The growing political risk to miners posed by water shortages
In response to the growing global demand for metals and minerals, the mining industry has stepped up exploration and development of mines in various inhospitable places the world over. Though this trend has recently reversed in the wake of softening global demand, 136 new projects were announced in 2012, according to Ernst & Young. Despite the soft medium-term global economic outlook and rapidly decreasing capital expenditures by major miners, the long-term demand expectations of the developing world remain high, and thus so too does the need to continue exploration for metals and minerals in the world's far-flung places.
Unsurprisingly, the development of difficult resource deposits has occurred in increasingly sensitive environments, far from the infrastructure necessary to meet the immense challenges of large-scale mining operations. One of the most common risk factors mining firms are faced with, in the frontier and emerging economies where these new deposits have been found, is a lack of the rivers, lakes, and water sources that are so important to a successful mining operation.
Access to a secure and stable water supply is essential for most mining operations, as water plays a vital role in every step of the mining process, from initial extraction to the refinement of ore. Water is often used to separate high value metals and minerals from the rock that ore is found in, is used to cool drill bits, and is essential for dust control. For mines that focus on the some of the world’s most important resources, such as gold and copper, water is a necessity. As the easy-access deposits of such valued resources have become increasingly scarce, and reliance on low-quality ores has increased, so too has the demand for water for the mining and refinement process.
Significant Risk to Asian Mines
Water risks are particularly significant in Asia, a continent rife with water scarcity issues and rich underdeveloped mineral resources. Asian governments, like those of China and India, are becoming increasingly aware of the need to steward water resources for agricultural and municipal purposes more carefully. As Asian governments seek to husband limited resources better, mining firms will find it increasingly difficult to source the water necessary for effective green field operations.
Countries that currently have extensive mining and exploration, such as Mongolia, India, China; countries thought to have great potential, such as Afghanistan and the Baluchistan region of Pakistan; and regions of Asia that remain underdeveloped, such as Central Asia, all suffer from significant limited water availability and a rapid growth in population consumption.
Mining and water issues are converging in a dramatic fashion in Afghanistan. Assessments of water resources conducted by the UN in 2008 suggest that Afghan groundwater levels have decreased by 4 to 10 meters throughout the country, and 50% of groundwater sources have been lost and are not expected to be rehabilitated in the near future. A 2004 US Army Corps of Engineers white paper on Afghan water usage anticipate that a modest population growth rate of 1% would likely lead to a dangerously arid future for Afghanistan. Afghanistan’s annual renewable water resources are estimated at 55 km3 a year; by comparison, US renewable water resources are estimated to be 2,818 km3.
Although great mining potential exists in Afghanistan, as is demonstrated by the expected one trillion dollar value placed on resources buried beneath its soil, water shortages would make it exceedingly expensive to extract without impacting local water supplies. This should draw the attention of all involved as major mines, such as Aynak, the largest copper mine in Afghanistan, would likely impact water availability in Kabul province. This would have serious ramifications for Kabul city, where water resources are already under strain due to a rapidly growing population.
In the more political friendly, although equally environmentally challenging, Mongolia, Rio Tinto has had to build a 70km pipeline in order to access the Gunii Hooloi aquifer to supply Oyo Tolgoi copper and gold mine with water. All this points to one clear conclusion: going forward, mining projects will have to look harder for water, take longer to build essential infrastructure, and be costlier and riskier to run. If carefully thought-out strategies for managing water resources are not utilized, local populations will increasingly shoulder the brunt of the negative environmental impact of mining operations.
Water Impacts the Bottom Line, Infrastructure Expensive
It is essential for investors to keep water risks in mind as well, as most mining firms are already experiencing significant cost inflation and water risks present a largely hidden cost, one difficult for investors to see, but sure to materially impact the bottom line. Global Water Intelligence, a UK-based consulting firm specializing in water issues, estimates that mining companies will spend $12 billion globally on water infrastructure in 2013, a 56% increase from the $7.7 billion spent globally by the mining industry in 2011. According to a recent Moody’s report, 70% of the mines of the “big five miners” (BHP, Rio Tinto, Anglo American, Vale, Glencore Xstrata) are already located in countries already under significant water stress (56%) or moderate stress (14%).
Compounding the issue is concern about the environmental impact of large-scale mining operations on water quality. Long a concern of environmentalists, water quality is quickly becoming a chief concern for governments with limited resources that must be shared between industry and citizenry. In April of 2012, the government of Peru went so far as to halt development of the Southern Copper-owned Tia Maria mine, a move prompted by concerns about the impact of mining on the quality of decreasing local water resources.
The halt is expected to last approximately one year, pushing the mines start-up to 2016, during which time an environmental feasibility study will examine the cost and impact of piping in raw seawater, which once desalinated would be used for operations instead of local water resources.
The costs associated with such endeavors are considerable. Both Anglo-American and Freeport-McMoRan are building desalination plants at mining operations in Chile that are projected to cost the firms $96 million and $300 million respectively. The World Resource Institute estimates that desalination infrastructure for a single large copper mine can run as high as $3.5 billion. The cost of the initial build is just the start of the expenses associated with piping in seawater to mining projects. According to a recent article in Emerging Markets Monitor, a Business Monitor International publication, desalinated water can cost mining firms 10 times the cost of locally-sourced freshwater.
Needless to say, the increased scarcity of water, along with government concerns about supplying growing urban populations, will increasingly bring mining firms into conflict with both local and host nation governments. This trend can already be seen in mining operations throughout Asia and South America, and will only add to the difficult operating environment with which global mining firms are faced.