MODULE 3

AUDITING
MINING
INDUSTRY
Overview :

The mining industry sector is a major backbone of the Philippine economy. The long history of the
industry has been much affected by the vicissitudes of the international market, as well as other domestic
factors. With the adoption of the 1986 Constitution, the concept of awarding mineral rights has been
drastically changed from leasehold to a system of contracts for various modes of production. Such changes
have, as expected, temporarily unsettled the industry. The preponderance of small-scale mining, the
growing public awareness on the environment, increasing labor and energy costs are concerns which
should be addressed. Amidst all these, and in the framework of very stiff competition in the region for
investments, new thrusts and directions, without compromising general stability, are urgently required for
the overall development not only of the industry but for the whole country.
Overview :

The Philippines is the fifth most mineral-rich country in the world for gold, nickel, copper, and
chromite. It is home to the largest copper-gold deposit in the world. The Mines and Geosciences Bureau
(MGB) has estimated that the country has an estimated $840 billion worth of untapped mineral wealth, as
of 2012. About 30 million hectares of land areas in the Philippines is deemed as possible areas for metallic
minerals. According to the Mines and Geosciences Bureau (MGB), about nine million hectares of land
areas is identified as having high mineral potential. The Philippines metal deposit is estimated at 21.5
billion metric tons and non-metallic minerals are at 19.3 billion metric tons, as of 2012.
 Module Objectives:

01 Know the nature and background of the particular specialized industry;

Learn the overview, statistics, and updates of the specialized industry in the
02 Philippine setting;

03 Identify the different audit considerations and trends for the industry.
 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 are activities for extraction and processing
minerals for commercial use. The mining sector is likely to contribute to the
development of the economy of any country through taxes from large-scale
mining companies and contribute to social–economic infrastructural development
within the area where the mine is located.
The mining sector can:
• create employment opportunities both directly in the mines
and indirectly on services to the mines,
• provide education and health services,
• increase foreign exchange reserves, (reducing a country’s
foreign exchange deficit),
• improve infrastructure like roads and water supply, and
• create other economic activities to support the mines instead of
importing all supplies from abroad.
A working definition of mining according to the United Nations
Environmental Program (UNEP) could simply be “the extraction of
minerals from the earth”. The word “minerals” in this case would
cover a wide variety of naturally occurring substances extracted for
human use.

Although this definition is adequate for our purposes, mining can

also be seen as a process that begins with the exploration and
discovery of mineral deposits and continues through ore extraction
and processing to the closure and remediation of worked-out sites.
Minerals are a non-renewable resource, so mining represents a
temporary use of the land. The mining life cycle during this
temporary use of the land can be divided into the following stages:
exploration, discovery, development, production and mine
closure.

In this section, we explain the various phases of mining, the

associated impact in each phase, and the suggested mitigation or
amelioration measures. The figure below sets out the five physical
stages of the life cycle of a mine.
 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 contributes the most in the
sector with 0.89% to GDP and 5.99% to total exports.

• However, there is considerable anti-mining sentiment in the

country especially at subnational levels where environmental
impact and displacement of indigenous peoples caused by mining
operations have been the focus of much debate. Small-scale
mining is also contentious, due to poor regulations and
overlapping policies between central and local government.
• The Philippines is a leading producer of mineral commodities such as
nickel, gold and copper. While mineral production volume increased slightly
in 2018, production has gradually decreased since 2015 -2017.
Nevertheless, the country is only behind Indonesia as the world's leading
producer of nickel. Other commodities being produced in the Philippines
include chromite, zinc, iron, silver, crude oil and natural gas.

• While the mineral sector slightly picked up in 2018, coal saw a slight dip in
production compared to its 2017 value. Domestic oil production follows a
similar trend as coal - declined from 3 million barrels of oil in 2014 to
only 1.1 million barrels in 2018. Exploration activities in mining are
spread nationwide, while coal production is focused in the province of
Antique. Oil and gas exploration is focused offshore.
The Philippines is one of the most highly mineralized countries in the world with vast
reserves of gold, silver, copper, nickel, and chromite. In 2018, the Philippines accounted for
6.4% of the world’s total estimated reserves of nickel.
• The main taxes levied on the mining sector are corporate income tax,
excise tax on minerals and royalties on mineral reservations, while the
major oil and gas levies are the government’s share in oil and gas
revenues, corporate income tax and withholding tax on profit remittance to
principal.
 
• The Bureau of Internal Revenue (BIR) is the main body responsible for
collecting taxes paid to central government, while the Mines and
Geosciences Bureau of the Department of Environment and Natural
Resources and the Department of Energy collect sector levies for mining
and coal, oil, and gas respectively. Local government units (LGUs) are
responsible for collecting subnational payments.
 
• Oil and gas service contracts (PSCs) are awarded through competitive
public bidding, while mining permits are awarded through direct negotiation.
Several moratoriums on the issuance of mining licenses implemented in
previous years from 2012 to 2017 have affected the number of mining
projects in the country
• As of February 2021, there were 309 Mineral Production Sharing Agreements, 5
Financial or Technical Assistance Agreements and 13 existing Exploration Permits
for the mining sector.
 
