Mining companies to come under increasing pressure to decarbonise their operations

Miners charting a strategic path to sustainable mining will unlock the most value for investors, says Old Mutual Wealth Private Client Securities

In a recent weekly newsletter, President Cyril Ramaphosa recommitted South Africa to a series of steps aimed at reducing the country’s carbon footprint because “the world is facing a climate crisis of unprecedented proportions”.

South Africa joins the world in this urgency as it races to achieve carbon neutrality and net zero targets over the coming decades, and industries and companies will find themselves under increasing pressure to support this goal.

Sameer Singh, Research Analyst at Old Mutual Wealth Private Client Securities, says that to reach the goal of carbon net zero, industry at large, and diversified miners specifically, can expect increased stakeholder pressure and must plan for business process transformation to remain both relevant and profitable.

“Mining, as an extractive activity, leaves a long-lasting mark on the environment. Additionally, the processes of extraction and refining emit a substantial amount of greenhouse gases. The mining industry specifically will see dramatic shifts in both the demand for their products and the regulatory environment. For some it will signal the beginning of the end, while for others it will be the start of a new growth trajectory,” says Singh.

One miner that started the transformation process years ago and which is plotting the path of mining for the future is Anglo American, says Singh.

“For much of the company’s existence, it had been about expansion. The 21st century ushered in a phase of consolidation, which saw the group shifting from operating eight business units with multiple commodities to four key business units and six commodity groups,” he says.

Anglo’s strategic shift, which included cost-cutting and streamlining, started in 2015 when the miner recognised both a change in demand as well as the inevitable need to define a relevant and more responsible mining industry of the future.

Singh says increased demand for platinum group metals is far more than a cyclical commodity trend. “Renewable energy, electric vehicles and battery storage, electricity networks and other clean energy technologies require significantly greater amounts of critical minerals than we are currently consuming. Transitioning to and meeting this increased demand will be a key focus for all miners over the next few decades. Platinum group metals are integral to the energy transition value chain, where hydrogen plays a big role too,” he says.

Beyond this, Singh says that across the industry miners are allocating about 1% of expected 2021 earnings to energy transition initiatives.

“While this might seem small now, the value is expected to increase over time,” he says, adding that over the medium term, the state of technology and required infrastructure development will determine the cost and speed of the transition.

He says that Anglo is an example of how making these transformative changes can be beneficial to both shareholders and the environment. In addition to managing the largest portfolio of critical transition minerals, he says Anglo has spent the past few years outlining and implementing strategic operational enhancements.

Singh says the miner’s sustainable mining vision, which aims to build connected, intelligent, automated and waterless mines, should see the miner achieve “less waste, fewer inputs, reduced energy consumption and lower capital intensity, which are all earnings accretive”.

In addition to that, he says Anglo is focusing on renewable energy generation, switching from diesel for fuel to hydrogen, battery energy storage, limiting methane emissions, pursuing carbon efficiency, and implementing emission compensation strategies.

“When investors look at the medium and long-term prospects of mining companies, they should do so with a future-oriented lens and track where the miner is going relative to where the world is going, and what stakeholders will demand,” says Singh.

Anglo has already secured 100% renewable energy for all its South American operations and is currently testing the mining industry’s first hydrogen-electric haul truck.

“From an investor’s perspective, Anglo is doing all the right things and is executing them well,” says Singh. He adds that 8% of the company’s long-term incentives are linked to greenhouse emission reductions and 5% of annual bonuses are tied to key environmental programmes.

Operationally, the group has already realised an 8% improvement in energy efficiency and a 22% saving in greenhouse gas emissions. Earlier this year, the group concluded the spin-off of its South African thermal coal business and announced the sale of South American thermal coal.

“By 2030 Anglo is targeting a 30% improvement in energy efficiency, a 30% net reduction in greenhouse gas emissions, and aims to have eight carbon neutral sites, and by 2040the group aims to be carbon neutral across all its operations,” says Singh.

Singh adds that the ship has sailed and that transformational change in the mining sector is inevitable.

“We believe that companies like Anglo, who are doing the right things right, will transform their business and redefine their role in society as we know it while unlocking value responsibly for shareholders”.

We hold Anglo in our portfolios and remain positive on its outlook as we back its strategic direction on carbon neutrality.