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The mining and metals industry is of vital importance to our continuing prosperity. It provides the basic materials on which our modern economies and almost everything we do depends. From infrastructure to energy systems, from bicycles to mobile phones - It’s easy to see how it drives more than 45% of the world’s measured economic activity. Mining and metals is one of the world’s most important industrial sectors for society now, and in the future.

The industry is at a crossroad.

Ever growing community concerns, environmental impacts on water and land use, rising costs, declining prices and profits, government intervention, deepening pits, lower ore grades and declining productivity are just some of the challenges faced by the mining industry. Finding, starting and running mines is more expensive and difficult than ever before.

However, it’s not all bad news. With the right tools - mining companies have an opportunity to become integrated development partners with all stakeholders. This will require becoming more transparent, providing robust and resilient natural environments and supporting healthy communities and thriving businesses.

Mining for prosperity: Accounting for the environment and society in the mining & metals industry

March 2016

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Introduction

Many mining and metals companies have mature sustainability programs which have helped their relations with communities and governments, reduce environmental impacts and communicate the economic and social importance of the industry. This paper examines innovative ways in which mining and metals companies can enhance their sustainability programs in the context of the current low prices for commodities including the use of natural and social capital accounting to integrate sustainability into the business, enhance efficiencies in existing operations and reduce the risk of community disruption, and new financial instruments such as green bonds to accelerate funding of sustainable projects. The benefits of these solutions include:

• Build resiliency against market cost fluctuations

• Fully integrate sustainability into mainstream business activities

• Enhance design and innovations

• Mitigate risk through accurate water stress or climate change mapping up to 2030

• Enhance efficiencies to existing operations through better understanding of process inefficiencies

• Optimise interventions and maximise investment in initatives such as biodiversity programmes etc.

• Reduce risk of community disruption

• Improve communication of environmental risks and opportunities to stakeholders

• Gain competitive advantage and increase sales through better environmental and social credentials

• Boost brand value and company reputation

Risk mitigation and resiliency against market cost fluctuations

Many mining and metals companies pay (next to) nothing for water, yet critical scarcity makes this increasingly untenable. It must safeguard access to the large quantities of freshwater it needs to operate, whilst relieving increased scarcity-related conflict with rural agricultural communities. Water scarcity risk mapping, climate change risk mapping and pricing projections incorporate the natural capital cost of doing business now, future issue projections and revenue at risk. Providing key insights that inform business strategy.

Better integration of sustainability into to the heart of business management

Since the Global Mining Initiative, mining and metals companies have made great progress with incorporating sustainable development into their business activities. Many firms have developed strategies which have helped improve environmental and social performance. But these programs are frequently built on conventional assessments of a company’s impacts using traditional metrics such as tonnes of carbon dioxide equivalent, cubic meters of water used and injury frequency rates.

Using natural and social capital valuation, a company is able to put a monetary value on a wide variety of environmental and social impacts, allowing managers to compare them on a like-for-like basis.

It also relates consumption of resources, for example water, to their scarcity, enabling a company to understand its natural capital dependency in relation to planetary limits. This gives data much greater clarity and relevance for the business, assisting in the integration of sustainability into mainstream management and planning. It also creates a strong evidence base on which to refine plans, set improvement targets or communicate with stakeholders.

Enhance efficiencies in existing operations through better understanding of process inefficiencies

As described above, natural and social capital valuation allows you to compare environmental and social impacts on a like-for-like basis. This in turn allows operations to prioritise and focus on the areas which have the most material impact on the business.

Broken down to the process level and including the supply chain such analysis can show the main inefficiencies in existing processes. Identifying and prioritising such inefficiencies and turning them into opportunities for improvement are of utterly importance in the current low price and cash constrained mining and metals environment.

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Example:Environmentalandsocialprofitandlosscalculation

A large mining & metals company wanted to know, both at a corporate level, as well as for its subsidiaries around the world, what their profit and loss sheet would look like if their social and environmental capital was accounted for.

As part of this project we looked at which methods and cost factors existed. We were able to account for about 30 social and environmental issues, including e.g. CO2 and other air emissions, water, land use, impact on biodiversity, safety and occupational health.

We assessed the impact the company had in these areas, e.g its air emissions, “translated” these into costs and benefits and added them to the traditional profit and loss sheet, both at a corporate and single business unit level.

The analysis brought some very valuable results to the company, including

• showing them the significant materiality of their social and environmental issues, if society was to change “the rules of the game” and charge companies for them

• that overall society still benefited from the company

• that some of their subsidiaries, which they thought profitable, were actually making a loss when looked at this way.

Reduce risk of community disruption and improve communication of risks and opportunities to stakeholders

“If your deal is too good to be true - well, it is likely too good to be true”. Many mining & metals companies have learned this lesson in recent years when it comes to communities. Their perceptions and expectations of mining have changed - and continue to do so at an ever faster pace, also thanks to the availability of mobile phones and the internet in even the most remote corners of the world.

Natural and social capital valuation offers a way to assess and prioritise community related risks to projects and operations by monetising impacts, which stand for stakeholder expectations.

For example, if a companies annual spending on water management is 1M USD, but the impact after treatment, using natural capital valuation is 100M USD, we would argue that there is a high risk for community disruption, since the discrepancy between these numbers is perceived too big.

