By William Mellor and Luzi Ann Javier

Dec. 24 (Bloomberg) -- Foreign investors can face daunting obstacles when they do business in the Philippines.

There are the communist rebels and al-Qaeda-linked Muslim groups who prowl the hills of the resource-rich archipelago, attacking mining sites and extorting money in return for protection. There are the pirates who waylaid six cargo vessels in the first nine months of 2008.

And then there are the legal hurdles, as Melbourne-based BHP Billiton Ltd. is learning. After losing its bid to buy rival Rio Tinto Group, the world’s largest mining company has been banished from a nickel deposit worth as much as $20 billion after its local partner obtained a court injunction.

Pedro “Pete” Tan, a 71-year-old Filipino entrepreneur who made his fortune selling socks with brand names copied from Western companies, is chairman of BHP’s joint-venture partner at Pujada Bay on the southern island of Mindanao. He obtained a court injunction in May 2008 barring BHP from the site.

Tan--who works from an office in a two-story building overshadowed by the towers of Manila’s Makati business district-- says BHP has reneged on a promise to his company, Asiaticus Management Corp., or Amcor, to start mining nickel by 2009.

Missed the Boom

Had BHP been willing, he says, production could have begun early enough to catch the peak of the commodities boom. Nickel prices soared to $54,200 a ton in May 2007 before plunging about 80 percent to $9,750 a ton on Dec. 23.

BHP doesn’t want to start mining the 200 million tons of nickel ore until 2015, according to an undated brochure the company distributed in the Philippines. BHP spokesmen declined to make company officials available for this article. A Philippine court rejected BHP’s bid to overturn the restraining order in June. BHP is attempting to resolve the dispute through international arbitration, which Amcor is boycotting.

Now, Filipinos--from top government officials in Manila to jungle tribesmen living in thatched nipa palm huts near the mine site--are divided over whether the commodities giant should be allowed back on site.

BHP’s woes highlight the perils for miners as they seek new sources of minerals in hostile environments, now that all of the easy places have already been tapped.

“The ideal situation is to find deposits where there is low political risk,” says Tim Schroeder, who helps manage the equivalent of $1 billion, including BHP shares, at fund manager Pengana Capital Ltd. in Melbourne. “But those places have been fairly thoroughly explored, so you go somewhere that has higher geological potential but may be extremely volatile. You have to weigh up the risk. It can be a nightmare.”

Rio Tinto Bid

Since BHP’s chief executive officer, Marius Kloppers, abandoned his hostile bid for rival miner Rio Tinto in November, the Philippine stalemate has taken on even more importance, Schroeder says. “Now they may not have as big a pool of future projects to look at,” he says. Rio Tinto has a nickel project of similar size in Indonesia.

The Philippines is a veritable resource treasure house. The impoverished archipelago of 7,100 islands, where one-third of the population earns less than $1 a day, may have $840 billion worth of copper, gold, nickel and other minerals, according to an October U.S. State Department country report. Those deposits put the Philippines on a par with Brazil, Ghana, Indonesia, Papua New Guinea and Russia, according to the latest annual survey of global mining companies by the Fraser Institute, a Canadian research group.

Biggest Market

The Philippines is also just across the South China Sea from China, which is the world’s biggest market for minerals--even amid the global plunge in commodities prices. China plans to spend $584 billion to stimulate its economy, with much of the money earmarked for metal-dependent projects such as housing, roads, railways and airports.

Yet the Philippines ranks 60th out of 68 jurisdictions in the Fraser Institute survey when it comes to being a hospitable environment for mining companies. Among investors’ complaints about the Philippines are corruption, attempted extortion by rebel groups, confusing regulations and an unpredictable legal system.

Twice this year, the communist New People’s Army has attacked and destroyed equipment at the Tampakan copper and gold project, which is 62.5 percent owned by Zug, Switzerland-based Xstrata Plc. A Philippine mining company started digging nickel without permission on land claimed by Perth, Australia-based Rusina Mining NL.

Fraport AG, owner of the Frankfurt airport, is still pursuing a $425 million compensation claim against the government five years after the Supreme Court voided its contract to build a new Manila airport terminal. The project was 98 percent complete.

‘Interminable Exercise’

“The last thing you ever want to do here is end up in court,” says Peter Wallace, a consultant to foreign companies in the Philippines and a director of the Australian-New Zealand Chamber of Commerce (Philippines) Inc. “It’s an interminable exercise with an unclear outcome.”

