhanced the BO Minerals
Declaration form. The revised General Information Sheet (GIS) ➢ Are the revenues from the extraction of minerals
under MC No. 15 mandates corporations to fill out a beneficial significant? (Each source of revenue should be
information declaration form that asks for nine categories of assessed individually, and their importance should
beneficial owners and their information, including complete also be assessed in the aggregate. While large
name, residential address, nationality, tax identification revenues can be significant on their own, some
number, and percentage of ownership or voting rights. While smaller sources of revenues may also be significant
there is currently no public register of beneficial owners, work because of their function. For example, leases,
has begun to ensure that BO information, contracts and licenses, and permits may be important because they
extractives information is integrated into one publicly-available enable departments to know who should be paying
portal. royalties and fees.)

Audit Considerations ➢ Is there a significant difference between predicted

and actual revenues? If so, what is the explanation for
Key Financial Concepts in the Mining Industry (see PFRS 6 this difference?
Exploration and Evaluation of Mineral Resources for more ➢ Are there any new revenue sources? (For example, is
information) there a new resource with its own royalty system,
➢ Revenue: such as a recently developed diamond mining
Ore (tons) x Grade (g/t) x Recovery x Pay industry?)
ability x Metal Price ➢ Has new relevant legislation or regulation been
➢ Royalties: introduced or have significant changes been made to
Properties often have royalties on them (e.g., 2% existing legislation and regulation recently?
Net Smelter Return)
➢ Operating costs: ➢ When was the last review of the revenue framework
Per ton basis (e.g., $2.50/ton for mining) conducted? When is the next one planned?
➢ Capital costs: ➢ Where significant changes in revenues are observed,
Includes initial capital (construction of mine) are they in line with current market conditions and
and sustaining capital (ongoing equipment, etc.) production levels?
 ➢ Has the revenue framework (and supporting High-Level Questions About Revenues from the Extraction of
regulations) been criticized for being overly complex Minerals
or unclear? Is there significant public interest in the ➢ Have there been any recent or looming changes in
topic? environmental standards or legislation that are
➢ Have there been any public complaints or reporting expected to affect required securities?
of any inappropriate practices in the sector (transfer ➢ Does the duration of the securities match the
mispricing, for example)? expected duration of the expected liability?
➢ Is there documented guidance on how to estimate
➢ Have annual financial audits identified significant or remediation costs?
chronic issues with regard to the collection of ➢ Are remediation-cost estimates periodically
revenues from the extraction of minerals? reviewed by the government or an independent
➢ Is there a regulated royalty audit regime in place? If expert?
so, is there 100-percent audit coverage or risk-based
coverage? Are audits completed on a timely basis? In ➢ If regulations allow for self-insurance, what is the
addition, have internal audits of revenue collection relative frequency of self- insurance by mining
processes been conducted? companies in the jurisdiction?
➢ Is there significant reliance on self-reporting of ➢ Are there mechanisms for regular monitoring of sites
production level? and monitoring of associated securities? Are these
➢ Does the government have sufficient expertise to mechanisms implemented? What is the frequency of
verify information reported by the private sector? site visits?
➢ Are the licensing and inspection functions
➢ Have previous performance audits of mining segregated?
revenues been conducted by the audit office? Has ➢ Is there a process to ensure that financial assurances
progress been made by the government to address are released only when compliance with site
prior recommendations? remediation requirements is achieved and
➢ Is there segregation of duties between the collection documented?
of revenues and the assessment of the completeness
of revenues received? ➢ Are site inspections providing sufficiently complete
➢ Has the government clearly established the objective assessments? (For example, can inspections identify
it is pursuing through its revenue framework for the underground contamination?)
mining sector? ➢ Are there sufficient penalties in place to encourage
➢ Is there legislation or regulation in place to ensure compliance with financial assurance requirements?
the public has access to reliable information on the
payments the government receives from mining
companies?

High-Level Questions About Financial Assurance for Site

Remediation
➢ Is there a regulated system of financial assurances for
site remediation in place? Is the system recent or
well-established? Has a remediation fund been
established?
➢ What is the current cost estimate (potential liability)
for rehabilitating all mining sites in the jurisdiction?
➢ What is the state or risk of unfunded liability in the
jurisdiction? Is the risk increasing over time?
➢ If there is a remediation fund, what is the current
balance of this fund?