Tuslequah Chief Copper-Lead Mine, BCCumulative Effects - Acid Mine DrainageMinera Escondida Copper, Chile
Water Scarcity - Desalination
Tia Maria, PeruWater Pollution à Social Conflict
PNG drought halts mining at Porgera
QuantifyingWaterrelatedFinancialRiskfortheMiningIndustry
Samarco, Brasil, Tailings Dam Failure
Atacama Floods, Chile
Operator/InvestorCAPEX, OPEX, Production Losses, Profit MarginsAsset Stranding, Operating License, Reputation, Regulatory Pressure
SocietyEnvironmental Degradation, Loss of Access to Water, Poverty Trap, Property and Life Casualty Losses
UpmanuLall,Yash Amonkar,JoseBlanchet,Luc Bonnafous,LaurenButler,PaulinaConcha,MadisonCondon,ChrisDolan,JuanGuiterrez,GarudIyengar,Nicolas Maennling,Karthyek Murthy,Jason Siegel,JorgeSuito&Sophie ThomashausenColumbiaUniversity with support from NBIM with contributions from Gavin Mudd,StephenNorthey, &TimWerner
Kennecott Copper, Utah
1
Contents
RESEARCHOBJECTIVE/PROBLEM1
VALUATIONANDRISKFRAMEWORK2
3 ANALYSIS,RESULTS,CONCLUSIONS
4 RECOMMENDATIONSFORCOMPANIES&INVESTORS
5 RESEARCHEXTENSIONS
2
ResearchObjective
SpecificCase:Copper/GoldMining&WaterRisks
WaterManagementRisksinMining:• Scarcity- Aridity,Drought• WaterQuality/Pollution,WasteSpills• IncreasingWaterSourcing&TreatmentCosts• Flooding• SocialConflict&AssetStranding• Regulations&theirEffectiveness• FailureofRiskMitigationActions
Howtoquantifyfinancialrisksfromenvironmentalfactorsforlongterminvestors?
3
1. Howdoincreasingwatermanagementcostsforminingimpactprojectriskandlongrunindustrycostcurve?
2. Whatarethefinancialriskexposurepathwaysforminingrelatedtowater&climate?Howcandataandestimatesonthesebedeveloped?
3. Whatarethemine'sriskmitigationstrategies,theircostsandresidualrisks?4. Givenlimiteddata,highuncertainty,andthepotentialforcatastrophicevents,
howbestcanfinancialriskattheassetandportfoliolevelbeassessed?5. Howwelldoregulatoryandfinancialdisclosureprocessesaddresstheserisks?
ResearchQuestions
4
ProblemFraming
• Minesareheavilyengineeredandregulatedwithlife>10years• Environmental/waterfactorshaveledtosignificantsocialconflict,
non-performingassetsandproductioncostrisks• Miningcompaniesdisclosetheireffortstoaddressthesechallenges
andprovideenvironmentalandfinancialreports• Analystsandregulatorsusethesereportstoassessperformanceand
valuethemines• Istheredatatoassesswhethertherisksareproperlyassessedand
disclosed?• Howdoesoneassesstheresidualfinancialrisk(beyondthemarket
valuation)recognizingthecomplexityinthephysical,social/legal,environmentalinter-dependenceoverthelonglifeofamine?Orforaportfolioofmines?
Whatarethematerialfinancial
risksrelatedtowater,howdotheyemerge,andhowcanone
valuethem?Aretheypricedright?
5
Contents
RESEARCHOBJECTIVE/PROBLEM1
VALUATIONANDRISKFRAMEWORK2
3 ANALYSIS,RESULTS,CONCLUSIONS
4 RECOMMENDATIONSFORCOMPANIES&INVESTORS
5 RESEARCHEXTENSIONS
6
ShortvsLongTermInvestorPerspectivesShortTermInvestors:• Willthecompany(anditsassets)beatmarketexpectationswhenitannouncesitsresults?
• Isthespotcommoditypricegoingup(ordown)thisquarter?• Willthecompanyhavepositiveexplorationresultsinthenear-term?• Willthecompanyproducemore(less)payablemetalthanthemarketexpects?• Arecostsgoingtobelower(orhigher)thananticipated?• Willthecompany’sassetsgetpermittedinthenear-term?
LongTermInvestors:• Arethecompany’sassetsfundamentallymore/lessvaluablethanmarketperception?
