The Shift to Renewables to Become a Growing Trend in Mining

KEY VIEW FROM FITCH SOLUTIONS:

• Renewable energy will play an increasingly important role in powering mining operations worldwide over the coming years.

• The reduction of renewable power costs and the prospect of more reliable power supply will be the key drivers of the shift away from traditional fuel sources to renewables among miners, ahead of ESG concerns.

• Mining markets with more favourable regulations and policies towards renewables will be ahead of the curve in the adoption of renewables in mining, with countries in the Americas standing out.

At present, most mining operations globally continue to rely on traditional power sources, mainly fossil fuel-based grid power or off-grid diesel-generated power. However, the share of renewables powering the mining industry is set to rise, driven by an increasingly favourable regulatory environment in key mining markets, combined with fast-falling renewable energy costs as well as a growing strategic importance given to reducing costs and improving ESG standards among miners. Countries and companies operating in the Americas, are best positioned to lead the way in the adoption of renewables in mining, aided by carbon pricing measures and an already significant integration of renewables in key operations. We expect Solar Photovoltaic (PV) and wind capacity will dominate the share of renewables favoured by miners moving forward.

Despite increasing social pressure to improve ESG standards, we believe that the price motive will remain the driving factor behind mining companies’ decision to increasingly shift their energy consumption towards renewables in the short term. Currently, Energy and Mines research estimates that energy costs, primarily made up of grid electricity, coal, diesel or natural gas, account for up to 30% of miners’ balance sheet costs and we expect this to increase over the coming years as ore reserves are depleted, forcing companies to adopt more energy intensive mining methods. In an environment where miners will remain committed to keeping costs down, the use of renewables offers significant cost-reduction potential ahead as technology improvements and larger scale being achieved among equipment manufacturers lead to falling prices, while maintenance costs are negligible compared to conventional generation (See ‘Global Renewables Capacity To Almost Double Over Next Decade’, August 21 2017).

INDUSTRY TREND ANALYSIS

Renewables also offer grid-tied miners the opportunity to mitigate the risks that come with a volatile power supply in the countries in which they operate in. Power outages and exorbitant electricity prices are commonplace in key mining markets with immature or inefficient energy sectors. For instance, Zambia’s overdependence on hydropower resulted in a tariff dispute between the government and the country’s key copper miners last year that led to power outages and production stoppages at Glencore’s Mopani Mines, one of the country’s largest. Even in more developed and diversified power markets such as Australia, hikes in power prices over the past years have impacted margins for miners including Glencore and Rio Tinto, putting jobs and production rates at risk. As a result, investing in self-supplied renewable power which is not dependent on national grids will become increasingly attractive propositions for miners over the coming years. Solar and wind power generation, in particular, will be the renewables of choice for the mining industry, due to their rapidly falling costs and prevalence as an energy source across the globe.

Countries that are already implementing widespread regulatory and policy changes in anticipation of a shift to a low carbon economy will be at the forefront of adopting renewables in mining. In light of the Climate Change Pact adopted by 195 countries at the COP21 UN conference in Paris on 12 December 2015, important mining hubs have implemented significant measures to reduce their emissions progressively, that have subsequently incentivised mining companies to shift towards renewables. For instance, in Chile and Canada, the introduction of carbon pricing schemes, at USD5/tonne and USD10 /tonne, respectively, is pushing miners to increasingly consider ways of limiting their carbon exposure as a core strategic objective and attracting interest in renewables investments. In Canada, mining companies including Barrick Gold, IAMGOLD, AurCrest Gold and Goldcorp are already investing in renewables and/or mine electrification in order to reduce greenhouse gas emissions. Chile meanwhile will remain a global outperformer in regards to the number of mines adopting renewables and the total installed wind or solar capacity (see ‘Global - Installed Wind And Solar Capacity By Mine’ table below). Up to nine different mining companies have installed either wind or solar-generating capacity in the country to date, including copper mining giants Codelco and Collahuasi and Antofagasta Minerals which boasts 191.5MW of installed Solar Photovoltaic (PV) capacity at its operations. Chile’s Association for Renewable Energy has projected 100% of the national grid in Chile could be powered by renewables by 2050 .

Government policy support will be instrumental in boosting renewables in the mining industries of other major mining markets moving forward. In India, the Modi government’s ambitious renewable energy growth targets will drive radical changes in the energy economics of the mining industry, where coal firms like state-run Coal India plan to generate 20 GW of solar power generation energy nationwide over the next ten years. Similarly, China will ramp up environmental regulations that will focus on curbing the use of coal and metal smelting as part of the government’s commitment to reduce 40 -45% of greenhouse gas (GHG) emissions by 2020. A key element of this objective is the national carbon trading scheme announced in July 2017 and set to be fully rolled out by 2020. Argentina and South Africa are set to follow suit and have already proposed carbon trading schemes of their own, with the latter’s set to be implemented by 2019. These countries accordingly outperform on our renewables industry rewards scores measuring renewables growth and capacity, while less regulated markets in Africa are set to lose out - posing challenges to the adoption of renewables in mining operations there.

While secondary to cost-efficiency, ESG considerations will have a growing influence on mining companies’ decision to shift their energy consumption away from fossil fuels and into renewables. The rapidly growing electric vehicle (EV) sector, underpinned by lithium-ion batteries, and consumer electronics sector will become increasingly valuable customers for top metal and mining companies, leading to rising pressure to reduce environmental impact in the industry (See ‘Miners Under Pressure To Improve Environmental Reputation, Transparency’ May 17). We believe mining companies will intensify their investments into renewable energy, battery storage, energy efficiency and carbon capture and storage (CCS) in order to improve their social license to operate over the coming years. Already, key deals between metal producers and EV or consumer electronics firms this year reflect the trend toward environmental sustainability and social accountability in the metals and mining industry:

• In May, US electronics firm Apple and top aluminium producers Rio Tinto and Alcoa announced plans to invest in carbon-free aluminium through joint-venture Elysis. Along with the Canadian and Quebec governments, the firms will invest CAD188mn in the venture.

• In January, BMW and top Chilean copper miner Codelco announced the ‘Responsible Copper Initiative’, aimed at improving the commitment to ecological and social responsibility in the copper industry. In 2017, BMW purchased 42kt of copper and expects this figure to increase by 20kt by 2025 as EVs are rolled out.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.