Acclimatise CDP Global Mining Adaptation Report

8/3/2019 Acclimatise CDP Global Mining Adaptation Report

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The Adaptation Challenge

Report prepared by: Report sponsored by:

Carbon DisclosureProject ReportGlobal MiningBuilding business resilienceto inevitable climate change


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Acclimatise reference CDP001/04

This document should be referenced as:Acclimatise (2010). Building Business Resilience to Inevitable Climate Change.Carbon Disclosure Project Report. Global Mining. Oxford

Project ManagerJean-Christophe Amado

Approved by

John Firth, CEO and co-founder

AcclimatiseHexgreave Hall,Upper Hexgreave,Farnsfield,Nottinghamshire,NG22 8LS

T: +44 (0) 1623 884347E: [email protected]: www.acclimatise.uk.com

Acknowledgements

The authors would like to thank the following organisations and individualsfor their guidance, advice and support in the preparation and publicationof this report:

Joanna Lee Carbon Disclosure ProjectDaniel Turner Carbon Disclosure ProjectDavid Beer AcclimatiseJean-Christophe Amado AcclimatiseClephane Compton AcclimatiseMatt King Acclimatise

David Carter IBMCathy Pickering IBMPeter Richardson IBMJeremy Yoo IBM


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1 IBM Corporation Envisioning the Future of Mining 2009.

The mining industry has been anessential contributor to society andthe economy for many years and hascontinually adapted successfully tochanges. IBM believes this rate ofchange is increasing and many withinthe industry realise that the modernminer will need to work differently andwork smarter.1

Several factors are driving this changesuch as volatile and emerging markets,new technologies, increased customerdemands, a dynamic workforce andnew business models. Increasinglythe potential impacts from inevitableclimate change resulting from pastgreenhouse gas emissions will needto be added into this mix, whether thistakes the form of adapting to reducerisks or complying with regulationsaimed at increasing energy efficiencyor reducing greenhouse gas emissions.This is particularly true for miningcompanies where long term investment

decisions have to be made.

Climate change is also affecting thecosts of mining. Labour and energy arealready major costs and are forecast toincrease as operations move to harsherand more remote locations and energycosts continue to rise. Water andcarbon costs are likely to become moresignificant as competition increasesfor scarce resources such as water,and pending legislation on carbonemissions comes into force.

The industry is already responding tothese challenges. Leading companiesaround the world can provide examplesof how they are changing their businessmodels to become more fluid, flexibleand agile so they can respond to theunpredictable. Also they are becomingsmarter to increase efficiencies,reduce costs and take advantageof opportunities.

Mining companies will have criticalchoices to make about variousaspects of their business. Theymust be considered in an holisticway and use technology widely asthe enabler, investing for futuresuccess rather than supportingoutmoded business models.

IBM Viewpoint

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1.1 Potential for change

If there is one constant in the miningindustry, it is constant change withunpredictability and complexity.Dealing with the impacts of inevitableclimate change from past emissionswill bring additional challenges aroundassets, operational procedures, wastemanagement and the labour force. Toadapt for success, mining companies

will have to become fluid, flexible andagile enterprises and the business ofmining must become smarter, perhapsby flipping the supply chain on itshead, where the goal wont be to pushproduct out of the ground to dump onthe market, but to respond nimbly tosophisticated customer relationshipsand market dynamics.

To achieve this success, IBM believesan holistic approach is needed whichconsiders nine characteristics of thefuture business of mining:

People and work Business model innovation,

governance and workforce,collaboration

Sustainability Safety, energy and environment

Operations and technology Asset management, productivity,

efficiency and cost reduction,information integration andvisualisation, remote operations.

1.1.1 People and work

Improvements in mining must startwith the most critical assets miningcompanies have: the intelligence,agility, and competencies of theirpeople, strategies and endeavours.

Business model innovation asunpredictability increases, not leastbecause of climate change, a new,more agile business model is requiredwhere volatile customer demands andneeds drive capacity and resource

planning. The mine adopts a newproduction discipline, best practicesand supporting metrics which enablethe company to focus on maximisingthe throughput, efficiency andprofitability of the entire process.

Example one of the worlds largeststeel makers re-engineered itsbusiness model, synchronising itsexternal and internal processes fromsuppliers through all divisions tocustomers, leveraging new end-to-endIT technology. This resulted in recorddelivery performance levels (95%)along with significant reductionsin inventories.

Governance and workforce asmarter mining company will needto improve its operational execution.Information and insight will becomecritical in managing fast changingdemands and inefficiencies.

Collaboration a new mode ofoperating with partners, customers andsuppliers is required to build enterpriseagility. Collaboration among individualsimproves the sharing of knowledgeand enables better decision-making;

among customers and partners it drivesinnovation and effectiveness.

Example using inter-company andinter-industry cooperative programmesto ensure the success of the membercompanies, a consortium of three majorUS auto manufacturers and four leadingsteel producers collaborates togetheron specific programmes that driveinnovation, technology advancementand efficiency across the steel-automanufacturing pipeline. Although theparticipating companies are clear

competitors and rivals, theyve realisedthat they can achieve more for theentire industry (and themselves) byworking together.

1.1.2 Sustainability

Today, providing a healthy and safework environment and protecting theenvironment are growing imperativesof corporate responsibility and must beintegrated into a companys businessstrategy, operations and culture todrive business value, reduce costsand provide benefits for the business

and society.


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Safety is of paramount importance toany mining organisation. In the words ofone CEO We will not mine if we cannotmine safely. As mining operations take

place in more hazardous and remotelocations, safety needs are becomingever more rigorous to meet the goalof minimising incidents. Technologycan help by locating people in anemergency, preventing people strayinginto hazardous areas, helping to identifyfailing or stressed assets and helping toavoid collisions.

Example one company, in the eventof an emergency, can easily locateits employees in specific areas andavoid the need to conduct sweeps to

search for unaccounted employees.Employees wear RFID tags linked toa visualisation engine providing a richgraphical view of employee locationsand associated metrics.

Energy and environment concernsare increasingly high on the publics andpoliticians agendas. To have a licenceto mine, companies must demonstrateresponsible use of resources andcare for the environment. Companiesare becoming serious about usingtechnologies and programmes to

manage pit to port costs that may beexacerbated by impacts of climatechange, reducing greenhouse gasemissions and improving efficiencyof water and energy use. The benefitsinclude reduced costs, ability to adaptsuccessfully to the challenges andan improved public image that canattract new talent and make substantialsocietal change at the same time.

1.1.3 Operations and technology

The heavy lifting aspects of miningwill improve in the future even whilst the

core objective of unearthing productstays the same.

Asset management the locationand status of assets is essentialinformation for an agile, smarterbusiness particularly as assets may bestressed beyond their design pointsdue to climate changes. Instrumentedassets can now be tracked (therebyhelping to reduce losses and optimisescheduling) and their performancemonitored (thereby minimising outagesand maintenance).

Example a major heavy equipmentmanufacturer is outfitting their fleet withthis new technology, shifting from areactive health maintenance mindset

to one where equipment is viewed inits total contribution to productioneffectiveness.

Productivity, efficiency and costreduction mining companies willneed to increase productivity andreduce costs simultaneously withoutsacrificing customer service, safety,or operational flexibility. Theseimprovements will be impacted by acompanys ability to adapt to climatechange in the future.

Information integration andvisualisation mining companies willneed improved realtime informationsynthesised from a wealth of newdata from instrumented assets andequipment, transportation, people,supplies, and plans. Decision-makerssuch as production and maintenanceoperations, analysts and field crewneed a realtime view of their entireoperation. Alerts, alarms and triggersenable the mine to be hyper-responsiveto change and challenges and to bepredictive rather than reactive.

Example a Norwegian petroleumcompany uses realtime data fromwireless sensors monitoring subsurfaceconditions (such as the pressure andtemperature at different points in thefield, as well as the movement of gasor oil deposits) to help the companysengineers to know when, where andhow much to pump.

Remote operations allow formore efficient use of resources andbetter access to experts. With all

the challenges facing the industry,including potential impacts fromclimate change, remote operations willbecome more essential. But it is notsimple as it requires the culmination ofinformation, collaboration, smarter andleaner organisation, governance andworkforce, visualisation, and businessmodel innovation.

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1.2 Opportunities to improve

The challenges facing miningenterprises today are pushing leaders

to adapt the traditional ways of thinkingabout their business to discover andexplore new practices that will improvethe business of mining. The future of themining enterprise is characterised in allaspects of the business, from improvingpeople and leaders, to engaging newbusiness models and processes,to employing new techniques indeveloping insight, knowledge andworking remotely. Most of all, the mineof the future is smarter. It responds tochange faster. It is agile and flexible.