• Whatshouldthefundamentalcommoditypricebe(supplyanddemand)?• Isitlikelythatcompany’sassetswillhavereserveshigherthanestimated?• Willthecompanybeabletoeconomicallyextractallofitsdefinedresources?• Whatlevelofcostsaresustainableinthelong-run?• Willthecompany’sassetsgetpermitted?• Aretherepotentialincreasesincostsduetounforeseenfactorsthatcouldleadtoa
strandedornon-productiveasset? 7
LongTermInvestment&SustainabilityGoals
• TypicallyDiscountedCashFlowisUsed• EmphasizesShort orNeartermCashFlows• Valuationsareupdatedascompaniesdisclosecosts,yieldsand
reserves,andanalystsupdatemetalprices• ProductionCostschangerelativelyslowly
• WaterManagementcostchangesareincluded• Riskdiscountsareappliedtoaddressuncertainties
• Costandproductionuncertaintiesarehighinearlystagesofminedevelopment
• RemediationcostsoccurlateinminedevelopmentandarehighlydiscountedinPresentValue,but=liabilities.
• Notclearhow“shocks”arepricedaccountingforpotentialmitigationeffortsbythecompany?
• Correlatedrisksacrossmineslimitedtometalprices
WhatkindofrisksarecapturedbyMarketResearch&Valuation?
ResidualFinancialRiskduetosystematicbiasinestimationand
disclosureofeitherthevalueatriskorthe
uncertaintyassociatedwiththerisk
8
FinancialImplicationsofEnvironmentalFactorsVA
LUE
UNCERTAINTY
REVENUE
COSTS
CAPEX
Examples:Productionstoppage,permanentmineclosure,modifiedexpansionplans
Examples:Legalcosts,monitoring,communityrelations,ongoingremediation,permitting
Examples:Clean-upcosts,settlements,reconstruction
PROBABILITYOFFOREGONEREVENUE
PROBABILITYOFINCREASEDCOSTS
PROBABILITYOFINCREASEDCAPEX
$
P($)
P($)
$
$
P($)
Decisionsaremadeinresponseto“riskevents”àmaychangeassumedminetrajectory9
• MinePlansincludeenvironmentalimpactassessmentsandmitigationoverdecades.Theyareupdatedovertime.
• Valueiscreatedasthemineis“de-risked”asanalysesanddataimprove(thereforetheoreticallymoreaccurate)
• Minesbecomelessriskyasfutureoutcomesarebetterunderstood
• Biggestwaterrisksà non-performingorstrandedassets• Lossoflicensetooperate• Socialconflict• IrreversiblePollution• CatastrophicInfrastructurefailure• Competitionoverwater
ValueCreation/De-riskingOverTime
EIA
Aretherecriticaltriggersandexposurepathwaysforwaterrisks? 10
UnderstandingProfitabilityImpactofEnvironmentalFactors
EXAMPLE:TAILINGSSPILL
REVENUE
COST
CAPEX
WILLTHEASSETEVERMAKEMONEYAGAIN?
WHATARETHECARE&MAINTENANCEANDONGOING
MONITORINGCOSTS?
WHATWILLBETHERESULTINGCLEAN-UPCOSTS/LIABILITY/
LITIGATION?
FULLWRITE-OFF:Assetdoesnothavesufficienteconomicreservestojustifyrestart→ASSETHASRESIDUALVALUEOFZERO
PARTIALWRITE-OFF:Assethassufficientreservestojustifyrestart→ASSETHASRESIDUALVALUEGREATERTHANZERO
IFFULLWRITE-OFF→ZEROIFPARTIALWRITE-OFF→EQUALTOFIXEDCOSTSOFMINEDURINGPERIODOFRESTART+INCREASEDMONITORINGCOSTSASARESULTOFTHEINCIDENT
FUNDAMENTALESTIMATEBASEDON:• Proximitytomajorpopulationcenters/
waterresources• Capacityandquantityoftailings• Impurities/toxicity• Mine/Companyinsuranceprotection
11
• Investorsrelyheavilyonminingcompanyanalysesasabasisfortheirinvestmentdecisions
• RegulatorshavetriedtostandardizetheseanalysesunderJORCand43-101toprotectinvestorsandpreservethecredibilityofthesestudies/publicdataandtheirrespectiveclassifications
• Researchhasshownthatanalysesarehistoricallyinaccurate.However,intheabsenceofotherpubliclyavailableinformationinvestorshavenoalternativeasabasisfortheiranalyses
• Thus,investorshavetocomeupwithsubjectivedeterminationsofriskassociatedwithcompanyestimates(discountstoNAV)
IssueswithRelianceonCompanyProvidedInformation
M&ADiscountstoNAVbyProject
Changingenvironment/climateandsocio-economicconditionsmayinvalidateminecompanyassumptionsanddisclosure
12
• Thereareempiricalexamplesofbondsbeinginadequatetocoverreclamationcosts
• Examplesinclude:• SummitvilleMineinColorado,cyanidespill
required$192millionSuperfundcleanupwhilefinancialassurancespostedbyoperatingcompanywere$4.5million.
