Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors...

22
Schroders Mining the ESG Ground Research Paper Assessing the financial component of sustainability strategies in the mining sector Sophie Rahm ESG Analyst December 2013

Transcript of Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors...

Page 1: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Schroders

Mining the ESG Ground Research Paper

Assessing the financial component of sustainability strategies in the mining sector

Sophie Rahm ESG Analyst December 2013

Page 2: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

2

Mining the ESG Ground Assessing the financial component of sustainability strategies in the mining sector

Executive Summary

Mining operations have considerable impacts on the environment and the wider communities in which they operate. The ESG performance of companies in the sector has traditionally been under great scrutiny and this has led to higher levels of disclosure on key material risks from large mining companies. These traditional risks, however, are now being exacerbated by more difficult operating conditions, mainly because of lower quality ore grades and access challenges. Mining companies have also had to broaden their horizon and look for materials in emerging market countries. This has, in turn, led to the emergence of new areas of risk, which include resource nationalism and community actions, whereby key mining stakeholders are increasingly challenging companies for a better management and fairer share of the resources. Corruption and water are also amongst the new areas of risk that mining companies have had to cope with in recent years. Poor governance systems in some developing countries and localised water scarcity both threaten the ability to continue to mine. These vulnerabilities and risks have tangible financial implications for mining companies. The adaptation to adverse environmental and social impacts that jeopardize operations bears additional costs for the miners. More adverse operating conditions have led to higher consumption of energy and water, while production output has remained quite stable in comparison. Despite the financial materiality of some of these issues and their impact on shareholder value, it remains difficult to assess if and to what extent mining companies have had to spend more on environmental or social mitigation programmes over the years. Usually subsumed in operating and capital expenditure figures, these costs are not easily identified and quantified by companies. Therefore, a qualitative appreciation of these factors remains the most robust way of assessing good ESG management practices in the mining sector.

Page 3: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

3

Introduction

New mining horizons

Companies in the mining sector are having to adapt to increasingly difficult operating conditions over the past 10 years. The days of mining the earth’s resources on the doorsteps of Western industrialised cities are over. Traditional mining basins have dried up, unable to support today’s demand. Mining companies have had to broaden their horizons, and look for materials in emerging market countries, such as Chile, China, India or Brazil. Additionally, activities have become more resource-intensive because of lower ore grade material that is more and more difficult to access. The valuable material is generally harder to reach since most of the superficial layers have been tapered. It is also of lower quality, which means that more ore has to be processed to obtain the same amount of metal. This in turn can lead to a greater portion of capital and operating expenditures being devoted to maintaining the physical ability to dig. Mining activities are resource-intensive by nature: companies in this sector consume vast amounts of energy (in the form of electricity or fossil fuels) and require considerable water intake. The modern challenges of difficult access and declining quality have exacerbated these needs. Given their dependence and impact on the natural environment, mining companies are also facing greater scrutiny from a range of stakeholders, not the least because these resources are becoming scarcer and multiple agents can be competing for them.

Is sustainable mining possible?

By looking at the recent conclusions of a Novethic study on 15 European investors and their portfolios, sustainable mining would seem to be nearly impossible, wishful thinking at most. Of the 16 companies most often excluded from investment portfolios for norms violation

1, 7 are in the mining sector, showing that there is

notable room for progress in order for the sector to shake off its high impact/low ESG performance reputation. If sustainable mining may never be fully achievable, it can nevertheless be desirable as it makes financial sense. Companies have traditionally been concerned with ensuring their legal entitlement to mine; permits, royalties, taxes and good relationships with local government were usually paramount to ensure a right to operate. As we have discussed in a previous report, broader physical and societal constraints are now forcing companies to ensure a wider ‘social license to operate’, where sustainability is an instrument of mine viability. Securing access to energy and water resources, ensuring good relationships with the workforce, gaining community support can –if overlooked– incur significant costs for miners, including loss of production, capital immobilisation or unplanned maintenance expenses to name but a few. The integration of these challenges at both the operational and strategic levels presents additional benefits, which may however come at a price initially. As recently noted by Exane, there are direct financial incentives for mining companies to commit to environmentally and socially responsible behaviour. Sustainable mining makes financial sense for four essential reasons

2:

energy makes up for 30%-50% of the total production costs for most metals, making energy efficiency a driver for cost savings,

the increase in fines and litigation costs incentivises companies to manage environmental and social risks more proactively,

safety performance statistics have proved to be a reliable proxy indicator for overall operating performance,

increased stakeholder scrutiny (from investors, governments, media and the public) puts greater pressure on companies to monitor and improve their performance.

1 With this approach, investments are being screened according to their compliance with international standards and

norms such as those developed by the OECD, the UN and UN agencies (including the Global Compact, ILO, UNICEF, UNHRC). 2 Exane, 2013. Sixteen tons – what do you get?, p. 8.

Page 4: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

4

This is further echoed by McKinsey Global Institute whose findings on global commodity markets show that geological challenges and input cost inflation (particularly energy) have been an important factor behind rising commodity prices. Continued demand from China, more challenging access to supply, logistical and skills challenges as well as the incorporation of environmental costs will all shape commodities prices.

3 Similarly,

Renaissance Capital’s view is that ‘miners can no longer rely on the tailwind of rising commodity prices to increase earnings and returns; operating margins [which] are largely determined by asset quality, and returns can only be sustainably improved through efficient capital allocation, operational efficiency and productivity improvements’.

4 Indirectly, this points to maintaining and enhancing the physical ability to operate.

As a result, the ‘links between the non-financial and financial performance of mining companies have become more direct and the taking into account of the so-called sustainability impacts inescapable’.

