Material water risk to metals & mining sector demands new valuation models

Posted: Monday 5th August 2013

Growth prospects at the largest companies in the metals and mining sector are significantly threatened by water risks but companies that are taking action now to manage water strategically are better financial performers. So reveals new investor analysis from CDP and Eurizon Capital, Metals & Mining: a sector under water pressure, analysis for institutional investors of critical issues facing the industry, which calls for a reassessment of current valuation models for the companies in the industry.

530 investors representing US$57 trillion requested 57 of the largest metals and mining companies in the Global 500 and other water-stressed markets disclose their water data through CDP. The report is based on information provided by 36 businesses. It finds that companies that report on and manage this issue generate superior financial returns (see graph below). The companies that failed to meet this investor demand for water data account for US$160 billion of market capitalization and are listed in the back of the publication.

The report details the material risks posed to this sector by water and shows how poor water stewardship can lead to increased capital expenditure and operating costs, lower revenues, decreased shareholder value and disruption or ultimately an end to business operations.

Key findings:

{ The 36 metals and mining companies that disclosed water data represent US$773 billion in market capitalization; all bar one (92%) identify substantive water-related risks that could reduce profits;

{ Water stress is identified as a possible risk to operations by more than two thirds (67%) of the sample, making it the most reported risk. It is also the most imminent risk, with nearly half (47%) of companies expecting water stress to hit their business within five years;

{ The majority (64%) of businesses have already been badly hit by water-related issues in the past five years, with flooding the most commonly cited occurrence;

{ More than one third (39%) are now experiencing increased costs as a result of negative water impacts. American aluminium producer Alcoa, for example, lost US$130 million (or 6.5% of EBITDA) in 2011 due to flooding damage;

Up to 40% of a metals and mining company’s value is based on its ability to exploit commodity reserves. However, insufficient volume or quality of water will hinder access to those reserves, significantly threatening business operations. US company Newmont Mining, for example, had to spend $200 million on larger water reservoirs to re-secure its license to do business in Peru. The publication therefore suggests that traditional approaches to valuing metals and mining companies are revisited, to take account of the uncertainty surrounding a company’s ability to access adequate water.

James Hulse, head of CDP’s investor initiatives says: “With investors’ attention sharply focused on water risks and seeking guidance for engagement, it is of great concern that nearly one third of the metals and mining companies targeted failed to provide information, despite evidence suggesting that sound management of water is linked to better financial performance. The valuation methodology for this sector must be revisited to factor in the impact of water scarcity.”

Gianluca Manca, head of sustainability at Eurizon Capital, comments: “Smart investors and companies know how damaging inaction can be. It is critical for metals and mining companies to integrate water in their current and future business strategies in order to develop more resilient business models that offer long lasting investment cases.”

The number of investors requesting critical water data from the world’s largest companies through CDP’s water program has nearly quadrupled in just three years. Guidance for investors to engage with companies to improve their management of water risk is included in the report, which is sponsored by Eurizon Capital and is available free on CDP’s website. The impact of water on all companies in the Global 500 will be revealed in the CDP Global 500 water report 2013, released on October 31st.

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