• 2005GAOReport:FinancialassurancesnotadequatetocovercleanupcostsofmajorityofinvestigatedabandonedminesonBureauofLandManagementproperty.
• Laterinthispresentation,wediscussindetailhowbiasisprevalentinreclamationcostestimateswhichcanhaveaprofoundimpactonstakeholders(includinglocalcommunities,regulatorsandinvestors)
IssueswithRelianceonCompanyProvidedInformation
RemediationCostsvs.PostedReclamationBonds
13
Contents
RESEARCHOBJECTIVE/PROBLEM1
VALUATIONANDRISKFRAMEWORK2
3 ANALYSIS,RESULTS,CONCLUSIONS
4 RECOMMENDATIONSFORCOMPANIES&INVESTORS
5 RESEARCHEXTENSIONS
14
KeyIssuesFocusedon
BIASINREPORTING
LOWPROBABILITY/HIGHIMPACTEVENTS
CLIMATEEXTREMES
MispricingofRiskduetosystematicerrorsincompanyreports
InfrastructureFailurewithwatersystemimpacts
Asatriggerforwaterscarcity&floodingàinfrastructureimpactsandsocialconflict
ReclamationCostDisclosureAnalysis
TailingsDamStateIdentification&Failure
ImpactAnalysis
MispricingofatsiteriskCorrelatedPortfoliorisk
CUMULATIVEWATERPOLLUTIONEFFECTS Regulatoryeffectivenessandoutcomes ReputationalRisk,
WatershedImpacts
SOCIALCONFLICT Covariatesofwaterrelatedsocialconflict AssetStrandingpotential
FINANCIALRISKMODELING
Modellongtermriskevolutionandmitigation,overquantifiableriskexposurepathwaysßinformationbiases&uncertainties
Robustrealoptionsmodeltheoryandapplication
WATERUSE&COSTS Boundsonpotentialwateruseandwastewatertreatmentcosts
Longruncostriskforatsitewateruse
REGULATIONS ComparativeAnalysisAcrossCountries PotentialEffectiveness,Delays
15
WaterUseandCosts
Concern:Increasingscarcity,competitionandconflictà increasinglongrunCAPEXandOPEXforwatermanagementà reducedIRRà assetstranding,especiallyasmetalpricesdropFindings:• Significantvariationsinwateruseandwastewater/tonproduced
• Decliningoregrades=moreprocesswateruse• Trendstowardsre-useanddesalinationinaridregions,andproducedwaterusein
humidregions• CAPEXandOPEXtypicallyvaryfrom5to10%oftotalproductioncosts,and
efficiency/technologyimprovementssuggestlongruncostcurveswillhold• LongrunCu/Augolddemandcurvestrendupfasterthanprojectedincreaseinwater
costsasafractionofproductioncosts• Longrunà industrycostcurverisesà newdemand-supplyequilibrium• WRIAqueductScarcityRiskIndexdoesnotpredictNAVorCreditRating
16
CopperPrice(NASDAQ) Notetheover100%variationincopperpricesover5yearsandyearoveryearvariationsof+/-50%
WaterUseandCosts
17
• Accordingtothe studybytheChileanCopperCommission,minelevel cashcostsatChile's19largestminesfelltoanaverageof$1.285perpoundduringthefirstthreemonthsoftheyear,down13.3%ornearly20capoundfromthesamequarteroflastyear.
• …improvedminemanagement,lowercostsforelectricity,servicesandshippingandlowertreatmentandrefiningchargedbysmelters.Thetrendoffallinggrades,coupledwithincreasingwatercostsinChilemakesthecostcuttingevenmoreremarkable.
