The rising water risk behind mining for metals

Water management is fast emerging as a critical issue within the metals and mining sector, whose high dependence on it is now throwing up a number of operational, financial and reputational challenges. Maxine Perella investigates

Mining corporations – and their investors – are faced with a growing responsibility to treat water with strategic importance, not only in tackling challenges around supply but also providing leadership to help build a more resource-resilient future for the sector. New research has found that water scarcity is now posing a significant restraint to growth, threatening the future value of these companies and forcing them to question how soon and how severe the impacts will be.

Analysis from the Carbon Disclosure Project Metals & Mining: a sector under water pressure has revealed that for the majority of metals and mining firms, there are very real concerns that water shortages could strike at the heart of their production systems. The paper distilled findings from 36 companies that were happy to disclose water data – these 36 organisations have a combined market share of just over 600bn euros, covering core markets in aluminium, steel, gold, precious metals/minerals and diversified metals/mining.

Out of those 36 firms, all bar one identified substantive water-related risks that could reduce profits going forward. More than two-thirds (67%) identified water stress as a possible risk to operations, making it the most reported risk compared to other factors such as flooding, declining water quality and regulation of discharge. Water stress was also identified as the most imminent risk, with nearly half (47%) of companies expecting water stress to hit their business within five years.

The research also found that the majority (64%) of businesses have already been badly hit by water-related issues in the past five years, with flooding the most commonly cited occurrence. More than one-third (39%) are now experiencing increased costs as a result of negative water impacts. Corporations such as Anglo American, BHP Billiton and Rio Tinto have already had to change their practices in response to this.

Given these impacts and the level of risk exposure, there is a clear and urgent need for companies to develop effective management responses in order to sustain business activities and ensure future resilience. However, addressing one issue in isolation can have unintended consequences. For example, a number of respondents reported using hydraulic power in their operations – when dams run dry due to drought, they then have to rely on replacement energy sources that emit greater volumes of greenhouse gases. It is essential therefore that any actions taken to mitigate water risks are assessed in a holistic manner.

The report also highlighted the importance of effective water governance. One of the first steps for companies should be to undertake a detailed water risk assessment of both current and future operations. This assessment should account for local variances and involve a wide range of stakeholders including the communities in which operations are located. On a strategic level at least, the picture looks encouraging – 86% of respondents reported board-level oversight of water issues, with 92% having a water target in place with a strong bias towards reduction of water intensity across their operations.

However water target setting is more complex than that of carbon as such targets, while they may indicate where efficiencies and reduction opportunities lie, will say little about what impact a company is having without it being set in the context of where and when the water is consumed. The study warns that focusing on efficiency also neglects the issue of quality and the impact that a mining company may have as a result of its waste water.

With profitability increasingly at the mercy of such issues, factoring water challenges in cash flow analysis is a wise move. When establishing a company’s value, valuation models currently do not account for the uncertainty in a company’s ability to assess adequate volumes of good quality water. The metals and mining sector is much more sensitive to a change in revenue than a change in costs due to the high fixed cost nature of the business – therefore, product disruption, temporary or permanent mining site closures would impact drastically on profit margins and in turn, future cash flows.

The report suggests that with such a large part of these companies’ valuation being based on the ability to exploit future commodity reserves, consideration should be given to the implications of water availability that could jeopardise critical business activities and thus the ultimate valuation of a company. It further calls for the sector to move rapidly beyond its legal obligations and compliance, and strive towards good water stewardship with regular engagement with key stakeholders to collaboratively manage this shared resource.

Maxine Perella is waste editor at edie

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