How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series)

With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people—Friedrich August von Hayek 

In this issue 

How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series)

I. The Absence of Commodity Markets Limits Investment Alternatives and Risk Management

II. Rising Operating Leverage: A Profit Margin Accelerator for Philippine Mines

III. Record-Breaking Gold Prices Spark a Reawakening of Philippine Gold Mining Shares (Exclusive for Substack Readers)

A. Belated Run-Up: Delayed Market Response to Gold’s Rally

B. Market Internals Reveal Vast Underweighting: Low Trading Volume and Limited Institutional Interest

C. Threading Uncharted Waters

D. Philippine Mining Industry: Entering a Bull Market Cycle? Potential for a Multi-Year Uptrend Amid Structural Challenges 

How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series) 

This is the third and final article of our series on gold. How will record gold prices affect the Philippine Mining industry and share prices in the face of many challenges. 

I. The Absence of Commodity Markets Limits Investment Alternatives and Risk Management 

The absence of a robust commodity market in the Philippines limits investment alternatives for both producers and investors, particularly in a resource-rich nation where gold plays a significant economic role. 

Back in 2008, the Bangko Sentral ng Pilipinas (BSP) acknowledged this reality, noting that one reason for holding gold reserves was because “the Philippines is a significant producer of gold.” 

This admission reveals a critical gap: instead of fostering investment alternatives for the public, the gold market remains underdeveloped, heavily reliant on physical sales—such as jewelry and ornaments—and the BSP as a major buyer of gold from local producers. 

Unlike other major ASEAN countries, including Indonesia, Thailand, Malaysia, and Vietnam, which have established commodity futures and derivatives exchanges, the Philippines lacks such a market infrastructure. 

These exchanges, accessible via platforms like the Indonesia Commodity and Derivatives Exchange, the Thailand Futures Exchange, the Bursa Malaysia Derivatives, and the Vietnam Commodity Exchange, provide critical benefits for resource-rich nations. 

Commodity markets enhance pricing efficiency by establishing transparent benchmarks, improve the allocation of commodity investments, and reduce the role of intermediaries or middle men, thereby lowering transaction and search costs. 

They enable producers and farmers to hedge against price volatility, access insurance, and secure better prices through competitive bidding, while also matching buyers and sellers more effectively. 

For savers and investors, commodity markets expand the investment universe, offering opportunities to diversify portfolios and achieve better returns by directly tapping into the price movements of commodities like gold, copper, and agricultural products. 

In the Philippines, the absence of such markets not only stifles these benefits but also limits the growth potential of the gold mining sector, leaving investors with few options beyond speculative investments in mining stocks. 

The lack of a commodity market means producers have fewer opportunities to hedge against price volatility, leaving them partially exposed to the risks of a potential global downturn, as discussed in the first article, where gold’s predictive power suggests an impending crisis.

While some Philippine gold producers mitigate this risk by hedging through international markets—such as the London Metal Exchange (LME) or the Chicago Mercantile Exchange (CME)—this approach is costly and less accessible for smaller firms, often requiring sophisticated financial expertise and exposure to foreign exchange risks. 

A local commodity market would provide a more direct and cost-effective hedging mechanism, enabling producers to lock in prices and protect against sudden drops in global demand. 

A crisis, as potentially signaled by gold’s historic highs, could expose gold miners to heightened credit risk, as lenders may tighten financing amid economic uncertainty, leading to critical dislocations in funding for operations and expansion. 

Additionally, such a downturn could reduce export revenues, particularly for the Philippines, where Switzerland and Hong Kong rank as the largest gold export markets (July 2024), accounting for a significant share of the country’s mineral exports.

For other commodity producers, such as those in agriculture or base metals like nickel, a global downturn could similarly dampen demand, disrupt supply chains, and lower export revenues, exacerbating economic vulnerabilities in a nation heavily reliant on commodity exports. 

The absence of a commodity market also limits the broader economic benefits for the Philippines. A well-functioning commodity exchange could channel investment into the mining sector, support infrastructure development—such as roads and processing facilities in mining regions—and create jobs in mining communities, fostering economic growth and reducing poverty in rural areas. 

For investors, it would provide a less speculative avenue to gain exposure to gold, copper and other commodity price movements, reducing reliance on volatile mining stocks and enabling more stable portfolio diversification. 

