ESG, geopolitical tensions, and climate change top risks facing miners in 2023

The vagaries of mining are such that the macro and micro factors that affect the sector and influence decision-making are as abundant as they are ever-changing.

While 2022 was a difficult one for many resources companies, there are new and ongoing challenges expected to arise throughout the year ahead.

According to a report by multinational professional services firm EY, environmental, social and governance (ESG), geopolitics, climate change, a license to operate, as well as costs and productivity are the top business risks (and opportunities) facing mining and metals companies in 2023.

The reports notes that resources companies will also continue to endure supply chain disruption, as well as face workforce and capital issues throughout the year.

Supply chain issues is a new entrant to this year’s EY ranking. Global disruption to trade is hitting the sector particularly hard, and in 2023, resources companies will be under pressure to fast-track the supply chain transformation that was underway before the COVID-19 emerged.

As 2023 gets underway, EY reports that the mining and metals sector is responding with more fundamental shifts to business and operating models. The multinational professional services firm notes that new business models offer opportunities for miners to re-position for a changing future.

Many companies are also considering the benefits of strategies to rationalise, grow and transform. The report suggests companies that scrutinise and shift business models now should get an edge on competitors as demand and expectations change.

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2022 – A year of challenges and hurdles for miners

EY says the past 12 months have endured huge upheaval and change for miners. War in Ukraine, climatic events, newly elected governments in key mining regions, and shifting relationships in others are all affecting global mining and metals companies.

The EY report adds that these external factors will continue to drive a shifting of the sector’s risks and opportunities as stakeholder and capital market pressure hold mining companies accountable on multiple fronts.

Regarding ESG, the multinational firm says this remains the number one risk and opportunity in mining and metals, according to survey respondents. Across the sector, there is more evidence that resources companies are integrating ESG factors into corporate strategies, decision-making and reporting, as the issue becomes a priority for all stakeholders, the report says.

According to EY Global Mining & Metals Leader Paul Mitchell, last year’s list of risks was also topped by ESG, reflecting miners’ new focus on considering different business models.

In fact, ESG-related issues made up the entire top three risks of last year’s report”

In fact, ESG-related issues made up the entire top three risks of last year’s report – each with a significant, distinctive impact that made it impossible to treat them as one risk. The combination of these social and environmental issues with digital transformation is driving sector-wide transformation, prompting changes to portfolios and risk appetite, creating regional differences and some nationalisation.

As we head into 2023, the mining and metals sector is responding with more fundamental shifts to business and operating models.”

ESG is more than net zero carbon emissions

EY says there are a plethora of elements to ESG that many companies do not address.

The report says: “If companies think by 2050 net zero carbon will be the minimum expectation they will be mistaken. Differentiation will come to those that are net positive on all aspects of ESG. Miners need to go beyond policy and have a holistic approach to ESG to gain investor confidence and community trust.”

Some 76% of EY’s survey respondents cited water stewardship as their top ESG risk, as climate change and water scarcity concerns escalate.

If companies think by 2050 net zero carbon will be the minimum expectation they will be mistaken”

Tailings and toxicity management are also important ESG issues where EY suggests greater collaboration could yield more effective solutions.

In 2020, the International Council on Mining and Metals (ICMM) members committed to implement the Global Industry Standard on Tailings Management (GISTM). All tailings facilities operated by members with “extreme” or “very high” consequence classification need to conform with the GISTM by August 2023, with all others to comply by August 2025.

ESG

The EY report says there are concerns that some mining companies may not be able to meet the deadline.

For emerging silica sand developer Metallica Minerals (ASX:MLM), ESG is at the forefront of its approach to delivering its low-impact Cape Flattery project.

The project is aligned to Australia’s 2022 Critical Minerals Strategy, which acknowledges silica sand’s importance in the transition to lower global carbon emissions.

Speaking to Mining.com.au about its ESG policy, Executive Chairman Theo Psaros says it was incumbent on Metallica to take a proactive approach to ESG given the increasing focus on these considerations by investors, governments and local communities.

Its early stage relationship building is growing positively as the company takes the Traditional Land Owners (TLO) through a process of exploration and evaluation, and soon through construction and operation.

“I want Metallica to be recognised as more than just a good corporate citizen but as a genuine partner who has diligently and honestly worked with Traditional Land Owners to bring a globally significant project into production.

We have been listening to what is important to them, taking on board their advice and guidance. We are working with the Traditional Owners and we are laying the foundation for Metallica, the clans, and the community of Hope Vale to benefit from a new silica sand project.

We want our project to create inter-generational opportunities that give young people the ability to create a strong future and provide them with more resources and skills to care for the country.”

Cobalt Blue Holdings (ASX:COB) is another miner focused on ESG and has adopted the Cobalt Institute Responsible Assessment Framework (CIRAF) as a means of assessing and implementing global best practice standards. The CIRAF is a management tool allowing participants to demonstrate their alignment with global best practice on responsible production and sourcing.

Locally, Cobalt Blue has an ESG focus in place, with particular attention to engagement with the Broken Hill community.

Geopolitical issues affecting trade of minerals and metals

At number two, respondents to EY’s survey say, unsurprisingly, the war in Ukraine has affected the trade of minerals and metals, while increasing competition between China and the US, and newly elected governments in key mining markets are affecting the long-term plans of mining companies.

