Greater accountability to societal and legislative demands could be the incentives needed to drive the mining industry to greater levels of transparency. The latest EY report into the mining sector shows that environmental, social and governance (ESG) issues continue to provide those in the boardroom with policy direction headaches.
Environmental, social and governance (ESG) is the biggest risk to their business, more than 150 mining executives told Ernst & Young (EY). This is the third consecutive year ESG has topped the risk register of EY’s Top 10 Business Risks and Opportunities for Mining and Metals in 2024 report.
Also of concern is the increased capital risks associated with the demand for critical minerals which continue to be driven by energy transition ambitions. Cobalt, copper, lithium, nickel and rare earth elements are all essential in the production of solar panels, wind turbines, electric vehicles and batteries.
The report notes that as the energy transition accelerates, future shortfalls in several key commodities are becoming apparent. Investment in mining and metals is increasing to meet the need for more exploration and development, but the sector will need access to significantly more capital if we have any chance of meeting these shortfalls, notes the report.
The need for mined commodities and the issue of investment is attracting more attention, as capital markets recognise the key role critical minerals will play in the energy transition. However, capital raised through debt and equity in the first seven months of 2023 has not grown, remaining steady at $196 billion compared with $192 billion for the same period of 2022. And this trend is expected to continue into 2024.
“Iron and steel, gold and coal companies have attracted the most capital since 2022, but investment is increasing in nickel and lithium. In 2023, large nickel miners have raised $2.76 billion through IPOs and follow-on equity issues.” In addition to this, the report finds that junior lithium miners raised $560 million through follow-on equity issues, mostly in Australia and Canada.
In Africa, Zimbabwe, which has the largest lithium reserve on the continent and the sixth largest in the world, has seen exports of the critical metal soar exponentially year-on-year since 2018. In the first nine months of 2023, exports, mainly off the back of Chinese projects, totalled $209 million, up from 2022’s $70 million.
EY says its ranking of risks and opportunities reveal that mining and metals companies face huge disruption and rapidly changing expectations that, together, may impact their ability to build sustainable value.
Many of the ESG risks raised in the survey are not new, but what is changing is a growing degree of both complexity and investor attention. “We believe this will spur more innovation, more ambitious targets and greater transparency in reporting,” assert the report authors. The report states that companies are grappling with issues ranging from water stewardship to ethical supply chains and mine closure — all while trying to navigate what respondents describe as an ’alphabet soup’ of regulations and with ongoing data integrity challenges.
The race is on to secure the huge investment in mining and metals required to meet growing demand for the minerals and metals critical to the energy transition, including copper, lithium and nickel.
Markets are responding, but, as of 31 July 2023, capital raised through debt and equity in 2023 remained steady ($178 billion compared with $183 billion in the same period of 2022). It appears, therefore, that capital is moving to new commodity markets rather than solving what is already a significant risk.
Iron and steel, gold and coal companies continue to attract the most capital, but investment is increasing in nickel and lithium.
Expectations of companies are growing, with people demanding they do more for the communities in which they operate. Sixty-four percent of survey respondents said community impact was the top ESG issue facing scrutiny from investors in 2024.
Executives say their understanding of sustainability-related matters has increased significantly over the years — but now they realise they cannot tackle all matters at once. The big question is what to prioritise to create real and lasting impact.
Actively engaging with communities to first understand, and then deliver, the value they need can help prioritise actions. Anecdotally, the miners with open, close communication with community leaders have more highly engaged employees and fewer strikes. Perhaps because communities see the value of miners’ contribution to local education, infrastructure and healthcare.
Climate change is a complex issue for miners. They must both provide minerals for the energy transition, while also reducing greenhouse gas (GHG) emissions.
Net-zero initiatives are progressing across the sector, though some survey respondents admitted challenges in meeting interim targets. Many miners are forming ecosystems and partnerships to develop the technological innovation that can fast-track decarbonisation.
Government support and the falling cost of renewables are driving growth in renewable energy contracts and investment in solar or wind generation. Many miners are sourcing green electricity to decarbonise Scope 2 GHG emissions but find it hard to get green energy at scale.
Leaders anticipate a surge of investment in data and technology, driven by demand across the business for digital solutions to reduce costs and improve productivity, safety and ESG outcomes.