WaterUseandCosts
18
19
RobustRealOptionsModelTheoryandApplicationsFINANCIALRISKMODELING
RealOptionsModel:Simulation-OptimizationModelingframeworkforriskandasset/portfoliovaluationSimulation =performance/outcomesinthefaceofstochasticshocksovertimethatleadtodecisionsonchangesinsystemdesignoroperationandhencecostsandrevenuesOptimization =atanygiventimewheresuchadecisionisneeded,assumingthecompanyisarationaleconomicactor,identifytheeconomicallyoptimaldecisiontotheendoftheoperatinghorizonThus,thenonlineardependencebetweenshocks,decisionsandoutcomesisexplicitShocks=financialorenvironmental
Robust:Recognizesthatdataonshocksandtheoutcomesoftheshocksmaybequitelimitedandorbiased.Howdoesonederiveappropriateboundsfortheprobabilitiesofshockeventsinthissetting?Howdoesonesimulateshocksusingtheserobustprobabilitybounds?
TheoryDeveloped.DatabaseandAppDevelopedandavailable.AppliedtoAssesswhetheraMine/Companyisover/underValuedconsideringrisks
20
SevereSustainedDrought
Replacementwater
Socialconflict
Revenue
ShorttermProfit
WastewaterTreatmentRequirements
Strandedasset
Climate
1.Financialexposurepathwaysforamineß waterrelatedrisks?
21
Socialconflict
Revenue
ShorttermProfit
Strandedasset
Climate
ExtremeRain&Flood
TailingsDamFailure
ToxicDischarge
2.Financialexposurepathwaysforamineß waterrelatedrisks?
22
Socialconflict Strandedasset
ToxicDischargeToxicDischargeToxicDischarge
ToxicDischarge
……..
DegradedWaterBodies
Cumulativeeffects
3.Financialexposurepathwaysforamineß waterrelatedrisks?
23
Acquire Permitted Operational
Social/LegalEIS, Permits, ConflictsSystems DesignFinancing
Regional Drought
Water Available ↓Discharge Allowed ↓Waste Treatment ↑Social Conflict ↑Production ↓Net Revenue ↓
WWT failureSpill
Social Conflict ↑Regulatory fines ↑Regulation ↑Production ↓Net Revenue ↓
Flood Event
Power & Transportation ↓Infrastructure ↓Waste Spill ↑Production ↓CAPEX ↑Net Revenue ↓
Tailings Dam Failure
Power & Transportation ↓Infrastructure ↓Waste Spill ↑Regulation ↑Legal Actions & Fines ↑Production ↓CAPEX ↑Net Revenue ↓
Mine Closure
Wet Period
Site RemediationNew standards?Adequate Bond?
Groundwater Contamination ↑Regulation ↑Acid Mine Drainage ↑Liabilities ↑
Consider climate extremes, Tailings failures, Social conflict emergence as stochastic shocks whose probability of occurrence changes over time based on covariates à risks that change over time
Mining companies design/insure some of the risks
Outcomes = function of planning + event effects
Discounted present value reflects the risk?Simulate all possible occurrences, and best decision forward at each time 24
MineSiteandPortfolioRisk,anditsChangeoverTimeCLIMATEEXTREMES
Databaseandexposureestimation/rankingAppDevelopedandavailable.AppliedtorankcompaniesintermsofVARorcVAR exposure,andforRealoptionsModel
April 17, 2016: “Codelco, the world's top copper producer, said the rains forced the Chilean state-owned miner to suspend production at its century-old underground El Teniente mine, likely leading to the loss of 5,000 tonnes of copper production.”
10 year 1 day event ?
Mine infrastructure is designed for a certain level of flood or drought risk. Insurance may cover the residual risk with a payout limit.Assumption: data used to compute the probabilities is representative of the future.
