ESG Focus: Mine Safety, Water & Diversity

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FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Mine safety and water scarcity are in focus, as is engagement with indigenous communities, while ESG was a hot topic at this year’s Macquarie Conference and Jarden lunches an ESG survey of listed companies.

-Safety performance impacts miner share prices
-Water depletion/contamination an issue
-BHP’s and Rio Tinto’s woes
-ESG at the Macquarie Conference
-Jarden’s new ESG survey

Compiled by Greg Peel

Mine Safety

Safety is a top priority for companies in the mining space with improvement seen over the past few years. RBC Capital Markets has compiled safety metrics across its global coverage universe including injury frequency rates and analysis of 100-plus fatal safety incidents since 2018, breaking down common events by region, root cause, and mine type along with corresponding share price and operational impact.

In RBC’s view, safety continues to be a growing focus for mining investors particularly around companies with less diversified portfolios, with premium paid for those with an established history of safer operations.

Looking at historic market impact to past fatal safety events, companies have experienced relative share price underperformance of -2.5% on the day of announcement and up to -5% over the following month, RBC found, with greater impact seen for intermediate/growth producers given less diversified portfolios.

Relative share price recovery back to prior baseline levels takes up to five months.

RBC estimates companies that have experienced a fatal incident over the past year are currently trading at an around -10% discount to peers on spot net asset value. RBC has highlighted those global companies with relatively better safety performance and lower injury frequency rates based on its analysis, and named seven companies.

Only one of those is Australian-listed, being Northern Star Resources ((NST)).

RBC continues to view safety as a top focus for investors and views potential for greater emphasis and premium to be paid for companies able to ensure a safe and stable workplace.

Water Scarcity

Jarden’s recent discussions with traditional owner groups in the Pilbara have highlighted water scarcity issues in mining operations. Whilst water scarcity is not new, the associated risks to social licence, potential fines and accusations of human rights violations demand increasing attention.

Looking across the assets of four ASX-listed mining companies BHP Group ((BHP)), Rio Tinto ((RIO)), Arcadium Lithium ((LTM)) and South32 ((S32), Jarden finds inadequate responses to water scarcity challenges, affecting both indigenous and non-indigenous communities locally and internationally.

For Rio, Jarden singles out Oyu Tolgoi in Mongolia, the QIT site in Madagascar, the Jadar site in Serbia, Simandou in Guinea and the Bungaroo Aquifer as all suffering variously from water depletion, contamination and/or lack of engagement with communities.

For BHP, clean-up costs following the Samarco disaster in Brazil are still being negotiated, lawsuits are being faced in Chile for over-extracting water in the Salar de Atacama, and Olympic Dam water usage and Native Title agreements face scrutiny.

BHP and Rio’s Resolution Copper joint venture in Arizona also faces ongoing legal challenges from the local Native Americans.

Arcadium Lithium has been accused of water depletion and contamination in Argentina.

South32’s Dendrobium mine faces a regulatory probe regarding unlicensed water extraction.

Post Rio’s destruction at Juukan Gorge, mining companies appeared to improve community and indigenous engagement and enhance their commitment to protect sacred sites, Jarden notes. However, persistent examples of inadequate engagement with indigenous groups and water management indicate ongoing impacts on livelihoods and in many cases lack of mitigation and remediation actions to avoid environmental and social damage.

In Jarden’s view, investors should scrutinise international and local operations impacting indigenous groups in particular due to more severe environmental and community impacts, particularly in less regulated countries and areas of high cultural and/or environmental sensitivity.

It gets worse for BHP and Rio

Further Issues

Rio Tinto has overseen two recent events in the Pilbara, WA where blasting had an impact /potential impact on culturally significant rock shelters at its Nammuldi and Robe Valley mines, Jarden reports.

On top of the water issues noted above, Rio is facing environmental concerns and its part-owned Mineracao Rio do Norte project in Brazil, and a report showing more than 100 environmental infractions at its aluminum division in Quebec over the past 15 years.

Simandou is a biodiversity rich area where more than 23,000 chimpanzees could be impacted.

The clean-up bill for Rio’s Argyle mine in WA is expected to be $270m more than estimated, and the company will manage the Ranger mine rehabilitation in Northern Territory which, after several delays and cost overruns, is now expected to cost materially more than assumed with an extended completion timeline.

Samarco remains the main overhang for BHP, and the company is planning to shut down its Nickel West operations in WA, attributing the decision to a significant decline in nickel prices. Closure and rehabilitation costs are estimated to be -$1.4bn.