Inevitable climate change is anadditional challenge that miningcompanies will face. It brings anadditional level of unpredictabilityto the equation which, again, a moreagile and smarter company will bebetter placed to manage.

Jeremy Yoo

Partner, Global Industrial ProductsIndustry LeaderIBM Global Business Services

David CarterIBM Global Solutions ExecutiveMining Industry LeadGrowth MarketsIBM Global Business Services

IBM Viewpoint


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Over the last two years an unparalleledperiod of soaring commodity pricesand economic growth collapsed andgave way to slowdown and recession.Although the outlook is now improvingthere remain difficult challenges for anindustry with major capital investmentneeds and long lead-in timelinesfor new developments; operating ina market subject to periodic sharpdeclines in prices and demands andincreasing costs. Companies are facedwith strategic choices which maychange their business models. It isclear however, that these are not theonly challenges.

Climate change is underway. Whateverwe achieve in reducing greenhousegas emissions, we are now facedwith further inevitable changes in ourclimate and in our social, economic andenvironmental systems. In our analysisof the responses made by miningcompanies to the Carbon Disclosure

Project (CDP) and drawing on otherpublished material and resources, itis clear that companies do not fullyrecognise the impacts (risks andopportunities) that are emergingdue to the changes in our climate.

The sustainability of mining companiesfaced with delivering long terminvestment potential with increasingshort term volatilities is challenging.Many of the challenges they face inmanaging boom bust, commodity pricevolatility, rising costs, geo-political

risks, energy security, water resourceavailability, workforce issues, localcommunity impacts and reputationalhits are also under pressure fromclimate change. However it is clear thatthe effect of climate change on thesechallenges is not well understood,for example:

Only 34% recognised that climatechange may create energy pricevolatility and security of supplychallenges.

24% identified the risks due torising sea levels, with 18% referringto potential problems due to theirreliance on marine transport andport facilities.

19% recognised that land basedtransport systems could bevulnerable.

1.6% considered that climatechange would have an impacton site remediation costs.

11% identified risks to essentialutilities. Direct risks to supply chainswere not identified (although thesemay have been included withinthe concerns raised regardingtransport disruption).

19% considered that there may bean increase in disease risks, with13% considering that they wouldbe under more pressure from localcommunities. 18% reported thatthere would be reputational issues ifthey were not seen to be dealing withclimate change.

No companies reported politicalinstability as a risk driven byclimate change.

Investors and the financial institutionsare taking an increasing interest inthe implications of climate change.They are exploring the implicationsfor their investments, and for lendingrisk on project finance. The potentialreputational implications arising fromcompetition for water resources and thewider impacts on local communities willbe placed under more intense scrutiny.

Most companies are tending to focustheir risk management activities onextreme (acute) events and may notbe recognising the risks posed byincremental (chronic) climate change.Disruptions from recent extreme events(for example, drought in Australia)serve to illustrate vulnerability to eventsgreater than the industrys current assetdesign, engineering and operationalstandards. Chronic (incremental)changes however, are more subtleand their impacts on business modelsand assets may pass undetected untilcritical thresholds are breached(for example changes in precipitation

and the impact on the design of tailinglagoons). The responses may resultin step-changes for a company,increasing operational costs beyondforecasts, unplanned capital investmentand additional balance sheet financingto manage the consequences.

81% of companies reported thattheir physical assets would becompromised by extreme events.

No companies specificallyrecognised the risks associatedwith chronic changes to theirphysical assets and disruptionsto essential infrastructure, utilitiesand supply chains.

Only 16% indicated that they weretaking action on water management.

Although there is uncertainty in theknowledge we have about the extentand rate of future climate change,there is sufficient information to assessimpacts on business models andenable robust decisions to be taken asa result. The existence of uncertaintiesregarding the business risks arisingfrom climate change, should by itselfact as a catalyst for companies toquantify the risks, monitor the impactsas they arise and be prepared forchanges to their business models.The baseline climate is changing, andbusiness decisions and practiceswill need to evolve as a result. Miningassets have been designed on the basisof historic climate data and a periodof relatively stable weather. Thesedesign assumptions, together withthose thresholds and margins set forregulatory, operational and financialperformance requirements, mayconstrain the future effectiveness ofassets to deliver under climate change.

Only 13% reported taking actionto protect assets against extremeevents.

Mining companies should consideracting now upon the clear signals thatclimate change is underway.A fullyintegrated approach to the challengesof reducing emissions and adaptingto climatic change is required.Companies should use the lessonsgained from the present financial crisisto avoid the even greater and entirelypredictable surprise2 created by

climate change. Acclimatise and IBMhave jointly prepared a set of Prepare-Adapt questions on page 22 to helpmining companies take the right stepstowards building corporate resilience toinevitable climate change.

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Executive Summary

2 M. Bazerman and M. Watkins (2004) Predictable Surprises:The Disasters You Should Have Seen Coming, and How toPrevent The m.


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Contents

IBM Viewpoint ii

Executive Summary iv

1 Introduction 1

2 Climate change is underway 2

3 Sustainable mining: a long 3term investment with shortterm volatility

4 What are the impacts for the 15mining sector?

Extreme (acute) events and 15incremental (chronic) climaticchange

5 Mining companies need 17to recognise growinginvestor concerns

6 How are companies 19

responding?

7 What actions should senior 21executives consider?

Developing an integrated 21approach

Prepare-Adapt: 10 questions 22for senior executives in themining sector

References and 24further reading

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1

1 Introduction

3 Learning from the Future Alternative Scenarios for the North American Mining and Minerals Industry 2002.4 Excluding question b Individual Performance of section 4 which focused on perfor mance towards GHG targets.

Climate change is underway. Whateverwe achieve in reducing emissions ofgreenhouse gases (GHG) we still faceinevitable changes in our climate and inour social, economic and environmentalsystems. If we fail to reduce emissions,then the changes in these systemswill be even greater. In this reportwe explore the issues that miningcompanies are beginning to face inresponse to a changing climate andthe actions being taken.

The mining sector has at timesappeared reticent to recognise theclimatic changes that are underwayand the consequences for theirbusiness models. As recently as 2002,in a publication by the MMSD, WBCSDand IISD setting out future scenarios forthe mining industry in North America,climate change (and its implicationsfor both mitigation and adaptation) didnot warrant any mention as a currentor future change driver3.

Mitigation efforts to reduce emissionsare vital if we are to keep climatechange from surpassing a dangerous,and rapidly approaching, threshold.This has been called avoiding theunmanageable. However, the effectsof climate change are already upon usand are growing rapidly. A significantreduction in emissions is essential butwe must also prepare for and respondto the impacts we must adapt tomanage the unavoidable.

The sustainability of mining companiesfaced with delivering long terminvestment potential with increasingshort term volatilities is challenging.The present financial crisis, increasingcosts, falling prices and demandshave caused companies to suspenddevelopment activities. As the globaleconomies begin to improve, miningcompanies will need to understand thattheir risk landscape is changing. Forboth new and existing mining assetsit is essential that the likely impacts ofinevitable climate change, examples

of which are considered in this report,are assessed and managed.

In this report we explain why companiesneed to understand the implicationsof both extreme (acute) events andincremental (chronic) climate changeand the direct and indirect effectsoperating through their businessmodels. Acute events like continuingdrought and water shortages inAustralia grab the headlines, but arecompanies recognising the warningsigns of chronic changes?

Given these impacts it is clear thatthere are potential financial risks tocompanies and to their investors.This report identifies areas wherethese risks may be significant,for example with regard to issuessuch as decommissioning andcontingent liabilities.

Drawing upon an analysis of theresponses from global mining andmetals companies to the 2008 Carbon

Disclosure Project (CDP), together withother published material and resources,this report provides an overview ofsome of the challenges that inevitableclimate change brings. It also sets outclear guidance for senior executiveson the business imperative to managethe unavoidable, and adapt theirbusinesses to the impact of achanging climate.

Acclimatise and IBM have prepared aseries of Prepare-Adapt questions onpage 22 to help senior mining company

executives identify the actions tobuild corporate resilience to inevitableclimate change.

The Carbon Disclosure Project

CDP is an independent not-for-profitorganisation which holds the largestdatabase of corporate climate changeinformation in the world. The data isobtained from responses to CDPsannual Information Requests, issuedon behalf of 475 institutional investors,to more than 3,700 corporations acrossthe globe. Since its formation in 2000,

CDP has become the gold standardfor carbon disclosure methodology

and process, providing primary climatechange data to the global market place.CDP plays a vital role in encouragingcompanies to measure, manageand reduce emissions and climatechange impacts.