Unfortunately, climate risk exhibits regime like behavior èDesign risk estimate may be out of phase with operation period risk
Climate risk exposure is also spatially correlated over a business cycle = Elevated Portfolio Risk
Daily Flow of the Mapocho River near Santiago, Chile
25
ExtremeRainfall:40mineRioTintoportfolio.• Highclustering:36exceedancesinoneyearoutof142• Thereisapronouncedtrendanddecadalvariability
BHPBillitonRioTinto
Drought:38mineBHPBillitonportfolio.• Highclustering:24exceedancesinoneyearoutof60
BHPBilliton
RioTinto
Annualexceedancesof10year30dayrainfall
Annualexceedancesof10yeardrought
PortfolioExposureExamples:RioTinto(40assets)andBHPBilliton(38assets)
26
0
1
2
3
4
5
6
7
BarrickGold
BHPBilliton Newmont RioTinto BarrickGold
BHPBilliton Newmont RioTinto
Ratioofactual numberofeventsinexcessof100year1dayextremerainfallforPortfoliorelativetowhatisexpectedbychance,for3
thresholdsoftheportfoliocdf
90th 95th 99th
Based onNOAA-CIRES1851-2014reanalysisBasedonECMWF1900-2010reanalysis
Fattailriskduetospatialclustering:
PortfolioExposureExamples:FourCompaniesandTwoClimateDatasets
27
28
DroughtRiskRankingsbyVARandCVARnormalizedtoportfoliosize
ClimateExtremes– ResultExample– ComparisonAcrossCompaniesforDroughtExposure
TailingsDamStateIdentification&failureImpactAnalysisLOWPROBABILITY/HIGHIMPACTEVENTS
Concern:Tailingsdamsstorehighlytoxicwastes.Theirfailurecanleadtocatastrophic,multi-billion$liabilitiesandpotentiallossoflicensetooperate,assetstranding.• Noglobaldatabaseofdams.Yet,failurerate3-5xofriverdams• Sequentiallyconstructedofearthenfill.Morepronetofailure• Dominantfailuremodes:Overtoppingduetohighrain,GeotechnicalFailure.
MismanagementApproach&Findings:• MachineLearningapproachdevelopedforautomaticidentificationoftailing
damsfromsatelliteimagery• Regressionandindexingbasedapproachforprobabilisticimpactanalysisand
rankingofdamfailureimpact(ecological,population)basedonrunoutfromfailure.
• PredictionprobabilitiesfromthemodelcoveractualSamarco impact• However,hazardratingsformanyotherBraziliantailingdamsintheregionare
muchhigherthanthoseestimatedforSamarco
BARRAGEM
ITABIRUÇU230Mm3
DamFailure, SatelliteImageDatabasesandRiskAppDevelopedandavailable.AppliedtoderiveprobabilistichazardratingsandrankingforMinasGerais dams
29
ReclamationCostDisclosureAnalysisBIASINREPORTING
DatabaseandRegressionModelDevelopedandavailable.Appliedtoestimate/predictdegreeofsystematicunder-reportingofReclamationcosts
Concerns:Ifminingcompaniessystematicallyunder-reportreclamationcosts,thenlongterminvestorsmayfacesignificantresidualfinancialandreputationalliabilities.• Companiesmayengageinstrategicbehaviortoavoidcoveringactualreclamationneedssince
theywerenotbudgetedordisclosed.• Dobiasesinthisaspectreflectsystematicbiasesinotherdisclosure?Findings:• Alongitudinaldataonreclamationcost,reserves,productionandothereconomicfactorswas
derivedfromquarterlyreports.• Regressionmodelshowsthatcontrollingforchangesinproduction,reserves,inflationand
otherfactors,the%ofremaininglifeofmineemergesasasignificantpredictorofreportedreclamationcostsà earlyestimatesaresignificantlybiasedlower.
• ComparisonswerealsomadewiththeEPA’srecentlyreleasedmodelwhichonlyusesasingledisclosureofcostsbyacompany,andfocusesonameanvalue.
