Auditing Specialized Industries: Mining Industry A working definition of mining according to the United

Nations Environmental Program (UNEP) could simply be “the

PRE 4 – MOD 3 extraction of minerals from the earth”. The word “minerals”
in this case would cover a wide variety of naturally occurring
AUDITING MINING INDUSTRY
substances extracted for human use. Although this
Overview: definition is adequate for this purpose, mining can also be
seen as a process that begins with the exploration and
The mining industry sector is a major backbone of the
discovery of mineral deposits and continues through ore
Philippine economy. The long history of the industry has
extraction and processing to the closure and remediation of
been much affected by the vicissitudes of the international
worked-out sites.
market, as well as other domestic factors. With the adoption
of the 1986 Constitution, the concept of awarding mineral Minerals are a non-renewable resource, so mining
rights has been drastically changed from leasehold to a represents a temporary use of the land. The mining life cycle
system of contracts for various modes of production. Such during this temporary use of the land can be divided into the
changes have, as expected, temporarily unsettled the following stages: exploration, development, extraction,
industry. The preponderance of small-scale mining, the processing, and mine closure. The following are the various
growing public awareness on the environment, increasing phases of mining, the associated impact in each phase, and
labor and energy costs are concerns which should be the suggested mitigation or amelioration measures. There
addressed. Amidst all these, and in the framework of very are five physical stages of the life cycle of a mine.
stiff competition in the region for investments, new thrusts
The exploration phase of mining
and directions, without compromising general stability, are
urgently required for the overall development not only of Exploration activities encompass all actions in the field that
the industry but for the whole country. precede feasibility studies. Exploration activities include
initial reconnaissance flights and geophysical surveys,
The Philippines is the fifth most mineral-rich country in the
stream sediment studies and other geochemical surveys,
world for gold, nickel, copper, and chromite. It is home to
construction of access roads, clearing of test drilling sites,
the largest copper-gold deposit in the world. The Mines and
installation of drill pads and drilling rigs, benching,
Geosciences Bureau (MGB) has estimated that the country
trenching/pitting, erection of temporary accommodation,
has an estimated $840 billion worth of untapped mineral
and power generation for exploratory drilling. Exploration
wealth, as of 2012. About 30 million hectares of land areas
activities also include determining the location, size, shape,
in the Philippines is deemed as possible areas for metallic
position, and value of a body of ore using prospecting
minerals. According to the Mines and Geosciences Bureau
methods.
(MGB), about nine million hectares of land areas is identified
as having high mineral potential. The Philippines metal The development phase of mining
deposit is estimated at 21.5 billion metric tons and non-
metallic minerals are at 19.3 billion metric tons, as of 2012. The development of a mine consists of several principal
activities: conducting a feasibility study, including a financial
Nature and Background of Mining Industry analysis to decide whether to abandon or develop the
property; designing the mine; acquiring mining rights; filing
A country’s socio-economic development largely depends
an Environmental Impact Assessment (EIA); and preparing
on the extent and composition of its natural resources.
the site for production. The development phase may include
Examples of natural resources include forestry, minerals,
such activities as
and commercial sources of energy (like coal, oil, natural gas,
and hydro power). Mining and mineral processing are  overburden stripping and placing,
activities for extraction and processing minerals for  road/trail, building and/or helicopter transport,
commercial use. The mining sector is likely to contribute to  drilling and trenching,
the development of the economy of any country through  erecting treatment plants, preparing disposal areas,
taxes from large-scale mining companies and contribute to and constructing services, infrastructure such as
social–economic infrastructural development within the power line or generating plants, railways, water,
area where the mine is located. The mining sector can: supplies and sewerage, laboratories and amenities.