5

In order to understand how mining companies can address successfully the sustainability challenge for their financial benefit, this report aims to highlight the various types of risks they may be subject to. Although it is difficult to generalise, it is nonetheless possible to identify the major environmental, social and governance (ESG) risks as well as opportunities for the sector, and examine some companies’ performance in that respect. Even though a vast majority of miners recognise the links between sustainability and business performance, research shows however that it is still difficult to make financial sense of ESG strategies given the current level of company disclosure.

3 McKinsey Global Institute, 2013. Resource Revolution:Tracking global commodity markets, p. 3.

4 Renaissance Capital, 2013. Mining – not a growth sector, p. 18.

5 Exane, 2013. Sixteen tons – what do you get?, p. 8.

Page 5: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

5

ESG Challenges in the Mining Sector

Recognising the sector’s impacts

The metals and mining sector has traditionally been seen as a high ESG impact sector. This is one of the reasons why some responsible investment funds may choose to exclude companies operating in the sector from their portfolios. Other investors may adopt another, more positive approach, which may be to invest in the companies they believe offer the best environmental, social and/or governance approach. The former does not go into further impact analysis, while the latter calls for a comparative view of the strategy, risk and performance profiles of companies. This is no easy exercise as there are as many risk profiles as there are companies. The extraction of different minerals at different sites has different –and sometimes very specific– impacts on the environment, the workforce or the wider community. Both the composition of a company’s commodity portfolio and the local context of operations usually dictate its ESG risk profile.

The environmental and social impacts of mining operations have been identified for some time and are now well-known to companies, regulators and investors alike. They have contributed to inform a set of criteria that are generally used to assess the ESG performance of a company. (Figure 1)

Figure 1: Overview of environmental and social impacts of mining operations by type of mineral6

Main characteristics

Impacts

Environmental Social

Precious Metals

underground mining

aggressive chemicals

sulphide-rich rocks

mercury content in ore (gold)

deep operations (platinum)

Air pollution

Acid Mine Drainage

Mercury pollution (gold)

High labour intensity

Greater safety issues

Base Metals

mainly open-pit with trend towards underground

sulphide-rich rocks

carbon intensive processing

large tailings (copper and zinc)

lower average concentration (nickel)

Landscape

Air pollution (nickel)

Acid Mine Drainage

Lower labour intensity

Safety issues

Bulk Metals (iron, coal)

extensive operations given large volumes

mostly open-pit

Landscape and deforestation

Infrastructure development

(rail, ports, etc)

Mechanisation with better safety controls

Aluminium

extensive operations

mostly open-pit

energy-intensive chemical treatment

recycling potential

Landscape and deforestation

High carbon intensity

Leakages

Infrastructure development (rail,

ports, etc)

Mechanisation with better safety controls

6 Adapted from Exane, 2013, p. 29.

Page 6: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

6

Company Performance

Large mining companies have the capacity and the commitment to address these issues effectively. The management of material ESG issues can be adequately monitored and compared, even if there is room for improvement and peer comparison has its limits. The fact that companies within a same peer group can have very different commodity mixes is a significant limit to the comparison. Conversely, junior miners who have gained prominence in exploration activities in the past few years are lagging behind. Calvert has suggested that the Equator Principles

7 and other ESG-related financing standards can be used to improve the overall

performance of junior mining companies.8 (Figure 2)

Figure 2: 2012 Performance of diversified miners (fatalities, LTIFR

9, GHG

10 and water intensity) with

their MSCI ESG rating

Source: Bloomberg, MSCI

7 The Equator Principles is an international risk management framework used by financial institutions to determine, assess

and manage environmental and social risks in projects. 8 Calvert, 2013. ‘The Mining Sector’s Long Road to Sustainability’ (online).

9 Lost-time injury frequency rate (LTIFR) is the number of lost-time injuries within a given accounting period relative to the

total number of hours worked in that same period. A lost-time injury is defined as an occurrence which resulted in a fatality, permanent disability or time lost from work of one day/shift or more. 10

Greenhouse gas emissions (GHG) are gases that trap heat in the atmosphere and exacerbate climate change. They include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and fluorinated gases.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0

5

10

15

20

25

BHP BILLITONLTD (A)

RIO TINTO PLC(BB)

ANTOFAGASTAPLC (A)

GLENCOREXSTRATA PLC

(BB)

ANGLOAMERICAN PLC

(BBB)

VEDANTARESOURCES

PLC (CCC)

LT

IFR

F

ata

liti

es

Fatalities and LTIFR - 2012

Fatalities LTIFR

0

20

40

60

80

100

120

0

500

1,000

1,500

2,000

2,500

BHP BILLITONLTD (A)

RIO TINTO PLC(BB)

ANTOFAGASTAPLC (A)

GLENCOREXSTRATA PLC

(BB)

ANGLOAMERICAN PLC

(BBB)

VEDANTARESOURCES

PLC (CCC)

Wate

r Inte

nsity

GH

G In

ten

sit

y

GHG and Water Intensity - 2012

GHG Intensity (t per $mn sales) Water Intensity (m3 per $mn sales)

Page 7: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

7

Despite being well documented, it remains nonetheless difficult to assess the financial implications of these environmental and social impacts, not the least because they are traditionally considered to be externalities and so are not priced by the markets (to the exception of carbon emissions in some cases). In the absence of a price tag, the cost implications of air pollution or injuries in the mining sector are being assessed in light of the associated costs as they are picked up by society. For instance, air pollution can cause respiratory diseases which in turn impose an additional burden (and cost) on a nation’s healthcare provision. However, the correlation is hard to establish, and the full internalisation of such external costs seems a long way away. According to Société Générale Cross Asset Research, ESG analysis can be seen as an attempt to incorporate these economic externalities into analysis that may not be included otherwise as managers and analysts ‘do not as a matter of course incorporate the potential impacts of global warming, air and water pollution, child labour law violations, water scarcity, product litigation risks and other such issues into their analysis’, which make it difficult to capture the impact of these economic externalities on the long-term value of investments.