• Beneficial Ownership (BO) disclosure and Politically Exposed Persons (PEP)
reporting in the Philippines has been a significant aspect of transparency in the
Philippines. The multi-stakeholder group identifies tax evasion, money laundering,
and compliance with the Constitutional provisions on the nationality of mining
companies as the national issues that their work on beneficial ownership aims to
address. It faces constraints, however, in terms of data privacy restrictions.
 
• The Philippines EITI previously published a Beneficial Ownership (BO) roadmap
on 15 December 2016. Several milestones of the Roadmap have been
accomplished by the beginning of 2021, including the integration of BO in the
mainstreaming efforts of PH-EITI, the increased coordination with the SEC and the
pilot disclosure of BO information. According to the 2018 EITI Report published in
December 2020, 41 out of 65 covered companies/projects fully or partially
disclosed beneficial ownership information. A total of 128 name entries were
declared as beneficial owners.
• Securities Exchange Commission (SEC) Memorandum Circular (MC) No.
15 (issued in July 2019) enhanced the BO Declaration form. The revised
General Information Sheet (GIS) under MC
No. 15 mandates corporations to fill out a beneficial information declaration
form that asks for nine categories of beneficial owners and their information,
including complete name, residential address, nationality, tax identification
number, and percentage of ownership or voting rights. While there is
currently no public register of beneficial owners, work has begun to ensure
that BO information, contracts and extractives information is integrated into
one publicly-available portal.
 AUDIT
CONSIDERATIONS
 KEY FINANCIAL CONCEPTS IN THE MINING INDUSTRY

• Revenue: Ore (tons) x Grade (g/t) x Recovery x Payability x Metal Price

• Royalties: Properties often have royalties on them (e.g., 2% Net Smelter Return)
• Operating costs: Per ton basis (e.g., $2.50/ton for mining)
• Capital costs: Includes initial capital (construction of mine) and sustaining capital (ongoing
equipment, etc.)
• Reclamation costs: Takes place at the end of a mine’s life; accrued for accounting
purposes but not accrued in a cash flow model.
• Depreciation: A percentage of production bases over the entire life of the mine
• Taxes: Can often be complicated with mining companies operating in several countries;
mining specific taxes and royalty agreements need to be considered
• Changes in working capital: Changes in accounts receivable, inventory, and accounts
payable should be factored into a cash flow model.
 CHALLENGES IN MINING INDUSTRY IN THE PHILIPINES

• Responsible Mining under Philippine Mining Act

• Circumvention of Permits
• Interfacing with LGUs
• Delays in the declaration of Indigenous Peoples (institutional issues with National Center
for IPs)
• Impact of COVID-19 pandemic
 High Level Questions About Revenues from the Extractions of Minerals

• Are the revenues from the extraction of minerals significant

• Is there a significant difference between predicted and actual revenues? If so, what is the
explanation for this difference?
• Are there any new revenue sources?
• Has new relevant legislation or regulation been introduced or have significant changes been
made to existing legislation and regulation recently?
• When was the last review of the revenue framework conducted? When is the next one planned?
• Where significant changes in revenues are observed, are they in line with current market
conditions and production levels?
• Has the revenue framework (and supporting regulations) been criticized for being overly
complex or unclear? Is there significant public interest in the topic?
• Have there been any public complaints or reporting of any inappropriate practices in the sector
(transfer mispricing, for example)?
• Have annual financial audits identified significant or chronic issues with regard to the
collection of revenues from the extraction of minerals?
 High Level Questions About Revenues from the Extractions of Minerals

• Is there a regulated royalty audit regime in place? If so, is there 100-percent audit
coverage or risk-based coverage? Are audits completed on a timely basis? In addition,
have internal audits of revenue collection processes been conducted?
• Is there significant reliance on self-reporting of production level?
• Does the government have sufficient expertise to verify information reported by the
private sector?
• Have previous performance audits of mining revenues been conducted by the audit
office? Has progress been made by the government to address prior
recommendations?
• Is there segregation of duties between the collection of revenues and the assessment
of the completeness of revenues received?
• Has the government clearly established the objective it is pursuing through its revenue
framework for the mining sector?
• Is there legislation or regulation in place to ensure the public has access to reliable
information on the payments the government receives from mining companies?
 High-Level Questions About Financial Assurances 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?
• Have there been any recent or looming changes in environmental standards or
legislation that are expected to affect required securities?
• Does the duration of the securities match the expected duration of the expected
liability?
• Is there documented guidance on how to estimate remediation costs?
 High-Level Questions About Financial Assurances for Site Remediation
 

• Are remediation cost estimates periodically reviewed by the government or an

independent expert?
• If regulations allow for self-insurance, what is the relative frequency of self-insurance
by mining companies in the jurisdiction?
• Are there mechanisms for regular monitoring of sites and monitoring of associated
securities? Are these mechanisms implemented? What is the frequency of site visits?
• Are the licensing and inspection functions segregated?
• Is there a process to ensure that financial assurances are released only when
compliance with site remediation requirements is achieved and documented?
• Are site inspections providing sufficiently complete assessments?
• Are there sufficient penalties in place to encourage compliance with financial
assurance requirements?
 
 Thank you!

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