The CDP Information Requests includea series of questions seeking disclosureon the physical impacts of climate

change on existing and future companyperformance and the managementresponses. (A copy of the questionsis available on the CDP website:www.cdproject.net together with a listof the investors). The 2008 InformationRequest was sent to the worlds largest144 mining companies globally (basedon market capitalisation) of which43% provided detailed responses.Acclimatise has analysed the responsesto assess the business resilience ofcompanies to a changing climate.

Acclimatisation IndexThe analysis of the responses to theCDP Information Request has beenundertaken using ourAcclimatisationIndex methodology. This enablesa semi-quantitative analysis of theresponses recognising the scopeof the questions. The Index cantake into account information fromother sources to provide a morecomprehensive analysis.

TheAcclimatisation Index has beenused to analyse the resilience of global

mining companies to climate changein response to questions containedwithin sections 1 and 44 of the CDPquestionnaire.


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Temperature(C)

2 Climate change

is underway

5 IPCC Climate change 2007: synthesis report.6 Scientific Symposium on Stabilisation of Greenhouse Gases Avoiding Dangerous Cl imate Change

Exeter February 2005 Executive Summary of the Conference Report.7 IPCC Climate change 2007: synthesis report.2

There is scientific consensus that theworlds climate is changing due tohuman activity and that whatever stepswe take to limit GHG emissions we arenow faced with several decades ofincreasing global temperatures and afar longer period of rising sea levels.

In 2007, the Intergovernmental Panelon Climate Change (IPCC) the most

authoritative scientific body on climatechange confirmed the scientificevidence that climate change is alreadyunder way5. Figure 1 shows theobserved changes in global average

temperature and average sea level rise,together with northern hemispheresnow cover. The results from the climatemodels developed by governmentsand research institutions show a strongcorrelation with the observed changes.The IPCC states that:

Warming of the climate system isunequivocal, as is now evident from

observations of increases in globalaverage air and ocean temperatures,widespread melting of snow and ice,and rising global mean sea level

Figure 1: Observed changes in (a) global average surface temperature;(b) global average sea level from tide gauge (blue) and satellite (red) data;and (c) Northern Hemisphere snow cover for March-April. All differencesare relative to corresponding averages for the period 1961-19907

At continental, regional, and oceanbasin scales, numerous long-termchanges in climate have beenobserved. These include changesin Arctic temperatures and ice,widespread changes in precipitationamounts, ocean salinity, windpatterns and aspects of extremeweather including droughts, heavyprecipitation, heat waves and the

intensity of tropical cyclones.

The IPCC has recommended thaturgent action is required to limitthe concentration of GHGs in theatmosphere and prevent global averagetemperatures rising above 2C. Atemperature rise above 2C will bedifficult for contemporary societiesto cope with, and will cause majorsocial, economic and environmentaldisruptions through the rest of thecentury and beyond. There are alsoconcerns that increases above 2C

significantly increase the risk of largescale, irreversible system disruption6.

0.5

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(millionkm2)

(millionkm2)

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Year

(a) Global average surface temperature

(b) Global average sea level

(c) Northern Hemisphere snow cover


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3

3 Sustainable mining: along term investment

with short term volatilityIt is important that any considerationof the impacts of a changing climateis considered within the context of thechallenges already faced by globalmining companies. Creating andmaintaining a sustainable businessrequires a comprehensive and detailedunderstanding of the risks andopportunities faced by a company andthe social, economic and environmentalconditions in which it operates. It alsorequires a view of how these conditionswill interact with each other and changeover time. The mining sector is a longterm investment by the very nature of itsfinancing requirements and operationalactivities, but it is subject to shortterm volatilities that require excellentmanagement skills.

Over the last two years an unparalleledperiod of soaring commodity prices andeconomic growth has collapsed andgiven way to slowdown and recession.Mining companies have seen at first

hand how recession bites hardest andquickest in those sectors providingthe raw materials and commoditiesthat build growing economies.Mining companies are now facedwith balancing short-term responseswith long-term strategy. This remainsa difficult challenge in an industrywith major capital investment needsand long lead-in timelines for newdevelopments; operating in amarket subject to periodic sharpdeclines in prices and demandsand increasing costs.

Falling demand, tumbling commodityprices, high operating and capitalcosts and falling share prices; theseare the characteristics of a miningsector suffering from the effects ofa financial crisis. During 2008 and2009 major international companiesannounced plans to stall or abandonnew mining developments. Reviews ofexisting operations have focussed onopportunities for closures to minimisecosts. Liquidity and managing cashflows and costs have become prime

business objectives.

As the first signs of global economicgrowth become evident, there willbe opportunities for some companiesto make strategic acquisitions.Merger and acquisition activitiesare likely to increase in the miningsector as commodity prices increaseand expectations rise of futuregrowth potential.

Some of the key challenges the sectorfaces which show clear signals of theimpacts of climate change are:

Natural resource pressures

Carbon management and emissionscontrol

Pollution and land contamination

Reputation and brand

Local community impacts

Economic growth

Workforce pressures

Political stability and geo-politicalrisks

Supply chains and logistics,pressures on consumables

Operating costs

Energy

Decommissioning and contingentliabilities

Intangible asset value.

Marius Kloppers CEO BHP Billitonrecently stated We must recognisethat the landscape has changed, andthat we need to reinvigorate or focuson cost management and operationalefficiencies. Importantly, efficientand predictable operations underpinour cash generation capability andestablish the foundation to supportfurther growth.

This report explores some of theimplications for efficient and

predictable operations arising fromclimate change together with theimplications for investors. Later in thisreport the appropriate responses bysenior executives will be considered.

Climate change will place greaterstrains on natural resources suchas land and water and contribute todeterioration in food security, politicalstability, health and poverty. Theseimpacts will be particularly apparentin developing countries, wheremining companies frequentlyhave operations.

It is increasingly important formining companies to understandnot only the direct impacts of climatechange on their business, but alsothe indirect impacts associated withcommunity and social adaptation.These pose a risk to their internationalreputation, their workforce and theirlocal license to operate.

Ed OKeefe, Director, SynergyGlobal Consulting

The science has become moreirrevocable than ever: Climate changeis happening. The evidence is allaround us. And unless we act, wewill see catastrophic consequencesincluding rising sea levels, droughtsand famine, and the loss of up toa third of the worlds plant andanimal species.

Ban Ki-moonSecretary-General of the UnitedNations, September 2009


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Water stress indicator: withdrawal to availability ratio

Water withdrawal: water used for irrigation, livestock,domestic and industrial purposes (2000)

Water availability: average annual water availabilitybased on the 30-year period 1961-1990

No stress

No/low stress and per capita water availability


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Research in the UK has highlighted

the relationships between climatechange, pollutant linkages andregeneration of contaminated land1:

Proper management ofcontaminated land requires anunderstanding of the magnitudeof the risk from climate changeto current, and future, pollutantlinkages between source andpotential receptors

Changes in environmentalconditions and processes will

inevitably affect the standards ofremediation required to ensurereceptors are not significantlyimpacted in the future

Warmer conditions favourbiologically-driven degradationof compounds amenableto degradation, while drierconditions are reported tohave the opposite effect

Heavy metal soil contaminants,whose movement is more relatedto issues of leachability, presentless risk in higher temperature and

drier climates due to increased soilspeciation and pH

Understanding the significance ofthe impacts of changing climaticconditions on contaminantspeciation and adsorption will befundamental to the developmentof sustainable risk managementstrategies for example, driersoil conditions might lead to theoxidation of reduced metal species(which are generally insoluble) andincrease their solubility

Changes in climate are alsolikely to highly impact physicalmovement of contaminantsthrough water erosion processes

Changing environmentalconditions also threaten thephysical integrity of containmentsystems; engineered coversystems and stabilised/solidifiedsoil systems have been shownto become extensively damagedunder severe wet-dry and freeze-thaw cycles, significantly reducingtheir mechanical properties and

hence effectiveness Over time, changes to the materials

used in cover systems, slurrywalls and geomembranes fromtemperature and moisture changesare likely to be significant.

[Source: SUBR:IM 2007]

Case study 1: Contaminated landand water resources

5

Carbon Disclosure Project Report Global Mining

14 UN Data, 2009.15 Eriksson et al 2000.

Many diversified mining companiesextract and produce coal, natural gasand oil, or they rely on these fuels forgenerating power for processes such as

smelting. It is inevitable that the carboncosts arising from the use of thesefuels will increase the costs to the user.Companies using fossil fuels for theirown energy needs may find their costsincreasing (and their margins beingsqueezed) when compared with othercompanies using renewable sources.In addition their use will over time becontrolled by increasingly prescriptiveregulation adding to costs of energyfor mining. In 2005, the global iron andsteel industry consumed over 900 TWhof electricity14. A large proportion ofthe energy for this came from fossilfuels which are becoming increasinglyexpensive. GHG emissions regulationsand carbon costs will be an increasingimportant cost driver for miningcompanies.

