PXP WON T REPEAT 2011 S PHP 5.

.6 BN RECORD NET INCOME , PUTS UP PHP 4BN FOR PADCAL, BULAWAN , KALAYAAN AND SILANGAN EXPLORATION CAPEX
SAYS PX CHAIR MVP

FGEN S CHEAP VS. EARNINGS

PROSPECTS

SCC: CALACA S REHABILITATED PLANT 2 W ILL

BE ON COMMERCIAL OPERATION ON AUGUST

2012

2012 Ju n 29 Vo l u me 1 No . 5

FIRST METRO INVESTME NT CORPORATION

he Bellwether
Fortnightly on Market Action and Outlook

Dizon Copper-Silver Mine Inc.s Tailings Dam Project is Key to Share Price Run
Dizon Copper Silver Mines Inc. (DCSMI), together with Canada-based Capital Gold, will form a joint venture (JV) company to operate its Tailings Dam Project. DCSMI will own at least 20% of the JV company while the remaining stake will be allocated to the foreign partner and a technological partner. The project will require an estimated development cost of $70mn, which will be shouldered by both the foreign and technological partner. Essentially, Dizon will enjoy a free carry from these investors, giving Dizon at least a 20% share in the income. The tailings dam was where Benguet Corporation's previous gold mining operations' (that ceased in 1997) "waste" went. Its estimated resource/reserves is 100m tons of gold ore or 1m oz. of extractable gold. Gold grade is 0.30 grams per ton ore. There are also copper and pyrite in the dam, whose separation from the gold deposits will require a flotation and a leaching facility.

Market Stats
For the week ending June 29, 2012
Top Gainers Stock BEL TEL GLO MER FGEN PSEi Closing High Low Value T/O (in mn Php) Price 5.25 2,650.00 1,115.00 253.40 17.66 % w-o-w change 10.06% 5.92% 5.19% 5.15% 4.50% Value 5,246.41 5,285.84 5,144.91 30,554.70 736.35 % w-o-w Change 2.47% 2.50% 2.97% 32.33% 1,147.39% Stock AGI SMC AC BDO Top Losers Price 11.54 114.00 469.20 63.40 % w-o-w change -3.19% -1.38% -0.17% -0.16%

Continuation on Page 4

Foreign Activity (mn USD)

Interest Rates Sideways to Downward

Yields will likely continue to move sideways with a downward bias as the government released its borrowing program for the 3Q2012. Amount was flat quarter on quarter, Php108bn, prompting market participants to look for timing of the issuance as cue, which was in the latter part of 3Q or in September. The 20YR and 25YR will be auctioned in August and September, respectively, thus limiting supply of the most liquid security, which is positive for market sentiment. Market participants opted for the 20YR paper, pushing down yields 8 to 10 bps week-on-week. Last Friday (June 29), yields went down 3 bps on the average across the yield curve, flatter on strong demand for the longer tenors. This trend is likely to be sustained. Secondary market trading volume also on that day rose to P40bn.
GSM PM CLOSE June 29, 2012 1.67y 5s67 2.85 (unch) 3.67y 7s48 4.285 (-.01) 4.27y 10s42 5.00 (unch) 9.50y 10s55 5.30 (-.08) Dealt @ 5.315 to 5.29 for 1.402Bn 9.65y 10s54 5.30 (-.03) Dealt @5.295 to 5.27 for .675Bn 19.15y 20s17 5.8875 (-.0175) Dealt @ 5.9075 to 5.88 for 28.705Bn GSM PM CLOSE June 29, 2012 23.57y 25s8 6.125 (-.015) Dealt @ 6.15 to 6.10 for 2.454Bn 24.36y 25s9 6.20 (-.05) Dealt @ 6.20 for .050Bn RTB Tranche June 29, 2012 15:15Y 5.50 (unch) Dealt @ 5.44 to 5.40 for .052Bn 20y 5.915 (unch) Dealt @ 5.9125 to 5.89 for 1.849Bn

Note: GSM is Government Securities Market

First Gen Corporation, (FGEN)

