EN BANC

[G.R. NO. 127882 : February 1, 2005]

LA BUGAL-BLAAN TRIBAL ASSOCIATION, INC., ET AL., Petitioners, v. VICTOR O. RAMOS, ET AL., Respondents.

DISSENTING OPINION

CARPIO, J.:

I dissent from the majority opinion and vote to grant petitioners' motion for reconsideration of the Resolution of 1 December 2004.

First, DAO 56-99 operates to deprive the State of any share from the mining revenues of foreign contractors under financial and technical assistance agreements (FTAAs). Second, DAO 56-99 is a usurpation by the Secretary of the Department of Environment and Natural Resources (DENR) of the constitutional power of Congress to prescribe the "general terms and conditions"¹ of FTAAs.

1.        DAO 56-99 Does Not Give The Government Any Share

a.        Like the WMCP FTAA, DAO 56-99 Gives a Sham Share to the State

In the Resolution of 1 December 2004, the majority assures the Filipino people that DAO 56-99 gives them an equitable share in the mining revenues of FTAA contractors under Section 81 of the Mining Act.² The majority further assures the Filipino people that this equitable share under DAO 56-99 is "more than the usual taxes, duties and fees." Thus, the majority guarantees the Filipino people, as the beneficial owner of the nation's mineral resources, that under the Resolution of 1 December 2004 they will receive a fair share of the revenues of foreigners who exploit the nation's mineral resources.

I disagree. The Resolution of 1 December 2004 legitimizes DAO 56-99. However, DAO 56-99 makes it impossible for the State to receive any share from the mining revenues of foreign contractors. DAO 56-99 is like the WMCP FTAA, which "guarantees" the State a 60% share in the net mining proceeds of WMCP. However, on further scrutiny, the WMCP FTAA cleverly takes away the 60% guaranteed share without any compensation to the State. DAO 56-99 operates the same way. The conditions imposed by DAO 56-99 before the State can receive any share are simply impossible to fulfill.

b.           The Impossible Conditions in DAO 56-99

DAO 56-99 provides three formulae, namely Options A, B and C, for determining the State's share in the mining revenues of foreign contractors. The foreign contractor has the sole option ³ to choose which formula to use. I will examine Option B, the option that foreign contractors will most certainly choose.

In providing for Option B, Section 3(g)(2)(b) of DAO 56-99 states:

Additional Government Share. The Government shall collect an Additional Government Share from the Contractor based on twenty-five percent (25%) of the additional profits once the arithmetic average of the ratio of Net Income After Tax To Gross Output as defined in the National Internal Revenue Code, for the current and previous taxable years is 0.40 or higher rounded off to the nearest two decimal places.

Computation. The computation of the Additional Government Share from additional profit shall commence immediately after the Recovery Period. If the computation covers a period of less than a year, the additional profit corresponding to this period shall be computed pro-rata wherein the total additional profit during the year shall be multiplied by the fraction of the year after recovery.

The additional profit shall be derived from the following formula:

If the computed average ratio as derived from above is less than 0.40:

Additional Profit = 0

If the computed average ratio is 0.40 or higher:

[NIAT-(0.40xGO)]

Additional Profit = ------------------------------

(1-ITR)

The Additional Government Share from the additional profit is computed using the following formula:

Additional Government Share

From Additional Profit = 25% x Additional Profit

where:

NIAT = Net Income After Tax for the particular taxable year under consideration.

GO = Gross Output from operations during the same taxable year.

ITR = Income Tax Rate applied by the Bureau of Internal Revenue in computing the income tax of the Contractor during the taxable year.

Option B stipulates that the State's share shall consist of "twenty-five percent (25%) of the additional profits once the arithmetic average of the ratio" of the after-tax net income to gross output for "the current and previous taxable years is 0.40 or higher." This means four conditions must concur before the State can receive any share from the mining revenues of the foreign contractor.

First, the foreign contractor's net income after tax must exceed 40% of its gross output or sales. ⁴ Second, this extraordinary high-income ratio must average more than 40% of gross output over two consecutive years. Third, the State's share shall come only from the excess of such 40% of gross output. Fourth, the State's share is only 25% of the excess of such 40% of gross output.

The first two conditions are impossible to achieve while the last two conditions are grossly unfair to the State. An after-tax net income of 40% of gross sales means P40 of after tax net income for every P100 of gross sales. Only P60 is left to answer for all operating expenses, depreciation, interest expense, the 32% corporate income tax, the 2% excise tax, and all other expenses. A 40% after tax net income on gross sales, two years running, is highly extraordinary in the business world, and unheard of in the mining industry.

The net income after tax (NIAT), gross output (GO), and NIAT to GO ratio of the six largest Philippine mining companies⁵ for the last nine years are as follows:

APPLICATION OF OPTION B TO SIX LARGEST

PHILIPPINE MINING COMPANIES ⁶

(NIAT to GO RATIOS)

2003 2002 2001 2000 1999 1998 1997 1996 1995

Atlas '-511 -345 -9.50 -10.14 -7.23 -9.08 na -2.52 -0.65

Benguet -1.61 -1.49 -2.15 -1.42 -1.37 -1.52 -1.43 -0.06 0.01

Lepanto '-0.07 0.09 0.07 0.20 0.22 0.19 0.20 0.04 0.10

Marcopper -41839 -25302 -14156 -31178 -22099 na na na na

Philex -0.14 0.01 -0.45 0.06 -0.04 -0.39 na na na

Rio Tuba '0.23 0.06 0.10 0.17 0.00 0.17 0.27 0.22 0.23

Over the last nine years, the highest ratio resulting from the application of Option B is 0.27 in 1997. The second highest ratio is 0.23 in 1995. Rio Tuba Nickel Mining Corporation, the most profitable mining company in the Philippines, accounted for both ratios which are, however, way below the trigger level of 0.40 in Option B. The highest two-year average ratio of Rio Tuba Nickel Mining Corporation is only 0.25 for 1996 and 1997, and its average ratio is only 0.16 over the nine-year period.

Lepanto Consolidated Mining Company, the second most profitable mining company in the Philippines, attained its highest ratio at 0.22 in 1999. Lepanto Consolidated Mining Company had a highest two-year average ratio of only 0.21 in 1999 and 2000, and an average ratio of only 0.11 over the nine-year period. In short, in the last nine years no mining company in the Philippines could satisfy the first two conditions in Option B - a trigger level of 0.40 for two consecutive years.

The nine-year ratios of the six largest Philippine mining companies clearly show beyond any doubt that the 0.40 trigger level in Option B is impossible to attain. If the profit-sharing formula in Option B is applied to mining companies operating in the Philippines in the last nine years, the State will receive no share whatsoever in the mining profits of the foreign contractor.

