hongkongen
Research shows link between ESG and profitability in mining

Research shows link between ESG and profitability in mining

31-01-2017 | Research

Robeco views sustainability as a long term-driver of companies’ performance. In a recent study, we find that miners with lower emissions per unit of material produced are also miners with a lower cost base. As investors, we therefore regard emissions per production unit as a valuable indicator of miners’ competitiveness.

  • Jaap Smit
    Jaap
    Smit
    Senior Portfolio Manager at Robeco Asset Management
  • Iva Koçi
    Iva
    Koçi
    Private Equity Trainee

Speed read

  • Recycling is not an imminent threat to primary commodity supply
  • Valuable metals like gold can be linked to higher country risk
  • GHG emissions per production unit are an indicator of profitability

Mining operations have a considerable impact on the environment and the community in which they operate. Miners are increasingly expected to demonstrate responsible stewardship in order to secure access to shared resources such as land and water. As mining companies have had to broaden their operations in emerging countries, risks are being exacerbated. Adding up lower ore grades, corruption and dewatering, the industry’s ESG risks require proper management.

In a recent study, we analyzed the link between sustainability and financial performance for copper, iron ore and gold. We looked into three aspects: the impact of recycling, the degree of country risk and the link between a miner’s greenhouse gas emissions and cost base.

Recycling as a proportion of supply is expected to remain stable

The first ESG issue we researched is the impact of recycling on commodity supply. From an ESG point of view, recycling is positive. Further development of countries like China can lead to more secondary recycled material coming onto the market and is competing with primary sourced material by the mining industry. Is this an imminent threat to the mining industry?

The copper recycling input rate has been stable over the last decade. Global copper demand is forecasted to increase by 2% per year. Recycling is expected to follow the same trend. As a consequence, the recycling input rate is foreseen to remain stable in the 30% - 35% range. The Chinese market, one of the main domains in copper usage, has been favoring primary sourced copper concentrate to secondary supply. The financial crisis, new supply and a more mature economic growth in China led to lower copper concentrate prices. The relatively competitive price of primary mined copper is hindering significant new recycling investments. More demand combined with higher prices is a better environment for more recycling capacity to come online.

A similar pattern can be drawn for iron ore. Scrap is integrated into ore production through Electric Arc Furnaces (EAF) as an alternative method of steelmaking to Blast Furnaces. New EAF capacity is now only being built in Saudi Arabia given low construction costs, a higher variable base and proximity to ports.

Gold recycling is closely related to the gold price and economic indicators. In periods of distress, when prices go up due to the safe haven effect, there is a higher incentive to sell gold for recycling. If an economic crisis will return we expect to see higher recycling rates in gold coming back.

The conclusion is that the recycling of the three metals will remain rather stable in the near term and will not impact primary supply.

Country risk: largest for gold

The second topic of our research is the degree of country risk involved in the mining of the three metals. Anecdotal evidence suggests that some mining operations are more risky than others. We take an empirical approach by testing the hypothesis of country risk differences across metals. We constructed a tailor-made country risk index considering four components: environmental policy, political stability, institutional framework and competitiveness of countries.

We use the RobecoSAM Country Sustainability Ranking. RobecoSAM evaluates countries via a structured framework covering a broad range of ESG factors that we consider to be relevant for investors from a risk-return perspective. The resulting scores offer insights into the investment risks and opportunities associated with each country.

Our research shows that gold operations involve a larger ‘tail risk’, followed by copper and iron ore. We interpret this as a tendency of gold miners to extend their operations into more risky countries. This is not only because of the price reward but also due to the fact that the geological deposits tend to be found in less stable regions.

The opposite takes place for iron ore which, being a bulky product at considerably higher grades (50%-60%), is mainly mined in more stable countries. Nevertheless, one should be careful to generalize as iron ore can be found in less stable countries as well, such as Liberia, and gold in more stable countries such as the US and Canada. We take this type of information into account in the investment analysis.

The link between sustainability and profitability

The third and final topic of our research is the link, if any, between greenhouse gas emissions and cost base. Geologic features, such as grade, ore hardness, and stripping ratio (the ratio of the amount of waste material required to extract a tonnage of ore), have a direct impact on the energy and water intensity of operations. For instance, low grades, deep underground mining with long haulage distances and a large stripping ratio, result in more energy and water intense operations and, consequently, significant greenhouse gas emissions. The question is whether more emissions also imply a higher cost base.

We collected the information on cash cost, production and emissions from annual reports, sustainability reports and climate change reports from the CDP (Carbon Disclosure Project) on pure copper, iron ore and gold miners. The evidence we find suggests a significant positive relationship between miners’ cost base and emissions per unit of production of iron ore, copper and gold. The relationship is most significant for iron ore.

Conclusion: emission level is an indicator of competitiveness

We conclude that miners with lower emissions per unit of material produced are also miners with a lower cost base. For investors, we therefore regard emissions per production unit as a valuable indicator to assess miner competitiveness. On top of that, from a portfolio perspective, investors should allocate their money not only to competitive low emission mines but also to a mix of assets with lower country risk when possible.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Subjects related to this article are:

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

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. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree