globalen
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

Disclaimer

The information contained in the website is solely intended for professional investors. Some funds shown on this website fall outside the scope of the Dutch Act on the Financial Supervision (Wet op het financieel toezicht) and therefore do not (need to) have a license from the Authority for the Financial Markets (AFM).

The funds shown on this website may not be available in your country. Please select your country website (top right corner) to view the products that are available in your country.

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 product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports, which can be all be obtained free of charge at this website and at the Robeco offices in each country where Robeco has a presence.

By clicking Proceed I confirm that I am a professional investor and that I have read, understood and accept the terms of use for this website.

Decline