Pollution and land contamination.Mining processes produce largevolumes of wastewater, oftencontaminated with harmful chemicals.This is left to settle in tailings ponds ordams. These ponds, due to their longlife spans pose risks to the surroundingenvironment and populations longafter they have stopped being usedby mining companies. Tailings pondspills can cause serious reputationaland financial damage to companiesas a result of the release of harmfulchemicals into local ecosystems andwater sources.

Legislation to control the design ofthese facilities and the consequencesof any failures is being implemented.In Europe the EU EnvironmentalLiability Directive (ELD) requires EUmember states to implement a new

liability regime for the preventionand remediation of environmentaldamage into their national laws. Ithas effectively extended the polluterpays principle, and seeks to moreclearly establish environmental liabilityfor companies that cause damage toprotected species and natural habitats,or contaminate surface waters, groundwaters or land that leads to a risk tohuman health.

An example of how this will impactmining companies can be seen in theconsequences arising from the bursttailings pond at the Aznalcllar zinc

mine in Spain in 1998. In this case, theSpanish authorities spent US$339million on clean-up operations, whereasin the future, under the ELD regime, theoperator of the mine will have to pay forthe clean up15.

Changes in precipitation, hydrology,ground conditions and soil-moisturecontent will have significant implicationsfor the design and operation of facilities.Existing assets may no longer be ableto meet original design parameters,leading to an increasing risk of dam

failures and pollution. Regulatoryprovisions will need to be reviewed toensure that impacts of climate changehave been considered. It is inevitablethat regulatory and consentingagencies will revisit pollution controlconsents (for example discharges towatercourses) given the inevitablechanges in water quality and ecologicalstatus of receiving watercourses.Water treatment facilities may needto be upgraded to meet tighterconsent standards.

Local community impacts. Climatechange is likely to increase thevulnerability of indigenous peoples whomay already be disadvantaged by beingmarginalised (see case study 2) andhave low adaptive capacity. In seekingdevelopment benefits for indigenousgroups, mining projects can look atopportunities to improve adaptivecapacity (e.g. by increasing accessto water, promoting or facilitatingmore climate-resilient sources oflivelihood etc).

The impacts of climate change ondevelopment are already widelyrecognised and are expected tomake it more difficult to achievethe Millennium Development Goals(MDGs). Many mining projects areproviding health care, employment,educations, skills training, access totransport and energy, and improvedwater and sanitation systems. Miningcompanies can make a positivecontribution to the achievement ofMDGs. The risk is that failure on theirpart to recognise the impacts of climatechange may compromise the ability

of local communities to become moresustainable. Mining projects directly


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16 Norwegian Government Pension Fund, 2006.17 World Gold Council, 2008.18 The Body, 2002.6

3 Sustainable mining: a long term investment with short term volatility

or indirectly (for example through offsite infrastructure finance) rely onorganisations such as the InternationalFinance Corporation, or the Asian

Development Bank to contribute totheir finance. These organisationshave performance criteria linked to theMDGs; project under-performance dueto unmanaged climate risks, may putthese beneficial impacts at risk, andmake mining companies less attractiveas investments.

Reputation. The mining sectorhas faced significant reputationalchallenges over recent years. Theprofitability of mining projects hasbeen hampered by community

action, primarily due to the adverseenvironmental and communityeffects of mining operations. Climatechange has the potential to createor exacerbate tensions that lead toreputational damage, by modifying therelationships between investments andtheir surrounding environments andlocal communities. It is also changingstakeholders expectations, and inparticular those that are sensitive tosocial and environmental impacts (forexample NGOs, institutional investorsand project financers, and mostimportantly of all, the local communitiesin which mining activities are located).

Facilities designed based on historicclimate conditions may not performas intended. Their demands, as wellas those of local communities and theenvironment, for resources such aswater, may change, increasing risksof conflict. Furthermore, becauseincremental changes in averageclimate conditions may go unnoticedfor some time, mining activities maybe held responsible for impacts, suchas reduced water resources or water

quality, which are actually the result ofchanges in climate conditions.

Investment banks, internationalfinance institutions providing debtand equity finance, and investorsproviding equity finance are underever-growing scrutiny. Community orgovernment opposition to a specificmining operation, or public criticismof investment decisions are oftenrelayed by the media or challengedthrough legal action or other formsof settlement.

The need for operational changes bymining companies to better managethe impacts of their activities and therelationships with local communities

was highlighted by the Mining, Mineralsand Sustainable Development Projectin 2002 when it published its report:Breaking New Ground. The miningsector is taking action and can becommended on the change in attitudesand its recognition that sustainabledevelopment is now critical to businesssuccess. However it is clear that farmore effort is required.

The potential risks to a company fromreputational impairment are evident.Freeport-McMoRan Copper & Gold

was excluded from the $300 billionNorwegian Government PensionFunds investment portfolio on ethicalgrounds. Freeports mining activities atthe Grasberg mine in Indonesia werefound to involve an unacceptable riskof complicity in severe and irreversibledamage to the natural environment16.

Workforce health. In parts of Sub-Saharan Africa companies are facingsoaring costs from employee healthcare and training, as well as elevatedrates of absenteeism from diseases.

In South Africa an estimated 30% ofall gold mining employees are HIV-positive17. Mining companies havecalculated that HIV adds between $4and $10 an ounce to production costsfrom South African mines18. Whilst thereis no direct impact between climatechange and HIV, there are potentialindirect impacts, arising from increasingstress on social and economic systems.

Climate change will affect the healthof the human capital upon whichbusinesses rely, including staff, labour

pools, sub-contractors and commercialpartners. This will create additionalcosts for mining companies throughlower productivity, compensationclaims and disputes, and businessinterruption.

The plans of Barrick GoldCorporation to exploit gold, silverand copper reserves at Pascua-Lama have been severely affectedby community opposition. Theproject is located high in the Andes,near glaciers which provide drinkingand irrigation water to downstreamcommunities in the Huasco Valley,where agriculture is the main sourceof livelihood.

Barrick believed that its operationswould have no significant impact on

water quantity and quality based on:

Years of monitoring in theproject area

Operations that minimise theamount of runoff water coming intocontact with mining operations

Multiple barriers of active andpassive protection againstflooding, even in the case ofextreme runoff events, during thelife of the mine and after closure

Avoiding operational dischargesto the environment

A comprehensive plannedwater quality monitoring andmanagement programmeproviding realtime data.

In February 2006, the projectsenvironmental impact study wasapproved by Chilean authorities,provided 400 conditions weremet. Nevertheless, communitiessurrounding the mine feared thatthe dust generated by the mining

activities would deposit on theglaciers and speed their melting,while the mine operation wouldcontaminate and divert local watersupply. Barrick stated that theglaciers have been receding becauseof climate change, and contend thatthe mining project would have only aminimum impact on any accelerationof the melting.

The IPCC predicts with highconfidence that overcomingdecades, Andean inter-tropical

glaciers are very likely to disappear.Studies demonstrate that manySouth American glaciers are alreadyretreating because of changesin climate.

Case study 2: Climate changefuels community conict withmining operations in Chile


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19 IPCC WG2 2007.20 Bray et al 20 07.


7

Assessing the implications of theimpact of environmental dynamicson planned infrastructure is not a newscience. Estimating and designing forthe implications of extreme events oods, droughts, seismic activity etc. have been integral requirementsof project planning, design andmanagement throughout the lifecycleof all major projects.

Anticipated climate change is notjust a political fad, it is raising the

stakes in risk analysis both interms of incremental changes andcatastrophic events. No companycan plan, operate, decommission orclose facilities without factoring in theneed for adaptation to anticipatedchanges in climate or the likelihood ofclimate induced events. Of particularconcern will be the management ofcontingent liabilities associated withpost mining legacy.

Jon HobbsLead Advisor Extractives

Industries Policy Departmentfor International Development,UK and Chairman of the InterGovernmental Forum on Mining,Minerals, Metals and SustainableDevelopment

Due to the situation of the Aquariusmines within and close to theborders of Zimbabwe, Mozambique,

Swaziland and Botswana, the areacould experience an inux of refugeesdriven by famine and disease, whichcould lead to conict situations asrefugees compete with locals forlimited resources.

Climate change-induced conict isanticipated to be prevalent in Sub-Saharan Africa through increasedcompetition for resources and pooradaptation capacity.

Whilst the levels of HIV prevalence

amongst employees are not known,it can be assumed that these may bebetween 20 and 30% of employeesbased on data released by the state,NGOs and other mining companies.

