The Philex Mining saga: How First Pacific acquired control

by Lala Rimando, Special Report

Posted at May 27 2011 03:44 AM | Updated as of Jun 08 2011 05:00 AM

The Philex Mining saga: How First Pacific acquired control

Last of a two-part series. Read part one here.

There were many moving parts when different business entities and political personalities changed hands in controlling Philex Mining  Corp. in 2009 to 2010. This last of the 2-part series explains the big picture behind the controversial deals.

MANILA, Philippines – Tax and justice officials are taking former state-run pension fund president Romulo Neri to court for reportedly failing to disclose his true income and pay over P18 million in taxes. While the investigations focused on the alleged crime, there is more to the profitable but controversial stock transactions of the Social Security System (SSS) chief than meets the eye. 

In November 2009 alone, he earned around half a million pesos when he bought and sold shares of Philex Mining Corporation over a period of only four days. The authorities who acted on the results of a previous Senate investigation on excessive income of government officials have questioned why Neri personally benefitted from trading Philex shares when he was merely representing SSS’s stake in the miner’s board.

The Philex Mining saga: How First Pacific acquired control 1Neri  acquired 123,000 Philex shares on November 16, 2009 under the miner’s stock option plan, which means he got them at less than the trading price of around P13 to P14 each at the time. On November 20, he sold the same number of shares for P17.50 each.

While trading Philex shares has brought tax troubles to Neri now, his actions as a Philex board member did not sit well with the other shareholders before. In fact, his earnings from trading the Philex shares in November paled in comparison to those earned by other shareholders who were also actively trading the miner’s shares in the last months of 2009.

For example, state-owned Development Bank of the Philippines (DBP) earned a whopping P1.3 billion from trading Philex shares also in 2009. Unlike Neri’s Philex-related woes, former DBP vice chair and president Reynaldo David described their Philex trades as “heaven-sent” for the bank. (Read Part 1 here)

In the boardroom of the country’s oldest mining company, representatives of the country’s two largest state-controlled financial institutions, SSS and DBP, joined two of the country’s most powerful businessmen: Manuel Pangilinan and Roberto Ongpin.

In this last part of a two-series special report, explains the many moving parts when different entities and personalities in both business and government changed hands in controlling Philex, one of the country’s biggest mining firms, in 2009 to 2010. 

Aiming for Philex

Investors have long recognized the potentials of the mining industry in the Philippines. But the sins of the past irresponsible miners who have left a trail of poisoned rivers or hollowed mountains have resulted in strong opposition from the Catholic Church, environmental and non-government groups, and local hosts.

The Philex Mining saga: How First Pacific acquired control 2Philex, which has been operating since 1958, has generally dodged these.  It mines gold, copper, and other minerals in various parts of the country. Pangilinan noted these when he stood in front of Philex shareholders in June 2010 and explained why his Hong Kong-based principals, who control diversified businesses in the Philippines and Indonesia, invested in the local mining company.

“First Pacific decided to go into natural resources because we strongly believe that the Philippine mining industry has tremendous potential for growth given the country’s known but still largely undeveloped mineral deposits,” he said in a speech. His group has business interests in telecommunications, power, utilities, infrastructure, media, hospitals, among others.

“First Pacific has chosen Philex to be the key company in its entry into this sector because of Philex’s reputation in the industry as a responsible and profitable operator…  and, of course, a market price that was well below its real value,” he said. 

At the time, Philex’s share price hovered at around P15 to P16 each, far lower than the P21 per share First Pacific Investment Corp. paid 6 months before to other shareholders who were no longer around during the annual stockholders meeting in 2010.

The Philex Mining saga: How First Pacific acquired control 3This was his second year as chairman of Philex. A year before, Pangilinan was with Ongpin, SSS’ Neri, DBP’s Reynaldo David, and former Philex president Walter Brown during the mining company’s annual stockholders meeting. Except for SSS, all these shareholders have since sold their stakes in Philex to Pangilinan-led First Pacific group, raking trading profits worth hundreds of millions of pesos in the process. looked back at the events leading to those acquisitions. These put into context not only the controversial loan of DBP to an Ongpin-led company in 2009, but also other high-profile events in Philippine business. These include the public spat between the Pangilinan-led group and the two state-run pension funds, SSS and Government Service Insurance System (GSIS), and parallel efforts by First Pacific to go around the costly mandatory tender offer at both Philex and power retailer Manila Electric Company (Meralco).