Even if applied to mining companies operating in other countries, the trigger level in Option B is still impossible to achieve. For example, the 1995 to 2003 NIAT to GO ratios of WMC Resources Ltd., the Australian mining company that owns or used to own respondent WMCP, are as follows:

APPLICATION OF OPTION B

TO WMC RESOURCES LTD. OF AUSTRALIA ⁷

(NIAT to GO RATIOS)

2003 2002 2001 2000 1999 1998 1997 1996 1995

'WMC 0.08 -0.03 0.14 0.24 0.13 0.10 0.13 0.16 0.14

The average ratio of WMC Resources Ltd. over the nine-year period is only 0.10, and its highest two-year average ratio is only 0.19 in 1999 and 2000. Thus, even the parent or former parent company of respondent WMCP could not meet the trigger level of 0.40 in Option B in any year during the last nine years. The highest two-year average ratio of 0.19 of WMC Resources Ltd. is less than the highest two-year average ratio of 0.25 of Rio Tuba Nickel Mining Corporation. The nine-year 0.10 average ratio of WMC Resources Ltd. is even lower than the 0.16 average ratio of Rio Tuba Nickel Mining Corporation during the same period. WMC Resources Ltd. is the number one nickel producer in Australia while Rio Tuba Nickel Mining Corporation is the number one nickel producer in the Philippines.

The 1995 to 2003 NIAT to GO ratios of four of the world's largest mining companies are as follows:

APPLICATION OF OPTION B

TO WORLD'S LARGEST MINING COMPANIES

(NIAT to GO RATIOS)

2003 2002 2001 2000 1999 1998 1997 1996 1995

Rio Tinto⁸ 0.16 0.07 0.13 '0.19 0.17 0.09 0.16 0.15 0.15

Newmont⁹ 0.15 0.05 -0.03 0.00 0.01 -0.24 0.04 na na

Placer Dome¹⁰ 0.13 0.10 -0.10 -0.06 0.03 na 'na na na

Phelps Dodge¹¹ 0.02 -0.09 -0.08 0.00 0.08 0.06 0.10 na na

These four mining companies have worldwide mining operations spanning several continents.

The average ratio of Rio Tinto plc, the world's largest mining company, is only 0.14 over a nine-year period. The highest ratio ofRio Tinto is 0.19 in 2000, and its highest two-year average ratio only 0.18 in 1999 and 2000. Newmont Mining Company, the largest gold producer in the world, has an average ratio of only 0.02 over a seven-year period. The highest ratio of Newmont Mining Company is only 0.15 in 2003, and its highest two-year average ratio is only 0.10 in 2002 and 2003.

The average ratio of Placer Dome, Inc., one of the largest gold producers in the world, is only 0.02 over a five-year period. Placer Dome, Inc.'s highest ratio is only 0.13 in 2003, and its highest two-year average ratio is only 0.12 in 2002 and 2003. Phelps Dodge Mining Company, the largest publicly listed copper producer in the world, has an average ratio of only 0.01 over a seven-year period. The highest ratio of Phelps Dodge Mining Company is only 0.10 in 1997, and its highest two-year average ratio is only 0.08 in 1997 and 1998.

This merely confirms that the trigger level of 0.40 in Option B is beyond the reach of any mining company of whatever size, whether local, foreign or with worldwide operations. Obviously, the trigger level of 0.40 in DAO 56-99 is a target intended never to be achieved so that the State will never receive any share in the foreign contractor's mining profits.

Mr. Benjamin M. De Vera, one of the proponents¹² of the formulae in DAO 56-99, has written in a paper¹³ that the 0.40 ratio in Option B is equivalent to a 20% return on investment (ROI).¹⁴ Mr. De Vera explains:

The trigger level of 0.40 is approximately equivalent to a 20% return on investment when computed based on the life of the project. Investors have indicated that their minimum return on investment before they would invest on a mining project in the Philippines is 15%. It was agreed upon that a return on investment below 20% but not lower than 15% is normal profit. If the project reaches 20% or better, then it shall be considered as additional or excess profits. The computation of the 0.40 trigger shall be based on a 2-year moving average which is the average of the previous year's ratio and the current year's ratio. x x x.

The proponents of DAO 56-99 consider profits not exceeding the trigger level of 0.40 as "normal profits." The proponents of DAO 56-99 have decreed that the State has no right to share in the foreign contractor's "normal profits." The proponents of DAO 56-99 allow the State a share only if the mining profits of the foreign contractor exceed the trigger level of 0.40. The proponents of DAO 56-99 claim that the trigger level of 0.40 is equivalent to a 20% ROI. In such event, the proponents of DAO 56-99 declare that the State's share is only one-fourth of the profits in excess of the 0.40 trigger level or 20% ROI.

The claim of Mr. Benjamin M. De Vera that a trigger level of 0.40 is equivalent to an ROI of 20% is not supported by data from the Audited Financial Statements of the six largest Philippine mining companies for the years 1995 to 2003. For example, the average ratio of Rio Tuba Nickel Mining Corporation over the nine-year period is 0.16, and its average ROI for the same period is 16%. Based on this, a NIAT to GO ratio of 0.40 for Rio Tuba Nickel Mining Corporation should translate to an ROI of at least 40.7%.

Likewise, the average ratio of Lepanto Consolidated Mining Company over a seven-year period¹⁵ is 0.11 while its average ROI for the same period is 6%. Based on this, a ratio of 0.40 for Lepanto Consolidated Mining Company should translate to an ROI of at least 21.8%. The industry data does not support Mr. De Vera's claim that a trigger level of 0.40 is equivalent to a 20% ROI, which is significantly understated. What is apparent is that a ratio of 0.40 implies an ROI significantly higher than 20%.

The admitted intent of the framers of DAO 56-99 is to prevent the State from receiving any share if the foreign contractor's ROI is "normal." Even if the foreign contractor's ROI is high or above normal,the intent of the framers of DAO 56-99 is still to deprive the State of any share of the mining revenues. The framers of DAO 56-99 intended to give the State a share only if the foreign contractor's ROI is extraordinarily high.

In its official publication A Response to the Issues Raised against Mining, ¹⁶ the Mines and Geosciences Bureau (MGB) of the DENR has publicly admittedthat the State is entitled to a share only if the foreign contractor's profits are extraordinarily high. Thus, the MGB states:

On the other hand, during periods of extraordinary profitability, e.g., high metal prices, the Government is entitled to a portion of such profits determined in consultation with the Contractor. This share from the profits is the Additional Government Share. The sharing is determined taking into consideration the capital investment in the project, contribution to the economy, the community, the local government, and the technical complexity of the project. (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

Clearly, the MGB, the creator of DAO 56-99, never intended to give the State any share if the foreign contractor's profits are normal or even high. Only if the foreign contractor's profits are extraordinarily high may the State share in the mining revenues of the foreign contractor. However, the extraordinarily high trigger level of 0.40, running for two consecutive years, is impossible to achieve based on the historical performance of mining companies in the Philippines and abroad.

The MGB's categorical admission that the State would share in the mining revenues of the foreign contractor only in case of "extraordinary profitability" is the "smoking gun" that DAO 56-99 is grossly and manifestly disadvantageous to the government and the Filipino people. The raison d'tre of DAO 56-99 betrays a callous intent to deprive the State and Filipino people of their fair and rightful share in the mineral wealth of the nation. On this score alone, even without applying Option B to the financial results of mining companies in the Philippines and abroad, this Court should declare DAO 56-99 void for being manifestly and grossly disadvantageous to the government and the Filipino people.