Aquarius Platinum

Under a changing climate, risk of death,disease or injury from heat waves,floods, storms, fires and droughtsfor mining operatives will increase.These occupational risks will affectboth indoor and outdoor workers. Thesafety and performance of buildings,structures and other assets that maynot be climate-resilient could alsotranslate into increased costs toensure worker safety, comfortand productivity20.

For example, warmer workingconditions are a concern for health,safety and levels of performance.They can lead to diminished mentaltask ability, increased accident riskand, if prolonged, heat exhaustion orheat strokes. These can significantlyaffect the productivity of outdoor,production line and factory workers.In order to reduce impacts, it islikely that we will see regulations onmaximum workplace temperatureswith significant compliance cost

implications for mining companies.

Economic growth. The effects ofclimate change on national economies,particularly emerging and developingstates such as China, India andBrazil, may be significant. In general,developing countries and smallereconomies face much larger outputdeclines due to extreme (acute) eventsand incremental (chronic) change.

Figure 3: Projected direction and magnitude of change of selected healthissues because of climate change, with attached level of certainty19

These countries are less able towithstand the initial disaster shockand prevent further spill-overs intothe macro economy. The potentialimpacts and costs are illustrated incase study 3. Mining companiesoperating in areas of the world whereeconomies and future economic growthare under stress will face increasingpressures. The impacts for investmenton essential infrastructure, health care,education, water, sanitation, transport

and energy will in turn create problemsfor mining companies and increasetheir costs.

Political stability and geo-political risks.Mining companies operate in areas withvarying degrees of political, legal andcommercial stability. Administrativechange, policy reform, changes inlaw or governmental regulations canresult in civil unrest, expropriation, ornationalisation. The consequences ofinstability or changes could have anadverse effect on the profitability, the

ability to finance or, in extreme cases,the operational viability of somemining operations.

The mining sector has traditionallyfound itself working in areas ofthe world where geo-politicalconsiderations can play a major rolein shaping operational success. Ata strategic level the implications fornational and international securityarising from climate change have beenidentified by a number of securitythink-tanks and military organisations

across the world. Military leaders andsecurity advisors recognise that thereare substantial security challengesarising from climate change that willfeature increasingly in the planningof military defence and homelandsecurity strategies.

Negative impact Positive impact

Very high confidence

Malaria: contraction and expansion, changes in transmission season

High confidence

Increase in malnutrition

Increase in the number of people suffering from deaths, disease andinjuries from extreme weather events

Increase in the frequency of cardio-respiratory diseases from changesin air quality

Change in the range of infectious disease vectors

Reduction of cold-related deaths

Medium confidence

Increase in the burden of diarrhoeal diseases


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8


Natural hazards and GDP lossesA recent study by the Economics ofClimate Adaptation (ECA) WorkingGroup (McKinsey) has estimated howthe changing incidence and severityof natural hazards could affect theGDPs of selected countries. Theestimates, presented in Figure 4are based on:

An analysis of selected naturalhazards (droughts, floods andtropical cyclones) within eachcountry

Estimates of changes in frequency

and severity of natural hazardsunder climate change scenariosin the year 2030

A natural catastrophe method,whereby the frequency andseverity of past and future naturalhazard events, the value of assets,incomes and populations exposedto the hazard, and their relativevulnerability, form the calculationof the expected loss per climatechange scenario

The combined losses from currentclimate-related factors, futureclimatic changes and futureeconomic growth (which addsvalue to future damaged assets).

ECAs study is only indicative of theexpected GDP losses because ofclimate change impacts. For instance,it does not account for futureadaptation actions which may preventsome loss, and it makes simplisticassumptions about economic andpopulation growth. ECA also usedclimate change projections fromdifferent global climate models, onthe basis of a best-fit approach foreach country.

Future regional and country-specificcosts of adaptationThe World Bank has recently publisheda report which provides estimates ofadaptation costs per region, whichillustrate how climate change risksmay translate into different aggregatedeconomic impacts across countriesand regions in which IFC invests,with consequences for investmentportfolio strategies.

The study considers five sectors:infrastructure; coastal zones, watersupply and flood protection; agriculture;forestry and fisheries; human health. Itcalculates the minimum cost of projects

and programmes required to returneach sector to its pre-climate changestandard, such as level of service ornutrition value respectively for theinfrastructure and agriculture sectors.

The World Bank used climate changeprojections based on two globalclimate models (GCMs) chosenbecause they provide extreme dryand wet projections of future rainfall(namely the Australian CSIRO modeland the American NCAR model), aswell as three GHG emission scenarios(A1B, A2 and B1*). Climate changeimpacts and adaptation costs werethen estimated.

In this study, the East Asia and Pacificregion had the highest adaptationcosts because of high projectedcosts in infrastructure and coastalzone defence and management. TheLatin America and the Caribbean andSub-Saharan Africa regions are next,due to the costs in the water supplyand flood protection and coastalzones sectors.

[Sources: ECA, 2009, World Bank, 2009]

Case study 3: Effects of climate change on national economies

Figure 4: Estimated losses from present-day natural hazards and from increased incidence of naturalhazards by 2030, due to climate change, as a percentage of GDP for selected countries*

GDP, %1

19

Today Highchange,2030

xx

810

Florida

12

Guyana

N/A 2

Mali

02

Tanzania

5

9

Samoa

3 4

India

2

6

China

1 1

UK

[Source: ECA, 2009]


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9

The UN Security Council held itsfirst ever debate on the impact ofclimate change on internationalpeace and security in June 2007.

This step recognised that climatechange will have significant impactson resources in many countries andthat there are new threats arising fromsocial, environmental and politicalfactors that do not necessarily fallunder conventional notions ofmilitary defence.

The scale of the potential problemis enormous. International Alert21identified 46 nations and 2.7billion people at high risk of beingoverwhelmed by armed conflict and

war because of climate change. Afurther 56 countries will face politicaldestabilisation, affecting another1.2 billion individuals.

In a recent report22 it was found thatthere are strong historical linkagesbetween civil war and temperature inAfrica, with warmer years leading tosignificant increases in the likelihood ofwar. Using climate model projectionsthe report estimated that there wouldbe a 54% increase in armed conflictincidence by 2030, with an additional

393,000 deaths, if future wars are asdeadly as recent wars. A 1C increasein temperature represents aremarkable 49% increase in theincidence of civil war.

The large majority of the poor in mostAfrican countries depend on agriculturefor their livelihoods, and their cropsare quite sensitive to small changesin temperature. When temperaturesrise, the livelihoods of many in Africasuffer greatly, and the disadvantagedbecome more likely to take up arms.

The research undertaken by theInstitute for Environmental Securitybased in the Netherlands supportsthese findings. The Institute has notedthat failure to recognise the conflictand instability implications of climatechange and to invest in a range ofpreventive and adaptive actions willbe very costly in terms of destabilisingnations, causing human suffering,retarding development, and providingthe required military response. Theconsequences for mining companiesoperating in Africa, and for globalcommodity prices are clear.

The current financial crisis. The miningsector has been one of the worstimpacted by the financial crisis. Themarket capitalisation of the 40 largest

mining companies decreased by 62%,nearly twice as much as the Standardand Poors 50023. As commodityprices rose in recent years, companiesaggressively expanded, with the cost ofthis expansion becoming a secondaryconcern24. This left them with largedebts as the financial crisis struck.

One of the most significant impactsof the crisis is the increased cost ofobtaining capital due to tighter debtand equity markets. This change infunding availability has an acute impact

on a capital intensive industry such asmining. We can expect to see the costof capital increase over time as thecredit risk implications of a changingclimate begin to be factored into projectfinance. The current analyses beingundertaken by some banks in this areaindicates the growing awareness of thepotential risks (see page 18) and theimplications for project finance.

Transport logistics.As minerals areoften extracted from remote locations,companies face a logistical challenge

in terms of how supplies, workforceand products are transported to andfrom the mine and onto the customer.Transport considerations, particularlycost containment and visibility, are vitalcomponents of any businesses supplychain. In a recent survey of executives,almost three quarters of supply chainexecutives positioned their supplychains as critical to cost containmentfor their overall businesses25.

Disruption to supplies are notoriouswithin the industry; in early 2008,

climatic events such as snow stormsin China, flooding in Australia andflooding related power outages inSouth Africa helped push up coal pricesrapidly. An example of the impacts ontransportation is provided in casestudy 4.

Transportation infrastructure andassets are extremely vulnerable to theimpacts of climate change. Changes insea conditions, coastal erosion, higher

temperatures, melting permafrost,changing patterns and variability ofprecipitation, and increasingly frequentand intense extreme weather events,for example, will have impacts fornavigation, materials handling andstorage, and port, river, railway androad infrastructure.