11

A 2013 report by Trucost on the costs of major environmental externalities by sector and region goes on to show that most modern industries would not be profitable as industries if their full environmental costs were internalised.

Trends in the mining sector

If it is complicated to make financial sense of the direct socio-environmental impacts of mining activities, it can be argued that socio-environmental factors can have a direct financial impact on companies. The model then shifts from describing the impacts that mining can have on its operating environment to the impact that the operating environment can have on mining companies. This is a subtle change, but it helps to understand the financial scale of these risks and can nurture the development of mitigation and adaptation strategies, which all come at a very real cost. Failure to manage geographic, environmental or social risks (which are often inter-connected) more proactively can have direct financial consequences for companies in the mining sector, and can help define the value of risk management. Although it is not always in the hands of mining companies to influence these factors to their benefit, they do require additional provisioning and strategic integration into the business model. Two emerging trends in the mining sector can help illustrate these newer challenges: resource nationalism and community actions. These areas are currently getting increased attention from stakeholders and shareholders alike, as they directly affect the ability of companies to operate. They have also contributed to bringing a different range of risks to the fore, most notably corruption and water availability. This is an interesting development in the perception of ESG risks in the mining sector as the above-mentioned elements cut across the traditional spectrum and have wide-ranging impacts. On the one hand, endemic corruption problems may jeopardise the underlying environmental or social performance as well as threaten the overall business performance. On the other hand, increasing water intake from the miners has led to significant, and sometimes violent, community reactions. As a result, traditional key performance indicators taken separately may become increasingly obsolete for assessing risk exposure as well as management profiles, supporting the need for a more holistic approach to risk evaluation. Resource nationalism sees the governments of emerging market countries continue to increase control over national resources, whose value they may have failed to capture in the past. The exploitation of mineral wealth creates jobs and infrastructure, thus contributing to a country’s development. However, mineral wealth can also hinder development; a phenomenon described as the ‘resource curse’ whereby there is a negative correlation between resource-based exports and economic growth, particularly in the mineral-exporting countries.

12 As a result, emerging market countries are now exerting more regulatory and financial pressure on

extractive companies. Windfall taxes were introduced in South Africa, Ghana, the Ivory Coast and Zambia; Chile and Peru have raised taxes and royalties; Argentina introduced export controls; Indonesia has limited foreign ownership of domestic mining companies to 49%.

13 In October 2013, the South African Department of

Mineral Resources released a new draft of the 2002 Mineral and Petroleum Resources Development Act,

11

Société Générale Cross Asset Research, 2013. Getting There from Here: An ESG/SRI Primer for Credit Investors, p. 31. 12

Exane, 2013. Sixteen tons – what do you get?, p. 12. 13

Deloitte, 2013. Tracking the trends 2013, p. 18.

Page 8: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

8

requiring companies to increase domestic processing requirements in order to reduce the 25% unemployment rate.

14

This trend, however, is also notable in more mature markets, such as Australia. A recent survey by Deloitte has highlighted the growth in royalty payments by the minerals industry in recent years; they have gone from AUS$3.6bn in 2006-2007 to more than AUS$9bn in 2011-2012 and AUS$8.6bn in 2012-2013. This tax survey of 22 companies has shown that the royalty tax ratio has increased from 13.9% to 15.1% between 2011 and 2012. This is thought to be a conservative figure compared to the industry, but it is nonetheless expected to rise further due to recent royalty increases in other states. Community actions are gaining increased visibility and can have real financial consequences for mining companies. They can be triggered by a range of issues, including -but not limited to- safety concerns at the mine, depletion of the water resources and population displacement. Some recent examples can help illustrate the growing importance of community relationships for mining companies, and the financial consequences that mismanagement of community-related issues can represent. The financial implications can be direct (the payment of damages or fines) or indirect (lost production output or disruption of operations). Some examples of which are:

Anglo American Poor health and safety practices have allegedly caused a number of silicosis

15 cases amongst Anglo

American’s workforce in South Africa. In September, the company settled a class action lawsuit with 23 gold miners. Interestingly, the terms of the settlement were confidential and it was made on the basis of no admission of liability.

16 Anglo American sold its gold assets more than 10 years ago, and this lawsuit

demonstrates that so-called extra-financial risks are also legacy risks, engaging liabilities of mining companies beyond their current and future portfolio of commodities. Moreover, human rights lawyer Richard Spoor filed an application for a class action lawsuit on behalf of 17,000 gold miners from South Africa, Botswana and Lesotho against 29 gold firms (including African Rainbow Minerals, Anglo American, Anglogold Ashanti, Gold Fields and Harmony). The possible pay-out is estimated to reach hundreds of millions of dollars.

17

Anglo American Platinum In October 2013, a number of two-week strikes in South Africa have led to significant production loss. The lost output was estimated to be approximately $4.3mn per day. Using a spot price for platinum of $1,380 per ounce, the total lost production amounted to approximately $65mn. In 2012, the company reported operating loss for a total of $710mn, partly due to output at its Rustenberg mine being disrupted by violent strikes.

18

Newmont Mining Protesters in Peru have pushed to stop the construction of Newmont Mining’s $5bn Conga mine due to concerns about water resource depletion. Despite being guaranteed local water supply, many residents have feared the loss of control over the resource and water pollution from the mine. Chief Executive Gary Goldberg expects construction to resume in early 2015, after local elections.

Vale In November 2013, a Brazilian court ordered Vale to pay $8.2mn (the state labour prosecutors originally sought $16mn) in damages for ignoring safety and environmental norms that could have prevented the deaths of five workers. In addition to the damages, Vale could have to pay daily fines of up to $8mn if it fails to comply with a series of 31 corrective measures. These include the supply of drinking water to its workers, the installation of safety barriers at port facilities and the introduction of an environmental risk prevention programme. Vale must also guarantee that third-party contractors comply with the ruling.