Cheap Vs. Earnings Prospects
We see three areas of significant improvement in FGEN's operating outlook that warrant a buy on current valuation, PE of 7x on 2013 earnings, which is even cheaper than EDC's 10.3x PE. 1) The consolidation of the British Gas' 40% earnings share in the natural gas (nat) power plants to FGEN will kick in 2H2012. We estimate a half year impact or Php1.1bn ($26mn) from the full year $52mn incremental earnings accruing to FGEN as a result of the buyout. Recall that FGEN used to own 60% of the nat gas plants through two operating subsidiaries First Gas Power Corporation (FGPC) for the 1,000MW Sta. Rita and FGP Corp. for the 500MW San Lorenzo plant. It recently concluded the purchase of its British partner's 40% equity stake in the nat gas plants. The purchase will now entitle FGEN to the full earnings of the nat gas plants, which in 2011 totaled $132mn in 2011 and $130mn in 2010. We're using $130mn as our 2013 earnings projection for the combined nat gas plants results, an approach acceptable to our FGEN resource person. The nat gas plants' earnings are fairly consistent as they are both contracted with Meralco with a selling price pegged at Php4.45/kwh and fuel cost treated as a pass-through. It is only plant downtime and load factors that account for the plants' earnings variability. 2) EDC's 130MW Bacman will contribute earnings of Php3.5bn next year to EDC's consolidated bottom line. That is when Bacman starts commercial operations in January 2013 on contracted capacity of 114MW at a selling price of Php4.70/kwh to several off-takers. The uncontracted capacity is sold to WESM. The Php3.5bn earnings of Bacman (EDC's estimate) will enable EDC to build the Php7.3bn projected earnings this year for its existing "running/operating" four plants: 110MW Mindanao 1 and 2, 680MW Unified Leyte, 132MW FG Hydro and 305MW Green Core for a minimum full year earnings of Php11bn in 2013. The latter figure is our projection vs. consensus earnings estimate of Php9.8bn. See our previous report on EDC in The Bellwether. FGEN has increased its economic interest in EDC to 49% from previously 44% and the full impact of the increased stake will be reflected in the books in 2013 worth an estimated increment of Php550mn attributable earnings. From EDC's improved earnings forecast for 2013 of Php11bn, FGEN stands to benefit by Php5.4bn or $126mn by virtue of its 49% stake.
Stock Data Price (Php) Market Cap (Php Bn) Outstanding shares (Bn) Book Value/Share (Php) Price to Book (X) Recommendation
Source: Bloomberg

17.66 59.39 3.36 0.36 49.06 BUY

demand in the Luzon grid, higher energy acceptance rate of National Grid Corporation of the Philippines (NGCP) for the reserve power market and spot prices for full year 2013 earnings to reach Php2bn, we estimate FGEN's profit uptake from FG Hydro to be Php800mn or 40% of the abovementioned figure. FG Hydro has one of the brightest prospects among EDC's power plants given the ff:

3) Since FGEN also owns a direct 40% equity in FG Hydro and 29% of the latter indirectly through EDC, it will share in the robust operating prospects of the hydro plant. FG Hydro made Php1.1bn net profits in 1Q12, equal to the full year net profits in 2011 worth Php1.1bn. Assuming the favorable earnings results in 1Q12 is replicated in 2Q12 due to strong electricity

it has an ancillary contract with NGCP which accounted for Php600mn of the Php1.4bn operating revenues in 1Q12; strong WESM prices hitting a high of Php16/kwh in May; strong electricity consumption; and high dam water levels.

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(FGENcontinued from page 2) Half of FG Hydro's 130MW capacity is contracted with Nueva Ecija electric cooperatives while the rest is sold to the merchant and ancillary markets. FGEN owns 40% of the plant directly and another 29% indirectly by way of EDC's 60% stake in FG Hydro. FGEN owns 60% of EDC.

Execution on Bacman's rehabilitation, which EDC said 4) Improved effective cost of debt to 2.04% in 1Q12 will start commercial operations early next year. The from 2.30% or a 26 bps decline as the newly issued weather for FG Hydro whose dam water level is critical preferreds last July 2011 carrying a lower interest rate to power sales delivery. Buy. were used to retire the high cost 11.5% note of Unified We estimate FGEN's 2013 earnings to reach $149mn Holdings (UL). UL owns FGEN's subsidiary FGP Corp. or Php6.4bn based on the contribution of its significant

that runs the 500MW San Lorenzo natural gas plant. Applying the cost of debt improvement on FGEN's outstanding debt of $936mn, we estimate a minimum yearly interest savings of $2.4mn of Php105mn. Also FGEN intends to pay down more of the natural gas plants' debt after extinguishing total debts worth $213mn last year. FGEN's balance sheet leverage remained steady even with the abovementioned bond paydown as new long-term debt of $60mn was booked as of 1Q2012. Interest bearing debt-to-equity ratio stood at 0.64:1, same as in 1Q11.

subsidiaries: the wholly owned nat gas plants, 49%owned EDC and 69%-owned FG Hydro (direct and indirect ownership of 69%). On market cap of Php59bn, FGEN's PE based on 2013 earnings is 9.4x, a deep discount to market PE of 15x. Key risks are:

Oriental Peninsula Resources Group, Inc.

