Accessing water and energy is becoming increasing difficult for mining and metals projects, especially in South America and Africa, says the EY report, Business risks facing mining and metals 2014-2015.
“Burgeoning energy costs and competing water demands in many mining regions around the world are starting to have a bigger impact on costs and the ability to operate,” propelling this issue into one of the top 10 business risks facing the mining and metals sector, according to EY.
“In 2013, mining companies spent US$11.9b on water infrastructure globally—an enormous 250% increase from US$3.4b in 2009,” the report quoted a May 30, 2013, Mineweb story. “Likewise, global energy prices have leapt by 260% since 2000.”
“The mining and metals sector faces increasing fuel prices while commodity prices tighten, resulting in ever-narrowing operating margins,” EY warned. “These high energy costs are impacting the competitiveness of the industry as costs escalate.”
Chile is one of the expensive mining region in terms of secure energy with electricity costs increasing by 11% annually since 2000. The mining industry consumes about 36% of the country’s electricity, while consumers pay some of the highest electricity price in Latin American due to a reliance on fossil fuels and import restrictions from gas-rich Argentina.
“Rising residential energy demand, combined with underinvestment by utilities in South Africa, means a loss of competitive advantage as a low-cost energy location,” said the report. “South African mining companies are struggling to adapt their consumption patterns and mining methods, resulting in substantially higher electricity bills and notable margin erosion.”
In their analysis, EY’s Global Mining & Metals experts observed that large capex requirements for developing the necessary water and infrastructure “is a limiting factor in developing some of the world’s richest mineral deposits. For instance, several large project have shelved development plans, including Barrick Gold’s Casale project, Goldcorp’s El Morro project and Teck’s Relincho project.”
In emerging and frontier countries, mining and metals companies have to compete with both government and communities for water and energy. Failure to carefully manage a mining operation’s use of water and energy may jeopardize the industry’s social license to operate, the report advised.
“Poor environmental risk management can lead to water contamination and resulting community backlash. This can lead to production stoppages, protests, fines and license withdrawals,” said EY.
The EY Global Mining & Metals group suggested, “The large, globally diversified companies, such as Rio Tinto, Anglo American and BHP Billiton, have the requisite expertise and financial strength to build these complex water procurement systems for large-scale projects. They are likely to emerge as the partners of choice in water-scarce countries seeking to exploit their natural resources as a result.”
“However, smaller companies, particularly those with single-mine operations in water scarce regions, such as South America are the most vulnerable. This is because they are likely to have the greatest exposure to event risks but have limited financial and technical resources at their disposal to deal with them,” EY observed.
“An efficient water management framework is essential and needs to be considered across all development and operational processes, including preliminary approvals, production, de-commission and closure,” the report advised. “Such a framework and its practices must aim to minimize contamination and optimize consumption. Companies need to find innovative methods to find a balance between regulatory compliance and cost savings.”
“Companies that treat water risks as a strategic challenge will be far better positioned in the future,” EY advised. “Mapping water risks within the whole supply chain remains a key challenge.”
“Going forward, a widely accepted water accounting framework may improve capability of the industry to report sustainable use of water resources, in a consistent and contextual manner, while enable benchmarking of operations to identify potential efficiency measures.”
Meanwhile, the report noted that mining is increasingly evaluating renewable energy as a possible source of cost-effective and reliable energy.
“Many of the world’s largest mining companies are evaluating greater use of renewable energy plants—a tend set to intensify rapidly—as a part of a broader strategy to lock in long-term fixed electricity prices and availability while minimizing exposure to regulatory changes, market pricing and external fuels,” said EY. Rio Tinto has the first solar-diesel hybrid energy plant in Australia to offset its diesel consumption, while Codelco has replaced 85% of diesel demand with solar thermal energy at one operation.
As mining operators use more renewable energy, it could also reduce water consumption for thermal generation, according to the report.
“As the cost of renewable energy declines, the mining and metals industry will increase its reliance on renewables,” EY observed. “The shift toward a resource efficient and lower-carbon operation can ensure community acceptance.