New Gold Fever Has a Grip on the Philippines : Commodities: Dozens of foreign firms have set up mining operations in the islands.

The year was 1987. Daniel Montano recalls sitting pensively in a Manila coffee shop as Agustine Jimenez, a 67-year-old former mine worker, told him a tale of a Philippine gold mine abandoned long ago.

As Montano tells it, he studied a warped and faded photograph of a young Jimenez and five other Filipino miners holding 12 gold bars in their hands. The bars were from a mine in the Paracale district of the Philippines, an area Jimenez claimed was rich in gold deposits.

The mine, Jimenez told Montano, had been run by a prominent Filipino family until 1941, when American engineers dynamited its entrance closed to keep its riches away from advancing Japanese troops. At war’s end, Jimenez bought claims to the abandoned mine.

Montano, gambling on an old man’s memories and the glimmering gold sparkle he saw when he later visited the mine’s entrance, had gold fever. To finance renovation of the mine, the Orange County investment banker put together a group of Filipino and American investors that includes fast-food chain owner Carl N. Karcher.

The promise that Montano saw in the Paracale district--about 230 miles southeast of Manila--has not escaped notice by other investors. Since the ouster of the late Philippine President Ferdinand Marcos in 1986, the nation’s gold mining industry has experienced a rebirth. Dozens of foreign companies have set up mining operations in the country, which is believed to have one of the world’s richest gold deposits. The Philippines is second only to South Africa in the concentration of gold deposits discovered per unit of land.

“There’s no doubt that there has been an increase in interest for foreign mining companies exploring in this country,” said Frank Reid, president of WMC Philippines in Manila, an Australian-owned gold mining concern. “One of the major attractions of the Philippines is that its gold mining industry has never been exposed to modern exploration techniques until now.”

The Philippines is one of eight Pacific Rim countries that sit atop the so-called Rim of Fire--a strip that runs from Japan southward to New Zealand. The region is dotted by volcanoes and hot springs where geologists say gold and other mineral deposits are concentrated.

The gold rush to the Philippines--and other Asian countries along the Rim of Fire--is being driven by advances in mining technology and a devaluation of local currencies that has made mining cheaper. Meanwhile, rising inflation, concerns about a global recession and turmoil in the Middle East have prompted some investors to buy precious metals, particularly gold, as a hedge.

Gold prices flirted with the $400-per-ounce mark last week, up from about $375 on Aug. 1, the day before the Iraqi invasion of Kuwait. “In light of what’s happening in the Middle East, speculators are driving up the prices,” said Simeon Hernandez, a trade representative at the Philippine consulate in Los Angeles.

Mining companies were also encouraged by the change in government in 1986. Under Marcos, exploration permits often were parceled out to the late dictator’s cronies or to mining companies that agreed to pay off government officials, mining executives said.

The Philippine government--hungry for foreign investment and new jobs to boost a foundering economy--has encouraged foreign gold mining companies by offering various financial incentives.

But mining executives still complain about Philippine government red tape and regulations that prohibit foreign firms from owning more than 40% of a mining company. That restriction limits the profits a foreign investor can take out of the country and forces the investor to find a local businessman with substantial capital, which is not easy.

Posing a different sort of problem are the leftist insurgents that roam parts of the country and who sometimes demand payoffs from prospectors. And the area is swept by frequent typhoons, as well as monsoons, which close the mines for five months a year.

Meanwhile, mining companies and the Philippine government also are dealing with the problem of gold smugglers--an estimated 500,000 of them, according to official statistics. The government blames smugglers, or so-called panners, for the loss of more than $1 billion in revenue last year.

Mining companies are required by law to sell at market value all gold produced in the country to the Philippine central bank. But smugglers sidestep the law by selling their nuggets on the black market, avoiding government taxes in the process.

“The panners can’t carry the gold around, so they sell it to people who want to risk transporting the gold to foreign markets,” said Henry Brimo, chairman of Philex Mining Corp., the second-largest gold mining company in the Philippines.

Hoping to ease the smuggling problem, the government is expanding the number of gold-buying stations in the nation’s mining regions to persuade panners to sell their gold legitimately to the government.

The government blames smuggling for a decline in official gold production, which dropped sharply from a peak of 35,400 kilograms ) in 1986 to 30,000 kilograms last year, according to government figures. A kilogram is about 2.2 pounds.

Most of the country’s gold mines opened in the 1930s, and there were about 40 mines operating at the outbreak of World War II. About half of those mines have resumed production, industry officials said.