Ships 2m tons of Low Grade Nickel Ore in 1H2012; Eyes 4m tons for whole of 2012
Last year, ORE targeted 750k tons of shipments but ended up with an actual 1m tons of high grade and middle grade ore shipments as it put into commercial operations two mines simultaneously. ORE continues to explore 400 hectares more of its 2,170 hectare MPSA area, 13% of which made up the fully explored area, with 1.5% grade. It has plans to put up a sintering plant to remove the moisture content of its nickel ore. ORE remains in our unpolished jewels list. Hold. Highlights of Our Interview with ORE Chair, Ms. Caroline Tanchay ORE has shipped a total of 2m tons of ore in the first half of this year to China and Australia. The shipments are low grade nickel ore with 48% iron content. Grade is below 1%/ton. Selling prices hover around $11-$12/ ton. The low grade shipments and low selling prices ($12/ton of ore vs. Marcventures Holdings' contracted $27/ton) amid a slumping LME spot price for pure nickel at $16.5k-17k/ ton are behind the disappointing earnings in 1Q12 of just Php167mn. Low grade nickel ore has found a commercial value due to the high demand for iron ore, which in 1Q12 hit a high of $130/ ton. According to Nickel Asia management, with whom we earlier spoke, for as long as iron ore is above $100/ton, low grade nickel will retain its commercial value.

Stock Data Price (Php) Market Cap (Php Bn) Outstanding shares (Bn) Book Value/Share (Php) Price to Book (X) Recommendation
Source: Bloomberg

5.45 7.91 1.45 1.59 3.43 HOLD

Electric Cooperative (ILECO 1) Build a 10MW hydro power plant in Cagayan de Oro costing $30mn, to operate in 4Q2013. Likely off-takers are Bukidnon Electric Cooperative or Cagayan Electric Power and Light Co., Inc.

Clarifications OREs Php470mn paid to related parties were Earnings ORE mines pre-operating costs incurred from 2Q2012 earnings likely to be higher than 2007 to 2010. These advances are likely to be Php167mn, the level of 1Q12. paid in stock and not in cash and the cash outORE has slumped to Php5.00/share on what the mar- Dividends likely in 2013 which will clearly put it flow wont repeat. ket perceives to be inconsistencies between shipment in the radar screen of more investors. Nickel ore average selling prices dipped from volume, selling prices and earnings. Slowly, ORE $32/ton in 2Q2011 to P13 per ton in 1Q2012 on share prices are recovering, rising to Php5.42/share Plans low-grade shipments. yesterday, in line with sector sentiment improving over Building a $10mn nickel ore beneficiation plant the "rumored" minimal changes in Malacanang's draft to be operational by 2013. mining policy to come out officially very soon. At the Acquiring a Palawan-based nickel mine bigger annualized 1Q2012 earnings which is a rough estithan its 2,100 ha. MPSA. mate of the full year operations of its two mines in Exploring a Mindanao gold mine, 4000 hectares. Palawan and assuming shipments of low-grade ore for Shipping a minimum of 3.5mn tons of ore in the entire year, which ORE management confirmed to FY2012 and 4mn tons in FY2013. be the operating cycle and strategy for 2012, PE is Expansion of port facilities costing P250mn to These are limonite (the top soil) with > 30% iron 12x. ORE's PE is below the market PE, but half-way double capacity from 5 to 10 vessels/mo. content selling at $25 to $28 per ton, the level at its peers' PE range: Marcventure's 5x and Nickel Expand monthly shipment from 400k tons in which Marcventures sells. Asia's 14x.Unless the LME nickel spot improves sub2012 to 700k tons in 2013. stantially, back above $20k, ORE is not shipping out Conclude a power supply agreement for its its high grade nickel ore. 18MW $60mn Aklan hydro power plant with Iloilo

