www.miningmx.com | grnbk08 A costly footprint

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A costly footprint
Marc Ashton
Posted: Fri, 14 Nov 2008

[miningmx.com] -- SOUTH AFRICAN COMPANIES, particularly those operating in the mining sector, are becoming increasingly aware of their exposure to the trillion-dollar carbon market and that�s likely to grow rapidly over the next few years.

So says leading mining industry business process consultant Simon Davies, of Partners in Performance International, a consulting firm that includes most of the world�s major mining houses in South Africa, Australia and Britain among its clientele.

�Irrespective of industry, the corporate world is becoming increasingly aware of its carbon footprint.� said Davies. He points to the travel industry, where major airlines provide a terminal that calculates the �carbon footprint� of a particular journey and allows passengers to then make a voluntary payment into a fund aimed at clean development projects. Davies says contributions like those will become compulsory in a few years� time and South African executives are taking notice.

�SA�s CEs are also becoming more aware of issues such as safety and the environmental impact of their business operations.� says Davies. �If one looks at Cynthia Carroll (Anglo American), she has shut down operations deemed unsafe.�

The global carbon market is being driven by the Kyoto Protocol, an agreement signed by developing and developed countries aimed at reducing the levels of carbon monoxide worldwide. The impact of such emissions on the atmosphere is having a profound effect and that�s influencing environmental aspects, such as climate change.

Companies operating in developed countries were expected to reduce their exposure with levels being �capped�. Firms that went above those levels were expected to either invest in clean development projects that would generate carbon credits, buy carbon credits on the open market or pay a monetary fine.

In essence, a monetary price is being placed on damage being done to the environment and that market�s creating both opportunities and threats for resources companies.

Traditionally, developing countries have had less exposure to regulation about pollution controls and many multinationals have been criticised for taking advantage of those loopholes to damage local environments without being held accountable. Many of SA�s major mining houses have operations worldwide.

Companies such as Anglo American, Sasol and BHP Billiton have exposure to both developed and developing countries. The Kyoto Protocol takes that into account and allows companies to invest in projects worldwide to earn those credits. For example, though AngloGold Ashanti could find itself above the limits with its US operations it could in turn invest in a clean development mechanism (CDM) project, such as hydroelectric power, in Ghana, where it has other operations.

Each signatory to Kyoto has its own designated national authority. In SA the Department of Minerals & Energy is responsible for compliance and managing CDM projects here.

SA businesses are also becoming increasingly aware of the value of those projects and the credits or liabilities on their balance sheets. �Our CDM project has already banked us in excess of R100m in credits,� said Sasol CEO Pat Davies in a recent interview after the chemical and mining giant announced its financial results.

Sasol has invested in a project to reduce the nitrous oxide emissions from its nitric acid plants at Secunda and Sasolburg.

Leading chemicals and mining firm Omnia recently commissioned an upgrade to its EnviNox plant in Sasolburg, which produces mining explosive. That�s expected to earn it approximately 500 000 carbon credits/year, which it may elect to �bank� or cash in. In terms of the wider Omnia group, the International Finance Corporation (the World Bank�s private sector group) has undertaken to buy up to 1m of its credits and sell them globally over the next five years. That�s expected to contribute around R60m/year to Omnia�s bottom line.

Many multinational mining and resources houses have made submissions to the Carbon Disclosure Project (www.cdproject.net), where they outline the risks their companies face from emission control legislation and climate change.

Diversified resources giant Anglo American says in its submission its risk has decreased significantly as it�s exited from its investments in Highveld Steel and Mondi, both responsible for high levels of emissions. Anglo has been involved in the following emission reduction projects since 2006, with the expected annual CO2e savings in brackets: � Scaw Metals fuel switch from producer to natural gas (130 000t).

� Transalloys energy efficiency replacement of old furnaces (100 000t).

� Richards Bay fuel switch from coal to biomass (120 000t).

� Richards Bay fuel switch from carbon-intensive grid power to an on-site gas turbine (220 000t).

� German Creek coal mine methane capture and combustion for power generation (1m t).

� Moranbah North coal mine methane capture and combustion for power generation (1m t)

Further emission reduction projects are under development. The most significant long-term project is Monash Energy, a joint initiative with Shell to develop a large coal-to-liquids project in Australia. The plant is expected to capture and store up to 13m t CO2e/year.

Anglo Platinum says it currently operates in a low regulatory risk environment, as their projects are primarily in SA. The risk would increase should SA be reclassified in any Kyoto extension.

AngloGold Ashanti says it faces a �medium� risk from environmental legislation over the next five to 15 years. It believes climate changes and associated legislation provides both future threats and opportunities. On one hand it raises concerns that water supplies may become disrupted should new legislation be introduced: that could negatively affect their gold mining operations, which rely heavily on a reliable water supply.

However, AngloGold says as society demands cleaner burning fuels that will see an increase in demand for uranium, which it mines as by-product.

Ordinary South African investors are also seeking ways to participate in the global carbon market. Currently, options are limited for direct participation but niche market securities firm Sterling Waterford has announced it will be listing a second tranche of their Carbon Credit Note on the JSE this month 2008. Its Carbon Credit Note provides investors with access to a �basket� of carbon credit projects worldwide.

The first tranche of the investment yielded around 250% for investors but was characterised by illiquid stock, and that was exacerbated when major institutional shareholders eventually made an offer to buy out minority investors as the instrument came to maturity.

Gregor Paterson-Jones, CEO of Sterling Waterford, says all indicators for the second note were bullish as the carbon credit market was the world�s fastest-growing financial market, with estimated growth in trade globally predicted to exceed $20 trillion/year by 2020 (according to Richard Sandor, chairman and CEO of the Chicago Climate Exchange and co-owner of the European Climate Exchange). It�s also the only market not to have been affected by the global economic downturn. �There�s regulated demand and the market is short of supply,� says Paterson-Jones.

The second tranche of the investment has increased its offer size by nearly five times, making it more accessible to retail investors.

Paterson-Jones says analysts believe when the product matures in 2012 the instrument could be valued at around �40. The instrument is expected to be priced at around �15 when it lists. The carbon credit note provides South Africans with rand hedge characteristics without affecting their offshore allowances.

�One of the problems with the first issue of the Sterling Waterford project was that investors didn�t really understand what they were buying� says Kevin James, of Global Carbon Exchange (GCX). However, he does say SA companies are becoming increasingly aware of the market and its impact on the environment.

GCX is a consulting firm with offices in Australia and SA that assists companies with calculating their �carbon footprint� and developing strategies to reduce that.

Useful websites for Green Book readers:

www.sterlingwaterford.com

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