BHP’s drama is being played out both in the cramped, low- ceilinged courtrooms of Manila and the mountainous tropical jungles of Mindanao, where Amcor has armed guards to prevent BHP employees from returning to the mining site.

BHP wound up with its 40 percent interest in the Pujada Bay nickel deposit as part of a decade-long acquisition binge that has transformed it into the world’s largest mining company.

The original foreign investor in the mine, Australia’s QNI Ltd., was taken over in 1999 by London-based miner Billiton Plc, which Melbourne-based BHP Ltd. merged with two years later.

Local Partners

Although foreigners can now own 100 percent of Philippine mines, rights to most of the mineral-rich areas have already been purchased by local entrepreneurs, according to Horacio Ramos, director of the Philippine Mines and Geosciences Bureau.

That was the case with the 11,800-hectare (29,000-acre) Pujada Bay deposit, which is known as Hallmark. Its 200 million metric tons of ore containing 1.3 percent nickel are spread over areas whose mining rights are owned by seven different local companies.

Among them is Tan’s Blue Ridge Mineral Corp. Born into poverty in the central Philippines, Tan began buying mining rights in the 1990s when low commodity prices made them cheap. When QNI came calling, Blue Ridge and other local investors set up Amcor, which is 20 percent owned by Tan.

In 2000, Amcor agreed to allow QNI to conduct a feasibility study. In 2002, the two companies signed a joint-venture agreement giving Amcor 60 percent of the project and QNI Philippines 40 percent. By that time, QNI Philippines had become a unit of BHP Billiton.

BHP Welcomed

“We were all happy when BHP signed that agreement with Amcor because, finally, the biggest miner in the world had taken notice of the Philippines,” Ramos says. “We were hoping to nurture their relationship.”

This isn’t the first time the 5-foot-6-inch (1.68-meter), silver-haired Tan has waged a court battle against a Western company. In 1990, he won an 11-year legal tussle initiated by Puma AG, Europe’s second-biggest sporting goods maker, which had tried to stop him from selling the socks he makes in Manila under the Puma name.

Tan says he can go the distance again. “People have told me we can’t beat BHP because we are up against a giant,” Tan says over lunch at the Tower Club, a penthouse retreat for Manila’s richest tycoons. “But I tell them I want to get into the Guinness book of records.”

Tan says that BHP made a verbal promise that the mine and a processing plant would be built and in production by 2009. BHP delayed the project’s formal commencement date, which would have activated that timetable, he says. BHP declines to comment.

Tan’s Worries

As the years passed, Tan says Amcor became alarmed that too little progress was being made exploring the deposit and digging the mine. “Mr. Tan would tell them, ‘I’m not getting any younger,’” says Lauriano Barrios, Amcor’s vice president for administration.

BHP was right to take a cautious approach to building the plant, says Peter Chilton, a fund manager whose 1 billion Australian dollars ($684 million) of holdings at Constellation Capital Management Ltd. in Sydney include BHP shares. “When projects cost billions, you don’t rush in,” Chilton says. “Often when you build these things, you do miss the boom and you’ve just got to wait for the next one. It takes years to plan and build.”

In 2007, the Amcor executives say, they saw on the BHP Web site a reference to a BHP plan to start mining Hallmark in 2019. For Tan, it was the last straw. He had Amcor write to BHP in July 2007 rescinding the joint-venture agreement. On Aug. 22, 2007, Amcor went to court seeking damages and an injunction.

Injunction

On May 20, 2008, the regional trial court in the Makati district issued an injunction to stop BHP from exploring, developing, exercising ownership of mining rights or even occupying the Pujada property while its dispute with Amcor was being heard.

BHP, which has said it will cost $1.4 billion to build the mine, hasn’t been able to do any work on the site for well over a year. Peter Ogden, a BHP spokesman in Melbourne, says the company has cut its workforce in the area to 10 from more than 100. “As a result of this dispute and a restraining order, QNIP has been unable to progress project activities at Hallmark for over 12 months,” he says.

The joint venture could have earned more money if it started mining right away, according to Tan. “We could have easily started mining in time to catch the peak of the boom,” he says.

Tan should have realized that BHP had its own corporate timetable, Environment and Natural Resources Secretary Lito Atienza says, adding he’s hoping to mediate a solution to get BHP back on the site soon.

