SM Group eyeing Tampakan

Posted at 09/17/12 6:59 AM

MANILA, Philippines - Billionaire Henry Sy may have struck gold building the Philippines’s biggest shopping mall franchise and its largest bank, but it seems the country’s richest man is turning his gaze toward the precious metal itself through the Tampakan project in Mindanao, one of the world’s largest undeveloped mines.

A possible entry point for Sy is Australia’s Indophil Resources NL, owner of 37.5 percent of the Tampakan project, sources with knowledge of the matter said.

The SM Group, through unit BDO Unibank Inc., has already obtained one board seat in Indophil—not as a shareholder but as a nominee of the Mindanao-based Alsons Group.

Led by the influential Alcantara clan, Alsons early this year increased its Indophil stake from about 3 percent to 19.9 percent in a $99.4-million private placement deal.

It was disclosed that the transaction, which gave Alsons two out of seven Indophil seats, had the “financial support” of BDO via a long-term loan.

What was not emphasized was that the deal had convertible features that could give the SM Group a minority stake in the mining project, people with knowledge of the transaction said.

One source said there is no guarantee that BDO will exercise any option given the long-term nature of the transaction and long-running uncertainties surrounding the $5.9-billion Tampakan project. “That decision has not been made,” the source said.

But it provides a glimpse into the mining strategy of the SM Group, which tends to make relatively smaller “portfolio” investments outside its core mall, retail, banking and real-estate businesses.

Sy-led flagship firm SM Investments Corp. (SMIC), for instance, is now the single-largest minority shareholder in listed copper producer Atlas Consolidated Mining and Development Corp., but it would rather leave the day-to-day operations to the company’s controlling owners.

According to Jose Sio, SMIC chief financial officer, it was typical for BDO to request a board seat.

“If we loan a certain amount, we have to have a board seat. We have to know what is going on in the company,” he said in a chance interview last week.

Sio declined to comment on the SM Group’s plans for Tampakan, while SMIC Vice Chairman Teresita Sy-Coson did not respond to an e-mailed request seeking her comment.

SM Group, meanwhile, continues to bolster its credentials within Indophil’s board.

On September 7 saw the appointment of SMIC Senior Vice President Frederic DyBuncio, who carries more experience in the mining sector through his role as vice chairman of the board of Atlas.

DyBuncio took the place of Walter Wassmer, a senior executive vice president of BDO who was appointed to Indophil’s board in early February.

Market players said they remain optimistic on Tampakan even as the massive project has come to symbolize inconsistencies in Philippine mining policy such as the difference between national and local-government laws.

A 2010 provincial ban on open-pit mining in South Cotabato has been one of the project’s major obstacles.

Tampakan operator Sagittarius Mines, a unit of Xstrata Plc., which owns the remaining 62.5-percent interest, said in August that the start of production will be pushed back two years to 2018 after its application for an environmental permit was rejected, among other regulatory and security issues.

“I still think it’s really an attractive project. We like the initial results of the exploration,” Joseph Roxas, president of stock-brokerage firm Eagle Equities Inc., said in a phone interview.

The Tampakan mine is potentially the biggest mining project in the Philippines and fifth-largest worldwide. It is estimated to have 15 million tons of copper and almost 18 million ounces of gold.

Another analyst said the SM Group’s presence in the project could also prove beneficial. “It gives [Indophil] easier access to financing on both equity and debt,” Edmund Lee, equities analyst with COL Financial Group, said.

Apart from Alsons, Indophil’s other Philippine-based shareholders include San Miguel Corp. and Philex Mining Corp., although the two firms control much smaller positions at 3.99 percent and 1.30 percent, respectively.

Market observers said they did not worry about the SM Group’s potential involvement in new projects as it stayed true to its focus on core businesses that have been tied closely to the country’s economic growth.

Apart from Atlas, the SM Group, through BDO, has a 12- percent stake in the operator of North Luzon Expressway (another private company held by the Sys owns 4 percent of the toll road) and recently signed a convertible loan deal with listed Phoenix Petroleum Philippines Inc.

“It looks like they just like the mining industry. They don’t have to do it themselves and like Atlas they can be a passive partner,” Roxas said.

Investors have rewarded this focus, with SMIC shares up 26 percent since the start of the year, outperforming the benchmark index, which gained 22 percent.