19

14

Renaissance Capital, 2013. Mining – not a growth sector, p. 11. 15

Silicosis is a form of occupational lung disease caused by dust inhalation. 16

Monteiro, 2013. ‘Anglo settles South Africa lung disease claims by 23 gold miners’ (online). 17

For more information on the companies named in the Richard Spoor lawsuit, see http://goldminersilicosis.co.za/about-the-silicosis-litigation/respondents/. 18

BBC, 2013. ‘Amplats production hit by striking miners’ (online). 19

Wall Street Journal, 2013. ‘Brazil’s Vale hit with BRL18.9 million in damages from labour suit’ (online).

Page 9: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

9

These risks are not necessarily company-specific and some issues may affect several companies at once. There is also an element of country risk which several companies may have to cope with. One notable example in recent years has been South Africa, where wildcat strikes, stoppages and labour wage claims have had a profound effect on mining companies. The National Treasury has estimated that the total value of mining production lost, owing to strikes and stoppages, amounted to approximately $1.8bn in 2012. Copper production declined by 21.8%, gold production by 14.5%, platinum-group metals by 12%.

New focus areas of risk

Corruption Developing countries now account for a significant share of the world’s mineral wealth, and this is expected to increase in the years to come. As a result, mining companies are exposed to above-average corruption and political risks, as many of these countries have poor governance structures. The interaction with governments on tenders, permits and taxes for mining projects adds another layer of bribery risk. Boosted by the Extractives Industry Transparency Initiative (a global coalition of governments, companies and civil society looking to improve openness and management of revenues from natural resources) as well as recent legislation in Europe and the USA, transparency on payments from extractive companies to foreign countries is likely to increase significantly. Country-by-country and project-by-project payment disclosure should ‘serve to help governments of resource-rich countries to implement the EITI principles and criteria and account to their citizens for payments such governments receive from undertakings active in the extractive industry’.

20

Geographic exposure can give a good indication of the corruption risk that mining companies may be exposed to. The Corruption Perception Index published annually by Transparency International evaluates the risk sensitivity of countries on a scale from 0 to 100; the higher the value, the more sensitive to corruption. This tool can then be used in conjunction with companies’ countries of operations in order to assess the severity of the corruption risk they may be exposed to. Based on the location of companies’ assets, GlencoreXstrata, Vale and Anglo American show the highest exposure to corruption of the diversified miners. GlencoreXstrata’s corruption footprint is driven by its presence in the Democratic Republic of Congo, Colombia, South Africa, the Philippines, Russia and Kazakhstan. (Figure 3) Figure 3: Diversified miners’ corruption risk footprint

* Average for Glencore and Xstrata Source: Adapted from Exane, 2013

20

Directive 2013/34/EU, 26 June 2013.

0% 20% 40% 60% 80% 100%

BHP Billiton

Rio Tinto

Anglo American

Vale

GlencoreXstrata*

Very high High Low Very low

Page 10: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

10

Water Although an essential input in the mining process, it is only recently that water availability has started to come onto the radar. This is due to a combination of factors relating to the water becoming scarcer in certain areas of the globe and mining processes generally becoming more energy and water intensive. Miners rely on stable water supply to ensure continuity of operations, and water shortage threatens the company’s physical ability to operate. Mining companies have recognised the need for water management and disclosure; it is one of the few sectors that can be considered a leader in water reporting.

21 However, the current state of this

corporate disclosure may not be giving a comprehensive account of water risk. For instance, reporting water abstraction at the consolidated group level fails to capture the local sensitivities to the risk. A localised methodology based on water basins may be more pertinent than peer comparison analysis on total water abstraction data. In response to Carbon Disclosure Project’s 2012 water questionnaire, almost all respondents (92%) identified some form of water risk with the potential to generate a substantive change in their business operation, revenue or expenditure now or within the next five years. Access to adequate volumes of good quality water is reported as a serious constraint to growth; however the depth and quality of responses to the CDP have been very different across the sector. Unlike greenhouse gas emissions and climate change whose impacts are felt globally, water is a localised issue and shortage thereof can have immediate and direct operational consequences. Indirectly, a lack of water oversight can lead to impairment of a resource on which several actors depend on and ultimately aggravate relations between the mine and its adjacent community. Overall, research shows that water can be a good proxy for environmental and social performance: - on the social side, maintaining strong relations with communities ensures project level ‘social license to operate’ and strong relations with employees help avoid work stoppages as well as lowers recruitment costs - on the environmental side, water, tailings and climate change need to be managed responsibly as they have impacts on multiple business drivers.

22

A good illustration of the competition for the water resources between mines and other actors is the Limpopo River Basin in South Africa. There, the distribution of resources creates a conflict between the mining and agricultural sectors: platinum mines (which saw wildcat strikes shake the industry in 2012) compete for water with the country’s primary agricultural area. Increased demand on a stressed water resource could lead to further production disruptions due to water shortages and disputes with local communities. For instance, mine dewatering can lower water levels for surrounding communities (Anglo American’s Kumba Iron Ore is required to provide grazing subsidies and alternative water supplies for farmers impacted by dewatering at its Sishen Iron Ore mine).

23 (Figure 4)

21

Studies by Ceres (2010) and KPMG (2012) both found the mining sector to be the leader in water reporting. 22

Société Générale Cross Asset Research, 2013. Mining and Water Risk, p. 5. 23

MSCI ESG Research, 2013. Water: upstream and downstream impacts from a well running dry, p. 9.

Page 11: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

11

Figure 4: High water risk mining projects

Source: Société Générale, 2013, p. 21 (╬ Precious Metals, ► Base Metals)

Some researchers argue that, similarly to the oil and gas industry, the mining sector is prone to stranded assets due to the location of mineral reserves in water-stressed regions. These reserves may turn out to be inaccessible and economically unviable. It is estimated that $152bn in reserves is at risk of being inaccessible due to water issues in the gold industry, which represents about 11% of the total gold reserve value within the MSCI World.