We argue that by going another step further - sharing the valuation results with stakeholders and making them part of an open, transparent dialogue - would improve relations even further since it lays out the prioritised risks and opportunities and allows to work towards a “fair deal” for all stakeholders in an objective and transparent way.

Example:WaterRiskMonetizer–MinesinCajamarca/Peru

The Water Risk Monetizer provides actionable information to help businesses understand the impact of water scarcity to their business and quantify those risks in financial terms to inform decisions that enable growth. The Water Risk Monetizer uses a scientific model developed by Trucost to quantify the impact of water scarcity on a facility in monetary terms. The model’s premise is this: the more scarce water is, the higher the value of the water, and the higher the risk for businesses that are relying on it.

We applied the Water Risk Monetizer on mines in the Cajamarca province in Peru and the results showed that they are all located in water high risk locations and that they can be expected to pay a higher premium for water in the future since water related risks are all expected to increase in the region.

The results did not only show risk based water prices into the future but also the potential revenue at risk of 20-50% that could potentially be lost at a facility as a result of water scarcity. Because water is a finite resource that is shared by many users in a

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water basin, the amount of water that should be available to a facility may be less than what a facility needs. The amount available could also change over time, as water scarcity increases or as a local economy grows. The model estimates the amount of water a facility requires to generate revenue, and compares it to the facility’s share of water in the basin if water were allocated among water users based on economic activity (contribution to basin-level GDP). If more water is required than the basin share of water allocated (as determined by the model), then the facility’s revenue is potentially at risk.

The biggest risk was shown for one of the new copper projects since it operates in a basin with greater risk from production losses, as indicated by 100% of potential revenue at risk.

Gain competitive advantage and increase sales through better environmental and social credentials

Expressions such as “conflict minerals”, “dirty gold” and “blood diamonds” have brought some of the most negative consequences of mining and metals into the consciousness of consumers and governments.

Bringing sustainability performance to a level above that of competitors allows to turn this risk into an opportunity. Better environmental and social credentials allow a company to become a preferred supplier by offering additional value to customers. This added value could be lower embedded carbon in steel or aluminium products for the car industry or better overall sustainability performance to the jewellery or electronics industry.

Enhance corporate reporting, reputation and brand value

Companies in all sectors including mining & metals are facing growing demands from investors and governments to integrate sustainability information into their annual reports and accounts. Companies are starting to publish reports which follow guidelines produced by the Integrated Reporting <IR> initiative.

Natural capital valuation can provide a means to meet these demands by converting traditional environmental measures into financial metrics that makes more business sense. Companies such as Puma, Yorkshire Water and Novo Nordisk have created a set of environmental profit and loss accounts (EP&L) covering the entire business.

Reporting greenhouse gas data to the investor-led CDP initiative is seen as best practice, with over 80% of the world’s 500 largest stock-exchange listed companies responding each year.

Companies see value in using such reporting methods to demonstrate to investors and other stakeholders how they are managing sustainability – with the goal of enhancing their reputation and brand value.

Using new financial instruments to fund sustainable mining projects

Green bonds offer mining and metals companies the opportunity to raise billions in capital to fund renewable energy projects and a host of other sustainable building technologies. In 2014 , the market saw a rapid increase in the number of corporate green bond issuances

Natural capital valuation offers bond issuers and investors the opportunity to develop a green bond market that is robust, credible and transparent. By quantifying the environmental benefits of green bonds and putting a monetary value on those benefits, all players will be able to compare the performance of different issuances on a like-for-like basis.

Recommendations

This paper suggests a range of solutions that mining and metals companies could explore to take their sustainability programs to the next level. Natural and social capital valuation offers a way to integrate sustainability into mainstream business activities that conventional approaches to sustainability management cannot. Companies that move early to grasp these opportunities stand to benefit the most.

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Michael TostFoundermichael.tost@mangoimpact.com

MangoIMPACT

About TrucostTrucost has been helping companies, investors, governments, academics and thought leaders to understand the economic consequences of

natural capital dependency for over 15 years. Our world leading data and insight enables our clients to identify natural capital dependency

across companies, products, supply chains and investments; manage risk from volatile commodity prices and increasing environmental costs;

and ultimately build more sustainable business models and brands. Key to our approach is that we not only quantify natural capital dependency,

we also put a price on it, helping our clients understand environmental risk in business terms. It isn’t “all about carbon”; it’s about water; land

use; waste and pollutants. It’s about which raw materials are used and where they are sourced, from energy and water to metals, minerals and

agricultural products. And it’s about how those materials are extracted, processed and distributed.

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About MangoIMPACTThe impact of ecological limits on the economy are now undisputed. The period of economic growth, as we have defined previously, approaches

its end. Companies and organisations today are faced with a rapidly changing environment and new challenges.

MangoIMPACT shows organisations in a professionally sound manner opportunities, but also risks, arising in this situation in the short,

medium- and long-term until 2050. Organisations that exploit these opportunities and minimise the risks secure continuous attractiveness in the

market and provide a solid foundation.

Contact

For further information about the issues raised in this paper, please contact:

Tom BarnettSenior Account DirectorEMEA@trucost.com

TRUCOST

Jacqueline JacksonAccount DirectorEMEA@trucost.com