Neri vs Pangilinan, et al
Keen watchers of how Pangilinan does business noted that he enters into deals with acquiring control as  the end in mind. “He pays premium for control,” an analyst, who asked not to be named, told

The Philex Mining saga: How First Pacific acquired control 4In previous deals, Pangilinan-led entities pursued companies where they could assert control by acquiring shares enough to clinch majority seats in the boardroom. This was apparent in Meralco where the Pangilinan group wrestled with state-run pension fund GSIS and another conglomerate, San Miguel Corporation from 2008 to 2010  to acquire more shares and board seats. Pangilinan’s group also walked out of a port deal in 2010 when the selling parties decided not to yield control. 

The price of control

The price of Philex shares were soaring in the run up to the controversial deal between First Pacific and the group of businessman Roberto Ongpin and state-owned Development Bank of the Philippines in December 2, 2009.
The Philex Mining saga: How First Pacific acquired control 5
Philex shares were trading at only about P5 to P6 at the start of 2009, then leap-frogged to P21, an all-time high, before the year ended. 

In an interview with Business Nightly in November, analyst April Lee Tan said there was no fundamental reason for Philex shares to go up so dramatically.  At the time, Philex actually had production issues since ground condition and ore handling problems affected mine delivery. These resulted in slightly lower net income of P2.74 billion compared to the P2.8 billion registered in 2008.

Around the same time, the share price of another mining stock, Atok-Big Wedge, was also soaring. The common directors between Philex and Atok were Ongpin and his nephew, Eric Recto.

The Ongpin group acquired majority stake in Atok, a penny stock, in October 2009. Atok shares rose from only P1.94 in September 4 and closed at P92 in December 11, a whopping 4,642% increase.

In an interview with Business Nightly, Eagle Securities President Joey Roxas said this phenomenal rise was not backed up by fundamental financial accomplishments or strategic plans. "Buy at your own risk," Roxas said. 
The Philex Mining saga: How First Pacific acquired control 6
After Ongpin sold his group’s Philex mining shares to the First Pacific group in December 2009, he became the chairman of Atok.
Fast forward to 2011. After those heady days in 2009, the prices of the two stocks have since fallen from the sky.

Atok’s shares were worth P30.90 apiece while Philex closed at P19 on May 26, 2011.

This time, there are already fundamental reasons for Philex’s share hike. Its net profits increased 44%  to P3.95 billion in 2010, thanks to higher metal prices, and it has recently wrapped up talks with Manila Mining which have gold and copper reserves near the former’s Silangan mining sites in Surigao del Norte. – Lala Rimando,

Thus, when First Pacific initially bought a 20% stake in Philex through unit Asia Link BV in November 2008, market watchers had their antenna up for a possible acquisition binge. After First Pacific initially bought shares at P7.92 each, the share price started inching up and peaked at a little over P8 that year.

An easier and simpler route for the Pangilinan’s group to gain control would have been a successful deal with SSS. The pension fund owned the other big bloc of Philex shares equivalent to over 20% stake, which could have easily jacked up First Pacific’s to over 40%, giving it a controlling ownership. But Neri, who was then the president of the pension fund, was not keen on selling. 

Neri, an academic-turned-government official, was appointed SSS chief by former President Gloria Arroyo after he was dragged in the botched National Broadband Network-ZTE telecommunications scandal, which he handled when he was the socio-economic planning secretary. As SSS chief, he did not only want to sell the Philex shares to the Pangilinan group, he also tried to block its initial entry in 2008.

Philex was then trying to raise funds to develop its mine sites in the Mindanao region since its current mineral resources and proven reserves at its premier Padcal mine in Baguio City in northern Luzon would be exhausted by 2017. Pangilinan’s group offered to buy Philex treasury shares in October 2008, but Neri cited an academic fact that current shareholders should have been offered these shares first since they have the “right of first refusal.”

Most Philex shareholders, including Ongpin who joined the Philex board in August 2008, were reportedly not pleased with Neri’s stand. It delayed the initial entry of the Pangilinan group.

A few months after, Pangilinan confirmed rumors that he personally approached Neri to offer to buy SSS’ shares in Philex.  “I was able to talk to Romulo Neri and he said they are not [selling] now but maybe next year. So we backed off,” Pangilinan told reporters. Neri confirmed this and said SSS would probably sell in mid-2010.

