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Philippines Mining Sector Summary

Core Content

The Philippines mining sector is currently under stress due to the slowing Chinese economy, which has significantly impacted commodity prices. The report highlights the performance of key mining companies and outlines the sector's challenges and strategies for survival.

Main Companies and Ratings

• Atlas Mining (AT): HOLD rating. The company faces execution risks, permitting issues, and cost-cutting measures due to its heavy reliance on China.
• Marcventures (MARC): HOLD rating. Similar to AT, it is highly geared towards China and faces similar challenges.
• Philex Mining (PX): HOLD rating. It is expanding its Silangan mine as its Padcal mine nears depletion.
• Semirara Mining and Power Corp (SCC): BUY rating. The company is most positive due to its power generation business and strong coal reserves.
• Nickel Asia Corp (NIKL): BUY rating. It is the most stable among pure mining plays and has the lowest costs and largest reserves.

Key Viewpoints

• SCC is the best performer due to its vertically integrated coal and power operations, with the potential to expand its power capacity to 1,600MW by 2018.
• NIKL is the most stable in the nickel sector, with processing facilities that allow greater value capture. However, upside is limited due to uncertain demand from China.
• China's economic slowdown has led to a decline in prices for metallic ores and coal, with nickel prices falling from USD7.00/lb to USD4.69/lb.
• The survival strategies of miners include cost reduction, expansion, and vertical integration to mitigate the impact of weak commodity prices.
• Execution and financial risks remain a concern for most mining companies, especially those with high exposure to China.

Sector Overview

• The Philippines mining sector is dominated by nickel, copper-gold, and coal.
• Nickel is primarily exported to China and Japan, with the main districts being Surigao, Palawan, and Zambales.
• Coal is mainly for domestic consumption, with Semirara Island being the largest coal basin.
• Copper-gold deposits are found in Central Visayas and Southern Mindanao.

Challenges from China

• China's economic slowdown and currency devaluation have made its imports more expensive.
• The decline in demand from China has led to a significant drop in prices for all major commodities.
• The current commodity price weakness has forced miners to adopt strategies that focus on cost optimization and resource preservation.

Survival Strategies

• Nickel miners are expanding capacity and investing in processing to ensure long-term survival.
• Copper-gold miners are dealing with execution risks and cost-cutting measures to remain profitable.
• SCC is leveraging its power generation business to stabilize earnings and reduce the sector's cyclicality.
• The high-iron limonite market has become uneconomic, prompting miners to focus on higher-grade ore production.

Regional Mining Districts

• Surigao Nickel District: The largest and most productive, with 18 nickel mining companies, including NIKL and MARC.
• Palawan Nickel District: Contains the Rio Tuba mine, owned by NIKL, and is known for its nickel laterite deposits.
• Zambales Nickel District: Has a long history of mining, with significant reserves and four active mining companies.
• Semirara Coal District: SCC has the largest coal reserves in the Philippines, with a focus on both coal and power generation.
• Central Visayas Copper District: Contains world-class copper porphyry deposits, including the Carmen mine operated by AT.

Financial and Operational Insights

• SCC has a market cap of PHP29.6B, with a target price of PHP175.62 and an upside of 34.1%.
• NIKL has a market cap of PHP1,265.9M, with a target price of PHP10.66 and an upside of 33.3%.
• AT has a market cap of PHP196.6M, with a target price of PHP5.37 and an upside of 19.1%.
• PX has a market cap of PHP532.7M, with a target price of PHP5.72 and an upside of 11.7%.
• SCC has suffered from mining accidents and ongoing environmental compliance issues, which have affected its operations.

Conclusion

The mining sector in the Philippines is currently in a neutral position due to the impact of China's economic slowdown. While some companies like SCC and NIKL are showing resilience and growth potential, others like AT, MARC, and PX are still facing significant challenges. The sector's future will depend on the recovery of commodity prices and the ability of companies to adapt to the current market conditions.