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How mining and metals companies are responding to challenges and embracing opportunities in the energy transition and effort to decarbonize.
In brief
- As mining and metals companies address environmental and social challenges and opportunities in their strategies, key questions can help steer discussions.
- Key questions can also shape miners’ long-term strategy as they build a proactive plan to decarbonize.
The energy transition and its focus on decarbonizing global heavy industries is a significant opportunity for the mining and metals sector. Demand for minerals is expected to increase for batteries and energy storage, renewable energy sources, electric vehicles and green infrastructure.
This is a significant opportunity for the Americas. For example, 40% of estimated global copper production comes from Chile, Peru and Mexico.¹ In addition, there is growing momentum in North America to increase mining and processing of rare earths, with new projects in development to supplement the 38,000 tons produced in 2020.²
There are, however, significant environmental, social and governance (ESG) risks facing mining and metals companies as they bring on increased supply to meet this rising demand. In the EY report Business Risks and Opportunities facing M&M companies, the top two risks and opportunities for 2022 are environmental and social, and decarbonization respectively. Our survey results show that these are also the top two risks and opportunities in the Americas. In fact, they directly impact and correlate to the remainder of the top 10 opportunities. For example, a good performance in environmental, social and decarbonization will most likely drive better access to capital, as well as a more robust license to operate.
In this overview, we consider how mining and metals companies in the Americas are responding to the challenges and embracing the opportunities that emerge.
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Chapter 1
Environmental and social
ESG is becoming a bigger priority for stakeholders and investors.
Miners are doing more to integrate ESG into corporate strategies, decision-making and stakeholder reporting as these become a bigger priority for investors, shareholders and a broader group of critical stakeholders.
Pressure from a variety of stakeholders over issues such as biodiversity and water management is intensifying, requiring miners to progressively plan for mine closures and better manage the water-energy nexus to manage expectations.
The focus on these issues varies from country to country within the Americas. For example, water management is particularly acute in Chile; the extent of deforestation in Brazil is a concern and in the United States the liabilities for mine closure and reclamation are something that mining companies have been seeking to resolve. Overall, concerns are serious enough to prevent approvals of new mines or the license to operate existing ones. In addition, the environmental and social issues are becoming mainstream discussion topics, with hyper-consumers being more vocal about the sourcing ecosystem of metals and minerals.
Key questions to consider
As mining and metals companies integrate environment and social risks and opportunities into their strategies, the following questions can help structure the enterprise conversation:
- Do you understand which ESG measures are most important to your stakeholders?
- Have you figured your data and reporting strategy for measuring, monitoring and communicating performance against these targets?
- How are you planning for mine closure to create a sustainable legacy beyond life of mine?
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Chapter 2
Decarbonization
Building a flexible decarbonization strategy can help achieve net-zero and differentiation
The recent UN climate change conference (COP26) and the events leading up to it have confirmed that mining companies should treat decarbonization like a serious strategic risk to their business.
Building a flexible path to decarbonization, which includes scenario modeling and reviewing capex, opex, technology and assets, will help companies achieve net-zero and differentiate. And while many companies have made progress in abating scope 1 and 2 emissions, now is the time to focus on scope 3. Those that can control these emissions can create genuine value and long-term sustainability. Miners such as BHP, Rio Tinto, Glencore and Newmont have committed to reach net-zero emissions by 2050, while some companies, such as Fortescue, are committed to carbon neutrality by 2030.¹⁰ Companies that have not set 2050 targets are still aiming to reduce carbon emissions mainly via scope 1 and scope 2 abatement.
Political pressure is accelerating the move to net-zero mining operations, and net-zero mineral supply chains. The highly variable cost of fossil fuel and the carbon taxes implemented in various jurisdictions globally are expected to make energy costs based on fossil fuels higher and unpredictable. While the EU is using a carbon tax to push for cleaner energies, the mining industry in Peru and Chile is under pressure in terms of additional royalties or taxes that may change the focus in terms of carbon emissions goals.
Greenfield mines have the opportunity to incorporate more sustainable technology up front. Kirkland Lake Gold’s Macassa mine and Newmont’s Borden mine in Canada both implemented electric vehicles into their operations since they began operating in 2016. Older mines with nonrenewable infrastructure are facing greater hurdles in divesting or upgrading assets largely due to a misalignment between the life of mine and the renewable asset. The installation of new infrastructure also needs a smooth transition from nonrenewable to renewable energy as any disruption will put production at risk.
Biggest decarbonization challenge or source of competitive advantage – controlling scope 3 emissions
Scope 3 emissions account for ~ 95% of the mining industry’s overall output, while it varies by end use of commodities.²⁴ For example, scope 3 emissions for Vale stood at 47 times of combined scope 1 and 2 emissions while scope 1 emissions for Arcelor Mittal stood at 88%.²⁵ These emissions are significant but historically underreported. Scope 3 emissions represent both potential counterparty and reputational risk for companies that could negatively impact their long-term value and social license to operate.