Survey respondents are excited by the potential of generative AI and are exploring other new technologies, particularly those that can optimise mineral recovery. Many are seeking greater collaboration and partnerships to help speed up transformation and drive innovation in the sector.
Inflation is easing, but costs remain high, particularly for energy and labour. Until recently, higher commodity prices have supported margins, but these now sit closer to 2019 figures, and we are seeing some evidence of stress.
Higher interest rates, the cost of decarbonisation programmes and more carbon pricing schemes also have an impact. Costs need to be managed with an eye on long-term value, as well as short-term gains.
The race for minerals and metals required for the energy transition has driven a new range of government incentives and restrictions.
As countries move to incentivise local investment, including through the US Inflation Reduction Act and the EU Critical Minerals Act, miners will need to be agile enough to take advantage of new opportunities while managing the risk of government intervention.
Resource nationalisation and more taxes, royalties and restrictions mean miners should expect tougher operating conditions in some countries.
Cyber is back on the ranking for the first time since 2020. Growing information technology (IT) and operational technology (OT) convergence, digital transformation and remote working, as well as the war in Ukraine, have seen cyber incidents skyrocket.
Today, all mining organisations are digital by default, operating in a vast, connected digital landscape where every asset represents another node in the network and increases the attack surface.
Another EY survey found 74% of mining and metals executives said integrating technology is a key challenge, compared with 37% for all sectors.
More mining leaders are worried about cyber-attacks that target intellectual property, a concern we expect to increase as investment in ESG initiatives ramp up.
Miners face the growing challenge of needing to invest in and adapt their business models, while maintaining discipline and returns.
EY analysis shows that most focus on traditional or core activities such as exploration, mining and processing to ensure returns remain strong and can fund investments in sustainability, technology and new business models.
Talent recruitment and retention continue to be a major challenge for mining and metals companies. To mitigate this, miners deploy a range of solutions that include upskilling internal candidates as well as considering digital solutions.
The report suggests that to avoid accusations of greenwashing, miners should ensure they source high-quality carbon credits and provide transparency around activities to actively reduce direct emissions. “Land-based carbon credits via nature are being considered as a priority, as they can also provide a positive biodiversity benefit,” states the report.
S&P Global Commodity Insights reported in October 2023 that carbon offsets will remain a critical part of miners’ decarbonisation toolkit, with Fortescue Metals Group confirming it will still buy mandatory carbon offsets while avoiding voluntary ones to achieve ’real zero’ emissions by 2030.
On 22 September 2023, Fortescue announced it would stop buying voluntary carbon offsets, with all funds allocated to carbon offsets to be diverted to its decarbonisation plan.
In terms of partnering for innovation the report points out that many miners are focused on R&D to solve their decarbonisation challenges. According to the report: “The bad news is that sometimes the right technology doesn’t yet exist. The good news is that this is driving miners to form ecosystems and partnerships, including with startups, to develop innovation.”
For example, Anglo American’s Pathways to Steel Decarbonization challenges startups and small and medium-sized enterprises (SMEs) to create technologies that reduce carbon emissions in steel manufacturing. To build a flexible transition strategy, the EY report lists three actions miners must consider, as follows:
As of 2022, 46 national or regional and 36 subnational jurisdictions have set a price on carbon, the report adds that: “Perhaps most notable of these is the EU’s Carbon Border Adjustment Mechanism (CBAM), which targets carbon-intensive sectors, including mining, to address carbon leakage and reduce emissions.”
CBAM-like taxes will hit miners in low to middle-income countries harder. [Refer to the article on page 18. – Ed] As an example of a potential knock-on effect, the EY report states that the current EU carbon futures prices of $87 per ton would add around $420 million to the price of Mozambique’s exports to the EU. “If more countries adopt similar carbon taxes on imports, the impact will be felt in countries where energy is still largely provided by fossil fuels,” says the report.
The report cautions that the mining industry face “huge disruption and rapidly changing expectations that, together, may impact their ability to build sustainable value.” Mitigating the risks and making the most of opportunities listed in the report, will require companies to make significant policy and strategy decisions. Miners that do so successfully will gain a competitive advantage, the report concludes.
References
This article is compiled by Yunus Kemp, Content Specialist at ESI Africa, based on the EY Top 10 Business Risks and Opportunities for Mining and Metals in 2024 report published in October 2023.
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