24

In April 2012, following an extended period of violent protests, the Peruvian government halted the development of Southern Copper Corporation’s $1bn Tia Maria project due to its potential harmful impacts on local water supplies.

25

Overall, it seems mining companies are not well-equipped to prepare and adapt to these additional constraints, or at least do not discuss them in as much transparency as other, more established, indicators. Resource nationalism and tax liabilities are seldom recognised as a strategic risk in companies’ disclosures, even though country-by-country reporting legislation is expected to pose an additional burden on companies in the next few years. Given the lack of transparency on this issue, it is unclear what consequences country and project level payments disclosure will have on companies, governments and stakeholders. Water issues, on the other hand, seem to be gaining more strategic attention with the majority of respondents to the CDP water questionnaire reporting board-level oversight. Most of the water targets adopted by companies, however, focus on reducing total water usage, thereby omitting the local context of where and when the water is consumed.

26 Some companies (including Anglo American and Rio Tinto) take a more

strategic and holistic approach to water governance, including engagement with communities, proactive transparency and integrated water management informed by local water basin priorities. The approach of others remains driven by legislative compliance. If environmental and social components of mining operations represent growing risks and costs for miners, companies offering mining support services may benefit in the medium- and long-term from this evolving operational context. It offers opportunities to mine differently.

24

Ibid, p. 5. 25

Moody’s, 2013. ‘Water Scarcity to Raise Capex and Operating Costs, Heighten Operational Risks’, p. 3. 26

CDP, 2013. Moving beyond business as usual – a need for a step change in water risk management, p. 12.

Page 12: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

12

The traditional company risks (such as production disruption, regulatory costs, insurance premiums, fines/penalties) are being increasingly augmented with their broader financial considerations: increase in capital expenditure, increase in operating expenses, lower revenues, and decrease in shareholder value.

27

27

Société Générale Cross Asset Research, 2013. Mining and Water Risk, p. 23.

Page 13: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

13

The financial materiality of ESG impacts

Assessing the costs and benefits of ESG

The mitigation of –or adaptation to– adverse environmental and social impacts implies additional costs for mining companies. The identification of these additional costs remains very difficult as they are usually subsumed in the traditional capital or operational expenditures. Two areas with greater financial visibility include rehabilitation and restoration provisions as well as fines for environmental incidents. Rehabilitation provisions are usually disclosed and presented as a proportion of cash flow, enabling analysis of the overall financial burden of mine closure and land restoration. Companies may also report the amount of environmental fines paid in any given year. Rehabilitation provisions generally represent management’s estimate of the present value of future costs required, which will be influenced by the regulatory framework, the extent of possible contamination and the costs of restoring the local environment to pre-mining status. After mining commences, any of these subsequent costs are expensed on the balance sheet and added to the provision. (Figure 5) Figure 5: Rehabilitation provisions as a percentage of operating cash flow

Source: Morgan Stanley, 2013, p. 8.

Rehabilitation provisions can be significant and lead to real cash outflows, and reductions in free cash flow to the equity holder. They can also be significantly under-estimated in light of the actual cost requirements. For example, in December 2010, Energy Resources of Australia (ERA) which is 68% owned by Rio Tinto, had A$315mn of rehabilitation provisions on its balance sheet compared to an EBITDA of A$136mn. In 2011, an increase in ERA’s estimate of the closure costs added A$220mn to this provision. At the end of the year, the total provision amounted to A$565mn, approximately 86% of revenues.

28

The number and amount of environment-related fines is available in mining companies’ disclosures. These fines are usually not material, although there can be exceptions. A subsidiary of Vedanta, Sterlite Industries’ saw its copper smelting plant shut down by the Madras High Court in September 2010 for polluting the air and water. In April 2013, India’s Supreme Court imposed a $18.4mn fine on the company.

29 Generally, the number

of environmental incidents and their severity (measured by the amount paid) may serve as a good proxy and forward indicator to gauge the environmental vulnerability and risk management of a company. (Figure 6)

28

Morgan Stanley, 2013. S+R Valuation Framework: Spotlight on mining, p. 8. 29

Ibid.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Reh

ab

ilit

ati

on

pro

vis

ion

s t

o o

pera

tin

g

cash

flo

w (

%)

Anglo American BHP Billiton Rio Tinto Vedanta

Page 14: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

14

Figure 6: Environmental fines for diversified miners in 201230

Data: Bloomberg

The impacts of mitigating adverse environmental or social impacts may, however, be felt more clearly in the capital and operating expense lines. Greater energy and water consumption have financial costs for mining companies, and maintaining the physical ability to operate may incur additional investments, such as adapting operations to flooding events or installing a desalination plant because the groundwater table can no longer sustain production levels. It is interesting to note that production levels may have in certain circumstances reached a plateau, whereas increasing amounts of energy and water are used to reach similar production figures. For instance, in Chile, the production of refined copper has remained relatively stable over the years, but energy requirements have increased (Figure 7). With energy costs having risen by 193% between 2000 and 2010 in Chile, there are financially material implications for the Chilean mining sector.

Figure 7: Evolution of energy consumption in refined copper production in Chile

Source: Chilean Copper Commission, 2012

A similar observation can be made with water intensity, which is set to increase in spite of stable –or even– declining production. Given the current pressure on the water supply in a number of regions, it is likely that governments will seek to modify current water permits or increase water costs, thus potentially incurring additional operating expenses for the miners. Figure 8 shows that Anglo American Platinum’s production

30

Anglo American’s disclosure on environmental fines is more detailed and comprehensive than its peers.

-

50,000

100,000

150,000

200,000

250,000

0

100

200

300

400

500

600

700 Am

ou

nt o

f en

viro

nm

en

tal fin

es ($

)

Nu

mb

er

of

en

vir

on

men

tal

fin

es

Amount of environmental fines Number of environmental fines

0

1

2

3

4

5

6

0

20

40

60

80

100

120

140

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Refin

ed

Co

pp

er P

rod

uctio

n

(millio

n to

nn

es)

En

erg

y (

Peta

jou

les)

Fuel Electricity Total Energy Refined Copper Production

Page 15: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

15

output have decreased significantly over the past three years, whereas water intensity has remained stable, demonstrating that more water is needed to reach similar levels of output. (Figure 8) Figure 8: Anglo American Platinum’s production and water intensity

Source: Bloomberg

As noted by Moody’s, operating costs are going up as securing, treating and managing water from alternative sources is often energy-intensive and requires significant ongoing maintenance expenditures. The financial implications are also being felt on capex requirements, with project development costs rising as companies need to invest in alternative water sources, such as desalination facilities and pipelines to transport water over long distances. According to Global Water Intelligence, mining companies will spend around $12bn globally on water infrastructure in 2013, which represents a 56% increase on the $7.7bn the industry spent in 2011 and a 275% increase on the $3.2bn spent in 2009. This compares to a net increase in global mining output for the major commodities of between 20% and 52% between 2009 and 2013.

31

In July 2013, BHP approved investment of $2bn in a new 2,500 litre per second seawater desalination facility. This is to provide water supply to its Escondida copper mine, located at an altitude of 10,000 feet in the Atacama Desert in Chile, as water use is set to increase with a new copper concentrator. The project includes two pipelines, four high pressure pump stations, a reservoir at the mine site and high voltage infrastructure. The facility will be commissioned in 2017 and minimise the reliance on local aquifers.

32

The use of a desalination plant improves water supply and reliability, but it also contributes to increase the site’s vulnerability to changing energy prices over time. Desalination plants have higher variable costs (50%) than traditional groundwater abstraction plants (30%). As a result of their energy intensity, desalination plants exacerbate greenhouse gas emissions and the extensive development of such systems can increase the dependence on fossil fuels and/or electricity. The cost of desalination, which can be between 2 and 3 times more than fresh water extraction, is also of concern (Figure 9).

31

Moody’s, 2013. ‘Water Scarcity to Raise Capex and Operating Costs, Heighten Operational Risks’, p.4. 32

Citi, 2013. BHP Billiton & Climate Change, p. 22.

2.0

4.0

6.0

8.0

10.0

12.0

14.0

3.20 3.25 3.30 3.35 3.40 3.45 3.50 3.55 3.60 3.65 3.70

2008 2009 2010 2011 2012

Wate

r Inte

nsity

(m3/to

nn

e)

Pro

du

cti

on

(m

n t

on

nes)

Platinum and Palladium Water Intensity

Page 16: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

16

Figure 9: Desalinated sea versus aquifer sourced fresh water – average cost

Source: KeplerCheuvreux, 2013.

A few companies have reported the amounts of investment that were made as a result of water-related events to the CDP, such as flooding or resource stress. In 2011, Freeport-McMoRan disclosed an investment of $300mn which represented approximately 12% of its total capex at the time. Anglo American reported a combined total investment of $82mn to mitigate water stress issues as well as possible flooding events. (Figure 10) Figure 10: Water capex for 2011

Source: CDP, 2013.

Nevertheless, capital expenditures and sales for the miners are not set to normalise until 2015 and low returns on previous investments make it unlikely for the industry to rush into new investments. Rio Tinto’s guidance has a capex declining by 20% per annum in 2013-2015 and Vale’s indicates a 9% reduction in capex for 2014. In the context of overall declining capex, it is unknown however if the share of environmental and social adaptation expenses is declining, stabilising or increasing. Given previous observations on environmental and social costs gaining momentum in the industry, it can be argued that the mitigation of these impacts will represent a greater portion of expenditure or even that they could ultimately lead to significant capex revisions. In order to test this hypothesis, we engaged with five companies with the aim to find about the costs and associated benefits of their environmental/social mitigation strategies. We were also hoping to better understand how companies go from identifying a potential problem to adopting a strategy and agreeing to cash injection.

100 94

113

113

0%

50%

100%

150%

200%

250%

300%

350%

Fresh water Sea water

Opex: pumping system

Capex: pumpingsystem

Opex and Capex:desalination system

Event Investment ($ mn)

Total capex ($ mn)

Water capex (%)

Freeport-McMoRan Water stress 300 2,534 11.8% Newmont Mining Water stress 200 2,787 7.2% Anglo American Water stress/flooding

82 6,203 1.3%

Engagement questions

- What percentage of capex and opex has been directed towards the mitigation of (or adaptation to) ESG impacts and/or risks? Has this increased or decreased over time? - What is the cash cost sensitivity to energy and water price increases? - How much more or less energy-intensive is the new mitigating equipment, if any? - What is the net effect of introducing the mitigating equipment? Does it compensate for the loss incurred in a business-as-usual scenario?

Page 17: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

17

The contacted companies include GlencoreXstrata, Rio Tinto, Anglo American, BHP Billiton and Antofagasta. Two did not respond to our initial query (Rio Tinto and Anglo American) while the three others (BHP Billiton, GlencoreXstrata and Antofagasta) said they were unable to provide the underlying as it was too difficult to track and to assess when a piece of equipment was bought in response to an environmental or social imperative. This was somewhat surprising for Anglo American given its disclosure to the CDP with regards to its water equipment investment for 2011. GlencoreXstrata provided an interesting response regarding its health and safety investment, saying that ‘each piece of equipment bought was delivering a health and safety benefit’; it was unclear, however, to what extent and how these health and safety concerns (fatalities, accidents, occupational health) triggered the purchase of new equipment, nor how the benefit of the purchase was established. The level of financial integration and consideration of these questions in companies’ reporting is lacking, and results of our recent contact activity with companies show that there is currently no real granular understanding of financial materiality. Even on a project basis (for instance on BHP Billiton’s Escondida desalination plant), it was not possible to have more details on the likely costs and benefits. This would suggest that mining companies have yet to integrate this view into their overall risk management systems, and it is expected that shareholders will require more granularity on capex and opex allocation decisions, especially as the motives for these costs may ultimately pose risks to the overall business model.