Was it the intent of the framers of the 1987 Constitution that the Filipino people should receive a share in the mining profits of the foreign contractor only in case of "extraordinary profitability"? Was it the intent of the framers of the 1987 Constitution that the Filipino people should forego any share in case the foreign contractor's mining profits are merely normal or even high? Obviously, this was never the intent of the framers of the 1987 Constitution for this would constitute betrayal of the national interest.

What is the legal basis of the MGB in deciding that the Filipino people deserve a share in the mining profits of the foreign contractor only in case of "extraordinary profitability"? The MGB "conceived and developed" DAO 56-99 without considering the rights of the State as owner of the mineral resources. The MGB has placed the interest of foreign contractors above the interest of the Filipino people. In a betrayal of public trust, the MGB has deprived the Filipino people of any share from the normal and higher than normal profits of foreign contractors. The MGB would concede to the Filipino people a share only if the profits of the foreign contractor are miraculously extraordinary, and even then at only one-fourth of every 1% percent of any extraordinary profit. Without doubt, DAO 56-99 is grossly and manifestly disadvantageous to the government and the Filipino people.

DAO 56-99 assumes that the Filipino people are entitled to share in the mining profits of the foreign contractor only in case of "extraordinary profitability." The majority's Resolution of 1 December 2004 puts the stamp of approval and legitimacy on DAO 56-99. Is it also the intent of the majority of this Court that the Filipino people will share in the mining profits of the foreign contractor only in case of "extraordinary profitability"?chanroblesvirtualawlibrary

The requirement of two consecutive years ofextraordinary profitability makes it even harder for the State to receive any share given the historical volatility of metal prices. The following graph showing the annual average gold and copper prices from 1991 to 2000 illustrates this volatility:

Gold ' Copper

YEAR London Final Grade A LME

'US$/oz US$/lb

'----------------------------------------------------------------------

1991 362.18 1.06

1992 343.73 1.03

'1993 359.77 0.87

1994 384.00 1.05

1995 383.98 1.33

1996 387.70 1.04

1997 331.10 1.03

'1998 294.16 0.75

1999 278.77 0.75

2000 279.77 0.82

US$ = United States dollars

Source: British Columbia Ministry of Energy and Mines (MEM) Statistics

Gold and copper prices swing up and down, often preventing metal prices from remaining extraordinarily high for two consecutive years. Gold and copper are two of the three principal mineral exports of the country, in addition to nickel.

Assuming arguendo that the first two conditions happen - a NIAT to GO ratio of 0.40 running for two consecutive years - the third and fourth conditions still limit the State's share to 25% of the profits in excess of the 0.40 trigger level. In other words, for every 4% additional profits in excess of the 0.40 trigger level, the State receives only 1% share of the contractor's excess mining profits. Since it requires 4% additional profits for the State to receive a 1% share, it will take an additional 40% of profits, in excess of the profits corresponding to the trigger level of 0.40, for the State to receive a 10% share in the excess mining profits. The excess profits over the trigger level of 0.40 refer to the profits in excess of the first 20% ROI if we follow the claim of Mr. Benjamin M. De Vera that a trigger level of 0.40 is equivalent to a 20% ROI.

The ponente of the majority opinion has assured the En Banc that he has thoroughly studied DAO 56-99, and that under DAO 56-99 the State will receive at least a 10% share in the mining profits. For the State to receive a 10% share, the foreign contractor's ROI must reach at least 50% per annum¹⁸ for two consecutive years, if the trigger level of 0.40 equals 20% ROI as Mr. Benjamin M. De Vera claims. For the State to receive a 10% share during the entire 50-year term of the FTAA a term the majority has ruled is valid - the foreign contractor must attain at least 50% ROI every year during the entire 50-year term of the FTAA. Even an ordinary businessman with limited experience can tell that this is impossible to achieve.

There is no mining company any where in the world that makes a 50% ROI every year. The highest ROI that investment managers of mining funds promise investors on a best efforts basis is an average of 20% ROI over a 10-year investment period.¹⁹ This 20% ROI, however, includes income from trading of mining shares in the stock market.

If the return is based solely on dividend income from equity investment, the rate of return is much lower. The historical global return on equity (ROE) in the mining industry in real terms is "just 5%" as stated in the World Mining Overview,thus:

However defined, the industry as a whole needs to achieve returns that exceed the cost of capital. In a paper entitled, "The Economic Performance of an "Old" Industry: Mineral Extraction and Processing", Rob McDonald, Managing Director of NM Rothschild & Sons (Australia) Limited, states that the mining industry has generated an average compound real rate of return to shareholders of just 5% over the past 25 years (McDonald, 2000). The paper further discusses the real US dollar cost of capital for the mining industry over the past 25 years has been between 7% and 8% per annum. Our industry clearly needs to improve if it is to attract equity capital.²⁰ (Emphasis supplied)

No mining company in the Philippines in the last nine years has achieved a 50% ROI even for one year. A 50% annual ROI during the 50-year term of an FTAA, as the majority assures the Filipino people, is a pipe dream. The majority's reliance on DAO 56-99 to insure an equitable share of the mining revenues for the Filipino people is a blunder of biblical scale.

The majority praises the MGB and the DENR Secretary for their 'admirable job of conceiving and developing"²¹ DAO 56-99. The world must be turning upside down. The majority lavishes praise on those who formulate profit-sharing schemes designed to deprive the Filipino people of their fair and rightful share in the nation's mineral wealth. The majority even legally sanctifies such schemes and elevates them to statutory status just to correct a constitutional infirmity in the Mining Act. The Filipino people will never understand this.

b. DAO 56-99 is Grossly Disadvantageous to the Government

DAO 56-99 operates to deprive the State of its equitable share from mining revenues. As owner of the mineral resources, the State must receive an equitable share from mining revenues. The majority does not dispute this. However, by imposing impossible conditions, DAO 56-99 gives all the mining revenues to the foreign contractor.

DAO 56-99 is grossly and manifestly disadvantageous to the State and the Filipino people. DAO 56-99 is contrary to public policy²² and contravenes the Anti-Graft and Corrupt Practices Act.²³ DAO 56-99 is an insult to the Filipino people because it pretends to give the Filipino people a fair share in mining revenues but in reality deprives them of any share from such revenues. This Court must reject DAO 56-99 and declare it void.

DAO 56-99 implements the intent of the Mining Act to limit the State's share in mining operations only to taxes, duties and fees, the same taxes, duties and fees that taxpayers who do not exploit mineral resources pay the government. DAO 56-99 implements the intent, plan and structure of the Mining Act, under its Sections 39, 80, 81, 84 and 112, to revert to the old system of 'license, concession or lease under the 1935 and 1973 Constitutions. The 1987 Constitution has abolished this discredited system.²⁴ This Court must reject any attempt to resurrect the old 'license, concession or lease system.

d.      Section 81 of Mining Act and DAO 56-99 Will Impoverish the Nation

The combined effect of Section 81 of the Mining Act and DAO 56-99 will impoverish the Filipino people. The second and third paragraphs of Section 81 provide:

The Government share in financial or technical assistance agreement shall consist of, among other things, the contractor's corporate income tax, excise tax, special allowance, withholding tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.

