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Essential Metals & Mining Insights - October 2021

Lenders, investors pressure miners for ESG solutions amid future credit risk

Two of the world's biggest miners said their external lenders, investors and communities are exerting greater pressure on environmental, social and governance issues, which S&P Global Ratings said will have an increasing impact on credit quality longer term.

Rio Tinto Energy Strategy Senior Manager Michael Scotton told a June 19 panel at the Energy and Mines Australia Summit in Perth, Australia, that more conditions and focus were being applied from its external lenders who want to see good ESG practices in projects before they will commit funding.

SNL Image
BHP Head of Low Emissions Technology Kirsten Rose, middle, with Kirkland Lake Gold's
Australian Operations Vice President Ian Holland, left, on a panel at the
Energy and Mines Australia Summit in Perth, Australia, on June 19.
Source: Energy and Mines Australia Summit

"I can't overstate the increasing pressure we're getting from communities and investors to really start walking the talk in terms of environmental action," said fellow panelist BHP Group Head of Low Emissions Technology Kirsten Rose.

Kirkland Lake Gold Ltd. Australian Operations Vice President Ian Holland, also on the panel, said his company was also under pressure from investors on those issues, albeit not as much, but was certain that "it's coming."

Rose said ESG concerns are becoming the norm for the industry, but added that it would also drive more positive behaviors by miners.

The comments came a day after S&P Global Ratings issued a report saying ESG risks are becoming more important for the credit quality of the world's top five miners: Rio Tinto, BHP, Anglo American PLC, Glencore PLC and Vale SA.

While those risks are unlikely to have a material impact on the top five miners' ratings over the next two years, their importance is growing in line with global regulators' and investors' increasing focus on that area, Ratings said.

Therefore miners' relative exposure to those risks, plus managements' mitigation policies, will impact their competitiveness over the medium and long term.

Ratings said the top five miners reduced scope one and two emissions by 7% annually on average between 2014 and 2018, driven by BHP's spinoff of South32 Ltd. and Rio Tinto's disposals of coal and some aluminum assets, along with greater efficiency in general.

SNL Image

Ratings believes that two dam failures involving Vale in just four years — Samarco in 2015 then Feijao in January 2019 leave it "highly exposed" to any further ESG failures or underperformance.

"We also believe that BHP and even miners that have not been involved in any disasters in the past five-to-10 years will face higher pressure, scrutiny, and potential sanctions related to environmental and social risks from regulators and investors," Ratings said.

Beyond those low-probability, high-severity catastrophes, Ratings said miners are increasingly exposed to "intrinsic and longer-term" ESG risks such as the pressure to limit greenhouse gas emissions, injuries to employees and the impact on communities local to the mining sites.

"In fact, we see environmental and social risks for metals and mining companies as among the highest across all sectors," Ratings said.

Proactive solutions

Rose said BHP is tendering for a significant amount of energy in Chile and Australia, which could be a "game changer" for the industry's decarbonization efforts and for the renewables industry, given the miner expects a big chunk of the tender will be renewable energy.

Given BHP is predominantly grid-connected, its Chilean tender for 6 gigawatt hours represents about 7% of Chilean consumption. BHP is also looking at other opportunities to get renewables into its operations, particularly in Western Australia where it self-generates, the only part of the world where it does so.

Scotton said Rio Tinto got a reputation boost by closing its Kennecott Utah Copper coal plant in May, but leading up to that, the miner had still been blamed for local air quality issues as it represented the biggest industry in the area, despite providing scientific evidence that Rio Tinto was not responsible for them.

The panelists agreed that collaboration is critical in finding ESG solutions, and Rose said OZ Minerals Ltd.'s June 18 launch of a collaboration with six partners to investigate renewable energy- and demand management-related activities at its Carrapateena project as a major positive step.

Holland also cited Kirkland's historic move to use the world's first 40-tonne underground battery electric truck for its Macassa gold mine in Ontario in 2011 as another positive ESG collaboration.

At the time, the original equipment manufacturers were unable to produce a unit that suited Kirkland's needs quickly enough, leading the miner to partner with California-based Artisan Vehicle Systems Inc. Today, 80% of its underground production is now transported through battery electric vehicles.

Practical limitations

However, Rose, Holland and OZ Minerals' general manager transformation and readiness, Katie Hulmes, said a challenge that mining companies face in ESG is to move beyond "site-specific" solutions.

Hulmes said OZ's West Musgrave joint venture with Cassini Resources Ltd. and Carrapateena expansion were unique, and "at the moment it is a challenge for the team to find a way to justify fully electric fleet and fully renewable assets."

Holland said "ultra-reliable power is critical" at its Fosterville gold mine in Victoria, Australia, where relatively short interruptions to power supply mean up to two weeks of activity loss at its bacterial oxidation plant.