Investing in Decarbonization: Risks and Opportunities

The transition to a low-carbon world brings challenges and opportunities to the metals and mining sector as it works to supply the raw materials needed to decarbonize the world’s energy supply, from securing the capital to invest in innovation to managing its own carbon footprint.

Those were some of the conclusions of a panel of experts at BMO’s 31st annual Global Metals and Mining Conference in Florida earlier this month.

The panel, Investing in Decarbonization, was moderated by Jonathan Hackett, head of sustainable finance at BMO Capital Markets, and featured Mikael Staffas, president and CEO of Boliden, Rohitesh Dhawan, CEO of the International Council on Mining and Metals (ICMM), Tal Lomnitzer, a senior fund manager with Janus Henderson, and Mark Fellows, co-founder and CEO of Skarn Associates.

“As a hard-to-abate sector, the mining and metals industry has still decarbonized at a very fast pace over the last five years, and will continue to do so in the next decade, with clear milestones and pathways,” said Rohitesh Dhawan of the ICMM, a group of many of the world’s leading mining companies that was founded in 2001 to improve sustainable development performance in the mining and metals industry.

Metals and mining will be critical to supplying the raw material required for the transition to a low-carbon world, but that opportunity is twinned with a challenge for the sector to decarbonize its own operations and produce those metals sustainably.

“Clearly there’s going to be money that needs to be spent,” said Tal Lomnitzer, senior fund manager with the Global Asset Management group Janus Henderson. Citing from a UBS estimate, Lomnitzer noted that some $140 trillion and enormous quantities of metals will be required by 2050 to decarbonize the world’s energy supply.

The demand opportunity for the mining industry could not be clearer, with many of the metals it produces used to build the batteries, wind turbines, solar panels and other forms of renewable energy that will be fundamental to a revolution in the way the world uses and consumes energy.

“That’s why you see demand shooting up so much, especially for the base metals in this transition,” said Boliden CEO Mikael Staffas, whose Swedish multinational metals, mining and smelting company produces metals including zinc, copper, lead, nickel, silver and gold.

Striking a Decarbonizing Balance

The challenge for mining companies comes in balancing the positive end-uses of their metals, and their contribution to decarbonizing the economy, with the carbon they shed in the process of extracting and processing those metals.

What many outside the metals and mining sector don’t realize is how far along the industry is on its own path toward net-zero, noted Dhawan, who pointed to the example of the ​Los Bronces copper mine in Chile, where Anglo American installed a photovoltaic solar array that floats on a tailings pond and can generate 150,000 kWh per year of renewable electric power.

The pilot project has demonstrated that, as well as producing clean power, it has the added benefit of reducing water evaporation in the area it covers in the tailings pond by 80%. In this key mining country, it is expected that by 2025 over 90% of mines will have renewable energy installed.

Of course, optimizing existing infrastructure to lower an operation’s carbon footprint is something Staffas is very familiar with. “All the investments we’ve done at Boliden that are linked to decarbonization have been both saving costs and have not been that costly in terms of investments,” he explained. “And it’s utilizing technology that’s been around forever.”

Mining companies that are pursuing sustainable practices have a unique added value for investors, which is sometimes referred to as a “greenium” or green premium because people are willing to pay more for them. Lomnitzer pointed out that capital has been flowing into these kinds of companies from sustainability-minded investors who want to make money while doing their part to help save the planet.

Building an Airplane in mid-Flight

Decarbonizing operations from Scope 1 through Scope 3 emissions, however, can also be much more complicated, something Skarn Associates CEO Mark Fellows likened to “building the airplane mid-flight.”

“We’re going to see a massive shift in the way that the underlying economics of mining, smelting and refining works. It’s going to have a massive impact on cost structure, operating costs, capital costs,” he noted. “We’ve seen some really great collaboration on technology in terms of decarbonizing mobile equipment. We’re seeing some agile thinking in terms of energy efficiency, getting scope two emissions down by sourcing lower-carbon power, and it’s cascading all the way up to the financial institutions who now have a very clear role in driving some of this stuff.”

As the sector digs in to reach its net-zero goals, there are a number of efforts to set comprehensive targets and trace each company’s trajectory toward hitting them. While the panel acknowledged the utility of the Science-Based Targets initiative (SBTi), which help companies to set emission reduction targets aligned with the Paris Agreement goals, Dhawan pointed out the difficulty of applying the SBTi to various producers of iron ore, copper and gold, because of the different mining practices involved and current technology availability.

While many individual companies have been engaging with SBTi in recent years, ICMM is seeking an industry-level engagement with them to address some of the key implementation challenges.

Funding Change

While it will be easier for larger, more established companies to adapt to lower emission mining practices, junior companies may find it hard to take the same steps, simply because they lack the capital. However, they can do their part in other ways, said Lomnitzer.

“Committing themselves to net-zero, and a very small thing like offsetting the carbon emissions from their drilling, and infrequent travel,” he said, “This is sort of a philosophical thing and a cultural thing that one can embed pretty early on.”

That said, the companies that are committing extra capital to decarbonization won’t necessarily suffer, Lomnitzer continued. “It’s not off-putting to see a company trying to move more quickly and sacrificing some cash flow,” he said. “I know the market doesn’t like it, but I’d say [that while] in the short term, the market’s a beauty contest, in the long term, it’s a weighing machine and, ultimately, the weighing machine tends to win.”

What is certain is that big changes are afoot for one of the world’s oldest industries.

“In my 30 years plus in the industry, we're currently in a place which is the most interesting, strategic turning point that I've encountered so far, in terms of technology shifts and changes in the underlying economics of the industry,” Fellows said.