Mining companies’ struggle to reduce Scope 3 emissions may jeopardize ability to survive
The world’s biggest mining companies are both blessed and cursed.
They are blessed because most of them produce the
commodities – copper, nickel, cobalt, among others – that are essential for the
transition to the “clean” economy. They are cursed because most of these same
companies also produce the commodities – coal, oil, iron ore – that are warming
the planet and falling out of favour with investors who increasingly view their
portfolios through the lens of environmental, social and governance (ESG)
standards.
So far, the cursed side is winning, with the Big Five mining
companies trading at low valuations, generally 2½ to four times enterprise
value (debt and equity) to EBITDA (earnings before interest, taxes,
depreciation and amortization).
Tesla Inc., the electric-car company that uses many of the
“clean” metals produced by mining companies – as well as some dirty ones –
trades at 70 times, partly because chief executive Elon Musk’s battery-powered
machines are seen as part of the solution to a warming planet and are beloved
by ESG investors, whereas mining companies are seen as part of the problem and
increasingly shunned by them. The S&P 500 trades at 15 times EV/EBITDA –
three times greater than that of the Big Five.
Their plight is made worse by the extreme difficulty of
reducing, and eventually eliminating, Scope 3 emissions. These are the indirect
emissions in a mining company’s value chain, notably from the use of the
commodities processed by their customers, such as the steelmakers who buy iron
ore from BHP, Vale, Rio Tinto and Anglo American (Glencore, the other Big Five
member, does not produce iron ore).
A few years ago, Scope 3 emissions barely registered among
ESG investors; they focused on a company’s direct emissions. Today, Scope 3
reductions are considered the key to sustainability. There is a recognition
among Big Mining companies (and Big Oil and Gas) that they have to take a
“stewardship” role in reducing these emissions, even if they have no direct
control over them.
Scope 3 emissions account for about 95 per cent of the
mining industry’s overall output, and companies that fail to lay out a clear
and determined strategy to bring them down will get punished by investors and
treated as pariahs at climate summits and among environmental scientists and
politicians, as Big Oil is.
“In a carbon-constrained world, companies that are not
demonstrating a concrete transition to net-zero emissions will increasingly
lose value against those who are making the transition,” said Emma Herd, the
CEO of Australia’s Investor Group on Climate Change and a committee member of
Climate Action 100+, the investor-led group, representing US$54-trillion in
assets, that puts pressure on big polluters to bring down their greenhouse gas
emissions.
All the big mining companies have set targets to reach
net-zero emissions, also known as carbon neutrality, by 2040 or 2050, but those
targets refer to the relatively minor Scope 1 and Scope 2 emissions. The former
are those produced by a company’s operations that are directly owned; the
latter are the emissions that are, in effect, bought by the company, such as
those generated during the production of the electricity to run those
operations.
Only Glencore of Switzerland and Vale, the Brazilian company
that bought Canada’s premier nickel miner, Inco, in 2006, have set precise
Scope 3 goals.
Vale is aiming for a 15-per-cent Scope 3 reduction by 2035.
Glencore, owner of Canada’s former Falconbridge mining company, has pledged to
cut total emissions by 40 per cent by 2035 and hit net zero by 2050 – Scope 3
emissions included. But Glencore’s pledge excludes third-party commodities
bought and sold by its global trading business, which account for most of the
company’s revenues but only a minority of its earnings.
Glencore has a simple and effective plan to bring down all its
emissions: It will deplete its coal mines – that is, not replace their reserves
as they are dug out. Analysts think the plan is credible. In an April note,
Citi’s mining analysts said they expect Glencore’s coal production to fall 43
per cent by 2035, mainly because Colombia’s Cerrejon mine is reaching the end
of its life. “Coal is by far the biggest emissions driver for Glencore,” they
said.
In an interview, Glencore CEO Ivan Glasenberg, who is to be
replaced in June by the company’s former coal boss, Gary Nagle, said: “Our
portfolio of commodities are key to the energy and mobility transition and
allow us to take the lead in the sector regarding our net-zero total emissions
ambition.”
He said he expects a flurry of mining deals in the next year
or two as companies spin off, merge or sell their “dirty” assets, mostly coal,
oil and iron ore, so they can emerge as “clean” companies, dominated by the
metals that are powering the renewable energy revolution, from wind turbines to
Tesla batteries.
That process appeared to have started early this month, when
Anglo American announced it would spin off of its African thermal coal
business, which will soon trade on the London and Johannesburg exchanges as
Thungela Resources. Analysts think Anglo’s move will inspire BHP to accelerate
the spinoff or sale of its thermal coal business. “We believe the demerger
process will boost Anglo’s overall ESG profile,” RBC Capital Markets said in a
note. “There is clear pressure from shareholders for large resources companies
to divest thermal coal.”
