Water scarcity could increase ratings pressure on mining companies

Ratings agency Moody’s Investor Service on Thursday warned that environmental factors, such as water scarcity, could adversely impact on the ratings of global mining companies if they failed to proactively manage the accompanying operational and political risks to their businesses.

In its ‘Global Mining Industry: Water Scarcity to Raise Capex and Operating Costs, Heighten Operational Risks’, it highlighted that mining projects were already competing with local communities for limited water resources, while having to comply with stringent environmental rules could add to the capital expenditure (capex) budgets for new mines.
In addition, tighter environmental permitting requirements could add to project timelines and require mining companies to seek more complex water procurement systems.
The report added that this would, in turn, push up the companies’ operating costs, owing to the higher associated maintenance and energy costs.
Further, political risk was likely to also increase as competition for water resources between mining companies and local populations intensified, Moody’s stated.
“Water scarcity is already changing the mining landscape as environmental legislation becomes more stringent, and operating in some countries increases political risk as mining companies’ water supplies can be restricted if the needs of communities increase, said Moody’s Corporate Finance Group analyst and author of the report, Andrew Metcalf.
“If, as a result, projects take longer to complete, and become costlier and riskier to execute, we would expect these factors to exert downward pressure on the ratings of the mining companies.”
Moody’s pointed out that smaller, less diversified mining companies, particularly those with single-mine operations, in water-scarce regions, such as South America, were most vulnerable.
These companies were likely to have the greatest exposure to event risks, but had more limited financial and technical resources at their disposal to handle them.
Large, globally diversified mining companies, such as Rio Tinto, Anglo American and BHP Billiton, would continue to be adversely affected, given their global footprints and willingness to operate in the most remote and arid regions.
These companies had the expertise and financial strength to build complex water procurement systems for large-scale projects, evidence suggested that they had, to date, needed to absorb increasingly significant costs related to environmental risks.

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