Navigating the energy transition

THE transition away from fossil fuels to cleaner sources of energy is likely to remain a key trend in the mining sector, although is too early to tell if the current market disruptions will help to accelerate the move away from a petroleum-based economy.
Navigating the energy transition Navigating the energy transition Navigating the energy transition Navigating the energy transition Navigating the energy transition

Chile's government has mandated that mining operations source 20% of their power from renewable sources by 2025

Yann Alix, Lorenzo Pacitti and Caroline Lindsey

Recent headlines have unsurprisingly focused on the COVID-19 pandemic and the collapse in the oil price. Many mining operations have been hit hard by health and safety concerns, disruptions in the movement of personnel and equipment, price volatility and falling demand.

Mining is inherently energy-intensive, with the energy required to power a mine historically accounting for up to one-third of a mine's operating costs.

The International Energy Agency (IEA) estimates that over one-tenth of final energy consumption globally is attributable to mining activities. This energy intensity increases as accessible resources are exhausted and ore grades deteriorate, requiring more energy to be expended to maintain the same level of mineral output.

Faced with mounting pressure from environmentally-conscious investors, financiers and host governments, and a desire to improve performance (both in terms of strengthening environmental, social and corporate governance, and managing energy costs), mining companies are increasingly looking at sustainable energy options for their operations. This is particularly the case in remote areas where ready access to a dependable grid supply is lacking. In such circumstances, the development of a renewable power source at the mine site potentially not only offers greater cost-effectiveness compared to conventional thermal power, but also increased energy security.

Assessing the options

Not all mining companies will choose to develop their own renewables infrastructure. For many, outsourcing the risks to an independent power producer or third party renewables developer and purchasing renewable power under a long-term power purchase agreement will be adequate for their needs.

For those, however, who elect to 'self-generate' and proceed with their own renewables development, there are a whole host of options for 'going green'. The best solution for any particular mining project will depend on the renewable resources available at or around the mine site (such as wind for wind turbines and sunshine for solar arrays).

Legal and commercial options include buying the expertise, either by acquiring a specialist renewables developer to bring within the mining group, or entering into a joint venture with a specialist renewables developer.

Each of these has pros and cons that should be carefully evaluated with the relevant in-house and advisory teams at the initial deal structuring stage.

Responding to regulatory change

The pace of energy transition is not solely dependent on the commercial and corporate social responsibility considerations of mining companies. Host governments are increasingly aware of the importance of safeguarding environmental standards and tackling issues relating to climate concerns, and are in a position to drive change within their borders through climate-friendly legislation and regulations.

One notable frontrunner is Chile. Under the Chilean government's "Energia 2025" policy, it has become mandatory for all mining operations to source 20% of their power from renewable sources by 2025. Coupled with the soaring cost of transporting fuel to remote mines located at altitude, this has provided a significant impetus for Chilean mining operators to switch to more sustainable sources of power.

Meanwhile, in Ghana, the Energy Commission has been urging mining companies to ensure renewables form part of their energy mix. While not specifically targeted at the mining sector, the Ghana Renewable Energy Master Plan published last year aims to increase the proportion of renewable energy  in the country's power generation mix and, perhaps more pertinently to mining companies, provide renewable energy-based decentralised electrification options in off-grid communities.

Branching out

The core business of mining companies is the extraction and processing of mineral resources. Mining companies looking to initiate their energy transition to renewables will need to be aware of a number of factors when navigating the contractual and operational arrangements for a related renewables project.

The development of two new, co-dependent projects in tandem - such as a new mine and associated renewables project - presents additional risks for the project developers and their lenders. These risks will need to be identified and addressed in the relevant project agreements. Stakeholders must consider what remedies are there if a delay in the construction of one project leads to a knock-on delay in the construction of the other? Will force majeure affecting one project trigger force majeure under the other?

For some mining companies, the energy transition may involve negotiating and implementing contractual arrangements with which they may not (yet) have a high degree of institutional familiarity, for example third party power offtake agreements, or operation and maintenance contracts for renewables infrastructure.

Funding routes

The upfront capital costs required to develop a self-generation project are potentially significant. There are, however, various financing options available to mining companies intending to pursue this route.

They include 'climate bonds', or 'green bonds', fixed-income debt instruments used to raise financing for projects or businesses with positive environmental and/or climate benefits. Issuers include multilateral development banks (the principal issuers of green bonds), public institutions and private corporations.

While climate bond issuances are not a common financing route for mining companies at present, Swedish iron ore miner LKAB successfully issued a SEK2 billion climate bond last year, and more mining companies could follow suit as they seek to enhance sustainability in response to climate change.

Environmental, social and corporate governance (ESG) loans (or 'green loans') are debt facilities linked to sustainability criteria, which can provide mining companies with access to dedicated capital pools, lower funding costs, increased certainty in investor credit approval, and potential tax benefits.

Atlantic Copper, the Spanish subsidiary of Freeport-McMoRan, last year entered into a green loan for the purposes of financing six sustainable projects, in a transaction supported by BBVA. Similarly, Rusal in 2019 announced the signing of some USD 1 billion ESG-linked pre-export finance facility with predetermined sustainability targets relating to improvements in environmental impact and sustainability practices.

*Yann Alix (London), Lorenzo Pacitti and Caroline Lindsey (Perth) are partners with law firm Ashurst.

In view of rising energy demand and intensifying pressure to decarbonise, Ashurst has produced a new global study, called Powering Change: Energy in Transition.

Surveying more than 2000 senior industry executives across the G20, the report delves into areas including the current state of the global energy market, pace of change and areas of future opportunity. The report can be downloaded here.