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Entering the mineral age: can we mine sustainably?

Kajetan Czyż, Senior ESG Analyst

Key Points

  • Mining has historically been a dangerous, heavily polluting and environmentally damaging activity
  • Thankfully, innovation in mining is offering solutions that could reduce its negative impacts
  • We support the companies embracing sustainability and believe the investments they are making now will bring long-term rewards

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

As the world transitions from a fossil fuel-intensive economy to one focused on sustainable energy sources, minerals are playing a crucial role – whether they are used in wind turbines or batteries for electric vehicles. However, mining is a resource-intensive process which raises questions: can we enter the mineral age without getting our hands dirty? Is there a way to be a sustainable miner?

Recycling is often seen as a way to reduce the need for mining. On the positive side, some minerals which are critical for the energy transition already have high recycling rates, at 75 per cent for aluminium and at times as high as 80 per cent for copper. Unfortunately, recycling alone cannot provide the quantity of materials that are required. It is estimated that even if we recycled everything humanity has ever produced, we would still need to mine up to 10 times more than that entire quantity of minerals to satisfy demand. Therefore, extraction of minerals from the ground is inescapable.

Mining has historically been a hazardous, heavily polluting and environmentally damaging activity. Thankfully, innovation in mining has accelerated in the last 5-10 years, offering solutions that can mitigate environmental and social risks while enhancing long-term business prospects.

A fall in the price of renewables is making it easier for mining companies to justify the initial investment required to switch to cleaner energy sources, cutting costs and emissions simultaneously. We invest in bonds of Antofagasta, a Chilean copper mining company. This company used to source its electricity primarily from coal. However, in 2022 Antofagasta switched completely to renewables, cutting its carbon intensity by 40 per cent. Electricity is a substantial part of its operating cost, so with renewable energy being cheaper the switch is good for the environment and the company’s profitability – and therefore good news for our clients as its bond investors.

Our long-term investment time horizon enables us to support the right mining companies on their journey. We believe the investments they are making now should allow our clients to reap the benefits of better operational performance in the future. Furthermore, we believe these investments allow them to differentiate themselves from competitors – something almost unheard of in the mining industry. Their customers are increasingly scrutinising emissions from supply chains and are likely to prefer cleaner commodity suppliers. A great example is Albemarle, a lithium producer whose shares are held across our income portfolios. We encouraged its management to commission an independent audit of the company’s mines from IRMA, the Initiative for Responsible Mining Assurance. Since completing the audit earlier this year, the company announced a new contract with Ford, the car manufacturer, specifically stating that it will be supplying lithium from IRMA-accredited mines.

There is still more to do. Biodiversity is a growing concern, with a third of all minerals needed to support energy transition located in ecologically important areas. Water conservation is also a critical area of focus for miners, with new technologies helping to reduce water consumption and improve mine safety. Lithium mining traditionally uses fresh water and has been blamed for causing water shortages. To address this problem, companies like Antofagasta are investing heavily in desalination projects, allowing them to use seawater within their existing plants. For new projects, modern designs can work with raw saline seawater, removing the need for energy-intensive desalination entirely.

In conclusion, we are already seeing significant progress in mining, with line of sight to an industry that is powered by renewables, safe for workers and respectful to the environment. However, we are not there yet. Our role as long-term investors is to select the companies making meaningful progress and support them on their journey to invest in new technologies. We believe that companies which address the negative impacts of their operations will not only see improved safety and lower operating costs but are also well-positioned to become preferred suppliers. We are convinced that in an industry increasingly finding itself at the centre of attention, investments to upgrade the quality of mining operations will pay dividends over the long term.

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Author

Kajetan Czyż

Senior ESG Analyst

Kajetan is a Senior ESG Analyst in our ESG Team. He joined Baillie Gifford in April 2020 from the University of Cambridge, where he was a Programme Director at the Cambridge Institute for Sustainability Leadership. Prior to that, Kajetan was a Programme Manager at Climate Bonds Initiative; an Analyst at BMO GAM and a Research Manager at ENDS Carbon (now ENDS Analytics). He represented the EU Investor community at the Paris Climate Negotiations through the IIGCC, was a contributor to the EU High-Level Expert Group on Sustainable Finance, the UK Green Finance Task Force and remains a contributor to the ISO work streams on sustainable finance. He holds an MSc in Carbon Management from the University of Edinburgh and an MSc in International Relations from the University of Lodz.

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