As indicated in the charts above, Lepanto Consolidated Mining (LC, the “Company”) experienced two declines in share price, on May and on July. May decline was caused by removal of LC from the PSE index while July was due to the release of Executive Order (EO) 79. The EO 79 that was rleased in July served as a huge blow for LC’s share price. LC’s Mineral Production Sharing Agreement (MPSA) will expire in 2015 and originally, EO 79 states that there are no renewal of MPSA until new tax rates are approved by congress.
LC’s story is their interest in Far Southeast Gold Resources, Inc. (FSGRI). On September 20, 2010, the Company approved an Option on Shareholder’s Agreement (Agreement) with Gold Fields Switzerland Holding AG (GFS), a wholly owned subsidiary of Gold Fields Limited, for a non-refundable option fee of $ 10 million.
The Agreement requires GFS to:
I. Fund the exploration and feasibility study of the FSGRI mining project
II. Contribute $110 million into FSGRI
III. Contribute proportionate share of the development cost
The Agreement grants GFS an eighteen-month option to subscribe to new shares of stock of FSGRI representing 20% interest in FSGRI. However, as of to date, GFS is yet to exercise their right pending the acquisition of Financial or Technical Assistance Agreement (FTAA) license—which allows a foreign corporation to legally own and control a majority stake of large-scale mineral resources in the Philippines. If the option is exercised the Company’s interest in will be reduced from 60% to 40%.
The Far Southeast project is covered by MPSA No. 001-90 which is granted on March 3, 1990 and is believed to have 19.8 million oz. of gold reserve. On October 08, 2012, a revised rules and regulations to the implementation on EO 79 was signed which allows the renewal of expired mining contracts even before the congress approves new tax rates for mining.  This latest developments suggests that the story of LC is still substantially intact. GFS may proceed with the MPSA and increase their interest to 60% in FSGRI as soon as they will be legally allowed to have FTAA.
Risk in investing in LC
Take note that the conversion of MPSA to FTAA is still not allowed until the approval of new mining tax rates. Since FTAA allows ownership of more than 50% in Philippine mining operations, GFS may opt to cease their operation and wait for the new mining tax rates.
- Update on Far Southeast Project, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6671_LC.pdf
- Rules and Regulations to the Implementation on EO 79, http://www.mgb.gov.ph/Files/Policies/DAO%202012-07.pdf
- Department Administrative Order 2012-7-A, http://www.rappler.com/business/special-report/whymining/whymining-latest-stories/13865-paje-signs-final-mining-rules?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rappler+(Rappler)
Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.