The collection of Government share in financial or technical assistance agreement shall commence after the financial or technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures, inclusive. (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

Section 81 grants the foreign contractor the right to recover fully all its pre-operating, exploration and development expenses. During this recovery period, which has no time limit, the 'collection of Government share does not commence. During the recovery period, the foreign contractor does not pay any tax, duty or fee to the Government. The foreign contractor is exempt from corporate income tax, excise tax, "all x x x other taxes, duties and fees," and even withholding tax on dividend or interest payments to its stockholders! In short, during the recovery period, the Philippine government will not collect a single centavo of tax, duty or fee from the foreign contractor and its stockholders.

DAO 56-99 attempts to limit the foreign contractor's recovery period to five years.²⁵ This violates the foreign contractor's statutory right to recover fully all its pre-operating, exploration and development expenses if after the fifth year the contractor still has not fully recovered such expenses. DAO 56-99 cannot amend Section 81. DAO 56-99 cannot truncate the foreign contractor's statutory right to recover fully all its pre-operating expenses.

The average return on capital employed of mining companies worldwide in the last four years is only 10.5%.²⁶ It will take the foreign contractor some 6 years²⁷ to recover fully all its pre-operating, exploration and development expenses. During this 6-year recovery period, the government cannot collect a single centavo of tax, duty or fee from the foreign contractor and its' stockholders. If the usual

three-year pre-operating period²⁸ is counted, the total period that the government cannot collect any tax, duty or fee from the foreign contractor and its stockholders extends to 9 years from the signing of the FTAA.

At least one President will have come and gone and still the State will not have collected a single centavo of tax, duty or fee from the foreign contractor and its stockholders. Definitely, no FTAA will contribute tax money to help solve the budget deficit of the government, not for the next 9 years at least. Those who trumpet the Mining Act as the solution to the current budget deficit have not studied thoroughly the Mining Act and DAO 56-99.

During the recovery period, the government cannot collect even the State's share under DAO 56-99. The State's share under DAO 56-99 does not run during the recovery period, which can stretch to 9 years. When it does run, the collection of the State's share is subject to the four conditions in Option B, which conditions are impossible to meet. In sum, the State is deprived of any tax and revenue share during the 9-year recovery period. After the recovery period, the State starts to collect the usual taxes but still cannot collect any share from the mining revenues.

This is the sad fate of the Filipino people under the Court's Resolution of 1 December 2004. The combined effect of Section 81 of the Mining Act and DAO 56-99 is to deprive the Filipino people of a fair share of their inheritance from the Creator - the P47 trillion mineral wealth of the nation. This will impoverish further the Filipino people, many of whom live below the poverty line. This Court should never allow such a tragedy to befall on the Filipino people.

Under DAO 56-99, the recovery of the foreign contractor's "pre-operating expenses" is expressly subject to the approval of the DENR Secretary.²⁹ This insures that the foreign contractor can deduct from the gross output or sales only actual, reasonable and necessary pre-operating expenses.

However, DAO 56-99 does not require the DENR Secretary's approval of the foreign contractor's operating expenses once commercial production begins. The only exception is the amount of consulting fees incurred outside the Philippines, which requires the approval of the MGB Director.³⁰ Capital expenses incurred after the start of commercial production are not subject to approval if already included in the approved Mining Project Feasibility Study.³¹

There is no provision in DAO 56-99 allowing the DENR Secretary, after the start of commercial production, to dispute the allowance of operating expenses or to submit such dispute to arbitration.³² The foreign contractor is free to deduct from the gross output all operating expenses it wants to deduct. This will reduce the after tax net income of the foreign contractor, bringing down further the NIAT to GO ratio. DAO 56-99 does not protect the State from this eventuality. The State is left to the mercy of the foreign contractor.

The 1987 Constitution vests in Congress the power to prescribe the 'general terms and conditions' of FTAAs. The fourth paragraph of Section 2, Article XII of the 1987 Constitution provides:

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. (Emphasis supplied)

The 1987 Constitution requires Congress to enact a law that prescribes the 'general terms and conditions of FTAAs. The most important term or condition is the fiscal regime of FTAAs, which must lay down clearly the share of the State in the mining revenues of the foreign contractor.

As owner of the mineral resources, the State is entitled to a fair share in the mining revenues of the foreign contractor. Such share is separate and distinct from the usual taxes, duties and fees paid by taxpayers who do not exploit the State's mineral resources. The usual taxes duties and fees are exactions by the State arising from its taxing power. The share of the State in the mining revenues is the income of the State as owner of the mineral resources. The right to receive a fair share in the mining revenues is an attribute of ownership, not of the sovereign power to tax.

In enacting the Mining Act, Congress prescribed a fiscal regime that is constitutionally deficient, both for FTAAs as well as for mineral production sharing agreements (MPSAs). Sections 80 and 81 of the Mining Act limit the share of the State in MPSAs and FTAAs to the usual taxes, duties and fees. The Mining Act does not require FTAA or MPSA holders to pay the State any share from their mining revenues. Thus, Sections 80 and 81 provide:

Section 80. Government Share in Mineral Production Sharing Agreement. The total government share in a mineral production sharing agreement shall be the excise tax on mineral products as provided in Republic Act No. 7729, amending Section 151(a) of the National Internal Revenue Code, as amended.

Section 81. Government Share in Other Mineral Agreements.

x x x

The Government share in financial or technical assistance agreement shall consist of, among other things, the contractor's corporate income tax, excise tax, special allowance, withholding tax due from the contractor's foreign stockholders arising from dividend or interest payments to the said foreign stockholder in case of a foreign national and all such other taxes, duties and fees as provided for under existing laws.

The collection of Government share in financial or technical assistance agreement shall commence after the financial or technical assistance agreement contractor has fully recovered its pre-operating expenses, exploration, and development expenditures, inclusive. (Emphasis supplied)

Section 80 expressly states that the " total government share in a mineral production sharing agreement shall be the excise tax on mineral products . There are no ifs or buts. The State is limited solely to the usual taxes, duties and fees. The State has no share whatsoever in the mining revenues of MPSA holders. The Resolution of the majority, however, skirts this issue by saying that Section 80 on MPSAs is not in issue in the present case even though the WMCP FTAA is convertible to an MPSA any time at the sole option of WMCP.

Section 81 of the Mining Act, which governs FTAAs, also limits the State's share to the usual taxes, duties and fees. However, the Resolution of the majority points to the phrase 'among other things in Section 81 as authority for the DENR Secretary to issue DAO 56-99 prescribing the State's share in FTAAs. Apparently realizing the flimsiness of this theory, the majority subsequently advanced the argument that the President has the power to prescribe the fiscal regime of FTAAs, and that the DENR Secretary issued DAO 56-99 in his capacity as the alter ego of the President.

The majority argues that since the 1987 Constitution authorizes the President to enter into FTAAs, the President has the prerogative to specify certain terms and conditions of the FTAAs. The Resolution of 1 December 2004 states:

x x x It is the President who is constitutionally mandated to enter into FTAAs with foreign corporations, and in doing so, it is within the President's prerogative to specify certain terms and conditions of the FTAAs, for example, the fiscal regime of FTAAs - i.e., the sharing of the net revenues between the contractor and the State. (Emphasis in the original; underscoring supplied)

This argument is patently baseless because the very provision of the 1987 Constitution authorizing the President to enter into FTAAs also states that the President must enter into FTAAs 'according to the general terms and conditions provided by law. This particular phrase is rich in constitutional history.