There was a plan to sell together with DBP,  but the latter had since sold its Philex shares at a premium. SSS retained its over 20% stake in the mining firm.

Minority shareholders

Pangilinan had been consistent in his media interviews that First Pacific intended to increase its stake
 in Philex. First Pacific, too, had disclosed  to the Hong Kong stock exchange that it aimed for up to 51% controlling stake in Philex.

With Pangilinan’s group evidently a motivated buyer of additional Philex shares, First Pacific’s next purchases would have to consider two things: how many more shares are needed, and how much to pay for them. 

Since SSS’ Neri was adamant about not entering into a deal with the First Pacific group, the latter had to pursue other minority shareholders with lesser stakes.

To control the Philex board, First Pacific would need to accumulate shares to clinch 5 of the 11 board seats, enough to veto major decisions made during board meetings. In a disclosure, First Pacific said these board seats would “allow the Company to exercise significant influence over the future strategic direction of Philex.”

It boiled down to math. Since Philex had 3.9 billion outstanding common shares, First Pacific would likely need about 1.8 billion total shares enough to entitle it to 5 board seats. But with around 30% of Philex shareholders already unaccounted for, First Pacific may aim for as low as 1.2 billion shares.

With the initial 20.06% stake acquired by First Pacific’s unit Asia Link BV in 2008, the Hong Kong-based conglomerate already had 779 million Philex shares. At end-November, First Pacific disclosed that Asia Link BV had accumulated 11.44% more, or over 444 million shares, from the open market, bringing the group’s total shareholdings to over 1.2 billion,  the low end of the possible target aggregate shares to assert control.

David said DBP’s capital markets group made its initial purchase of a few million shares in March 2009 when Philex’s shares dipped to P5 each. They continued to accumulate more in the coming months.  “We were thinking that MVP (Pangilinan) would buy an additional 20% from the market since Philex had no more treasury shares,” David said.

Meanwhile, like DBP, the Ongpin group was also slowly building up their Philex shareholdings. Ongpin’s firms acquired a few more Philex shares in 2009, including the additional 50 million shares from the state-owned bank acquired through a loan in November.

Ongpin, like Neri, also personally acquired 3.2 million shares under the company’s stock option plan. This increased the group’s total Philex shares to 321.81 million. The Ongpin group’s shareholdings accounted for 6.58% of Philex as of November 23, a week before the December 2 mega-deal with Pangilinan.

The banker and the dealmaker

The Philex Mining saga: How First Pacific acquired control 7The deal between First Pacific unit Two Rivers Inc. and “the group led by Mr. Roberto V. Ongpin”  for a bloc of shares representing 9.24% stake in the mining firm was sealed in the evening of December 2, 2009.

Of the 452 million Philex shares covered by the share purchase agreement, DBP accounted for 59.3 million (1.2% stake) while Walter Brown had almost 29 million (0.5%).

Ongpin had the largest share among the sellers. Accounting for 7% of the total shares sold to First Pacific’s Two Rivers were shares held by the following Ongpin-led sellers: Boerstar Corp. (175 million shares), Elkhound Resources (66.25 million shares), Goldenmedia Corp. (123.2 million shares), and from Ongpin himself (3.2 million shares).

The December 2 deal, valued each share at P21, was a record high. It represented a 7.7% premium over the P14 per share closing price that day. First Pacific paid a hefty P9.49 billion for the bloc sale.

It meant a windfall for DBP. At P21 per share, its almost 60 million remaining Philex shares translated to a hefty P1.25 billion profit, the highest ever the bank earned from its trading activities.

A month before, however, DBP sold almost half or 50 million of Philex shares to Ongpin-led Goldenmedia for only P12.75 per share. Critics have questioned the glaring price difference of the two transactions and raised concerns on whether DBP entered into a deal with Ongpin that effectively deprived DBP of fatter profits.

Since the deal with Ongpin included a P510 million loan, DBP was also criticized for accepting credit, which involved a borrower  with questionable financial capacity, instead of outright cash.

David denied that he calculated the potential risks of the loan and agreed to a less profitable share purchase deal with Ongpin since he had intimate knowledge of an upcoming more profitable deal between Ongpin and Pangilinan.

