Establishing Rules and Regulations for a Copper Stabilization Fund

Case Overview and Summary

Summary of Executive Order No. 759 - Establishing Rules and Regulations for a Copper Stabilization Fund

I. Purpose of the Copper Stabilization Fund
- To finance operating cash flow deficits of primary copper producers during periods of depressed copper prices. (Rule I, Sec. 1)
- The Fund shall not be used for expansions, capital investments, or debt replacement. (Rule I, Sec. 1)

II. Establishment and Funding
- The Fund is established with an initial contribution of TWO HUNDRED MILLION PESOS (P200 million) from the National Government. (Rule I, Sec. 2)
- Primary copper producers shall contribute to the Fund as per Rule V. (Rule I, Sec. 2)
- All transactions of the Fund shall be denominated in United States Dollars (US $). (Rule I, Sec. 3)

III. Borrowing from the Fund
- Primary copper producers can borrow when they incur cash flow deficits due to a shortfall between the cash cost and proceeds from a copper export shipment. (Rule II, Sec. 1)
- "Cash Cost" is defined as total operating cost, plus freight, insurance, smelting and refining charges, plus interest on short-term borrowings for working capital, less by-product credits. Depletion and depreciation are excluded. (Rule II, Sec. 1)
- The amount that can be borrowed is the difference between the cash cost and proceeds from each copper export shipment, based on the estimated copper content. (Rule II, Sec. 2)
- Borrowings from the Fund shall be charged an interest rate of twelve percent (12%) per annum. (Rule II, Sec. 3)

IV. Repayments
- Repayments shall be made automatically with each shipment whenever the copper price rises above the cash cost, until all borrowings are fully repaid. (Rule III, Sec. 1)
- The repayment amount is the excess of the proceeds from a shipment over the applicable cash cost, based on the estimated copper content. (Rule III, Sec. 1)
- Repayments shall first be applied to accrued interest charges before reducing the principal amount borrowed. (Rule III, Sec. 2)
- Borrowers shall repay obligations to the Fund before servicing other creditors, except interest on short-term borrowings for working capital. (Rule III, Sec. 3a)
- Borrowers shall refrain from declaring dividends or distributing profits while borrowings are outstanding. (Rule III, Sec. 3b)

V. Contractual Commitment
- Before any drawdown, the borrower shall execute a written contract, confirmed by its Board of Directors, agreeing to comply with the Rules and Regulations and terms set by the Fund Administrator. (Rule IV, Sec. 1)

VI. Contributions to the Fund
- As a condition for borrowing, copper producers shall commit to contribute to the Fund after repaying their borrowings. (Rule V, Sec. 1)
- The contribution amount is ten percent (10%) of the excess of the proceeds from a shipment over the applicable cash cost, based on the estimated copper content. (Rule V, Sec. 1)
- Contributions shall be made as long as there are no outstanding borrowings and copper prices are higher than cash costs. (Rule V, Sec. 2)
- The maximum contribution amount shall not exceed the highest outstanding balance of previous borrowings. (Rule V, Sec. 2)
- Contributions to the Fund shall earn interest at twelve percent (12%) per annum, and interest earnings may be withdrawn quarterly. (Rule V, Sec. 3)
- The principal amounts contributed shall be utilized to finance future Fund requirements and shall not be withdrawable, except by way of borrowings in case of cash flow deficits due to depressed copper prices. (Rule V, Sec. 4)

VII. Administration of the Fund
- The Central Bank of the Philippines shall act as Administrator of the Fund and is authorized to issue implementing guidelines. (Rule VI, Sec. 1)
- The Administrator may assign any government bank as a conduit institution for releasing borrowings, receiving repayments, and contributions. (Rule VI, Sec. 2)
- Borrowers shall accept a nominee of the Administrator as Fund controller to ensure compliance with rules, regulations, and guidelines, and periodically review cash production costs and financial statements. (Rule VI, Sec. 3)