ESG in Focus

At this year’s annual Macquarie Conference, at which 113 companies made presentations, various ESG issues were highlighted.

Firstly, Australia’s energy transition is taking longer with regulatory approval delays and availability of labour a challenge. AGL Energy ((AGL)) noted solar and wind developments taking around five years, although battery developments were quicker.

Origin Energy ((ORG)) flagged Eraring’s life was expected to be extended. Aurizon Holdings ((AZJ)) is seeing a stronger thermal coal demand outlook and while Worley ((WOR)) is still seeing a positive sustainability investment pipeline, there has been some shift back to traditional projects with energy transition capital deployment taking longer.

There was also growing sentiment around gas as a transition fuel.

Secondly, critical minerals supply chain diversification remains an opportunity. Across the critical minerals sector, particularly in rare earths and lithium, supply chain monopolies continue to be a concern. For example, currently 90% of rare earth elements and 65% of lithium chemicals are produced by China. These concerns were discussed by Boss Energy ((BOE)), Arcadium Lithium, Liontown Resources ((LTR)) and Patriot Battery Metals ((PMT)), among others.

Thirdly, labour conditions remain challenging in construction and skilled staff. Shortages in engineering and electrical highlighted by Aurizon and Sims ((SGM)). In the real estate sector, Mirvac Group ((MGR)), Stockland ((SGP)) and Qualitas ((QAL)) flagged construction cost pressures due to labour and subcontractor shortages. These shortages in skilled staff need to be addressed with push towards renewable energy which will require upskilling the workforce.

Finally, AI and productivity, power requirements and data centre opportunities were a talking point.

NextDC ((NXT)) estimates productivity benefits from using AI models of some 5-10x almost immediately. Productivity benefits were flagged by multiple companies including Domain Group ((DHG)), Temple & Webster ((TPW)), Wesfarmers ((WES)), Worley and WiseTech Global ((WTC)). Some companies are taking a cautious approach to AI, including Insurance Australia Group ((IAG)), nib Holdings ((NHF)) and Wesfarmers given regulatory and ethical considerations.

The growth in AI and implications for energy demand was highlighted by Santos ((STO)). The greater power requirements saw strong interest in data centre exposure at NextDC, Goodman Group ((GMG)) (not at conference) and Megaport ((MP1)).

More Generally

Jarden has launched its new quarterly ESG Survey, covering 145 ASX-listed companies, to capture and track regular ratings of how analysts view company exposure to, and management of, the most material three-four ESG topics for each sector. In the first round of assessment to March 2024, the main trends relate to three sectors: gaming, mining and retail.

Jarden found the following:

Gaming: Aristocrat Leisure ((ALL)), Tabcorp ((TAH)) and Jumbo Interactive ((JIN)) improved their performance in diversity & inclusion (D&I) but cyber risk is on the rise for The Lottery Corp ((TLC)) and Tabcorp. The recent period has seen a general effort across the sector to push for improvements in D&I across gaming, a sector that has traditionally not attracted female talent.

Aristocrat, Tabcorp and Jumbo have all met their HESTA 40:40:20 targets. The focus on D&I helps them to bolster their social licence to operate, which also improved over the period. Meanwhile, cybersecurity threats increased for those gaming companies (Lottery Corp and Tabcorp) that are moving from retail to online operations.

Mining: IGO Ltd ((IGO)), Liontown Resources, Evolution Mining ((EVN)), Capricorn Metals ((CMM)) and Champion Iron ((CIA)) are most exposed to increasing regulatory risks as they wait longer to get approvals for new projects and navigate more complicated and unclear approval processes, which do not appear to be easing over the coming year.

Champion Iron, Core Lithium ((CXO)) and IGO also have greater social licence to operate risks due to operating near local townships and on culturally and environmentally sensitive lands. Positively, however, mining companies have been focusing on nature-related risks and biodiversity, which has provided opportunities to improve their social licence to operate.

Retail has shown a trend of higher safety risks and declining safety performance across Woolworths Group ((WOW)), Domino’s Pizza ((DMP)), Wesfarmers, Lynch Group ((LGL)) and Inghams Group ((ING)), with retailers such as Woolworths and Domino’s recording fatalities in FY23 and stubbornly high TRIFRs (total recordable injury frequency rate) due to the manual nature of the industry and staff turnover.

Wesfarmers, for example, noted the Bunnings TRIFR expanded for a couple of reasons, up to 15.9 in the first half FY24 (from 11.3 in FY21 and FY22), with an increase in manual handling, which was covid-related and a workforce profile with a materially older age demographic.

FNArena’s dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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