switzerlanden
Miners face rising environmental liabilities

Miners face rising environmental liabilities

04-12-2018 | Insight

Environmental costs are becoming an ever-increasing burden for mining companies, a study shows.

  • Jaap Smit
    Jaap
    Smit
    Senior Portfolio Manager at Robeco Asset Management

Speed read

  • ESG factors have a large impact on the mining sector
  • Long-term rehabilitation is a big drag on enterprise value
  • Liabilities can be credit risks, more disclosure is needed

The provisions that miners need to set aside for future clean-up and other restoration costs after their mining operations have ended are already extensive. If not properly managed, they could become a credit risk for their bonds, says Jaap Smit, Credit Analyst for Metals and Mining at Robeco.

“Mining companies are already obliged to make provisions for so-called restoration and decommissioning of their assets,” he says. “These provisions are liabilities to restore the environmental disturbance that was caused by the operations of the mining sites and to rehabilitate the environment when the asset is depleted and closed.”

Before and after: how a former mine is restored.
Source: Goldcorp Marlin

“Every large mining company remains responsible for a sizeable number of closed mining sites, including the tailings dams used to store byproducts of mining operations, along with old processing facilities and so forth. For example, Rio Tinto has 13 old mine sites in closure, some of them decades old, plus 200 other industrial legacy sites, compared to 57 active mine sites. Remediation sometimes costs hundreds of millions of dollars per site, and often requires costly annual monitoring and maintenance.”

“By way of comparison, about 20% of BHP’s total provisions are reserved for closed sites. One of Rio Tinto’s most expensive projects – the former Holden copper mine in Washington state – cost the company USD 500 million and took five years to rehabilitate. Environmental regulation across the world is becoming more demanding and can be an inflationary cost factor.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

External influences

The real problem is correctly estimating these provisions while simultaneously dealing with external influences such as currency fluctuations, changing interest rates, and more critically, the risk of falling commodity prices which lowers future revenues, he says. The latter problem can squeeze a company’s finances just at the time it needs extra money for restoration.

“In absolute terms, the provisions are sizeable, a significant item on the balance sheet, and a burden on total enterprise value,” Smit says. “We see a risk that cash costs for environmental rehabilitation might rise over time and become an accounting expense in the income statement. In terms of the credit impact, we see that the costs are about 0.5% of sales annually, which means they are a manageable but not negligible item for investment grade companies.”

“For high yield companies, environmental provisions result in higher adjustments to their leverage. A more detailed disclosure is needed. Liabilities such as pensions and leases get a lot more attention, while this type of environmental liability is also a real financial one.”

Read the full article, ‘Are environmental liabilities becoming an ever-larger burden for mining companies?’

Logo

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree