Industry Trend Analysis - Global Regulatory Development: Major Accidents To Accelerate Changes - JULY 2016
BMI View: Globally, mining regulations will tighten on the back growing awareness and concern over environmental damage, social impacts and climate change. A case study of two recent mine tailings dam failures demonstrate s the implications for miners of increasingly stringent regulations, namely, rising costs and reputational damage.
The global mining industry will face rising costs and reputational damage due to tightening environmental regulations across major mining markets over the coming years. As climate change concern draws increasing scrutiny to mining disasters, governments will ramp up efforts to implement changes ( see ' Metals & Mining Megatrends To 2050: Supply And Demand Patterns To Shift ' , March 9). Naturally, economies more dependent on the mining sector, measured as a proportion of GDP, will be slower to enact and implement regulatory reforms. For instance, in Botswana, where we estimate the mining industry value to account for 19.8% of GDP, the government will continue to prioritise business-friendly policies in a bid to increase its competitiveness as a destination for international mining investment. On the other end of the spectrum, in the US, where the mining industry value contributes less than 1% of GDP yet remains a significant contributor to global production, the Environmental Protection Agency has passed a string of legislation aimed at reducing coal dependency, and therefore production. Nonetheless, we expect to see a general shift towards a tighter regulatory environment.
|Exposure To Mining Will Inform Pace Of Regulatory Changes|
|Global - Mining Industry Value As Share Of GDP (%), 2016|
|Source: National Sources, BMI|
Mine Tailings Dams To Come Under Increasing Scrutiny
With each new mining-related disaster, standards will continue to climb, translating to higher up-front investments and more expensive upgrade commitments. Two major failures at mine tailings dams over the past two years highlight this trend. Tailings dams, which hold the waste created during the process of separating the desired metal from mined rock, are generally constructed one of three ways: upstream, the least expensive and least stable; centreline, which new levels of the dam up and out resulting in sturdier structure; and downstream, where new levels are continuously built outward. In the following cases, the former was an upstream dam and the latter a centreline.
Brazil - In November 2015, a mine tailings dam burst in Minas Gerais, releasing two mine-waste ponds of toxic tailings down the Rio Duce, killing several people and dislocating over 600. This incident, widely regarded as the worst environmental disaster in Brazil's history, will usher in regulatory legislation targeted at improved monitoring and construction of tailings dams. For instance, Brazil's previously defunct National Department of Mineral Production received USD2.4mn in emergency funding immediately following the dam failure to ramp up inspections in Minas Gerais through 2016. Proposed legislation includes a requirement for miners to use dry-processing of iron ore and avoid tailings pond dams altogether. Furthermore, companies responsible for such disasters will face increasing legal fees and reputational damage. As of June 23, Samarco Mineracao, along with parent firms Vale and BHP Billiton, settled a civil lawsuit for USD5.6bn to be paid over 15 years, had another USD6.0bn civil lawsuit dismissed, and face an ongoing lawsuit filed by federal prosecutors for USD44bn. Samarco is reportedly looking to restructure USD1.6bn in loans and USD2.2bn in bonds, as operations at the iron ore mine will not resume during 2016.
Canada - In August 2014, a tailings dam breach at Imperial Metals' Mount Polley copper mine disgorged millions of cubic metres of tailings and water into central British Columbia waterways. While the firm was not fined, the accident motivated new legislation to strengthen regulatory oversight. In April 2016, British Columbia introduced amendments to the Mines Act including an increase in maximum penalties from CAD100,000 to CAD1mn and from one year imprisonment to three years.
|Environmental Disasters Bad For Business|
|Samarco Mineracao 2022 Bond Yield (%, LHC) & Imperial Metals Equity (RHC)|
Implications: Invest Now Or Face Fines Later
Mine tailings dam failures will remain a prominent risk in the global industry, as structurally lower mineral prices weigh on miners' profit margins and lead to continually deeper spending cuts ( see ' Mining Mid-Year Update: Key Themes For 2016', June 22). Ever increasing production growth will result in larger and inherently less stable waste ponds. As such, governments will gradually tighten regulations, with the implicit goal being an outright ban of upstream designs. Chile, for instance, banned upstream dams following an earthquake in 1965 that led to several collapsing at the El Cobre mine. While the reforms seen in Brazil and Canada will not entirely mitigate the risk of upstream dams, any increase in fines and severity of penalties will incentivise miners to invest in the better technology at the outset of projects. For example, Vale's USD8.0bn S11D iron ore project will incorporate a plant designed to use the natural humidity of the region, eliminating the creation of and therefore need to store tailings entirely. Furthermore, the system will reduce water consumption by 93%. Proactive miners will invest in research and development to lower operating costs in compliance with tighter regulatory expectations in the long term. On June 21, Australian iron ore miner Centrex Metals Limited, the University of South Australia and the governments of South and Western Australia announced a collaborative research funding partnership for molten salt minerals processing research based on the firm's Oxley Potassium project. If successful, the use of molten salt throughout mineral processing will significantly lower processing energy, water and capital costs.
|Country||Company||Mineral||Waste Released (cubic metres)||Year|
|Source: WISE Uranium Project|
|Brazil||Samarco Mineracao (Vale 50%, BHP Billiton 50%)||Iron ore||62mn||2015|
|Brazil||Herculano Mineracao Ltd||Iron ore||-||2014|
|US||Duke Energy||Coal||100,000 (74.4kt toxic coal ash)||2014|
|Armenia||Cronimet Mining AG||Copper, molybdenum||-||2013|
|Canada||Sherritt International||Coal||670,000 (90kt muddy sediment)||2013|
|Finland||Talvivaara Mining Company||Nickel||-||2012|
|China||Xichuan Minjiang Electrolytic Manganese Plant||Manganese||-||2011|
|Hungary||MAL Magyar Aluminium||Bauxite||700,000||2010|
|Peru||Unidad Minera Caudalosa Chica||-||21,420||2010|
|US||Tennessee Valley Authority||Coal||4.1mn||2008|
|China||Tashan Mining Co||Iron ore||-||2008|
|Brazil||Mineracao Rio Pomba Cataguases||Bauxite||2mn||2007|
|Zambia||Konkol Copper Mines (Vedanta Resources 51%)||Copper||-||2006|
|China||Zhen'an County Gold Mining Co||Gold||-||2006|