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.
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.
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.
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 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.
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.