 create employment opportunities both directly in Overview, Updates, Statistics of the Mining Industry in the
the mines and indirectly on services to the mines, Philippines
 provide education and health services,
 increase foreign exchange reserves, (reducing a The extractive sector in the Philippines makes a relatively
country’s foreign exchange deficit), small contribution to the national economy. The latest
 improve infrastructure like roads and water supply, disclosure (2018 EITI Report) shows the mining sector
and contributes the most in the sector with 0.89% to GDP and
 create other economic activities to support the 5.99% to total exports. However, there is considerable anti-
mines instead of importing all supplies from mining sentiment in the country especially at subnational
abroad. levels where environmental impact and displacement of
indigenous peoples caused by mining operations have been national issues that their work on beneficial ownership aims
the focus of much debate. Small-scale mining is also to address. It faces constraints, however, in terms of data
contentious, due to poor regulations and overlapping privacy restrictions.
policies between central and local government.
The Philippines EITI previously published a Beneficial
The Philippines is a leading producer of mineral commodities Ownership (BO) roadmap on 15 December 2016. Several
such as nickel, gold and copper. While mineral production milestones of the Roadmap have been accomplished by the
volume increased slightly in 2018, production has gradually beginning of 2021, including the integration of BO in the
decreased since 2015 -2017. Nevertheless, the country is mainstreaming efforts of PH-EITI, the increased coordination
only behind Indonesia as the world's leading producer of with the SEC and the pilot disclosure of BO information.
nickel. Other commodities being produced in the Philippines According to the 2018 EITI Report published in December
include chromite, zinc, iron, silver, crude oil and natural gas. 2020, 41 out of 65 covered companies/projects fully or
While the mineral sector slightly picked up in 2018, coal saw partially disclosed beneficial ownership information. A total
a slight dip in production compared to its 2017 value. of 128 name entries were declared as beneficial owners.
Domestic oil production follows a similar trend as coal -
Securities Exchange Commission (SEC) Memorandum
declined from 3 million barrels of oil in 2014 to only 1.1
Circular (MC) No. 15 (issued in July 2019) enhanced the BO
million barrels in 2018. Exploration activities in mining are
Declaration form. The revised General Information Sheet
spread nationwide, while coal production is focused in the
(GIS) under MC No. 15 mandates corporations to fill out a
province of Antique. Oil and gas exploration is focused
beneficial information declaration form that asks for nine
offshore.
categories of beneficial owners and their information,
The Philippines is one of the most highly mineralized including complete name, residential address, nationality,
countries in the world with vast reserves of gold, silver, tax identification number, and percentage of ownership or
copper, nickel, and chromite. In 2018, the Philippines voting rights. While there is currently no public register of
accounted for 6.4% of the world’s total estimated reserves beneficial owners, work has begun to ensure that BO
of nickel. information, contracts and extractives information is
integrated into one publicly-available portal.
Taxation
Audit Considerations
The main taxes levied on the mining sector are corporate
income tax, excise tax on minerals and royalties on mineral Key Financial Concepts in the Mining Industry (PFRS 6
reservations, while the major oil and gas levies are the Exploration and Evaluation of Mineral Resources)
government’s share in oil and gas revenues, corporate
income tax and withholding tax on profit remittance to  Revenue: Ore (tons) x Grade (g/t) x Recovery x
principal. Payability x Metal Price
 Royalties: Properties often have royalties on them
The Bureau of Internal Revenue (BIR) is the main body (e.g., 2% Net Smelter Return)
responsible for collecting taxes paid to central government,  Operating costs: Per ton basis (e.g., $2.50/ton for
while the Mines and Geosciences Bureau of the Department mining)
of Environment and Natural Resources and the Department  Capital costs: Includes initial capital (construction of
of Energy collect sector levies for mining and coal, oil, and mine) and sustaining capital (ongoing equipment,
gas respectively. Local government units (LGUs) are etc.)
responsible for collecting subnational payments.  Reclamation costs: Takes place at the end of a
mine’s life; accrued for accounting purposes but
Oil and gas service contracts (PSCs) are awarded through
not accrued in a cash flow model.
competitive public bidding, while mining permits are
awarded through direct negotiation. Several moratoriums  Depreciation: A percentage of production bases
on the issuance of mining licenses implemented in previous over the entire life of the mine
years from 2012 to 2017 have affected the number of mining  Taxes: Can often be complicated with mining
projects in the country. companies operating in several countries; mining
specific taxes and royalty agreements need to be
As of February 2021, there were 309 Mineral Production considered
Sharing Agreements, 5 Financial or Technical Assistance  Changes in working capital: Changes in accounts
Agreements and 13 existing Exploration Permits for the receivable, inventory, and accounts payable should
mining sector. be factored into a cash flow model.