These changes can all disrupttransportation infrastructure andnetworks, resulting in losses forbusinesses relying upon them andincreased costs to the governments

and companies charged withmaintaining them. For example,South African mining company ExxaroResources Ltd has estimated thesecosts, finding that two months of lostexport opportunities occurring fromtransportation and/or infrastructuredamage would cause revenue lossesof $60 million26.

As climate change impacts becomemore frequent and severe, businessesshould expect and plan for disruptionsto climatically vulnerable transportation

systems and assets, as well as thesubsequent economic and financialimpacts.

Marine transport accounts for around90% of world trade by volume and 70%of global trade by value. As a result,climate-related disruptions to maritimetransport infrastructure and assets canhave significant ramifications for theglobal economy, let alone individualbusinesses.

Ports and coastal areas are particularly

vulnerable to numerous climateimpacts, including coastal erosion,sea level rise, tidal flooding and stormsurges. Heavy precipitation events(in conjunction with land use change)can contribute to sedimentation ofports, channels and other marinetransportation routes, causing directdamages to infrastructure as well asdisrupting transportation itself.

21 International Alert (2007). A climate of conf lict: the links between climate change, peace a nd war. London.22 Proceedings of the National Academy of Scienc es Warming increases the risk of civil war in Africa (2009).23 PwC, 2009.24 Ernst and Young, 2009.25 IBM, 2009.26 Exxaro Resources. Response to the Carbon Disclosure Project 2008.


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10

27 Nicholls et al (2007).28 E.g. GMA Resources has recently experienced de lays in receiving critical supplies at its Amesme ssa gold mine in Angola.

http://www.proactiveinvestors.co.uk/companies/news/6504/gma-resources-taking-further-steps-to-address-amesmessa-mine-supply-issues-6504.html.

29 Campbell, 1995.30 PwC, 2009.


On the Tibetan Plateau, warming ofthe climate and decreased depthof frozen soils is already occurringand threatens the stability of theUS$4.2 billion railway line connectingLhasa, Tibet, to the Chinese networkin Qinghai, China, known as thehighest railway in the world. Therailway will provide access to enablethe extraction of significant copper,lead, zinc, and iron ore depositstogether with rare earth elements.

The railway is built on warmpermafrost, with a mean annualground temperature rangingfrom 0 to minus 1C. Monitoringof permafrost along the railwayconfirmed that the soil beneath therails is vulnerable: warm permafrost(warmer than -1.5C) is very sensitiveto disturbances from engineeringactivities, which have an immediateand direct impact on its thermal andmoisture regimes. Climatic changeswill have more severe impacts on thestability and reliability of engineeringinfrastructures founded on warmpermafrost.

Permafrost on the Tibetan plateauhas warmed by about 0.3C over thepast 30 years. Where human activityhas disturbed the soil, such as duringconstruction of the railway, the rate ofwarming is double, i.e. about 0.6C.The area of the Southern Qinghai-Tibethighway with underlying permafrostdecreased by 36% between 1974 and1996, while the permafrost area ofthe Northern Qinghai-Tibet highwaydecreased by 12% between 1975 and2003. Research indicates that thepermafrost area on the Plateau maybe reduced by up to about 60% bymid-century.

To manage the impacts of the changingclimate, engineering techniquescommon in Alaska and Siberia wereused to stabilise the ground by keepingit frozen well below 0C: steel tubescontaining ammonia were drilled intothe soil to draw heat out of the soil.At the design stage, the use of thiscooling technique added costsrepresenting 1% of total projectexpenditure (i.e. $420 million).

Passive methods aimed at simplyraising embankment height andinsulating materials were consideredineffective.

The IPCC (2007) predicts an increasein annual average air temperaturesin the region where the railway islocated, of around 2-3C by 2050.The railway was built to withstandrates of warming of about 0.2Cand 2C for soil and air temperaturesrespectively, over the next 50 years.If the IPCCs higher end projectionsare realised, further capital

investment and operational costswill be required to maintain theengineering integrity of the railway.Mineral operators may be facedwith a call for them to contribute tothese unplanned future capital andoperational investment requirements.

[Sources: Cheng et al., 2008; Cheng, 2005;UNEP, 2007; Wu et al. 2007;http://news.xinhuanet.com/english/2009-08/17/content_11896656.htm]

Case study 4: Impacts of permafrost thaw on the Qinghai-Tibet railway

For example, the total value of assetsin port cities exposed to coastalflooding due to storm surge in 200527was estimated to be US$3,000 billion,(around 5% of global GDP in 2005)the majority of which are found in thedeveloped world. As climate changeimpacts become more frequent andsevere, these figures are projectedto increase substantially.

Climate change will not only pose risksto businesses relying upon marine

transport infrastructure and operatingwithin the transportation sector; it couldalso lead to opportunities. (See casestudy 5.)

Operating costs. As a result of theremote location of many mine sites andthe amounts of heavy machinery used,companies are impacted by supplyissues. A common delay for miningcompanies is finding spare parts forwhen an asset or piece of equipmentbreaks down28. Direct maintenancemakes up a large proportion of

expenditure; this ranges from 20%to 50% of total project costs29, someof the highest levels in any industry.

As a result of the financial crisis,companies are taking a closer look attheir operational costs.

The higher commodity prices pre-financial crisis masked the significantincreases in operating costs whichrose on average by 28% in 200830.Rising production costs is a majorpressure on the mining sector furthereroding margins.

Many of the impacts identified in thisreport will place increasing stress onasset management and operatingcost profiles.

Older plant and equipment can beless productive and can give rise toa number of other challenges andcosts, including health and safetyconsiderations. Equipment designed tohistoric climate conditions (for examplepumps, compressors, generators)and nearing the end of their asset lifemay be required to work close to orexceed operating profiles, and in more

challenging environments.

The equipment and asset designstandards for existing assets may nolonger be sufficient to meet the impactof a changing climate, for example, thecapacity of tailing lagoons and surfacewater management systems may notprovide sufficient risk headroom withchanges in precipitation and stormconditions. The combined effect ofasset age and a changing climateshould be considered in operationaland health, safety and environmentrisk assessments.

Asset maintenance and monitoringregimes should be reviewed in the lightthat the impacts of a changing climatemay require:

Changes in the frequency ofmaintenance and monitoringprocedures

New and/or revised maintenance andmonitoring procedures.

The costs for asset depreciation and

replacement due to climate changeare asset and location specific.


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31 Onyango. J Production costs rise with regular power cuts. Business Daily Africa 13 July 2009.32 Commodity Online, 2009.

As sea and air temperatures increase,

ice-restricted ports will find theyhave longer operation seasonsas navigation routes become lessrestricted. In polar regions, newroutes may become available as thearea covered by sea-ice retreatscreating new shipping lanes. Inlandwaterways in Russia, Canada and

the USA will be ice free for longer and

provide more reliable transport routes(subject to changes in river flows).

September 2009 saw the first evercommercial use of an arctic routefrom South Korea to Europe. Althoughthere may be depth limitations that

restrict the size of ships, it may

provide an economic route for bulkcargoes given the significant fuelsavings from the shorter routes.The routes may also enable thesupply of materials and consumablesto mining operations.

Case study 5: New maritime transport routes may open up

Figure 5: Projected Arctic ice melt by the 2080s

Energy and security of supplies. Mostbusinesses rely on a secure source

of energy for the continuity of theiroperations. Some industry sectors havecritical logistics or operations for whicheven a short-term disruption in energysupply creates significant losses andlower revenues. Mining is one suchsector where disruptions and increasesin energy costs can challenge thefinancial viability of operations.

In Ghana in 2006 the Volta RiverAuthority was forced to ration powersupplies on a scale not seen since 1983due to impacts of changes in rainfall

on hydro-power. The crisis threatenedmine closures due to electricity outagesand led to increases in operating costs.

In the case of infrastructure in Alaska(see case study 6), the main climate

risks affecting assets were thawingpermafrost, increasing flooding andcoastal erosion. Acknowledgingdifferences in baseline conditions,future changes in climate andinfrastructure asset value andcomposition; it can be estimated basedon the Alaska analysis that miningcompanies operating in similar areasmay require additional replacementcosts on a similar scale, i.e. of theorder of 10% to 15% by 2030. It islikely that on shorter timescales thepercentage increase in costs might

also be significant.

Current arctic conditions Projected arctic conditions

Temperate forest Boreal forest GrasslandPolar desert/semi desert

Tundra Ice

Observed ice extent

September 2002

[Source: IPCC WG2 2007]

Projected ice extent

2080-2100

Northwest Passage

Northern Sea Route

As a result of energy disruptions, fourmining companies have collaborated

to build a new 80MW dual fuel thermalpower plant at an estimated costof US$45.5 million to ensureenergy security31.

