Philippines SECTOR RESEARCH| 1 Philippines Mining Sector under stress  Neutral on sector due to HOLD ratings on AT, MARC and PX.  SCC and NIKL are the best counters for their profitable operations although it is power driving SCC’s growth.  China’s slowing economy is pushing prices down. Clear bottom has to be established before sentiment turns. Neutral on sector: BUYs on SCC and NIKL Among mining stocks we cover, we are most positive on Semirara Mining and Power Corp (SCC), not for its coal mining but for its power generation business. Mining makes up 14% of our valuation of SCC. For pure mining plays, Nickel Asia Corp (NIKL) is the most stable in an environment of weak commodity prices. But upside is limited after factoring in uncertain demand from China, especially with the recent currency devaluation. We have Hold ratings on Atlas Mining (AT), Marcventures (MARC) and Philex Mining (PX), all highly geared towards China. We are Neutral on the sector. Best player is most profitable SCC is vertically integrated as a coal and power producer. It has the largest coal reserves and is expanding further within its contract area in Semirara Island. At the same time, its power capacity is expanding from 600MW in 2014 to 900MW in 2015 and potential to reach 1,600MW by 2018. NIKL has the lowest costs, is the largest producer and accounts for the biggest reserves among nickel miners. Similar to SCC, it is starting to invest in power to stabilize earnings. AT, MARC and PX are still beset by execution risks, permitting issues and cost-cutting measures to offset the negative sentiment because of China. Mixed signals from China China’s government has been trying to stimulate the economy in different ways but recent indicators show continuing weakness. The recent devaluation of its currency is being taken as a sign the economy needs more stimulus through greater exports. It has also made imports more expensive, including ores sourced from the Philippines. Until there are consistent signs of strength, the mining sector will remain stressed. Analyst StockMkt capRatingPriceTPUpsideP/E (x)P/E (x)P/B (x)P/B (x)Div yld (%)Div yld (%)(USDm)(PHP)(PHP)(%)15E16E15E16E15E16EAtlas Mining196.6 HOLD4.51 5.37 19.1 NM5.1 0.3 0.3 5.1 - Marcventures82.7 HOLD2.11 2.91 37.9 13.2 1.7 1.3 0.8 10.9 3.8 Nickel Asia1,265.9 BUY8.00 10.66 33.3 15.8 10.3 2.2 2.1 5.6 6.7 Philex Mining532.7 HOLD5.12 5.72 11.7 18.8 14.6 1.0 1.0 0.3 1.3 Semirara2,960.5 BUY131.00 175.62 34.1 16.8 13.4 5.2 4.2 3.1 3.1 (Unchanged) NEUTRAL Philippines Research Team (63) 2 849 8845 Research_Dept@maybank-atrke.com 2 Philippines Mining Mining sector dominated by nickel, copper-gold and coal Most of Philippine mining activity is concentrated in metallic ores, such as copper, gold and nickel, almost all of which are exported. The main markets are China and Japan. Non-metallic ore mining consists largely of coal and limestone and this is mostly for domestic consumption. Coal production is used for power generation while limestone is quarried for the cement industry. In this report we focus on metallic ores and coal. Living with a slowing China Prices of metallic ores and coal have seen huge declines in prices since last year mainly due to cooling demand from China. Nickel was the exception because of the regional supply squeeze when Indonesia banned direct shipping of ores. This made the Philippines the major supplier to China of nickel laterite ores. This year, however, as China’s economy continues to slow down and with the build-up in inventories in 2014, nickel ore prices have also come off significantly from USD7.00/lb at the start of the year to a low of USD4.69/lb. Copper started the year at USD2.90/lb and fell to a low of USD2.30/lb. This downward trend started in Feb 2011 when both metals peaked, nickel at USD13.10/lb and copper at USD4.60/lb. Falling prices moved local miners to target cost reduction through production increases or cost-optimization measures, value-added operations to improve value capture and/or merger and acquisitions. At the end, survival is the driving force and the strategies reflect the strengths of the different companies. Survival strategies of miners Nickel miners are expanding capacity on the basis of their strong resource base; some are even going into processing to ensure the long-term survival of the business. At current ore prices, only miners with large resources and