For listed Philippine gold mining companies, the current surge in gold and copper prices could drive share prices higher as investors seek to capitalize on rising profit margins driven by operating leverage. 

However, the lack of accessible hedging mechanisms increases their vulnerability to price swings, leaving them exposed to the downside risks of a potential crisis, such as a sudden drop in commodity prices or a contraction in global demand. 

II. Rising Operating Leverage: A Profit Margin Accelerator for Philippine Mines 

The current environment of rising commodity prices amplifies the financial dynamics for Philippine mining companies, particularly through operating leverage.

Gold has reached historic highs, as discussed in the first and second series of this article, driven by geopolitical tensions, deglobalization, and central bank buying, while copper prices have also broken into all-time highs, partly influenced by Trump’s tariffs, which have increased demand for domestically sourced metals and disrupted global supply chains.

Figure 1 

The chart of gold and copper prices illustrates this tandem rise, with gold climbing steadily since 2023 and copper following suit, reflecting heightened industrial demand and inflationary pressures. 

For Philippine gold mining companies, which often extract copper as a byproduct due to the geological association of these metals in porphyry deposits, this dual price surge presents a unique opportunity to capitalize on rising revenues, but, again, also underscores the need for accessible commodity markets to manage price volatility and attract broader investment.

Investment in mining companies hinges primarily on their reserves, which represent future earnings potential and determine a mine’s long-term viability.  

Rising commodity prices—particularly gold and copper—amplify the financial benefits for these companies through operating leverage.

Operating leverage measures how sensitive a company’s profit is to changes in revenue, driven by its mix of fixed and variable costs.

In the mining industry, high fixed costs—such as equipment, infrastructure, permits, licensing, labor, and energy—create significant operating leverage. 

This means that small increases in revenue, whether from rising commodity prices or higher output, can lead to disproportionately large boosts in profit margins, as the additional revenue is not offset by proportional cost increases. 

Conversely, if revenues decline due to falling prices or reduced production, profit margins can shrink rapidly since fixed costs remain unchanged, exposing companies to heightened financial risk during downturns.

To illustrate this dynamic, consider the following table of a hypothetical gold mining company, showing the impact of rising gold prices on its operating leverage: 

Figure/Table 2

In this example, as the gold price rises from $1,800 to $2,200 per ounce—a 22.2% increase—revenue grows from $18 million to $22 million. However, because fixed costs remain at $10 million, the operating profit surges from $6 million to $9.6 million, a 60% increase, and the profit margin expands from 33.3% to 43.6%. (Figure 2, upper table)

This demonstrates how operating leverage acts as a profit margin accelerator, making mining companies highly profitable during commodity price upswings.

Another table from Canada highlights B2Gold, a Canadian company listed in Canada, with a mining project in the Philippines provides insights into the country’s gold production costs, particularly in terms of cash operating costs and All-in Sustaining Costs (AISC). (Figure 2, lower table)

The same principle applies to copper, where price increases further enhance revenues for Philippine mines that produce both metals, amplifying the financial upside.

However, this high operating leverage is a double-edged sword.

Ceteris paribus, while rising prices boost margins, a downturn in commodity prices can lead to significant losses, as fixed costs remain constant, squeezing profitability. 

Moreover, operating margins also depend on cost discipline—mines that fail to control variable costs, such as energy or labor, may see diminished gains even during price surges. 

For Philippine gold mining companies, the current environment of historic highs in both gold and copper prices offers a window of opportunity to leverage these gains, improve financial stability, and attract investment. 

Yet again, the lack of a local commodity market exacerbates their exposure to global market risks, as they cannot easily hedge against price volatility. 

As global uncertainties mount—driven by geopolitical tensions, deglobalization, and central bank policies—the development of a commodity market in the Philippines becomes increasingly urgent to unlock the full potential of its gold mining sector, mitigate the risks of an impending crisis, and ensure sustainable economic benefits for the nation. 

III. Record-Breaking Gold Prices Spark a Reawakening of Philippine Gold Mining Shares 

A. Belated Run-Up: Delayed Market Response to Gold’s Rally

Despite gold prices achieving a successive winning streak since at least 2022, as highlighted in the first segment, the Philippine Stock Exchange (PSE) largely overlooked these developments until the start of 2025. 

This delayed reaction underscores significant shortcomings in the PSE’s pricing mechanism, reflecting deeper structural issues in the market. 

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