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Water Scarcity Could Hurt Ratings Of Global Mining Companies, Moody's Warns

Wednesday, February 20, 2013

By Andrea Vittorio

Water scarcity could hurt the ratings of global mining companies if they do not act to manage related operational and political risks, according to a Feb. 14 report from Moody's Investors Service.

The report, Global Mining Industry: Water Scarcity to Raise Capex and Operating Costs, Heighten Operational Risks, said competition with local communities for limited water resources and stringent environmental rules are adding to cost of new mines as companies seek more complex water procurement systems. Political risk also is likely to increase as pressure between mining companies and local populations intensifies.

“If, as a result, projects take longer to complete, and become costlier and riskier to execute, we would expect these factors to exert downward pressure on the ratings of the mining companies,” Andrew Metcalf, an analyst in Moody's Corporate Finance Group and author of the report, said in a statement.

Mining projects require significant amounts of water, especially in the processing of ore. Their supply typically includes captured surface water and groundwater or water from long-term contracts with local municipalities.

Greater water usage due to population growth, urbanization, and rising incomes has driven mining companies to increasingly compete with local communities and the agricultural industry for water supplies, Moody's said. As a result, both project development costs and operating costs have climbed while mining companies turn to alternative water sources, such as desalination facilities, and pipelines to transport water over long distances.

Rising Environmental Compliance Costs

The report said mining companies also face rising costs associated with environmental compliance as well as growing risks from noncompliance, which could lead to production stoppages, fines, and damage to reputations.

Mining companies will spend about $12 billion globally on water infrastructure in 2013, according to Global Water Intelligence, a U.K.-based water consultant. That figure represents a 275 percent increase from the total spent on water infrastructure in 2009.

“One of the main reasons why water management costs are rising is because the majority of new mining development projects are based in water scarce regions, such as Australia, South Africa, Chile and Peru,” Moody's said.

However, “the pace of project development in water-scarce countries shows no sign of abating,” the report said.

Investors to Consider Water Risk

Moody's predicted that smaller mining companies in water-scarce regions will be the most vulnerable to ratings drops, while larger, globally diversified mining companies will be able to better preserve their ratings profiles even as they absorb higher costs.

In the future, capital markets are increasingly likely to factor environmental risks into their lending and investment decisions. Moody's said it also expects to place greater analytical emphasis on rated mining companies' environmental policies and risk management practices in its credit assessments.

In a 2010 report by a network of institutional investors, the mining industry scored the highest overall among water-intensive industries for managing and disclosing water-related risks to investors. The vast majority of the companies analyzed in the report fell short in disclosure on water use and water scarcity concerns.

The International Council on Mining and Metals has been studying good practices in the mining industry for water resource management since 2008. The council also is working to develop an international framework for water reporting and accounting.

“Given the serious work in this area that is ongoing, it would seem to be premature and short-sighted to lower mining company credit ratings,” Nancy Gravatt, a spokeswoman for the National Mining Association, told BNA in an email.