The 1986 Constitutional Commission debated at length the power of the President to enter into FTAAs in light of service contracts with foreign contractors entered into by former President Ferdinand E. Marcos. One group of Commissioners favored the concurrence of Congress to all FTAAs entered into by the President. Another group was against Congressional concurrence but wanted Congress to prescribe the terms and conditions governing FTAAs, with the understanding that President must strictly comply with such terms and conditions. The following exchanges in the deliberations of the Constitutional Commission are instructive:

MR. GASCON: As it is proposed now, such service contracts will be entered into by the President with the guidelines of a general law on service contracts to be enacted by Congress. Is that correct?chanroblesvirtualawlibrary

MR. VILLEGAS: The Commissioner is right, Madam President.

MR. GASCON: According to the original proposal if the President were to enter into a particular agreement, he would need the concurrence of Congress. Now that it has been changed by the proposal of Commissioner Jamir in that Congress will set the general law to which the President shall comply, the President will, therefore, not need the concurrence of Congress every time he enters into service contracts. Is that correct?chanroblesvirtualawlibrary

MR. VILLEGAS: That is right.³³

x x x

MR. BENGZON: The reason we made that shift is that we realized the original proposal could breed corruption. By the way, this is not just confined to service contracts but also to financial assistance. If we are going to make every single contract subject to the concurrence of Congress - which, according to the Commissioner's amendment is the concurrence of two-thirds of Congress voting separately - then (1) there is a very great chance that each contract will be different from another; and (2) there is a great temptation that it would breed corruption because of the great lobbying that is going to happen. And we do not want to subject our legislature to that. Now, to answer the Commissioners apprehension, by "general law," we do not mean statements of motherhood. Congress can build all the restrictions that it wishes into that general law so that every contract entered into by the President under that specific area will have to be uniform. The President has no choice but to follow all the guidelines that will be provided by law.³⁴

x x x

MR. GASCON: But my basic problem is that we do not know as of yet the contents of such a general law as to how much constraints there will be in it. And to my mind, although the Committee's contention that the regular concurrence from Congress would subject Congress to extensive lobbying, I think that is a risk we will have to take since Congress is a body of representatives of the people whose membership will be changing regularly as there will be changing circumstances every time certain agreements are made. It would be best that to keep in tab and attuned to the interest of the Filipino people, whenever the President enters into any agreement with regard to such an important matter as technical or financial assistance for large-scale exploration, development and utilization of natural resources or service contracts, the people's elected representatives should be on top

x x x

MR. COLAYCO: Thank you, Madam President.

I support in substance the position taken by Commissioners Gascon and Nolledo. Let me point out the original thinking of the Committee itself. The second paragraph of Section 3 reads: "The President with the concurrence of Congress, by special law. .. " In other words, the original thinking of the Committee here was really to put some safeguards, but it turned around and agreed to delete the safeguards. These special contracts will probably involve oil and mineral land explorations. These will, therefore, involve millions.

One of the reasons given for the deletion of "the concurrence of Congress" is that it may open the system to payola. This fear can also be entertained the other way. The President acts only upon the advice of his advisers, and if Congress can be bribed, a group of people can be bribed much more easily. But I am not thinking of that; I am simply thinking of human error. Probably Congress can anticipate the period, say, that the exploration should not exceed a certain period, and set standards. But as to the share of our government, for instance, there can easily be a mistake of judgment. There is no way that Congress can anticipate the discretion that should be used or the guidelines that should govern the thinking or the decision of the President. And for this reason, I believe that some kind of a safeguard or mechanism should be inserted in the system to obviate or at least reduce the possibility that our government may be too negligent in accepting the terms of the explorer. That is why I agree with the thinking of the two Commissioners who spoke ahead of me that we should retain the original plan of the Committee. However, personally, I would put it at a MAJORITY of either the Lower House or the Upper House.³⁵

Those who were against Congressional concurrence to FTAAs won the argument. Thus, under the 1987 Constitution, Congress prescribes the general terms and conditions of FTAAs, and the President must strictly comply with such terms and conditions. Without a law prescribing the terms and conditions of FTAAs, the President cannot enter into any FTAA. The President on his own cannot prescribe the fiscal regime of FTAAs. 'The following exchanges in the deliberations of the Constitutional Commission clearly bring this out:

THE PRESIDENT: Commissioner Tan is recognized.

SR. TAN: Am I correct in thinking that the only difference between these future service contracts and the past service contracts under Mr. Marcos is the general law to be enacted by the legislature and the notification of Congress by the President? That is the only difference, is it not?chanroblesvirtualawlibrary

MR. VILLEGAS: That is right.

SR. TAN: So those are the safeguards.

MR. VILLEGAS: Yes. There was no law at all governing service contracts before.

SR. TAN: Thank you, Madam President.³⁶

x x x

MR. DAVIDE: - To allow the execution of service contracts, there must be a law for said service contracts.

MR. SUAREZ: There must be a general law providing for the terms and conditions under which particular service contracts can be entered into by the executive department, Madam President.

MR. DAVIDE: Yes, Madam President.³⁷

x x x

MR. SUAREZ: As it is formulated, the President may enter into service contracts but subject to the guidelines that may be promulgated by Congress?

MR. JAMIR: That is correct.

MR. SUAREZ: Therefore, that aspect of negotiation and consummation will fall on the President, not upon Congress?

MR. JAMIR: That is also correct, Madam President

MR. SUAREZ: Except that all of these contracts, service or otherwise must be made strictly in accordance with guidelines prescribed by Congress?chanroblesvirtualawlibrary

MR. JAMIR: That is also correct.

MR. SUAREZ: And the Gentleman is thinking in terms of a law that uniformly covers situations of the same nature?

MR. JAMIR: That is 100 percent correct.³⁸

(Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

Contrary to the claim of the majority, the prerogative to prescribe the fiscal regime of FTAAs does not belong to the President but to Congress. The clear intent of the framers of the 1987 Constitution was to remove from the President the power to prescribe the terms and conditions of FTAAs, a power that former President Ferdinand E. Marcos exercised solely. The framers of the 1987 Constitution intentionally gave to Congress the power to prescribe the terms and conditions of FTAAs, and to deny the President the exercise of such powers.

The President can enter into FTAAs only within the terms and conditions prescribed by Congress, in accordance with any delegated authority that Congress may include in the enabling law. This is clear from the following exchange in the deliberations of the Constitutional Commission:

THE PRESIDENT: Commissioner Foz is recognized.

MR. FOZ: May we just add the word GENERAL to describe "terms and conditions" because Congress cannot be expected to lay down detailed terms and conditions for the contracts to be entered into between the executive department and the foreign-owned corporation. Congress can only lay down general guidelines.

MR. ROMULO: The Gentleman wants to add the word "GENERAL"?chanroblesvirtualawlibrary

MR. FOZ: Yes, Madam President.

MR. ROMULO: Does Commissioner Sarmiento accept that? We have no objection.

MR. SARMIENTO: May I hear the amendment.

MR. FOZ: It merely consists of the insertion of the word GENERAL before "terms."

MR. VILLEGAS: I think the Committee will accept the amendment to the amendment.