• Difficulttocompiledataonactualreclamationcostsvsearlierestimates,butwerecommendreclamationbondsreflect90%probabilitycoveragebasedonuncertaintyestimates
30
CovariatesofWaterRelateSocialConflictSOCIALCONFLICT
Concerns:WaterisperceivedasaprimarydeterminantofsocialconflictsrelatedtomininginLatinAmerica,andhasledtoassetandinvestmentstranding• Istherequantitativeevidencethattheprobabilityofconflictrelatestoawaterissue?Findings:• Datawascompiledforreportedwaterrelatedviolentandnon-violentminingconflicts
inPeruandMexicoandabroadsetofdemographic,waterandclimatecovariates.• Bayesianandrobustregressionmodelsfindthat
• Pastconflictisthestrongestpredictor• OthersareMiningScale,RedistributionofTaxrevenues,CorruptionPerception• Drought(rainfallreduction)ratherthanabsolutewateravailability,andwaterfines
(relatedtopollution)arethemainwaterpredictorsidentified• Cumulativeeffectsofminingandtheassociatedemergenceandpersistenceofconflict
maythusbekeyfactorsdeterminingassetlevelriskinawatershed
Peru&MexicoconflictsandcovariatesDatabaseandRegressionModelavailable.Appliedtoestimate/predictlikelihoodofconflict
31
RegulatoryEffectivenessandOutcomesCUMULATIVEWATERPOLLUTIONEFFECTS
Concerns:Evenifsitelevelregulationofmineeffluentsiseffective,collectiveimpactsfromminingandotherpollutantsourcescancompromisethewatersources,leadingtosocialconflictandlossoflicensetooperate.• Isthereevidencetoquantifytheseeffectsandattributethemtospecificsources?• Docurrentregulatoryprocesseseffectivelyaddresstheserisks?Findings:• Significantlegacywaterpollutioneffectsofminingareidentifiedinallcountries• Datasetstopursuespace-timetrendidentificationandattributionaresparse• Miningcompaniesfaceconsiderablerisksasincreasingwaterscarcityandcompetition
exacerbatetheimpactsofpollutedwaters• EnvironmentalImpactAssessmentsandassociatedbondsarelikelyhighlyinadequateto
addressthesechallenges• Riskquantificationfortheindustryandforamineisconsequentlydifficult.• Anapproachtoregulationthatbuildsinwatershedoutcomesandattributionisneeded.
DatabaseWater qualityandpredictivefactorsdevelopedforbasinsinPeru&USARegressionmodelsillustratetrendsanddependenceonaggregateminingactivity
32
1. Sourcewater(desalination,re-use,efficiency)costsmayaddupto10%tocopper/goldproductioncosts,andmaytranslateintolongtermmarginalcostcurvesforproduction.
2. Uncertaintiesrelatedtophysicalriskfactors:climate;tailingsdamfailure;andcumulativewaterpollutioneffectsmayleadtosignificantunpricedresidualfinancialrisks.Spaceandtimeclimateriskclusteringneedstobeaccountedforinportfoliorisk.
3. Arobust,realoptionsmodelingframeworkisusefulforderivingriskadjustedE[NPV]byintegratingtheseriskandcostfactors,consideringtheiruncertainties,andmineleveldecisionsformitigatingtheserisks.
4. FinancialDisclosuresneedtodirectlyprovideinformationonresidualrisksandtheirfinancialimplications,ratherthandetailedwaterrelatedmetrics.Biasesinclosurecostdisclosureswereidentified.Analyticstoevaluate/verifyfinancialdisclosuresareneeded.
33
KeyFindingsandRecommandations
Contents
RESEARCHOBJECTIVE/PROBLEM1
VALUATIONANDRISKFRAMEWORK2
3 ANALYSIS,RESULTS,CONCLUSIONS
4 RECOMMENDATIONSFORCOMPANIES&INVESTORS
5 RESEARCHEXTENSIONS
34
Impacts:ReiteratingResearchObjective
• Identifykeyriskexposurepathwaysandmitigationstrategies
• Developprobabilisticmeasuresofriskfactors&theirvaluationwherepossiblefromavailabledata
• Assesspotentialmispricingorunder/overstatementoftherisks
• Translateriskstofinancialriskmeasures(VAR,CVAR)wherepossible
• Integraterisks,mitigationstrategiesintoarobustrealoptionsmodelingframeworkforriskbasedvaluation(withbounds)
• Assess&compareriskadjustedportfolios
Identifyrisksthatmanifestthemselvesoverthelongtermforminingcompaniesthatcompaniesandinvestorsmaynoteffectivelyconsider
35
Recommendations:WhatdoesthismeanforCompanies&Investors?
BIASINREPORTING/MISALIGNMENTOF
INCENTIVES
LOWPROBABILITY/HIGHIMPACTEVENTS
LONGDURATIONTEMPORALTRENDS&CUMULATIVEIMPACTS
Company-formulatedestimatesofreclamationcostsarebiasedandtendedtoincreasenearertotheend
oftheminelife
Therisksassociatedwithtailingsdamfailurescanbetoidentifycompanies/assetsmostatrisk.
Certaincompaniesaremoreexposedtoclimateextremesthanothers,basedonthelocationsoftheir
assets.Evenwhenamineconformstoenvironmental
regulations,significantcontaminationofwater(evenfarawayfromsite)canoccurovertime.
