Addressing climate change in the mining industry

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Addressing climate change in the mining industry

How does mining contribute to climate change?

TM On an emissions-per-GDP basis,

South Africa (as a country, across all industries) ranks among the top 20 carbon-intensive economies globally – primarily due to grid electricity that has a high carbon intensity. This obviously then also has implications on the carbon intensity of South

African mining operations, as processing and refining are highly energy intensive. However, mining companies are already pursuing paths to lower their carbon footprint. In April 2022, KwaZulu-Natal was hit by

Like other industries, mining has a crucial role to play in mitigating the impacts of climate change. Dineo Phoshoko speaks to Tycho Möncks, heavy rains and resultant flooding that claimed the lives managing director and partner at Boston Consulting Group Johannesburg, of more than 400 people and to discusses climate change in the context of mining. caused major damage in parts of the province, providing a stark reminder of the harsh consequences of climate change.

What risks are most elevated as a result of climate change?

The carbon-intensive nature of mining in

Major infrastructure damage was caused by the KZN floods in April 2022

Tycho has been with BCG since 2007 and has many years of on-site, hands-on experience

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South Africa and the country’s vulnerability to climate-related events create a unique set of risks. • Trade risk: The South African economy will face mounting trade pressure as key trade partners implement low-carbon commitments.

It is essential to consider how South Africa’s competitiveness in global markets will be affected if key trading partners take steps to protect their net-zero commitments and enable their net-zero carbon growth trajectories. • Reduced demand: Two of the four most important minerals in South Africa’s commodity footprint are at risk: thermal coal and platinum group metals (PGMs) – including platinum, palladium and rhodium. However, the uptake of clean energy technologies such as electric vehicles and renewable energy technologies will become major drivers of new demand and shift value pools in commodity markets to other commodities such as lithium, nickel and manganese.

What is the mining industry in South Africa actively doing to address climate change and what more can be done?

Even though climate change presents challenges for South African mining companies, there is an opportunity for the companies to become more resilient. Most mining companies have attempted to address climate change

by enhancing energy efficiency, securing water supplies, and reorganising portfolios to exit commodities that negatively impact the environment (most notably coal). Several companies are also deploying large-scale efforts for renewable self-generation and storage of electricity (or have vested plans in place to do so in the near future); others are exploring alternative powertrains (e.g. Anglo American Platinum deploying hydrogen-based truck fleets).

To build an uncertainty advantage around climate change risk, mining executives can also focus on two key priorities: developing a climate-conscious, scenario-based business strategy, and climate-proofing their operations. The true impact of climate change is far from certain. As such, companies’ climateconscious, scenario-based strategy needs to be adaptable to a range of possible scenarios. By running scenarios and simulations, mining companies can gauge the various implications for the company’s portfolio and build effective response strategies both for the near term and looking further into the future. The more diverse their options for rebalancing their portfolio and minimising negative exposure, the better.

How have other countries dealt with climate change in mining?

An example of how a country has dealt with climate change in mining comes from South America. Water shortages increased capex and the risk of stranded mining assets, resulting in Chile becoming the first country to require mines to use desalinated water. Mines that did not invest in desalination experienced interruptions in operations due to water shortages. Building resilience against the physical risk of local climate change will be critical for mining companies in South Africa.

Additionally, seven of South Africa’s key export markets have all set net-zero targets, including the EU, USA, UK, China, Japan and South Korea. As more countries and companies set ambitious decarbonisation targets, a significant shift in commodity value pools begins to materialise, which will have significant business impact for South African mining players.

Who are the important stakeholders to include in discussions about climate change in mining?

Climate responses will need to be coordinated across the industry, and with the support of regulators and stakeholders that include employees and local communities.

Implementing measures to address climate challenges will require all stakeholders to collaborate diligently and remove any barriers to enable the change needed, including regulators increasing self-generation caps, for example.

By working together, the various stakeholders can shape a greener mining industry in South Africa – and one that is more competitive on the global stage.

What does policy and regulation say about climate change in South Africa’s mining industry? Do you think it is effective?

The mining sector in South Africa has

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maintained that a clearer and more predictable policy and regulatory environment is required to attract investment in increased exploration and decarbonisation.

Policies and policy initiatives that should be aligned with international best practices to enable sector decarbonisation include: the regulation of carbon-offset initiatives; the Carbon Tax Act (No. 15 of 2019) – to incentivise switches to green beneficiation processes, such as green steel production; the National Environmental Management: Air Quality Act (No. 39 of 2004); the draft Climate Change Bill (2018); and the Mining Charter III.

If the existing structural issues are overcome, an enabling policy environment is developed with a clear path towards decarbonised operations, and the production of clean commodities and technologies exists, South Africa’s mining sector could become a prime destination for global long-term investments in mining and contribute to a just energy transition in South Africa.

Furthermore, to address their scope 1 (those from managed operations, including mines, processing and power) and scope 2 emissions (those from third-party providers that supply, for example, electricity or steam), mining companies have six main levers at their disposal – energy efficiency, fuel switching, renewable power, green hydrogen, methane capture, and carbon capture – and should try to work on several simultaneously.

For South African mining companies, reducing scope 2 emissions (electricity, heat and steam from third-party suppliers) will be vital to any emissions reduction programme, as ~73% of scope 1 and 2 emissions in South African mining are from the electricity supply. Deploying renewable energy either in a fully off-grid system or utilising a hybrid renewable and grid system would lead to cumulative 2020-2050 emissions savings of between 197 Mt CO₂e (29%) for a hybrid renewable and grid supply system to 466 Mt CO₂e (67%) for a fully off-grid supply. Given the existing electricity tariff structure and the increase of the self-generation cap to 100 MW, a promising business case emerges towards a hybrid or off-grid supply.

Many mining companies hope that regulators will intensify their efforts to ease rules that currently make it difficult to invest in renewables. Regulators have recently taken steps in this direction, but more needs to be done.

For example, South African mining lost between R7 billion to R12 billion of production due to load-shedding in 2019, with these intermittent blackouts anticipated to continue. Privatising generation, either through self-generation or independent third-party generation, is the key to mitigating this risk. The government should further ease the regulatory burden and process barriers with regard to self-generation. This will allow mining companies to achieve stable production and more predictable prices for electricity.

Mining companies in South Africa have announced renewable generation totalling ~6 GW, indicating that the industry sees both the cost and environmental benefits of a selfgeneration strategy.

Regulators and shareholders have a role to play in supporting companies in their efforts to tackle climate change issues. But make no mistake, the bulk of the responsibility lies with mining executives.

What lessons can be learnt from climate change in the mining industry?

Climate change in the mining industry has an influential impact on South Africa’s competitiveness in global markets; the South African economy will face mounting trade pressure as key trade partners implement lowcarbon commitments.

Additionally, South Africa is a semi-arid country and a global average temperature increase of 1.5°C translates to a 3°C increase in Southern Africa. Models show this could lead to more variability in rainfall and an increased risk of extreme weather events. Mining companies will need to adapt to these physical changes in their operating environment and along the value chain. Mining infrastructure is vulnerable to physical risks from climate change. Water shortages would increase capex as well as the risk of stranded mining assets and interruptions in operations due to water shortages. Building resilience against the physical risk of local climate change will be critical for local mining players.

According to BCG’s Smart Multiple analysis, mining companies that have been early movers in addressing climate change – that is, those in the top quintile of emissions reduction performance – have valuations that are, on average, 20% greater than those of their peers in the bottom quintile. To build an uncertainty advantage around climate change risk, mining executives should focus on two key priorities: developing a climate-conscious, scenariobased business strategy and climate-proofing their operations.