While it may not be feasible or practical for some companies to set targets, investors want to see a clear strategy for dealing with the issue. Arizona Sonoran Copper plans to develop the Cactus copper project as a net-zero mine, which will boost the company's bottom line, and the net-zero plan should drive a higher valuation for the company.²⁶
Strategies to tackle scope 3 emissions
1. Invest in carbon reduction technology
Companies are investing in technologies to reduce carbon emissions across the value chain. For example, BHP’s $50m investment in Boston Metal to develop molten oxide electrolysis (MOE) technology that converts iron ore to steel with zero carbon emissions represents the miner’s effort to decarbonize the value chain as iron ore makes up the highest level of scope 3 emissions at BHP.
2. Grow and build the value chain collaboratively with suppliers
Collaboration with suppliers in order to build the upstream supply chain with least emissions should be priority. Through carbon insetting a company can offset its emissions through a carbon offset project within its own value chain. For example, Coal India Ltd is committed to achieving a carbon offset of over 60,000 tons via energy efficiency measures and is forging ahead with a series of measures to offset carbon emission in mining operation in all its coal producing companies.²⁷
3. Co-create a cleaner supply chain
A proper analysis of logistics should be done to keep emissions as low as possible both upstream and downstream. Vale is committed to the International Maritime Organization’s goal of reducing emissions by 40% by 2030 and absolute emissions by 50% by 2050. The Ecoshipping program is a collaboration aimed at cutting emissions from the shipping of iron ore. One such project uses rotating sail technology in very large ore carriers (VLOCs), which will result in fuel savings of up to 8% and an annual reduction of up to 3,500 tons of CO2 equivalent per vessel.²⁸ Suppliers could also move their manufacturing facilities closer to consumers to reduce emissions from transportation.
4. Adopt a circular economy mindset
Such a paradigm shift can help in tackling the remaining emissions after the implementation of renewable energy and improving energy efficiency. Secondary markets for major metals exist in some places where prices and readily available supply of waste stock encourage investment in recycling, e.g., 40% of copper, 33% of aluminum, 35% of lead and 30% of zinc products are produced through recycling.²⁹ This is not currently the case for many minerals and metals that are vital for energy transition. Used batteries from EV and storage applications are under 2GWh in 2021. It is estimated that ~100GWh of used batteries by 2030 and 1.3GWh of used batteries by 2040 (IEA SDS* scenario) would be available, representing over 20% of new battery requirements in that year.³⁰
To meet rising demand while keeping emissions in check, the share of recycled minerals and metals needs to be increased. Policy/regulatory measures and company initiatives can support the development of recycling markets and reduce many of the environmental and social impacts associated with mining e.g., Electra Battery Materials plans to expand its operations to recycle lithium-ion batteries and will start refining the components of EV batteries, known as black mass, in 2022. The expansion is the second phase of a four-part strategy to turn the company’s facility into a low carbon North American battery materials park.³¹
Key questions to consider
As miners build a proactive plan to decarbonize, key questions can shape their long-term strategy:
- How do we deliver and operate generation assets?
- Are we making the best use of tax breaks?
- Did we consider available incentives and finance structures?
- What are the funding and capital models available to us?
- Do we know which technology should be used to scale up and accelerate decarbonization?
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Chapter 3
The need for transparency in communications
Mining and metals companies need to ensure continued communication and transparency to stakeholders
As mining and metals companies integrate ESG risks and opportunities into their strategies, they need to ensure that they continue to communicate and provide transparency to stakeholders around their targets and performance. Some companies are associating decarbonization as part of performance standards, i.e., tying remuneration to CO2 reduction targets. Vale and BHP, for example, have linked scope 1 and 2 emissions to the variable remuneration of its employees.
Digitizing the processes around metrics and sharing the road map to net-zero with intermediate milestones and successes will be key to gaining investor confidence and, potentially, competitive advantage.
Amid the uncertainty of emerging new carbon legislation, miners need to respond appropriately to shareholder pressure to meet climate targets, while avoiding committing to potentially unrealistic goals. Emissions data management needs to be more timely, reliable and standardized through automated data collecting, processing and reporting to allow for proper review of progress against decarbonization targets. Digitizing the processes around the metrics and sharing the road map to net-zero with intermediate milestones and successes will be key to gaining investor confidence and, potentially, competitive advantage.
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Chapter 4
Conclusion
Creating long-term value
Sustained investment in the following areas will be key to creating long-term value and ensuring that stakeholders realize the quality and quantity of shared value that can be obtained:
1. Communicating a net-zero strategy
Companies can choose various pathways to abate emissions, but it will be essential to communicate that a clear strategy to achieve net-zero is necessary to gain investor confidence and, potentially, competitive advantage.
2. Investing in host communities
Major areas where long-term value can be created are procurement, employment and social investment. Investing in skill development to plug the capability gap among the eligible host community members helps build future workforce to be absorbed. Bringing in the host communities into the supply chain procurement creates employment and livelihood as a long-term economic solution for the host communities.
3. Investing in infrastructure
Investment by companies adds value to communities as they get a better standard of living and basic amenities at close proximity.
Summary
A set of leading practices along with engagement of mining operators with local communities, governments and other stakeholders will help ensure license to operate. Acknowledgment of and proactive measures to tackle the issues related to environmental, social and governance issues have already turned into opportunities for some miners. This demonstrates to other communities and broader stakeholders that societal expectations are achievable and that there are precedents for good practices on mine sites.