In South Africa gold mining companiesproduction fell by almost 20% on ayear-on-year basis in the first quarter of200832 due to electricity shortages.

In Brazil (where approx. 80% ofelectricity is generated throughhydropower) during 2001, reservoirlevels were at 30% storage capacitydue to drought. The effects resulted in

the government taking severe measuresto reduce electricity consumption by10-35%. The usage reduction quotas


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33 Cashmore et al 2006.34 Only remote liabilities do not deserve mention in f inancial statements (see footnote below).35 Probable means more likely that not, or with chance of occurring greater than 50 perc ent. Reasonable possibility means

more than remote but less than 50 per cent. Remote means the chance of the future event or events occurr ing is slight.

As a global mining and metalsgroup, Rio Tinto operates minesand smelters in a wide spectrumof climates, ranging from tropicaland temperate to arctic and desert.Since 2006 the Group has usedhigh resolution climate modelling topredict the physical impact of climatechange on many of our operationsand projects. The results of thismodelling are being incorporatedinto risk management processes,water management strategies and

project development.

Peter CunninghamMD Energy and Climate StrategyRio Tinto

affected some industry sectors morethan others and those that did notcomply were fined or eventually hadtheir power supply cut off. The impactof Brazils electricity rationing wasnational: it is estimated that the droughtled to a loss of approximately US$20billion, the equivalent of about 2% ofBrazils GDP33. (See case study 7.)

Contingency and decommissioningliabilities. Loss contingencies may

need to increase as the risks of climatechange become more likely andquantified. Loss contingencies typicallycover risks which can be exacerbatedby climate change, such as loss of ordamage to assets through droughts,storms, heatwave and fire risks, andpending or threatened litigation.They are accrued on clients incomestatements34 as probable35 lossesfor which the amount of loss may bereasonably estimated. Other climate-related risks which may fall within thescope of loss contingencies includesupply chain disruption. Insurance

costs for these risks are likely toincrease over time.

12


The most signicant physical riskfrom climate change to Northamis anticipated to be water scarcity

resulting from a decrease in rainfall.Northam used 18.1 million m3 ofwater in 2007 Supply of water bythe bulk utility, Magalies Water, is notyet a constraint but may become onein the near future.

Should water restrictions be imposeddue to severe water shortages thiswould impact the hydropower supplyto Northam signicantly, and havecost implications for accessing thealternatives described above.

Northams current infrastructurehas been developed to utilisehydropower, which required a veryhigh capital investment. Extremewater shortages resulting in adiscontinuation of this technologywould be highly expensive forthe company.

Northam Platinum Ltd

Wear and tear on assets andinfrastructure will increase dueto climate change. Research inAlaska has estimated the additionalimpact of climate change oncapital depreciation for theStates infrastructure by:

Calculating the baselinereplacement costs for publicinfrastructure based on documentedlife-spans of various asset classesand standard financial techniquesfor calculating depreciation

Applying annual engineeringdepreciation rates and percentchanges in temperature andprecipitation, based on assetclass, topography and proximityto floodplains.

The study investigated two scenarios one in which adaptation is undertakenwhen climate change leads to a lossin useful asset life of 20% or more,with an additional associated costof 5% and allowing full asset life tobe regained.

Case study 6: Infrastructure and assets wear out more quickly andrequire additional capital expenditure under a changing climate

Under the second, withoutadaptation scenario, public agenciessimply react as conditions change:they continue to design and constructinfrastructure taking into accounthistoric climatic conditions butnot projected changes; they findsolutions as problems develop ratherthan anticipating and planning fortrends in climate change and futureinfrastructure vulnerabilities.

The study found that, under the withadaptation scenario, climate changewill add between US$3.6 and 6.1billion (NPV, using a public sectordiscount rate of 2.85% per year) tothe costs of wear and tear between2006 and 2030, across a range ofclimate change projections. Thesefigures equate to between 9 and 15%of total asset value ($39.4 billion at2006 replacement costs). Withoutadaptation, the costs of climatechange are in the range $5.6 to$6.7 billion.

[Source: Larsen 2007]

Loss contingencies are recorded asfootnotes in a companys balancesheet. Losses which are probableor have a reasonable possibility ofoccurring should be disclosed infinancial statements, indicating thenature of the liability and an estimate orrange of possible loss. The probabilityof losses due to disruptions is likely toincrease over the life of a mining asset.The return periods for extreme eventsare decreasing for example, in 2003 theEuropean heat wave was estimated tobe an exceptional, 1 in 500 year event.Due to rising temperatures, by 2040, theUK Met Office predicts that summersas hot as 2003 will have a returnperiod of 1 in 2 years, and by 2060a 2003 type hot summer will beconsidered as a relatively cool summer.Such dramatic increases in theprobability of damaging events andtheir impacts on business are withinthe requirements for disclosure.(See case study 8.)


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Tarong Energy (TE), a state ownedenterprise in Queensland, owns theTarong Power Station (TPS) and partlyowns the Tarong North Power Station(TNPS). TE also own an adjoiningcoal mine which supplies the coalrequired for electricity generation atboth stations. The ownership of themine changed from Rio Tinto to TE in2007. The power stations and minejointly draw a substantial proportionof local resources from the region andprovide employment opportunitiesfor approximately 500 people, mostof who reside within the boundaries

of the region. The current miningactivities at Meandu Mine are purelydependent on power station demand.

The financial performance of TE in2006/07 was significantly affectedby the 2007 drought in SouthEast Queensland (SEQ), with theCorporation posting a loss forthe first time in its history. In TEsAnnual Report 2006/07, losses ofAUS$68.6m (after tax) were reported,due to reduced generation due to thedrought, a change to the Australian

International Financial ReportingStandards (AIFRS) and write down ofinvestment in TNPS.

The cooling system at TPS alonerequires about 600 litres of water persecond to make up the evaporationlosses in its two cooling towers. Waterrequired for the cooling towers isobtained through a purpose-built 96kilometre pipeline from BoondoomaDam. The power stations normallyrequired approximately 35,000 MLof water per annum. However, the

worsening drought conditions over2006/07 led to restrictions on wateruse and a significant reduction inthe stations output. This adverselyimpacted on the neighbouringfarming community because of thelimited release of water for irrigated

Case study 7: Australian drought leads to signicant reduction inenergy generation and mining production

farming. Prior to the drought, waterreleased by the power stations wasused for irrigation by farmers alongMeandu and Barkers Creeks.

The cut in power station outputshad a direct impact on upstreamsupply chains. In 2007, Rio Tinto werereported to have halved productionof coal and cut 160 jobs at its Tarongmine in south-eastern Queenslanddue to the cuts in power stationoutput. Coal production was reportedto have dropped from 605,000 tonnesper month to 300,000 tonnes.

The drought also lowered water levelsat hydro-electric power station damsin the Australian states of New SouthWales, Victoria and Tasmania. It wasreported that wholesale electricityprices were up to four times higherthan usual for the time of yearbecause the drought had reducedsupply at hydro-electric and coal-fired power stations.

TE responded to the drought by

introducing a sustainable generationprofile plan and a variety of waterefficiency measures, such asrecycling water from the ash dam,capturing and harvesting storm water,coordination of recycled water usebetween the power stations and themine, reducing wastages throughleaks and water use restrictions, andcommissioning a reverse osmosisplant to provide potable water onsite. Crucially as a safeguard againstthe affects of drought, the stationsbecame connected to the SEQ WaterGrid in June 2008.

[Sources: Delpachitra, 2008;www.theage.com.au/news/business/rio-to-cut-coal-jobs-as-drought-bites/2007/05/16/1178995236604.html(accessed 20/08/2009)]

A changing climate is an importantoperational consideration for RioTinto, which already experiences

weather related disruptions.

Changes to climate may affectoperations, especially our longerlife assets (up to and beyond50 years in some cases).

Water availability is a signicantdesign issue for many operations,and is affected not only by climatechange but also by increasedcompetition where local populationand industrial development is onthe increase.

Increased frequency and/or intensityof extreme events such as cyclonesand other types of storms havethe potential to cause disruptionand damage.

Sea level rise may affect coastalfacilities, including power stationsand ports. In some regions a changein health risks (e.g. malaria anddysentery) could affect both theworkforce and local communities.

Changes in temperature and rainfallcould also affect land rehabilitationprogrammes and the security ofour operations.

Rio Tinto

Intangible values.A mining companysstock market valuation is not merelya function of its assets, reserves,costs, revenues, and profitability.Investors recognise the importance ofa companys intangible assets and thecontribution they make to overall value.

