The mining and metals sector is facing greater scrutiny from communities in host countries, consumers and society at large, demanding transparent, ethical supply chains, as well as a lower carbon footprint, a new study from Deloitte shows.
Rather than declining any time soon, the pressure to meet those expectations will force resource companies to redefine the way they do business, shaping the sector in the short- and medium-term.According to Deloitte's "Tracking the trends" annual mining report, now in its twelfth edition, miners will have to work this year on building trust with communities, consumers and investors.
Companies need solutions for climate change, water management, health and safety, and fair treatment of workers and communities, the report highlights.
Investing in environmental, social and governance is estimated at over US$20 trillion in assets under management, and those numbers are only expected to grow. Companies that fail to deliver value beyond compliance could face financial consequences and a blow to their reputations.
"Many investors are making it clear that they will not advance funds unless companies can demonstrate a meaningful and measurable commitment to the principles so much of society holds dear," says Leeora Black, Deloitte Australia's principal of risk advisory. "This causes mining companies to consider not only threats to public trust, but also potential."
Most top miners are well aware of the need for change and have already kicked off company-wide initiatives. BHP Billiton (NYSE: BHP; LON: BLT) recently committed US$400 million over five years to lower greenhouse gas emissions from its operations and mined commodities.
The miner, the world's largest, has promised to reduce its Scope 3 emissions (those generated by end-users) - an important consideration, given that it is the top exporter of coking coal used in steelmaking and number three in iron ore, the raw material for steel.
Rio Tinto (NYSE: RTP; LON: RIO), the world's second-largest miner, signed a pact last year with China's biggest steelmaker, Baowu, to develop and implement ways to lower carbon emissions in the steel sector, which is responsible for 9% of global carbon dioxide emissions.
The transition to a low-carbon economy is underway and the pressure to accelerate this transition seems to grow every day. As of 2020, roughly 800 financial service organizations with US$118 trillion of assets under management have committed to making climate-risk disclosures about their portfolio investments.
"Despite the business case in support of decarbonization, many mining companies continue to see it as a cost rather than an opportunity - making it difficult for proponents to unlock the capital required to move forward," says Tim Biggs, mining and metals leader at Deloitte UK. "A massive shift toward electrification could also change the way employees work, requiring companies to obtain buy-in not only at the management level, but at the operations level."
The sector leaders, however, are setting an example in terms of switching towards renewables.BHP estimates deals announced last year to switch two giant copper mines in Chile to solar, wind and hydro sources in place of existing coal and gas power will cut energy costs 20%.
Anglo American (LON: AAL), which has installed floating solar panels on a copper mine's waste pond, has said that renewable energy will help deliver cheaper mining operations.
Fortescue Metals Group (ASX: FMG) recently flagged potential savings from new investments to switch mines to renewable energy as it expands a US$700-million program to add transmission lines, solar arrays and battery storage in Australia's Pilbara region.
Together with committing to deliver value beyond compliance and reducing their emissions, companies should pay attention to other growing industry trends that would determine their success. According to Deloitte, they are:
Partnerships and joint ventures - Mining companies should be open to consolidation to gain scale. Given the size of capex projects in the mining sector, their location in remote regions and the growing complexity associated with accessing many orebodies, companies of all sizes can benefit from partners to finance projects, source critical skills, build local relationships and share risks.
Seize opportunity amid uncertainty - Miners should start preparing for the next downturn now. Globally, trade volumes are down and geopolitical tensions remain high. Concerns about China's economic revival remain front and centre. Deloitte's experts recommend over-investing in communication, town halls and one-to-one meetings.
"People long for transparency, and, in the absence of clear communication, will create their own narrative," the report highlights.
Dynamically managing risk - Miners should go back to the basics, taking time to redefine their risk appetite, identify gaps in their risk and control framework, and ensure their risk management methodology covers strategic, operational, financial, cyber, regulatory and environmental risks.
Embracing intelligent mining through investments in automation, technology modernization and the right workforce - Bringing new technologies into a business is the first step. Companies must also invest in an adaptive workforce, with a new set of skills, to sustain their competitive advantage in global markets. One way companies can ensure they have the right skills in place for intelligent mining is by classifying the capabilities required on a matrix to identify skill gaps and determine how best to fill them.
Proactively planning for the social impact of digitalization - In the same way as mining companies conduct life-of-asset and life-of-mine planning, longer-term and more strategic talent planning is becoming more critical to planned business outcomes, and avoiding possible repercussions on local communities.
Leadership in an industry 4.0 world - The mining workforce of the future needs leaders who base their decisions on decades of hands-on experience, as well as analysis of large sets of data. To leverage emerging data insights, for instance, leaders will likely need digital fluency, data visualization skills, and an understanding of cognitive and AI-driven technologies.
Tax tribulations - Concerns over "transfer mispricing" put miners in the spotlight. Deloitte recommends using bilateral agreements and partnerships with host countries, ensuring compliance with tax regulations and an ability to substantiate positions and defend against any challenges made by tax authorities, while maintaining healthy relations with government.
In the past, miners thought that generating employment and tax receipts for government was enough to secure a social licence to operate. But in an era of populist politics and growing activism, mining companies need to do more.
Among the pending tasks, the report highlights, miners need to show how they work towards sustainable and inclusive growth, which helps redefine the sector's image as a responsible source of the minerals and metals that are the base for a green future.
- This article first appeared in The Northern Miner's sister publication, MINING.com.