Qualityandavailabilityofwaterimpactssocialconflict.Parameterswereidentifiedthatcanhelp
predictthelikelihoodoffutureconflicts.
Considerpotentialbiasininvestmentanddecision
processes
Considerpotentialassetandportfoliolevelriskand
uncertainty
Considerlong-termimplicationsonlicensetooperateandclean-upcostsConsiderpotentialimpactonassetlevelproduction,capex,costsandtimelines
36
Recommendations:WhatdoesthismeanforCompanies&Investors?
KEYCONCLUSIONS
DATA/DISCLOSURE(COMPANY
ACCOUNTABILITY)
METHODOLOGY(INVESTOR/STAKEHOLDERANALYSIS)
• Long-termstakeholdersneedtobeawareofrisksthatcanslowlymanifestthemselvesovertime,suchascumulativepollutioneffects.Throughbetterdisclosure,investorswillbeabletoidentifyandencouragecompaniestomitigatetheserisksbeforetheproblemescalatestoalevelthatisunsolvable.
• Workingwithminingcompaniescanhelpidentifyavailabledatatohelpinformbetteranalyses.
• Discountedcashflowsshouldnotbetheonlymethodologyrelieduponfordecisionmaking.Ourrobustrealoptionsapproachissuperiorforriskbasedvaluationwithlimiteddata.
• Stakeholderscanuseadatadrivenapproachtoidentifythelikelihoodofsocialconflict.Thekeyparametersinducingconflictcanbeidentified,whichcanhelpshapedecisionprocessesbyinvestors,regulatorsandcompanymanagement.
• Investors,localcommunities,employeesandregulatorsneedtobecognizantthatminestudyworkispronetobias– differentstakeholdersneedtofindwaystoholdminemanagementaccountableforprovidingbiasedandconsistentlyinaccurateinformation.
• Low-probabilityhigh-impacteventscanhaveacatastrophicimpactonlocalcommunitiesandoncompanyandportfoliovaluations/returns.Longtermstakeholdersneedtobecognizantoftheserisksintheirdecisionprocessesandencouragebetteralignmentbetweenthemselvesandmanagement.
• Certaincompaniesaremoreexposedtoclimateextremesandsocialconflictthanothers,basedonthelocationsoftheirassetsamongotherfactors.
37
ResearchExtensions:WhatotherrelevantprojectsareweworkingonatColumbia?
Focusontimelines,production,capex,opexandproducingamethodtostandardizeminingproject“discountstoNAV”
UsingBayesandotherstatisticalmethodstoexpanduponconclusionsfromtheworkwithNBIM
WorkingwithMajorMiningCompanytodeveloparisk-basedwatervaluationformining,takingintoconsiderationenvironmentalandsocial
aspects
Attemptingtoputforthmetricstoobjectivelymeasureperformancebothovertimeandretrospectively,andidentifyadditionaldatathatcanbedisclosedbyminingcompaniestohelpinformfurtheranalyses
Applyingourconclusions/methodologiesregardingrealoptions&climateextremestootherindustries
DevelopingPilotProcessforintegratedmonitoring,attributionandstatisticalcontrolforPeru
Howprevalentisbiasinotherareasofminingcompanystudywork?
Canweidentify“redflags”thatcauseproblemsforstakeholdersearlyonbeforetheymaterialize?
Canwecreateageneralizedmodelforwatervaluationtointegrateintoordinarycompanydecisionmakingprocesses?
Howcanwevalidate/increaseaccountabilityofminingcompanymanagementfortheirdisclosure/estimates?
Howcanweapplyourfindingsfromthisanalysisonminingtootherindustries?
Howcanweimproveregulatorymodelstoreducecumulativeeffectsandreducesocialrisk?
38
Datasetscompiledandavailable• MinelevelwateruseinCuandAu,Waterdevelopment&water/wastewatertreatmentcostsformines
• Globalgriddedclimatedata=100+years• Tailingdamattributes,satelliteimagery,damfailureattributes• SocialconflictandrelatedcovariatesforPeru&Mexico• Miningproduction,ambientwaterqualitytimeseriesforPeru,USA• Remediationcostestimatereportsovertimeformines• Financialreportingandvaluationdataforminesfrommarketresearch• “WaterRisk”indicesfromAqueduct• Waterrelatedminingregulationsforcomparativeanalysisacrosscountries
39