Miners are under pressure to quickly assess how different alliances, disrupted trade flows, new governments, and taxes will affect business decisions.

Further, as the interplay between ESG and geopolitics increases, EY notes so too does  the amount of regulation the sector needs to comply with.

The report notes: “As miners consider strategic decisions, they should assess the implications of several geopolitical trends.”

“As miners consider strategic decisions, they should assess the implications of several geopolitical trends”

There are mounting concerns over the security of supply of critical minerals which is expected to intensify in 2023 as the nexus between climate change and political risk becomes more evident.

According to EY, as governments move to mitigate near-term climate change impacts and accelerate the energy transition, they are prioritising policies that highlight the importance of metals and minerals needed for renewable energy production and storage.

Alexander Scanlon, Managing Director of Barton Gold (ASX:BGD), told Mining.com.au in a wide-ranging interview in August 2022, as early as 2016 he saw a confluence factors set to fuel a global trend towards hyper-nationalism, political factionalism, and a destabilisation of the post-WWII economic and social order which has underpinned several decades of relative stability and growth.

Barton feature Gawler Craton

Rising political tensions in Asia and recent ‘test skirmishes’ in Europe were already forming cracks predictive of larger future ruptures, and global social, economic trends, and credit trends back then had pointed to previously unparalleled asset bubbles and inflation risks.

Reflecting on current global circumstances, Scanlon noted: “Sadly, we foresaw much of this – record corporate and personal credit of declining quality, already troubling levels of constant Western monetary issuance, and rapidly devolving global and domestic geopolitical frameworks.

On this basis I decided to position heavily in physical gold, targeting existing proven geology in a very safe jurisdiction, and with ownership of, or access to, existing infrastructure.”

Climate change the foundational driver for most trends

Meanwhile, one unnamed senior executive was quoted in EY’s report saying that climate change is emerging as a major risk to mining companies globally.

“Climate change is the threat multiplier for every other ESG issue – it’s going to be the foundational driver for most trends.”

While last year, the focus of climate risks was firmly on decarbonisation, in 2023, EY’s report says while still targeting net zero, miners are also mitigating broader transition risks, and physical risks demonstrated through recent natural disasters.

Many mining and metals companies have committed to ‘highly ambitious’ decarbonisation targets, but 2023 will reveal whether the sector is on the trajectory to net zero.

Some 55% of survey respondents said that lack of timely technology and innovation is a key risk for energy transition.

Resources companies that take on the right technology and innovation to mitigate climate risk are expected to gain competitive advantage, the report adds.

Community engagement complex but critical

Interestingly, a major risk in 2023 miners expect to face is the license to operate.

Evolving expectations around the sector’s effects on communities and the environment is making obtaining and maintaining an LTO an increasingly complex issue to navigate. One mining leader surveyed likened community engagement to “a big spaghetti bowl — and trying to unravel that is chaotic and challenging”.

One mining leader surveyed likened community engagement to “a big spaghetti bowl — and trying to unravel that is chaotic and challenging”

Taking a whole of society view is key, the report continues.

From this year on, resources companies will need to think differently about how they build LTO and strengthen their brand and reputation, EY says.

COVID-19 has changed the way people think about where they want to live and how they engage with colleagues and within the communities where they live and work. EY says this is a challenge for miners who are now expected to take on the role of “place-makers,” creating liveable communities where people want to live, forge connections and settle for the longer term.

Protecting cultural heritage is emerging as a major focus for mining companies, which are being challenged around the process of heritage space, not only from federal governments but also state jurisdictions and local communities.

In 2021, Rio Tinto (ASX:RIO) established an Indigenous Advisory Group to improve its senior level understanding of cultural issues in Australia. The move followed the mining giant’s destruction in 2020 of a 46,000-year-old aboriginal heritage site during a mine expansion.

Rio’s aim is to mentor corporate leadership on cultural management, and the group forms part of a broader effort to bring a wider range of views to decision-making processes and more actively engage with investors on transparency issues.

The demolition of the Juukan Gorge cave shelter in Pilbara, received major public and investor backlash, bringing to light the tenuous relationships between mining companies and traditional landowners (TLOs).

Rounding out the top 5 risks facing miners, costs and productivity is emerging as a major concern, as inflation affects costs of mining operations and may potentially delay growth plans.

However, EY says any cost reduction plans should be focused on value and avoid impacting ESG commitments.

With costs likely to remain high in 2023, EY says more innovative approaches to managing variability, including improved modelling and digital twins, can unlock genuine productivity gains.

Miners need to managing costs with an eye on long-term value, as well as short-term gains. Sustainable cost reduction measures include, for example, switching to renewable energy, encouraging innovation to reduce costs in the longer term and creating strategic joint ventures to optimize economies of scale, EY adds.

Write to Adam Orlando at Mining.com.au

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Written By Adam Orlando
Mining.com.au Editor-in-Chief Adam Orlando has more than 20 years’ experience in the media having held senior roles at various publications, including as Asia-Pacific Sector Head (Mining) at global newswire Acuris (formerly Mergermarket). Orlando has worked in newsrooms around the world including Hong Kong, Singapore, London, and Sydney.