Tribal Consent

Amcor shouldn’t wait for a solution, says the National Commission on Indigenous Peoples, a government body set up under the Office of the President to protect the interest of the Philippines’ numerous tribes. Under Philippine law, miners have to get the permission of local people to mine tribal land.

Felicito Masagnay, a commissioner for indigenous peoples, based in Manila, says the local tribes gave their consent to Amcor, not to the BHP joint venture, which was only set up as a company in 2005, three years after the initial agreement was signed. “BHP does not have the legal right to explore or operate in the area,” Masagnay says.

High on a jungle-swathed peninsula a bone-jarring two-hour drive from the nearest town, the land is the traditional home of the Mandaya and Manobo tribes. They eke out a living hunting wild boar and fishing for Lapu-Lapu, a type of grouper named after a Filipino hero who in 1521 confronted invading Spanish soldiers and killed their leader, Portuguese explorer Ferdinand Magellan.

Squatting in a thatched hut made of palm and bamboo, Mandaya chieftain Rufino Mapingos says he sides with Amcor. “We need the jobs and the money now so we can afford to send our children to school,” says Mapingos, a wizened, mahogany-skinned 75-year-old.

Mining Urged

Last year, he and 700 members of his tribe petitioned the NCIP for BHP to leave the site and Amcor to start mining immediately. “If the mining doesn’t start soon, we’ll all be dead and part of the ore body ourselves,” he says.

BHP has won over some of the Mandaya and Manobo communities because they’ve provided health services, including an anti- malaria campaign, and safe drinking water, says Joel Unad, a tribal leader in Davao city, 100 miles (160 kilometers) from Mati.

Unad, 49, who uses the honorific datu, which means chief, heads a group called the Mindanao Indigenous Peoples Conference for Peace and Development. “They know it was BHP that spent for the community projects implemented by the joint venture,” he says.

Lack of Respect

BHP wasn’t as careful in dealing with Tan, says Wallace, the Manila-based business consultant. For instance, the company failed to send a top-ranking executive to talks last September in Singapore, at which the Philippine government’s Atienza tried to broker a settlement. “This showed a lack of respect,” says Tan, who attended with Amcor President Vicente Jayme.

BHP should have known what it was getting into when it took Tan as a partner, Wallace adds. “In the Philippines, due diligence is not just looking at audited statements,” Wallace says. “It’s going to cocktail parties and finding out what’s really going on. Pedro’s 71, and he wants his money in his lifetime.”

So far, BHP’s experience hasn’t stopped it seeking new deals in the Philippines, at least with foreign partners. It has conditionally agreed to take 60 percent of a deep water offshore oil and gas exploration project from another Australian company, Otto Energy Ltd., according to a Dec. 22 announcement to the Australian Stock Exchange.

Pirates, Terrorists

Even if BHP and Amcor were to settle their legal dispute, the mine still faces daunting challenges before it can be profitable. The nearest port to the mine site is Mati, a steamy, sun-bleached equatorial town of 100,000 where the main industry is the export of copra, the dried white flesh of coconut that’s turned into oil for cooking and making soap and moisturizers.

The area around Mati is a base for the Moro Islamic Liberation Front, the communist New People’s Army and pirates, according to the Philippine military. Mindanao is also home to Abu Sayyaf, a Muslim terrorist group linked by the U.S. to al-Qaeda.

“That’s a very high risk area,” says Army spokesman Major Randolph Cabangbang, who rates the Pujada Bay site a 7 on a scale of 1-10 in terms of danger. “MILF rebels extort money from all companies operating in the area.” Cabangbang says 300 armed MILF rebels are based nearby and pirates operate in the waters surrounding the mine’s proposed port.

No matter who wins the legal case, the ultimate loser could be the Philippines itself. “Mining could be a launching pad for explosive growth,” says Fred McMahon, Toronto-based director of the Fraser Institute’s Centre for Globalization Studies. “But that potential is being frustrated. The Philippines has missed a great opportunity during the boom and, if commodity prices are slow to come back, may face even greater disappointments in the years to come.”

In 2004, the Philippines set itself the target of attracting $10 billion in foreign investment in the mining industry. So far, it has attracted just $1.72 billion--in part because of the woes of investors such as BHP.

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To contact the reporters on this story: William Mellor in Hong Kong at wmellor@bloomberg.net; Luzi Ann Javier in Singapore at ljavier@bloomberg.net.