Because most of the mines already were in production before the war, companies excavating those sites today have generally been spared the huge expense of building a mine from scratch, said John Teeling, deputy chairman of Kenmare Resources PLC, an Irish company that operates several gold mines in the Philippines.

“There’s a general feeling of optimism among investors that everyone will get their fair share,” said a former chairman of the Chamber of Mines, a Philippine industry group representing mineral producing companies.

Daniel Montano is one such optimistic investor. His investment group has plowed $2.3 million into its Philippine mining operation so far. Another $6 million is needed to get the mine running, he said.

Montano is a stocky amateur boxer with short, curly hair and gold-rimmed glasses. The founder of a small investment bank in Orange and chairman of two small Orange County firms, he has made a career as a turnaround specialist for small, ailing companies. He plays down the financial and security risks of his Philippine venture.

“The mining area we’re going into has no (guerrilla) insurgency problem. The villagers loved us,” he said. “The area’s potential mineral resources and the readily available skilled and cheap labor outweigh all other disadvantages.”

Montano is no stranger to the uncertainties of doing business in the Philippines. One of his companies had to scuttle plans to build a retirement island in the Philippines for elderly Japanese after a military coup attempt last year in which some Japanese tourists were taken hostage in Manila.

Montano is the chairman of two public companies, VTN Corp., an engineering firm in Orange, and Shelly Associates, an electronics firm in Tustin. Since 1988, the two companies together with other investors have purchased a 40% stake in the Philippine gold mine through a joint venture, Precious Metals Mining and Development.

Last Tuesday, Precious Metals announced that it had purchased an option for 3,097 acres in the same Paracale district where it already owned claims for 250 acres. Paracale is a hilly, jungle region dotted with coconut plantations and rice fields, and populated by about 15,000 villagers who live in bamboo huts.

Montano estimates that the latest options raise the venture’s ore reserves to more than 10 million troy ounces of gold worth some $4 billion at the current market price of nearly $400 per ounce.

Getting that gold out of the ground is easier said than done.

A Filipino mining executive familiar with the Paracale district said that although the area has potential, geological surveys show “no indications that a large deposit could be found in that area.”

The area has been “extensively prospected since the 1930s (and) I don’t think anybody has any secrets,” said the executive, who asked not to be named. Most of the area’s gold mines have “very thin veins, good grade (ore) but difficult mining conditions.”

Some geologists say the highest concentration of ore in the region is likely to be buried deep below the earth’s surface, probably between 2,000 feet and 4,000 feet--a depth at which mining would be very expensive. But Montano claims that samplings taken from nearby sites show the highest concentration of gold at a depth of 1,200 feet to 1,500 feet.

Gold prospecting in the Philippines might sound like a wild scheme, but mining executives say their studies show it is economically viable.

Kenmare’s Teeling said that at current market prices of $400 an ounce, a mining company can profit if it can extract 1/10th of an ounce of gold per ton of earth excavated. He said that extraction rate would be considered good even at a Nevada gold mine, where labor costs are much higher. Unskilled Filipino laborers earn about $3 per day, while skilled miners are paid about $6. U.S. miners average about $20 an hour, including health and other benefits.

Montano said it doesn’t much matter whether his group strikes it rich or not; as far as he’s concerned, the venture was worth it just for the adventure.

It was October, 1989, when he and a group of engineers and geologists, with former miner Jimenez as their guide, cleared away the thick vegetation that protected the mine’s entrance. They used dynamite to blow away three feet of concrete that had been used to seal the mine shaft nearly five decades earlier.

“We felt like Indiana Jones,” he said. “Going down the shaft was like entering an ancient treasure-trove. It was like walking through a Greek ruin. Everything was intact.”

Montano describes how he inspected the foundation of the mine’s ore processing mill. He saw the tailing pond that had been used to dump the waste material after the gold was extracted. He touched the discarded dirt in the pond, and grew flustered.

His fingers gleamed with gold.

“We extracted three grams of gold per ton from that scrap!” he recalled. “There was gold all over the area.”

GOLD DIGGING IN THE PHILIPPINES

Gold mining production rose in the Philippines to 35,400 kilograms in 1986 before declining to 30,000 in 1989.

Philippine gold mine production in thousands of kilograms:

1980: 20.0 1981: 23.6 1982: 26.0 1983: 26.1 1984: 25.7 1985: 33.1 1986: 35.4 1987: 32.8 1988: 30.5 1989: 30.0

A LINE OF GOLD IN THE PHILIPPINES?

Volcanoes are strung along a geological fault line which runs the length of the Philippines. There is some speculation that gold is more likely to be found near this fault line.

Source: Precious Metals Mining and Development Corp.