The implication is that companies that fail to lower their
emissions, especially their Scope 3 emissions, over the next decades will get
punished by investors, raising their cost of capital in a highly
capital-intensive business and thus jeopardizing their ability to stay in
business, let alone remain profitable. Already, some oil and mining companies
are being kicked out of portfolios, as investors ranging from BlackRock, the
world’s biggest asset manager, to Norway’s sovereign wealth fund embrace ESG
standards.
Mark Travers, the executive vice-president of base metals at
Vale, which includes the Canadian nickel operations, agrees that mining
companies that don’t show credible pathways to emission reduction risk
alienating the expanding universe of ESG investors. “We don’t have all the
answers for Scope 3 yet,” he said. “But we are part of the problem, and part of
the solution, and have to push for change. Our goal is to deliver on what ESG
investors are demanding.”
Depending on the progress, or lack thereof, in the effort to
reduce emissions, companies may be forced to shed entire businesses. “I believe
we will all be pushed eventually to look at our portfolios,” Mr. Travers said.
The companies with vast exposure to iron ore, including BHP
and Rio Tinto, will have the hardest time crushing their Scope 3 emissions.
Iron ore is the key ingredient in steel, the production of which accounts for 8
per cent of global greenhouse gas emissions. Most of their Scope 3 emissions
come from steelmakers whose smelters in China, Japan, South Korea and elsewhere
are beyond their control. Iron ore is also highly profitable – and CEOs don’t
like to give up their cash juggernauts.
To be sure, companies such as BHP and Rio Tinto are trying
to get their Scope 3 emissions down – and saying so loudly to try to spare
themselves the wrath of the ESG crowd. But they acknowledge that the effort
won’t be easy, to the point they are loath to set firm Scope 3 targets.
“We’ve been taking action to address climate risks for over
two decades now and are committed to achieving net zero operational emissions
by 2050,” Mike Henry, the Canadian CEO of BHP, said in an e-mail. “We are also
taking action on Scope 3, including partnerships with leading steelmakers to
reduce emissions in steelmaking and with ship owners to reduce emissions in the
transport of our products.”
BHP’s goal is to help its steel-mill customers reduce the
carbon intensity of steelmaking by 30 per cent by 2030 and help the ships that carry
its commodities cut their carbon output 40 per cent by the same year.
Rio Tinto has been somewhat more skeptical about Scope 3
targets but relented in February after China, Japan and South Korea set
net-zero targets for their industries and BHP got into the Scope 3 game. It too
intends to help iron-ore customers reduce the carbon intensity of steelmaking
by 30 per cent by 2030 while it prays for a technological breakthrough, such as
the use of clean hydrogen to produce iron and steel, which will allow it to
make a meaningful dent in its Scope 3 emissions by 2050.
In an interview, Peter Toth, Rio Tinto’s group executive for
strategy and development, said that cutting Scope 3 emissions “is going to be a
joint effort” with players along the company’s value chain. “Our Scope 3
emissions are our customers’ Scope 1 and 2 emissions,” he said, implying that
the effort may not be as difficult as advertised.
He noted that reducing Scope 3 emissions is far easier for
companies that mine coal – Rio Tinto does not – since that resource can be
easily substituted or pushed out. “If you don’t have fossil fuels in your
portfolio, it’s hard to set a Scope 3 target,” he said.
With its high exposure to copper, nickel, zinc and cobalt,
and waning exposure to coal, Glencore may be an attractive partner for a
company seeking a big portfolio of “clean” metals.
Freeport-McMoRan, one of the world’s leading copper
producers, also stands out as a potential merger partner. Copper is a vital
component of electric cars, and Freeport shares are up 300 per cent in the past
year.
It’s an open secret in the industry that all the big mining
companies, including Canada’s Teck Resources Ltd., whose portfolio includes
copper, metallurgical coal and oil through the Alberta oil sands, are all
discussing possible mergers or restructurings that would make their net-zero
emissions drive, including Scope 3, faster. The alternative – a portfolio
swamped with dirty commodities and an unambitious net-zero plan – might doom
them to ever-lower trading values.
“The miners supply the commodities to sectors that are
essential for the transition to a low-carbon economy – EVs, wind turbines,
solar panels and other technology,” Mr. Glasenberg said. “Some of these
companies are trading as high as 70 times EBITDA multiples, yet our sector’s
multiples barely reach four times. The disconnect is huge.”
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