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(Dizon Tailings Dam Project...continued from page Cash cost per oz is estimated at $400, lower as the 1) gold deposits are already on the surface requiring no mining cost, which is about $850/oz. for a typical mining The consortium of foreign investors are after a copper operation. off-take (for Hyudai) and gold (for Capital Gold), whose sales the latter is sharing with Dizon. Dizon, being the We obtained 20% of the tailings dam project NPV tailings dam claim owner, is also entitled to 80% of the worth Php4.5bn which is the value of Dizon's project 2.5% royalties computed on the gross profit margin. stake and add the DCF of Dizon's earnings from project royalties, being the claim owner, worth Php510mn. We estimate the net present value of the tailings pro- Thus our estimate of Dizon's equity value (excluding ject to be Php23bn based on a six year mine life. Out- other planned acquisitions) is Php5bn or Php64.35/ put (gold ore extraction) is planned to be ramped up share. from initially 20k daily tonnage in year one or 2014 to 100k tons as early as the second year or 2015. That Key risk is execution. translates to a recovery of 85% of the 1m oz of gold reserves or 170k oz of shipment per year at $1,500/oz. Recommending a trading buy on Dizon.

Stock Data Price (Php) Market Cap (Php Bn) Outstanding shares (Mn) Book Value/Share (Php) Price to Book (X) Recommendation
Source: Bloomberg

33.00 2.57 78.00 0.36 91.67 TRADING BUY

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Philex Mining Corp.

Philex wont Repeat 2011s Php5.6Bn Record Net Income, Puts Up Php4Bn for Padcal, Bulawan, Kalayaan and Silangan Exploration Capex
PX won't be able to repeat the record high Php5.7bn earnings last year. This is on account of lower metal output and falling gold grade from its lone operating mine, Padcal copper gold deposits in the province of Surigao del Sur. This we confirmed with Philex Mining Chair M. V. Pangilinan in an interview. Metal output and sales are estimated at 119k oz. of gold and 30m lbs of copper, below last year's actual 140k oz. of gold and 38m lbs. of copper. We estimate earnings of Php5.1bn on gold selling price of $1,600/oz. vs. Bloomberg consensus of Php5.3bn, in our previous report on PX. Total cost and expenses per oz of gold net of copper revenue credit is $114/ in 2011, lower than 2010's $404/oz due to the higher selling prices of copper against which gold operating costs are charged, as copper is a by-product. Operating cost per ton of ore milled was Php560 in 2011, higher than in 2010's Php534/ton. At the market cap of Php117bn, PX's PE at our estimated 2012 earnings is 23x. PX is also eyeing more shares of LC, 5% of which it currently owns. The purchase would either be from the market or from a block seller. The strategic value of LC to PX is its co-ownership of the Kalayaan gold and copper mine through a 20% ownership in MA, which in turn, owns 100% of the old Placer Mine and 40% of Kalayaan. Furthermore, the Kalayaan mine is part and parcel of the contiguous ore body of the old Bayugo and Boyongan mines, now called the Silangan mine project and is being developed by Silangan Mindanao Mining Corp., a wholly-owned subsidiary of PX. Kalayaan's reserves, according to a recent appraisal revealed to us by LC President Bryan Yap in a company visit, is 27.7m tons with grade of 0.49g/ton gold and 0.20%/ton copper. The Silangan ore body is 400m tons in resource (measured and indicated) with grade of 0.45%/ton for copper and 0.70g/ton gold. The resource estimate and the grade of Silangan is superior than Padcal's 140m ton resource and reserves of 80m tons with grade of 0.24% cu/ton and 0.49g/ton gold. Silangan's theoretical value at the gold selling price of $1,600/oz and copper's $3.50/lb. and contained metal of 4.9bn lbs of copper and 9m oz of gold amounts to $31.7bn, based on a certified report by the Philippine Mineral Reporting Code. This information was announced in the stockholders' meet by the company CFO R. Migrino. This valuation is way above Padcal's theoretical value of $6.2bn. Mine life of Padcal could extend beyond 2020 after the results of ongoing drilling in the Sto. Tomas and Bumolo prospects are concluded. PX is spending Php1.5bn for Padcal's exploration and another Php2.5bn for all other explorations such as that of Silangan, Bulawan -- a gold mine in Negros -- and Kalayaan. Should exploration results show comparable reserve estimates for Silangan and Kalayaan, the mines will be merged and operated jointly, according to Mr. Pangilinan. Earlier, Silangan was seen to be commissioned ahead of Kalayaan, specifically in 2015 with initial tonnage of 5m a year, to rise to 10m in the second year.
Stock Data Price (Php) Market Cap (Php Bn) Outstanding shares (Bn) Book Value/Share (Php) Price to Book (X) Recommendation
Source: Bloomberg

23.85 117.63 4.93 5.00 4.77 SWITCH TO PXP

Given the earnings drop this year for PX's bread and butter gold mining operations, we are recommending a switch to PXP. PXP has been generating market excitement in terms of the prospective resource estimates, contingent reserves of the natural gas find on par with Malampaya as well as its varied fuel resource portfolio of coal (with an off-take agreement with Iligan Cement), petroleum expansion through Galoc phase 2 and Pitkin's oil exploration in Peru and Vietnam and most recently an announced expansion into renewable energy, i.e. geothermal.

