Mining and Water Risk: Diagnosis, Benchmarking, and Quantitative Analysis of Financial Impacts

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As populations, economies and global per capita consumption continue to grow, so does the need for raw materials. Mining activity—including both primary production and the secondary recovery from recycling of mine tailings — will need to increase to meet these growing demands. At the same time, water availability and poor water quality are increasingly emerging as global risks for many industries, especially in arid and densely populated regions, and the mining sector is no exception. Because of the long-term and potentially irreversible impacts of mineral extraction on land and water resources, the mining sector faces increasing scrutiny from citizens, local and national governments, and civil society organizations. Water re-use as well as the use of desalinated ocean or waste water can reduce the mining sector’s water footprint; re-use, however, is generally more energy-intensive and therefore more costly, in effect transferring risks and impacts from water to energy.

Water management costs have been increasing rapidly for mining companies and are expected to continue to do so. This trend has led to growing interest from various stakeholders for better assessments of the financial risks posed by water-scarcity, the development of general “water risk” reporting tools, better disclosure of water use and related factors, and the creation of more reliable water footprint and accounting frameworks to assess efficiency.

While existing tools may be useful for a general comparison of companies and locations and for raising public awareness, they are inadequate for asset level and quantitative analysis of short- and long-term risks related to water. They are therefore insufficient for any valuation of mining assets that seeks to account for water risks, and fall short when it comes to informing regulatory processes or debates related to the development and restoration of mining assets and the implementation of best water-risk mitigation practices, financial risk analysis, or scenario analysis.

As part of 3-year grant from Norges Bank Investment Management (NBIM), CCSI is working with the Columbia Water Center to develop and benchmark a modeling platform for quantitatively assessing environmental risks associated with mining and their financial implications, as part of a rigorous analysis of investment for sustainable development. The initial models consider water-related risks for selected mining activities, and will subsequently be extended to a more comprehensive analysis of other possible factors such as land, energy and other resources. The intended users are financial analysts, mining companies, government regulators, civil society organizations, and academics.

The below papers represent a first step in this analysis by investigating three interconnected themes: water risks associated with mining, the causality between environmental factors and the financial performance of companies, and perspectives on legal and regulatory risks. Beginning with a literature review, each of the three research teams briefly assess and present an overview of current understanding and lines of potential future inquiry.

Since these preliminary papers, CCSI has profiled the legal and regulatory frameworks governing the use and discharge of water by the copper and gold mining sectors in a selected sample of resource rich jurisdictions (see here). For each jurisdiction, CCSI has mapped out how water issues are regulated prior to and during mining operations and post mine closure, including the enforcement actions available to different stakeholders, and identified the key institutions and legislation regulating water use and discharge in mining. In September 2016, CCSI organized an event for institutional investors to discuss water related risks from an investor perspective (see background brief here) and co-submitted a letter to the SEC to comment on the modernization of property disclosures for mining companies. CCSI has also developed a framework to approach the shared use of water and water infrastructure, among other types of infrastructure, after conducting a worldwide survey of related case studies. Research papers on shared use in the context of other types of infrastructure are posted here.

Papers:

Blanchet, J., Dolan, C., Iyengar, G., and Lall, U. Towards a Robust Top-Down Model for Valuation of Mining Assets

Fonseca, F., Bonnafous, L. and Lall, U. Asset-level Analysis and Modeling of Water Risks Associated with Mining

Thomashausen, S., Maennling, N., Nielsen, D. and Vempati, A.R. Mining and Water: A Perspective on Legal and Regulatory Risks