MR. ROMULO: We accept the amendment.³⁹

Plainly, based on the intent of the framers of the 1987 Constitution, and on the language the framers used in the fourth paragraph of Section 2, Article XII, the power to prescribe the terms and conditions of FTAAs, including their fiscal regime, rests with Congress and not with the President.

Indeed, in enacting the Mining Act, Congress has stipulated the terms and conditions for FTAAs. Section 35 of the Mining Act provides that the 'following terms, conditions, and warranties shall be incorporated in the financial or technical assistance agreement to wit: x x x. Section 38 of the Mining Act expressly limits an FTAA to a 'term not exceeding twenty-five (25) years.

'The majority opinion claims that the President has the power to prescribe 'the fiscal regime of FTAAs - i.e., the sharing of the net mining revenues between the contractor and the State. This claim of the majority renders the entire Chapter XIV of the Mining Act, an act of usurpation by Congress of Presidential power. Chapter XIV - entitled 'Government Share - prescribes the fiscal regimes of MPSAs and FTAAs. The constitutionality of Sections 80 and 81 of Chapter XIV - whether the fiscal regimes prescribed in these sections of the Mining Act comply with the 1987 Constitution - is the threshold issue in this case.

The majority seeks to uphold the constitutionality of Section 81 of the Mining Act, an enactment of Congress prescribing the fiscal regime of FTAAs. If it is the President who has the constitutional authority to prescribe the fiscal regime of FTAAs, then Section 81 is unconstitutional for being a usurpation by Congress of a Presidential power. The majority's argument is self-contradictory.

By claiming that the President has the prerogative to prescribe the fiscal regime of FTAAs, the majority contradicts its basic argument that DAO 56-99 draws life from the phrase "among other things" in Section 81 of the Mining Act. Apparently, the majority is not confident of its position that DAO 56-99 draws life from the phrase 'among other things. The majority now invokes a non-existent Presidential power that directly collides with the express constitutional power of Congress to prescribe the 'general terms and conditions of FTAAs.

In issuing DAO 56-99, the DENR Secretary usurped the power of Congress to prescribe the terms and conditions of FTAAs. The following provisions in DAO 56-99 reveal this blatant usurpation of legislative prerogative:

SECTION 1. Scope. This Administrative Order is promulgated to:

a. Establish the fiscal regime for FTAAs which the Government and the FTAA Contractors shall adopt for the large-scale exploration, development and commercial utilization of mineral resources in the country; x x x

x x x

SECTION 3. Fiscal Regime of a Financial or Technical Assistance Agreement. The Financial or Technical Assistance Agreement which the Government and the FTAA Contractor shall enter into shall have a Fiscal Regime embodying the following provisions:

a. General Principles. The Government Share derived from Mining Operations after the Date of Commencement of Commercial Production shall be determined in accordance with this Section.

x x x. (Emphasis supplied)

DAO 56-99 purports to "establish the fiscal regime of FTAAs" without guidelines or standards from Congress, for there are none. DAO 56-99 fixes the non-tax "Government Share" from mining revenues, a share that Congress does not prescribe in Section 81 of the Mining Act. DAO 56-99 is void because the DENR Secretary has clearly no power to prescribe the fiscal regime of FTAAs, particularly the government's non-tax share from mining revenues.

3. Conclusion

In Sections 80 and 81 of the Mining Act, Congress required holders of MPSAs and FTAAs to pay only the usual taxes, duties and fees. Nothing in Sections 80 and 81 requires holders of MPSAs and FTAAs to pay the State any share from their mining revenues. Section 84 reiterates that the State's share is limited to the 2% excise tax.⁴⁰ Section 112 places under the fiscal regime established in Section 80 all MPSAs and FTAAs executed prior to the Mining Act. Thus, holders of prior MPSAs and FTAAs shall pay only the 2% excise tax as the 'total share of the State. Section 39 grants holders of FTAAs, like respondent WMCP, the option to convert their FTAAs to MPSAs.

The President cannot save the Mining Act from constitutional infirmity by requiring FTAA contractors to pay the State a share from their mining revenues. The power to prescribe the fiscal regime of FTAAs belongs to Congress, not to the President. Neither can this Court elevate DAO 56-99 to the status of a law to plug a fatal constitutional hole in the Mining Act. Like the President, this Court cannot legislate the fiscal regime of FTAAs.

This Court must simply do its solemn duty - declare Sections 39, 80, 81, 84 and 112 of the Mining Act unconstitutional for violation of Section 2, Article XII of the 1987 Constitution. This Court must allow Congress to enact the remedial measures to correct the constitutional infirmities in the Mining Act. This Court cannot act as savior of the Mining Act by interpreting the phrase 'among other things' as the source of authority for the DENR Secretary to correct a constitutional defect in the Mining Act. This Court cannot invest in the President the power to prescribe the fiscal regime of FTAAs just to save the Mining Act from constitutional infirmity. Such power clearly belongs to Congress, not to the President.

This Court must also declare void the 50-year term in Section 3.3 of the WMCP FTAA. FTAAs are mineral agreements that are subject to the 25-year term limit in the first paragraph of Section 2, Article XII of the 1987 Constitution. The WMCP FTAA's 50-year term also violates Section 38 of the Mining Act, which expressly limits FTAAs to 25-year terms, thus:

Term of Financial or Technical Assistance Agreement. - A financial or technical assistance agreement shall have a term not exceeding twenty-five (25) years to start from the execution thereof, renewable for not more than twenty-five (25) years under such terms and conditions as may be provided by law. (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

There is no escaping from the invalidity of the 50-year term of the WMCP FTAA. This violation is so glaring and blatant that the Court has no choice but to declare the 50-year term void. The majority cannot simply declare the 50-year term valid without any explanation why a 50-year term is valid considering the mandatory 25-year term limit in Section 38 of the Mining Act. To merit observance and respect a ruling of this Court must state clearly and distinctly the law which serves as basis of the ruling.⁴¹

Likewise, the Resolution of 1 December 2004 ruled that Section 112 of the Mining Act "cannot be made to apply to FTAAs." Since Section 112 does not apply to FTAAs, the majority conclude that the provision in Section 112 placing all mineral agreements under the fiscal regime applicable to MPSAs "cannot be made to apply to FTAAs." The majority justified its ruling that Section 112 does not apply to FTAAs by stating that -

x x x Section 112 does not specifically mention or refer to FTAAs; the only reason it is being applied to them at all is the fact that it happens to use the word "contractor." Hence, it is a bit of a stretch to insist that it covers FTAAs as well. x x x." (Emphasis supplied)

The majority's justification that Section 112 does not specifically mention or refer to FTAAs collides with the express language of Section 112, which provides:

Section 112. Non-impairment of Existing Mining/Quarrying Rights. - All valid and existing mining lease contracts, permits/licenses, leases pending renewal, mineral production-sharing agreements granted under Executive Order No. 279, at the date of effectivity of this Act, shall remain valid, shall not be impaired, and shall be recognized by the Government: Provided, That the provisions of Chapter XIV on government share in mineral production-sharing agreement and of Chapter XVI on incentives of this Act shall immediately govern and apply to a mining lessee or contractor unless the mining lessee or contractor indicates his intention to the secretary, in writing, not to avail of said provisions: Provided, further, That no renewal of mining lease contracts shall be made after the expiration of its term: Provided, finally, That such leases, production-sharing agreements, financial or technical assistance agreements shall comply with the applicable provisions of this Act and its implementing rules and regulations. (Emphasis and underscoring supplied)ςrαlαωlιbrαrÿ

The last proviso of Section 112 categorically states that "financial or technical assistance agreements shall comply with the applicable provisions of this Act and its implementing rules and regulations." It is as clear as daylight that Section 112 specifically mentions and refers to FTAAs.