Impacts on company valuation

If mining companies may not yet be in a position to disclose the financial impacts that environmental and social events may have on their balance sheet, there is clear evidence that such events can affect how shareholders value their stock. Particularly valid in the mining sector, safety and water issues can influence share price. The market reactions to Aquarius Platinum’s fatalities in 2010 showed how safety-related events can quickly destroy shareholder value, catalysing stocks and providing event-driven trading conditions. (Figure 11) Figure 11: Aquarius Platinum share price (rebased, 25.06.2010=100)

Source: Bloomberg

Other examples of the impacts of fatalities and accidents on share price include Vedanta and Fresnillo. Vedanta’s share price slumped 15% in the six weeks after May 17 when it reported 22 fatalities in the fiscal year through March, compared with a 4% decline in London’s FTSE350 Mining Index. Fresnillo, the world’s largest primary producer, fell about 17% in the six weeks after its April 18 output cut, prompted by safety-related slowdowns.

Page 18: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

18

During the second quarter of 2013, Barrick Gold’s share price plunged (Figure 12), mostly due the difficulties encountered by the company at its Pascua Lama mine located on the Chilean border with Argentina. Pascua Lama has been disrupted by protests from local groups concerned about the mine’s impacts on the environment and the water resource. In May 2013, a Chilean court of appeal ruled to stop the construction until appropriate water infrastructure is built to prevent pollution. To date, Barrick Gold has been fined $12mn for environmental breaches at the mine. In 2009, the maximum cost estimate for Pascua Lama was $3.6bn. By mid-2012, Barrick Gold announced a 50%-60% increase in capital costs. As of October 2013, the total capital expenditure planned for the project stands at $8-$8.5bn. The construction is approximately 40% complete. In 2013, Barrick Gold recorded a total impairment charge of $8.7bn, including $5.1bn for the Pascua Lama project.

33

Figure 12: 2013 Barrick Gold share price vs. MSCI World Metals & Mining (rebased, 15.03.2013=100)

Source: Bloomberg

If the impacts of environmental and social events can be relayed via the share price, it is however more difficult to integrate the risks into valuation before they translate into value-destroying events. CDP has tried to address this problem by seeking a correlation between good water management practices and traditional financial indicators, such as operating margins and return on invested capital (ROIC). It found that companies disclosing business critical water information through the CDP platform have better financial results than non-respondents, with respondents’ operating margins being on average 50% higher than non-respondents’. Similarly, respondents have a ROIC 25% higher than non-respondents. This could indicate that respondents invest in more profitable projects, including water-related investments, which could be partially responsible for this higher return.

34 In this case, disclosure could be a proxy for good management.

The next step would be to use environmental or social information to inform the valuation of companies before shocks are felt on the share price. Given the financial prominence of mitigation efforts for mining companies, inputs into valuation seem possible so that better decisions can be made and more resilience built into these models. As noted by Morgan Stanley, much of the data is currently qualitative and not easy to integrate into cash flow valuation. Even if some financial estimates may be available on a project-by-project basis, they are not easily plugged in.

33

Société Générale Cross Asset Research, 2013. Mining and Water Risk, p. 29. 34

CDP, 2013. Moving beyond business as usual – a need for a step change in water risk management, p. 13.

Page 19: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

19

Environmental or social considerations (for instance, the ‘social license to operate’) may already be captured in the stock valuation. A former COO for Gabriel Resources has argued that ‘it used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction, and the world price of gold; today (…) two mines identical on these three variables [can] differ in their valuation by an order of magnitude (…) because one has local support and the other doesn’t’.

35 The consolidation of this

view at the stock level may be more challenging for analysts. The necessary information from companies is still missing and the methods to quantify this information have yet to be developed.

35

Henisz, 2011. ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, working paper, p. 3.

Page 20: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

20

Conclusion The environmental and social impacts of mining activities have long been known and described. Companies have become better at reporting and giving strategic importance to key material issues. Overall, it has been easier to assess progress and the credibility of their systems. The financial materiality, however, remains difficult to identify, both for companies and shareholders. This area is poised to receive greater attention in the years to come for a number of reasons. Mining operations are located in riskier countries and lower quality ores as well as access difficulties make mining an increasingly more resource-intensive activity. The sector finds itself competing with other industries or communities for its resource inputs and this in turn can lead to stakeholder upheaval. Although very localised, these issues can very quickly have a global resonance given the high media scrutiny of mining activities. Emerging material trends for the sector include resource nationalism from resource-rich countries’ governments as well as community actions, which both threaten the physical ability to operate and can generate real financial costs for mining companies. Among new areas of risk, corruption and water scarcity can take their toll on a company’s financial performance. There are a number of recent examples which supports this view, but it remains very difficult for companies and shareholders alike to quantify the financial implications of environmental and social mitigation systems in the mining sector. Our engagement with five companies has shown that determining the share of capital or operational expenditures devoted to these mitigation systems is currently impossible, and there is no sense for how these have evolved over time. In a time of capex and opex rigour, it appears nonetheless essential to identify what additional onus this places on companies. Only then will a true valuation of the company and its operations be possible. It is unclear, however, if companies will be in a position to provide this information going forward. Most companies are aware that ESG considerations will be part of their opex and capex figures, but a more quantitative assessment on the associated costs seems unlikely. Rather, the appreciation of the ESG risks and how these are managed by companies is set to remain of a qualitative nature.