“I didn’t have a crystal ball. I didn’t know that Philex shares would even be sold at P21. I didn’t even know that there would be a takeover (of Philex by First Pacific group),” he told
David admitted, however, that he learned that the two were talking 4 or 5 days before it was announced. He maintained that he did not know how much the two would price the deal. He said he wanted to be part of the bloc that would sell to Pangilinan.

In those 2009 deals, David was the banker, Ongpin the dealmaker, and Pangilinan the motivated buyer.

Fund raising and tender offers

Why was the deal between the groups of First Pacific and Ongpin made on December 2, 2009? 

One potential reason was availability of funds. A month before, First Pacific announced that it was raising $277 million through a rights issue partly to “expand and develop the Group’s mining strategies in the Philippines.”

Coincidentally, December 2 was also a year after First Pacific acquired its initial Philex stake through unit Asia Link BV.

Keen observers of how Pangilinan does business note that share acquisitions were usually precisely scheduled so as not to trigger an expensive mandatory tender offer, a rule that requires any individual or group who acquires a 35% stake in a listed company within the span of a year to buy out other shareholders at the same price agreed upon with the block seller.

The Philex Mining saga: How First Pacific acquired control 8While First Pacific disclosed that Asia Link BV had spent about $96 million to accumulate additional 11.44% between November 28, 2008 and November 28, 2009,  Asia Link effectively had an aggregate stake of 31.5%. It did not breach the 35% cap nor trigger the mandatory tender offer rule.

First Pacific group’s stake jumped to 40.7% in December when another First Pacific unit, Two Rivers, acquired the additional 9.2% stake in Philex from Ongpin and DBP. However, the conglomerate stressed in a disclosure  that the mandatory tender offer was not triggered since it was “being acquired after the lapse of the 12-month period from First Pacific’s initial purchase.”

The First Pacific group was particularly careful about the tender offer rule since, around that same time, it was facing a thorny issue on this in Meralco, the country’s biggest power distributor. 

The Philex Mining saga: How First Pacific acquired control 9The conglomerate had then acquired an additional 6.7% stake in Meralco from the Lopez group of companies, bringing its aggregate stake to 41.4%.  This generated a complaint from pension fund GSIS, then led by its former general manager Winston Garcia who had previously waged a public war with the Pangilinan group.

In November 2009, GSIS wanted the Philippine Stock Exchange to suspend trading of and delist Meralco over an alleged scheme to skirt the mandatory tender offer rule.  In December, GSIS filed large scale estafa cases against officials of the units of First Pacific and the Lopez Group before a regional trial court.

Interestingly, while GSIS was in a legal battle with First Pacific over Meralco, it was also accumulating shares in Philex, the mining arm of First Pacific. In November, GSIS’ stake in Philex  was increased to 5.14%. After the Ongpin group and DBP sold their Philex shares to First Pacific’s Two Rivers in December, GSIS further beefed up its stake in the mining firm.

In January 14, 2010, Philex reported that GSIS already owned a 5.33% stake, and that Garcia had the “sole power to vote/direct the disposition of the said shares.”

Four days after, in January 18, GSIS turned around and sold all its Philex shares to Two Rivers. The deal – a conditional sale with GSIS granting proxy to Two Rivers/First Pacific – priced the Philex shares at P21, the same price fetched by the Ongpin group and DBP a month before. It had a price tag of P6 billion, representing a 42% premium over the P14.75 closing price that day.

On the same day, GSIS announced that it was dropping its tender offer demand against the First Pacific and Lopez group officials. The pension fund also sold its remaining shares in Meralco.

After the dust settled in January 2010, the First Pacific group had solidified its control of Philex with a higher stake of 46%. It has spent around $571 million (around P25 billion) since 2008 in buying Philex shares from different entities and individuals. 

It’s a price for control the conglomerate justified to its shareholders. In its 2010 annual report, it wrote: “The blended cost of acquisition will average to approximately P11.8 (equivalent to approximately $0.26) per share.” That still represents a healthy discount compared to current share prices. On May 26, Philex traded at P19 per share.

In this saga for control of Philex, the shrewd and prudent, as well as the winners and losers, made their mark. is the online news arm of ABS-CBN Corp, a member of the Lopez Group of Companies, which has a minority stake in Meralco.

Ongpin rejoinder is publishing in full the response of Mr. Roberto V. Ongpin to our 2-part special report written by Lala Rimando.