There is no doubt whatsoever that Section 112 applies to FTAAs. There are no ifs or buts that Section 112, by its clear and unequivocal language, applies to FTAAs. The last proviso of Section 112 expressly mandates that FTAAs must comply with the applicable provisions of the Mining Act. One of the applicable provisions is Section 112 itself, which places "all" mineral agreements executed prior to the Mining Act under the fiscal regime governing MPSAs in Section 80 which limits the "total government share" to the 2% excise tax. This makes the last proviso of Section 112 unconstitutional because it limits the government share in FTAAs to the usual taxes, duties and fees.

How the majority can proclaim that Section 112 does not specifically mention or refer to FTAAs defies the clear, physical and tangible written wording of Section 112. The majority has ruled that the words "financial or technical assistance agreements" do not appear in Section 112 when in reality and in fact these words appear in Section 112. The majority should explain why the last proviso in Section 112 does not apply to FTAAs despite its express reference to FTAAs, instead of saying that Section 112 does not contain any language mentioning or referring to FTAAs.

This Court cannot rule that a word does not appear in the law when in fact the word is so obviously written in the law. What this Court can validly rule is that despite the express mention of a particular word, the intent of the law is otherwise. The majority must read the written words in the law the way the public reads the written words in the law. No one can dispute what the written words are in the law. The written words are found in the enrolled bill enacted by Congress and approved by the President or allowed by the President to lapse into law. The majority can interpret the written words differently from the minority, but the majority cannot simply wish away the existence of certain words expressly written in the law.

This Court, moreover, must declare unconstitutional Section 3(aq) of the Mining Act authorizing the issuance to foreign contractors of exploration permits. Section 2, Article XII of the 1987 Constitution reserves to Philippine citizens and 60% Filipino owned corporations the 'exploration, development and utilization of natural resources. In FTAAs, the State may authorize the foreign contractor to conduct the physical act of exploration as agent of the State but not as holder of the exploration permit.

In FTAAs, the State itself directly undertakes the exploration and exploitation of minerals, petroleum, and other mineral oils with the foreign contractor providing the State assistance - financial or technical or even both.The foreign contractor, as contracting agent of the State, may manage the contracted mining operations covered by the FTAA to the extent of the foreign contractor's financial and technical contribution. Such management, however, remains subject to the full control and supervision of the State.

There is no dispute that the foreign contractor can engage in mining operations as the contracting agent of the State under an FTAA. The fourth paragraph of Section 2, Article XII of the 1987 Constitution expressly allows the State to enter into an FTAA with a 'foreign-owned corporation. Thus, the issue is not whether a foreign contractor can engage in mining operations in the Philippines. Rather, the issue is the equitable share of the State from the mining profits of the foreign contractor.

The P47 trillion mineral wealth of the nation is the Filipino people's inheritance from the Creator. This mineral wealth is exhaustible and non-renewable. Once removed from the earth, this mineral wealth is gone forever. This mineral wealth is a major part of the patrimony of the nation. The 1987 Constitution mandates the State to 'conserve and develop the national patrimony for the benefit of the Filipino people. 'Sections 3(aq), 39, 80, 81, 84 and 112, as well as DAO 56-99, constitute a sell-out of the national patrimony to foreigners.

Let it not be said that no one warned this Court of the tragedy about to strike the Filipino people as a result of the Resolution of 1 December 2004. One can just imagine the anger of the Filipino people once they realize they will not receive any share in the mining profits of foreign contractors. The Filipino people will inherit a land environmentally degraded before by forest denudation, and now by large-scale mining. The Filipino people did not receive any share in the profits of logging concessionaires. Now, the Filipino people will also not receive any share in the profits of mining contractors. To save themselves from the Filipino people's ire, the mining industry, the legislature and the executive will all point to this Court's Resolution of 1 December 2004. Sadly, the blame will fall squarely on this Court.

By validating DAO 56-99, the Court's Resolution of 1 December 2004 legitimizes the plunder of the P47 trillion mineral wealth of the nation. This reminds us of the plunder by the Spanish conquistadores in the 16^th century of the riches of the Aztecs, Mayans and Incas. The only difference is that the Aztecs, Mayans and Incas lost their wealth involuntarily by force of arms. Under the Resolution of 1 December 2004, the Filipino people will lose their mineral wealth voluntarily to foreigners by judicial fiat of this Court.

The decision of this Court in the present case will determine largely whether this country will remain poor, or whether this country can parlay its P47 trillion mineral resources into developing the national economy. History will judge whether this Court has met in the present case the challenge of conserving and developing the national patrimony for the benefit of the Filipino people.

I vote to grant petitioners' motion for reconsideration and to declare unconstitutional Section 3(aq), Section 39, Section 80, the second paragraph of Section 81, the proviso in Section 84, and the first proviso in Section 112 of the Mining Act.⁴² The power to prescribe the fiscal regime of FTAAs is lodged in Congress, which must consider the following in prescribing the fiscal regime:

I also vote to declare void DAO 56-99 for being manifestly and grossly disadvantageous to the government and the Filipino people, aside from being a usurpation of the legislative power to prescribe the fiscal regime of FTAAs. In issuing DAO 56-99, the DENR Secretary gravely abused his discretion amounting to lack of jurisdiction.

Lastly, I also vote to declare the WMCP FTAA void since its Sections 2.1, 3.3, 7.8, 7.9, 8.3 and 10.4(i) violate Section 2, Article XII of the 1987 Constitution.⁴⁵ Section 3.3 of the WMCP FTAA is also void for violation of Section 38 of the Mining Act.

Endnotes:

¹ Paragraph 4, Section 2, Article XII of the 1987 Constitution provides:

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. (Emphasis supplied)

² Republic Act No. 7942.

³ Section 3(g)(2) of DAO 56-99 provides: "Additional Government Share. Prior the commencement of Development and Construction Phase, the Contractor may select one of the formula for calculating the Additional Government Share set out below which the Contractor wishes to apply to all of its Mining Operations and notify the Government in writing of that selection. Upon the issuance of such notice, the formula so selected shall thereafter apply to all of the Contractor's Mining Operations."

⁴ Section 151(B)(1) of the National Internal Revenue Code provides: "'Gross output' shall be interpreted as the actual market value of minerals or mineral products, or of bullion from each mine or mineral land operated as a separate entity, without any deduction from mining, milling, refining (including all expenses incurred to prepare the said minerals or mineral products in a marketable state), as well as transporting, handling, marketing or any other expenses: Provided, That if the minerals or mineral products are sold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted: Provided, however, That in the case of mineral concentrate not traded in commodity exchanges in the Philippines or abroad, such as copper concentrate, the actual market value shall be the world price quotations of the refined mineral products content thereof prevailing in the said commodity exchanges, after deducting the smelting, refining and other charges incurred in the process of converting the mineral concentrates into refined metal traded in those commodity exchanges.