Page 21: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

21

References

Accenture, 2012. Sustainablle Energy for All: Opportunities for the Metals and Mining Industry Bank of America Merrill Lynch, 2012. Who Does What Where? 2012 WDWW Primer Update BBC, ‘Amplats production hit by striking miners’, Available from: http://www.bbc.co.uk/news/business-

24397524 [Accessed 21 November 2013] Calvert, 2013. The Mining Sector’s Long Road to Sustainability. Available from: http://www.calvert.com/sri-

SAGE-mining-sector-road-to-sustainability.html [Accessed 19 September 2013] Carbon Tracker, 2013. Unburnable Carbon 2013: Wasted capital and stranded assets, Available from:

http://www.lse.ac.uk/GranthamInstitute/publications/Policy/docs/PB-unburnable-carbon-2013-wasted-capital-stranded-assets.pdf [Accessed 10 September 2013]

Cattaneo, B., 2006. Managing Political Risk in Mining Operations CDP, 2013. Moving beyond business as usual – A need for a step change in water risk management, CDP

Global Water Report 2013, Available from: https://www.cdproject.net/CDPResults/CDP-Global-Water-Report-2013.pdf [Accessed 07 November 2013]

Citi, 2013. BHP Billiton & Climate Change DB Climate Change Advisors, 2012. Sustainable Investing – Establishing Long-Term Value and Performance Deloitte, 2012. Disclosure of long-term business value – What matters? Deloitte, 2013. Tracking the Trends 2013 Ernst & Young, 2013. Business risks facing mining and metals 2012-2013 Ernst & Young, 2013. Value of sustainability reporting Exane, 2013. Sixteen tons, what do you get? Gassert, F. et al., 2013. Aqueduct Global Maps 2.0. Working Paper. Washington, DC: World Resources

Institute. Available from: http://www.wri.org/publication/aqueduct-global-maps-20 [Accessed 28 October 2013].

Henisz W.J. et al, 2011. ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, working

paper, Wharton School ICMM, 2013. Adapting to a changing climate: implications for the mining and metals industry ICMM, 2013. The cost of carbon pricing: competitiveness implications for the mining and metals industry IntierraRMG, 2013. State of the Market: Mining and Finance Report. Available from:

http://www.austmine.com.au/Portals/25/Content/Documents/StateoftheMarketReportEdition120132.pdf [Accessed 19 September 2013]

Jamasmie, C., 2013. ‘Large miners affected by cost of desalinating water in Chile; twice as much as in the

US’. Available from: http://www.mining.com/large-miners-affected-by-cost-of-desalinating-water-in-chile-twice-as-much-as-in-the-us-58235/?gce_var=lower-comments&utm_expid=17625373-0.wR1isPasQ6GSvnWKGYTdqA.1 [Accessed 23 September 2013]

KPMG, 2012. Water Scarcity: A dive into global reporting trends. Available from:

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/sustainable-insight/Documents/sustainable-insights-water-survey.pdf [Accessed 2 December 2013]

Page 22: Schroders Mining the ESG Ground...Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013 5 ESG Challenges in the Mining Sector Recognising

Research Paper: Mining the ESG Ground For professional investors and advisors only December 2013

22

Loayza N. et al., 2013. ‘Poverty, Inequality, and the Local Natural Resource Curse’, Policy Research Working

Paper 6366, Available from: http://go.worldbank.org/V84KYHFSV0 [Accessed 20 September 2013] McKinsey Global Institute, 2013. Resource Revolution: Tracking global commodity markets. Available from:

http://www.mckinsey.com/insights/energy_resources_materials/resource_revolution_tracking_global_commodity_markets [Accessed 20 November 2013]

McMenemy L., 2012. ‘Responsible mining: can it work?’, The Guardian, Available from:

http://www.theguardian.com/sustainable-business/responsible-mining-can-it-work [Accessed 18 September 2013]

Moody’s, ‘Water Scarcity to Raise Capex and Operating Costs, Heighten Operational Risks’, Available from:

https://www.moodys.com/research/Moodys-Water-scarcity-could-increase-rating-pressure-on-global-mining--PR_266225 [Accessed 10 December 2013]

Monteiro, A., 2013. ‘Anglo Settles South Africa Lung Disease Claims by 23 Gold Miners’, Bloomberg, Available

from: http://www.bloomberg.com/news/2013-09-25/anglo-settles-south-africa-lung-disease-claims-by-23-gold-miners.html [Accessed 20 November 2013]

Morgan Stanley, 2013. S+R Valuation Framework: Spotlight on Mining MSCI, 2013. Water: Upstream and Downstream Impacts from a Well Running Dry Official Journal of the European Union, Directive 2013/34/EU on the annual financial statements, consolidated

financial statements and related reports of certain types of undertakings. Available from: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:182:0019:0076:EN:PDF [Accessed 2 December 2013]

PwC, 2013. Business guide to water valuation PwC, 2013. Mine A confidence crisis – Review of global trends in the mining industry PwC. 2012. Mine The growing disconnect Renaissance Capital, 2013 Mining – not a growth sector Société Générale Cross Asset Research, 2013. Getting There from Here: An ESG/SRI Primer for Credit

Investors Société Générale Cross Asset Research, 2013. Mining and Water Risk Wall Street Journal, 2013. ‘Brazil’s Vale Hit with BRL18.9 million in damages from labour suit’. Available from:

http://online.wsj.com/article/BT-CO-20131125-708276.html [Accessed 1 December 2013] The views and opinions contained herein are those of Sophie Rahm, ESG Analyst, and may not necessarily represent views expressed or reflected

in other Schroders communications, strategies or funds.

For professional investors and advisors only. This document is not suitable for retail clients.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an

offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting,

legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does

not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability

that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.

Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in

the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London

EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored. 934748