Beneficial Ownership (BO) disclosure and Politically Exposed Challenges in Mining Industry in the Philippines
Persons (PEP) reporting in the Philippines has been a
significant aspect of transparency in the Philippines. The  Responsible Mining under Philippine Mining Act
multi-stakeholder group identifies tax evasion, money  Circumvention of Permits
laundering, and compliance with the Constitutional  Interfacing with LGUs
provisions on the nationality of mining companies as the
  Delays in the declaration of Indigenous Peoples  Has the government clearly established the
(institutional issues with National Center for IPs) objective it is pursuing through its revenue
 Impact of COVID-19 pandemic framework for the mining sector?
 Is there legislation or regulation in place to ensure
High-Level Questions About Revenues from the Extraction
the public has access to reliable information on the
of Minerals
payments the government receives from mining
 Are the revenues from the extraction of minerals companies?
significant? (Each source of revenue should be High-Level Questions About Financial Assurances for Site
assessed individually, and their importance should Remediation
also be assessed in the aggregate. While large
revenues can be significant on their own, some  Is there a regulated system of financial assurances
smaller sources of revenues may also be significant for site remediation in place? Is the system recent
because of their function. For example, leases, or well-established? Has a remediation fund been
licenses, and permits may be important because established?
they enable departments to know who should be  What is the current cost estimate (potential
paying royalties and fees.) liability) for rehabilitating all mining sites in the
 Is there a significant difference between predicted jurisdiction?
and actual revenues? If so, what is the explanation  What is the state or risk of unfunded liability in the
for this difference? jurisdiction? Is the risk increasing over time?
 Are there any new revenue sources? (For example,  If there is a remediation fund, what is the current
is there a new resource with its own royalty system, balance of this fund?
such as a recently developed diamond mining  Have there been any recent or looming changes in
industry?) environmental standards or legislation that are
 Has new relevant legislation or regulation been expected to affect required securities?
introduced or have significant changes been made  Does the duration of the securities match the
to existing legislation and regulation recently? expected duration of the expected liability?
 When was the last review of the revenue  Is there documented guidance on how to estimate
framework conducted? When is the next one remediation costs?
planned?  Are remediation cost estimates periodically
 Where significant changes in revenues are reviewed by the government or an independent
observed, are they in line with current market expert?
conditions and production levels?  If regulations allow for self-insurance, what is the
 Has the revenue framework (and supporting relative frequency of self-insurance by mining
regulations) been criticized for being overly companies in the jurisdiction?
complex or unclear? Is there significant public  Are there mechanisms for regular monitoring of
interest in the topic? sites and monitoring of associated securities? Are
 Have there been any public complaints or reporting these mechanisms implemented? What is the
of any inappropriate practices in the sector frequency of site visits?
(transfer mispricing, for example)?  Are the licensing and inspection functions
 Have annual financial audits identified significant or segregated?
chronic issues with regard to the collection of  Is there a process to ensure that financial
revenues from the extraction of minerals? assurances are released only when compliance with
 Is there a regulated royalty audit regime in place? If site remediation requirements is achieved and
so, is there 100-percent audit coverage or risk- documented?
based coverage? Are audits completed on a timely  Are site inspections providing sufficiently complete
basis? In addition, have internal audits of revenue assessments? (For example, can inspections
collection processes been conducted? identify underground contamination?)
 Is there significant reliance on self-reporting of  Are there sufficient penalties in place to encourage
production level? compliance with financial assurance requirements?
 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?