Global Workshop on Mining-related Water and Environmental Risks and their Financial Implications

On November 30, 2015, the Columbia Water Center hosted a global workshop on mining-related water and environmental risks and their financial implications. Over 50 participants who work in varying sectors of the mining industry as well as academics and financial professionals attended the workshop. The purpose of the meeting was to gain input for the Norges Bank sponsored project for the quantitative modeling platform currently being developed by Columbia Water Center researchers. Isabelle Juillard Thompsen, Senior Analyst, Ownership Strategies, at Norges Bank Investment Management summarized the significance and importance of having these discussions, not only for Norges Bank but also for all stakeholders in the mining industry-

“Why is water relevant to us? In recent discussion notes, the IMF highlights water stress is a growing global concern that could challenge countries’ economic prospects. Today and tomorrow, climate change provides additional water challenges. Insight from a broad range of disciplines is needed to manage and mitigate such risks. Solutions will have to involve politics, technology and finance. We are particularly concerned about how water risks can effect profitability at company level and return at fund level.”

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The discussion centered around three topics: (1) pinpointing the main water risks associated with mining, (2) the causality between environmental factors and financial performance of companies, and (3) perspectives on legal and regulatory risks.

Water scarcity and the uncertainty of drought is a risk and is intertwined with issues of water rights and social conflict. Pollution is another large risk factor that has little regulation and is led by fear and misperceptions on what would happen if information were made known publicly. There is a lack of data about past events, a lack of willingness to share information between companies, and hurdles to obtaining data from the government. Many companies do not have records about history of activity, financial records, or previous failures. Mines that have been audited have a much lower rate of disaster. A need for disclosure of site level asset information and an increase in third party audits would help to mitigate some risks.

It is important to point out the difference between large and small mining companies and their capacity to mitigate different risks. Large companies typically have risk management processes in place and are able to construct insurances whereas small players, especially companies that have only one mine, have significant liabilities that can pose a risk to the entire industry. There is also a difference in the ability of large mining companies and small companies to absorb risks associated with catastrophic incidences. The juniors are not able to leverage debt in the same way that some of the majors can, which affects their ability to manage risk. Large companies have the potential to securitize risks but the actual cost to securitize against the physical risk is smaller and more easily absorbed than the reputational risks and thus serves as a disincentive. Whereas for a smaller firm, if they are able to get involved in such a process it could increase security and operational ability to move forward if a catastrophic event did occur.

There is a distinction between site level assets versus the social issues when acute disasters occur. Stock prices plunge over hours or days, but the social issues, perhaps low probability with very high impact, will have a long-term effect. Because of the time factor associated with them they don’t hit the market in the same way and people slowly absorb costs over time. Acute disasters hit the news immediately but social issues can be ongoing in the background for long periods of time.

In some cases it could be possible to plan ahead and avoid future social issues, especially involving water scarcity. Accruing of liability for mine closure could be extended to some of the other probable issues such as, if you know that in 30 years you are going to have water scarcity in a given area, you could accrue liability in the same kind of way to have social bonds that are established to be able to afford a desalination plant in 30 years. Dr. Hubert Fleming, Head of Water Management at AngloAmerican, gave a presentation on managing water risks in mining operations and stressed the importance of water, taking into account that most mines are located in water stressed regions but those located in areas where water is abundant can also pose risks due to flooding. He had this to say:

“The number one impact to us in looking at growth expansion in our various expansion operations is water. As we look at projects we’re going to push the button on for the next 30 to 50 years, it’s water. So growth potential is dramatically limited by water and it’s our number one issue.”

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Weak regulatory environments are at the heart of the conflict seen in mining, resulting in blowback on the industry and difficulties in obtaining and maintaining social licenses to operate. There needs to be a shared responsibility between the companies and the regulators. There is a need for more transparency, at the very least when a mine company submits a regulatory compliance report it should be made publicly available along with the standards it’s being assessed against. The way companies are managing their risks is likely more important than the legal compliance risks in that someday the industry needs to get to a point where regulatory compliance is a given. Rather than focusing on regulatory issues at a company or mine site level they should be looked at from a jurisdiction level. It would be beneficial to develop an index or a metric that would combine various inputs into a factor for a jurisdiction that could include things like the number of inspectors versus the number of mines, the number of inspections done, the regulatory budget, the level of qualifications of inspectors and the requirements of an environmental impact statement.

Professor Upmanu Lall, Director of the Columbia Water Center, at Columbia University closed the workshop on a hopeful note that communication lines will open up and information will become more widely shared among the industry:

“We hope this leads to interactions with many of you and as we explore specific questions see how we generate information rather than just data for this particular topic. In particular, how does data in the future come together for this particular set of questions whether or not it goes through us because that’s one of the issues that the disclosures and standardizations is bringing up.”

 

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