⁵ 'Taken from the Audited Financial Statements filed with the Securities & Exchange Commission by the following companies: Atlas Consolidated Mining & Development Corporation (Atlas), Benguet Corporation (Benguet), Lepanto Consolidated Mining Company (Lepanto), Marcopper Corporation (Marcopper), Philex Mining Corporation (Philex), and Rio Tuba Nickel Mining Corporation (Rio Tuba).

⁶ Figures are taken from the Audited Financial Statements filed with the Securities & Exchange Commission for the years 1995 to 2003. Records prior to 1995 are no longer available.

⁷ Taken from the 1995 to 2003 Annual Reports of WMC Resources Ltd., www.wmc.com.

⁸ Taken from the Databook of Rio Tinto plc, www.riotinto.com.

⁹ Taken from the 1997 to 2003 Annual Reports of Newmont Mining Company, www.newmont.com; data for the years 1996 and 1995 are not available.

¹⁰ Taken from the 1999 to 2003 Annual Reports of Placer Dome, Inc., www.placerdome.com; data for the years 1995 to 1998 are not available.

¹¹ Taken from the 1997 to 2003 Annual Reports of Phelps Dodge Mining Company, www.phelpsdodge.com; data for the years 1996 and 1995 are not available.

¹² Resolution of 1 December 2004, p. 118.

¹³ Sharing the Proceeds of Mineral Development: the Fiscal Regime of Philippine Mining, paper presented during the 8^th Annual Mine Safety and Environment Symposium held on 24 November 2000 at Concorde Hotel, Baguio City; www. mgb.gov.ph.

¹⁴ Return on investment (ROI) is a measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. ROI measures how effectively the firm uses its capital to generate profit ; the higher the ROI, the better; http://www.investorwords.com/.

¹⁵ Lepanto's audited financial statements for 1995 and 1998 are incomplete thus preventing the calculation of its ROI for these two years.

¹⁶ www.mgb.gov.ph/response/miningissues.php.

¹⁷ www.metals.about.com; The Mines and Geosciences Bureau provides the following similar data www.mgb.gov.ph/aveprice-metals.php:

Average Prices of Metals [17]

1996 1997 1998 1999 2000 2001 2002 2003 2004 (1st Qtr) Average World Price of Copper (WMS) $1.04/lb $1.03/lb $0.75/lb $0.71/lb $0.82/lb $0.72/lb $0.71/lb $0.81/lb $1.24/lb Average World Price of Gold (WMS) $387/oz $331/oz $293/oz $279.04/oz $279.28/oz $270.71/oz $309.71/oz $363.38/oz $408.27/oz Average World Price of Silver (WMS) $5.20/oz $4.90/oz $5.51/oz $5.22/oz $4.95/oz $4.36/oz $4.60/oz $4.87/oz $6.64/oz Average World Price of Nickel (WMS) $3.40/lb $3.14/lb $2.10/lb $2.73/lb $3.92/lb $2.69/lb $3.06/lb $4.37/lb $6.67/lb Peso to US Dollar Exchange Rate (BSP) P21.25/$ P29.47/$ P40.90/$ P39.08/$ P43.81/$ P50.8/$ P51.28/$ P54.02/$ P55.74/$

¹⁸ If the NIAT initially increases by 40% above the amount corresponding to the 0.40 trigger level, resulting in an additional government share of 10% of this increase, and if this additional share is tax deductible, then the additional taxable income is the 40% minus the 10% or 30%. At a tax rate of 32%, the after tax profit to the foreign contractor is 20.4% out of the original 40% increase in profit.

¹⁹ New Africa Mining Fund, Report R40/2002, p. 6, Department of Minerals and Energy, Republic of South Africa, www.dme.gov.za.

²⁰ See note 19.

²¹ Resolution of 1 December 2004, p. 133.

²² Article 1409(1), Civil Code.

²³ Section 3 of RA No. 3019 provides:

xxx

e) Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official administrative or judicial functions through manifest partiality, evident bad faith or gross inexcusable negligence. This provision shall apply to officers and employees of offices or government corporations charged with the grant of licenses or permits or other concessions.

xxx

(g) Entering, on behalf of the Government, into any contract or transaction manifestly and grossly disadvantageous to the same, whether or not the public officer profited or will profit thereby.

²⁴ Miners Association of the Philippines v. Hon. Factoran, Jr., et al., 310 Phil. 113 (1995).

²⁵ Section 3(e) of DAO 56-99 provides: "x x x The Recovery Period, which refers to the period allowed to the Contractor to recover its Pre-Operating Expenses as provided in the Mining Act and the IRR, shall be for a maximum of five (5) years or at a date when the aggregate of the Net Cash Flows from the Mining Operations is equal to the aggregate of its Pre-operating Expenses, reckoned from the Date of Commencement of Commercial Production, whichever comes first. x x x."

²⁶ World Mining Overview, see note 17.

²⁷ Assuming a depreciation period of 15 years, the annual depreciation will be roughly 1/15 or 6.7% of the initial investment, assuming all investments are in depreciable assets with only negligible working capital. Thus, the recovery period would be about 100/(10.5+6.7) or 5.8 or some 6 years.

²⁸ The pre-operating period may even stretch to 7 years. The Philippine Daily Inquirer reported on 30 December 2004, p. B2, in an article entitled 'Dont bet on mine revenue, govt urged:

According to Walter Brown, Philex Mining Corp. President, mining projects have long 'gestating period (sic).

He said the entire project - from the exploration phase to the conduct of feasibility study, construction and actual mining production - may (sic) take six to seven years. (Emphasis supplied)

²⁹ Section 3(f) of DA) 56-99 provides: "Recoverable Pre-Operating Expenses. Pre-Operating Expenses for recovery which shall be approved by the Secretary upon recommendation of the Director shall consist of actual expenses and capital expenditures relating to the following: x x x." (Emphasis supplied)

³⁰ Section 3(c)(3)(b), DAO 56-99.

³¹ Section 3(c), DAO 56-99.

³² In contrast, the Occidental-Shell FTAA gives the State the right to dispute operating expenses, and in case the dispute is not amicably settled, to submit the dispute to arbitration. See Dissenting Opinion of 1 December 2004.

³³ Record of the Constitutional Commission, Vol. III p. 350.

³⁴ Id.

³⁵ Id. at p. 354.

³⁶ Id. at p. 352.

³⁷ Record of the Constitutional Commission, Vol. IV p. 213.

³⁸ Supra note33 at p. 348.

³⁹ Supra note 33 at p. 349.

⁴⁰ Under Section 151(A) of the National Internal Revenue Code, the excise tax on metallic products is only 2% of the gross value at the time of removal from the mine site.

⁴¹ Section 14, Article VIII of the 1987 Constitution states: "No decision shall be rendered by any court without expressing therein clearly and distinctly the facts and the law on which it is based."

⁴² Republic Act No. 7942.

⁴³ Consolidated Mines, Inc. v. Court of Tax Appeals, 157 Phil. 608 (1974).

⁴⁴ See Dissenting Opinion of 1 December 2004.

⁴⁵ Ibid.

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