Many of the intangible assets held bymining companies have the potential tobe seriously affected by the direct andindirect impacts of inevitable climatechange. Examples have been providedin the preceding sections. (See casestudy 9.)


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It is acknowledged that threatsto reputation whether real orperceived can damage an imageor brand. On the balance sheet,reputation value is considered as anintangible asset and is accountedfor under goodwill or intellectualcapital.

More and more studies demonstratethat reputation affects stock marketvalues and contributes to explaining

the difference between companymarket capitalisation and bookvalue. Some experts estimate thatreputation can account for much ofthe 30 to 70% gap between the bookvalue and the market capitalisationfor publicly-listed companies. Astudy comparing market value tobook value of 3,500 U.S. companiesover a period of two decadesshows the dramatic upward rise inintangible value. In 1982 the value ofintangible assets was significantlyless than the tangible assets, by1999 tangible assets only accounted

for 16% of the market value.

Investors will continue to increasetheir interest in the managementof intangible assets, particularlyif these assets are at riskfrom climate change. Miningcompanies can expect to seepressure for disclosure about theirunderstanding of the impactsof climate change, their riskmanagement processes, and theirstrategies to maintain intangibleasset value.

[Sources: Tergesen, 2002; Regesteret al., 2002; Daum, 1999]

Case study 9: Client reputationaldamage linked to climatechange may result in decreased

return on equity

A recent report from Standard and

Poors sets out concerns regardingdisclosure by mining companiesof their future decommissioningliabilities. The report refers to thelack of information provided bycompanies. An assessment ofleading companies indicates thatdecommissioning provisions (whichare treated as additions to debt)equate to around 40% of a companysreported debt. Decommissioningprovisions represent a significant partof these companies financial riskbecause the majority of cash flowsoccur at the end of the projects life.

The accounting rules for suchprovisions under IFRS (IAS 37) andthe new Financial Interpretation47 (FIN 47) require a company torecognise a liability as soon as thedecommissioning obligation iscreated, which is normally at thetime a mining project is commenced.Standard and Poors found that thescale of decommissioning provisionstends to be based on managementjudgement rather than third-partyappraisals.

There is no evidence that the newstandards and principles that havebeen implemented and acceptedby the mining sector contain anyreference to the impacts that climatechange will have on the costs ofdecommissioning their existingand planned assets. If this is correctthen it is possible that companiesmay be underestimating their futuredebt liabilities and failing to meetreporting obligations.

There are new and emerging risks tobe considered; examples of whichare provided in this report. Many ofthese have the potential to createchallenges for the decommissioningof assets, for example:

Rising groundwater levels

may create new source-pathway-receptor relationshipsincreasing risks associated withcontaminated land

Increasing flood levels will result inenhanced risks to decommissionedsites requiring higher levels of floodprotection

Environmental site protection andreinstatement plans agreed duringthe licensing and consentingprocess may not be appropriatein view of the changes in speciesand habitats during the life of

the project.

Each asset type, the area in whichit is located, and the intendedafter-use of the site, will have to beexamined and the decommissioningcosts reassessed. In many caseslegally binding obligations, linked toconsents and licences to operate,may have been given regarding thedecommissioning and restorationof a site and its future use, whichmay no longer be achievable.These obligations may need to be

re-negotiated.

Robust climate change information isavailable to help assess the impactson asset decommissioning costs.Failure to do so raises questionsregarding the corporate governancecredentials of individual companiesand their fiduciary responsibilities totheir shareholders. It also questionstheir reporting procedures andcompliance with IAS 37.

[Source: Standard & Poors 2007]

Case study 8: Decommissioning liabilities


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4 What are the impacts for

the mining sector?Successful mining companies alreadycope with historic climate risks,ranging from day-to-day and seasonalchangeability in weather and extremeevents. Assets have been designed tooperate within historic thresholds andmargins to:

Meet the climatic differencesacross the various regions in

which they operate Maintain social, environmental

and health and safety regulatoryrequirements

Deliver against financial performancestandards

Meet operational performanceand service delivery standards.

Most companies have practicalstrategies in place to manage climateuncertainty and minimise disruption,including for example, taking outinsurance, maintaining updatedcontingency plans, and investing inemployee education and healthcare.

These strategies continue to beimportant in coping with naturalclimatic variability. However, thebaseline climate is changing, andbusiness decisions and practiceswill need to evolve as a result. Miningassets have been designed on thebasis of historic climate data and aperiod of relatively stable weather.These design assumptions together

with those thresholds and marginsset for regulatory, operational andfinancial performance requirements willconstrain the future effectiveness ofassets to deliver under climate change.

Companies should recognise thatclimate change will have both directand indirect impacts across their valuechains. It is vital that companies do notlimit their risk assessments to the directphysical impacts of climate change.The compound impacts are likely toreverberate through a companys

business model creating a pinballmachine effect as the impacts in onearea rebound and have consequentialimpacts elsewhere within a companysbusiness systems, for example:

Access and availability of naturalresources and raw materials

Procurement supply chainsand logistics

Asset design and construction

Asset operation, performanceand maintenance

Markets and customers

Workforce Local communities and the

environment.

Most reports on climate changeimpacts focus on direct climate hazardsand environmental effects due toextreme events. They concentrate onanalysing a one-to-one mapping ofhazard to impact, for example, floodrisk. This oversimplifies the complexcause and effects that exist as theclimate hazards and environmental

effects manifest themselves withina companys business systems. Italso ignores the effect of incrementalclimate change and under-estimatesthe potential costs of the impactsand the adaptation responses by thecompany and by its stakeholders.

Extreme (acute) eventsand incremental (chronic)climatic change

Both acute and chronic climatechange effects will impact thebottom lines of mining companies by

influencing, for example:

Operational performance as a resultof degraded site conditions, damageto assets, decreased efficiencies ofoperations, reduced availability andquality of raw materials and naturalresources, effects on workforcehealth and safety

Social performance becauseof increased competition withlocal communities for access toclimate-sensitive natural resourcesand changes in socio-economicconditions

Environmental performance throughchanges in habitats, flora and fauna,impacts of discharges and use ofnatural resources.

Disruptions to mining extractionprocesses from recent extreme events(for example, the drought in Australia)serve to illustrate the vulnerabilityof assets to events greater than theindustrys current asset design,engineering and operational standards.

These events, combined with theavailability of increasingly sophisticated

climate change models, have generatedgreater interest in planning for moresevere and frequent climatic events.In contrast the creeping averagechanges are much harder to recogniseand are more likely to be overlooked.

Figure 6 illustrates the importanceof identifying climatic sensitivitiesand critical thresholds for assets andbusiness systems. These provide theboundaries between tolerable andintolerable levels of risk. Informationand data on current and future climate

conditions can then be assessedagainst the asset thresholds, toevaluate the likelihood of theirbeing exceeded.

Acute (extreme) events. Setting thecritical thresholds for asset designand operation is essential, but there isalways an event greater than that forwhich protection has been provided.Climate change (as indicated byfigure 6) is predicted to increase therisk of extreme events exceedingcritical thresholds. Companies should

assess their risks and develop strategicplans to expand the coping rangeof their assets through adaptationmeasures. Business continuity andcrisis-management responses areappropriate to manage the impactsof extreme events but have littlerelevance to incremental change. Thelatter requires companies to carry outfundamental reviews of their businessmodels and check that processes areresilient to the new operating conditionscreated by climate change.

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Chronic (incremental) changes.These changes to our climate aremore subtle and their impacts onbusiness models and assets may pass

undetected until critical thresholdsare breached (for example changes inambient air temperature affecting assetperformance). The responses mayresult in step-changes for a company,increasing operational costs beyondforecasts, falling revenues, unplannedcapital investment and additionalbalance sheet financing to managethe consequences.

Assets and operational processesdesigned without an appropriateallowance for incremental change mayfail to meet design criteria, operational

performance targets, key performanceindicators (KPIs) and future regulatorystandards. Understanding theincremental changes in the climateand a companys current thresholds,sensitivities and vulnerabilities aresignificant issues to be consideredin any analysis of a companys futurefinancial performance. They shouldfeature in corporate assessmentsof strategic, operational and projectrisks. This is a particularly importantarea for companies to focus on whenundertaking asset and capabilityoptimisation actions.

Extreme weather events andchanges in weather patterns affectproject and region-specic issues

and require a collaborative approachto identifying and implementingsolutions. Extreme weather eventsand changes in weather patternscan affect our operations.

Warmer winters can mean a shorterwinter drilling season for ourCanadian Conventional operations.As a result, companies may bechallenged to complete drilling andother operations when conditionsare amenabl

Acclimatise CDP Global Mining Adaptation Report

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