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Semirara Mining Corp.

Calacas Rehabilitated Plant 2 Will be on Commercial Operation in August 2012
Sem Calaca will start commercial operations of its 300MW plant 1 by August 2012, the second unit to be fully rehabilitated. This is past the original schedule of June 15, 2012, which explains some of the share price softness. The plant, the older one of the two 300MW units and commissioned in 1984, will be under a 1-month reliability testing before starting to sell to Meralco by August 2012. Plants 1 and 2 will have a combined contracted capacity with Meralco of 440MW at a guaranteed rate of return of 14%. Fuel is a pass-through and Meralco is in effect just paying SCC a return on its fixed investments and disallowing any margin on fuel and other variable cost. Meralco is also allowing Calaca to have no replacement power for any downtime within a 60-day period, a provision lacking in the NPC contract (with Meralco) under which Calaca belonged together with Aboitiz Power, Masinloc, Sual of San Miguel Corp. Calaca expects Php2.25bn earnings at the minimum from running both plants simultaneously for the first time since the rehabilitation program began with plant 2 in October of 2010. That rehabilitation lasted until April 2011, also past the deadline of Feb. 2011. Plant 1's rehabilitation started last Sept. 2011 and will end June 30, 2012. Calaca will have zero sales to the WESM as it is fully contracted with Meralco at the time when the WESM has touched a high of Php16.00/kwh last month and the Luzon grid achieved a historic high peak demand of 7,900MW. Underscoring the strong electricity sales in the Luzon grid was Meralco's year-to-date May energy sales of 10%, slightly higher than the first quarter's 9.9% growth this year. Meanwhile, Semirara's coal mining operations will have more domestic shipments than international amid

Stock Data Price (Php) Market Cap (Php Bn) Outstanding shares (Mn) Book Value/Share (Php) Price to Book (X) Recommendation 218.20 77.73 356.30 46.42 4.70 BUY

PSEi Near-term Uncertainty

In the week ending June 29, 2012, the Philippine market closed on a positive note on the back of quarter-end windowdressing. The PSE index was up 126 points (+2.47%) week-on-week to close at 5,246.41. Foreigners were NET BUYERS by P31.14B, mainly driven by the SMC block sale. In developed markets, US equities soared on the back of optimism over the EU Summit. For the week, the Dow rose 1.89%, the S&P gained 2.03%, and the Nasdaq added 1.47%. Today, we see the local bourse to react positively to the recent developments in Europe (i.e. agreement of the EU leaders to help the regions struggling banks). While there may be signs of progress, it only dissipates near-term uncertainty. We remain to be cautious as the devil may be in the details. Moving forward this week, Europe remains to be the biggest concern as investors will focus on the ECB policy meeting this Thursday. Consensus is that the ECB will slash its main refinancing rate by 25bps to 0.75% and cut its deposit rate by 25bps to 0%. US economic data due this week include ISM manufacturing index, construction spending, factory orders, June car sales, ISM service sector, non-farm payrolls, unemployment rate, and unemployment benefits. In the Philippines, June Inflation reading is due out this Thursday.

the weakness of coal prices abroad. The sales volume mix is expected to turn 80% in favor of local versus exports amid the China slowdown, which previously accounted for a third of the 30% share of exports to Semirara's total coal sales of 6.5m-7.0m tons yearly. Calaca's two plants running will increase coal demand from Semirara to 2m tons as each 300MW unit will require about 1 million tons each year of coal. Semirara's domestic coal selling price is holding at Php3,000/ton, lower than the previous high of Php3,300/ton early in the year and in late in 2011. However, coal exports have softened to slightly below Php3,000/ton. Domestic demand for coal is expected to pick up with about 900MW coal-fired plants rising in the Mindanao grid in the medium-term, the one by Abotiz Power "Davao Coal" and three units of 200MW each by Conal in Zamboanga province. All these plants will use circulating fluidized-bed combustion technology that require low grade coal. At an assumed shipment of 7m this year, we expect the mining bottom line to be Php5.3bn. Add the Php2.25bn from Calaca, our consolidated bottom line projection is Php7.6bn for a PE of 10x. Buy.

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