From the tundra to the savannah: climate change risk for a global mining company

Rio Tinto, the second largest diversified mining company in the world, combats different types of climate change risks across its geographically diverse global footprint.

As the second largest diversified mining company in the world, Rio Tinto (RT) conducts metals and minerals mining operations across six continents in a variety of different geographic settings [1]. Because of this broad geographic distribution, the company’s operations are exposed to many different types of climate change-related business risks associated with the company’s supply chain and distribution channels.

 

Reliance on climate-sensitive inputs

These business risks exist because mining operations rely heavily on climate-sensitive inputs. Energy supply, water supply, and infrastructure effectiveness represent three primary concerns for the industry as climate change increasingly impacts operations [2], and RT is exposed to potential risks to these systems in different ways across its variety of geographies.

 

At the subarctic Diavik Diamond Mine in Northwest Territories, Canada, infrastructure is particularly susceptible to warming temperatures observed in the region because a 568 km “ice road” provides the only ground transportation to the mine. The majority of the traffic on the road is trucks carrying diesel fuel for the mine’s electricity generation. In 2006, when warm temperatures shortened the ice road season, RT was forced to fly in 15 million liters of diesel fuel, increasing fuel costs by an estimated $11.25M [3]. In addition, RT also experiences infrastructure risk in its shipping activities, as port operations are increasingly suspended due to intensifying storms. Recently, RT’s shipping operations in northwest Australia were delayed due to intensifying cyclones in the Indian Ocean [4].

This 568km “ice road” is the only ground transportation link to the Diavik Diamond Mine and is only open during the cold winter months.

In addition to energy supply and infrastructure, water supply also represents a significant physical and regulatory risk in RT’s supply chain. At RT’s various mines located in water-scarce regions, production has been impacted from water shortages and often the cost of water as well as the cost of wastewater discharge will increase. Furthermore, maintaining water supply often puts industry in direct conflict with local communities, making engagement with local regulatory bodies essential to the success of the company [5].

 

Mitigating risk in the short and medium term

In cases such as the Diavik Diamond Mine, RT has learned the hard way that risks of climate change are real and present; therefore, they continual assess opportunities to combat these risks. In order to mitigate the ice road infrastructure risk at Diavik, RT installed a 9.2 MW wind farm to diversify the energy supply and protect themselves against shortening ice road seasons [6]. This effort was also a part of the company’s effort to reduce greenhouse gas emissions intensity (relative to 2008) 24% by 2020 [7].

 

RT has also formed a water resource management program that focuses on site-specific risks such as security of water supply and regulatory requirement changes. At the Richards Bay Minerals mine in South Africa, where mining operations are located near rural communities, the company recycles water 16-20 times in order to reduce water supply costs and meet regulatory requirements [8]. The company claims that 67% of operations with site-specific water risk are on track to achieve their internal water supply performance targets by 2018 [9].

 

Recommended steps for management to take

As a global industry leader, Rio Tinto has an opportunity to develop technologies to be used in mitigating climate change risk. The management team should first focus funds for tech development on the company’s core competency of energy efficiency in mining and processing in order to reduce energy supply risk. These technologies could be patented and could provide additional revenue for the company [10]. With exposure to many of the various risks of climate change across their various geographies, RT is developing valuable trade knowledge across many risk profiles.

 

Additionally, management should periodically conduct risk analysis to determine where the inventory risk is greatest in their supply chain. Using this analysis, the company should continually assess if inventory capacities should be increased in order to protect the company from increased costs during unforeseen circumstances. For example, while it may not have been feasible to add additional diesel fuel storage at the Diavik mine in the past, if the frequency of short winters increases, the economics of additional storage capacity may change.

 

Lastly, RT should evaluate the pros and cons of developing an international agency to share best practices for climate change risk mitigation. Such an agency would improve efficiencies across the industries, but some companies might be unwilling to give up their best practices if they see them as a competitive edge.

 

Questions to be answered

As an industry leader, what obligation does Rio Tinto have to share their best practices for climate change risk reduction with competitors? Should businesses share their learnings for the greater good?

 

Word Count: 757

 

References:

[1] Rio Tinto, 2016 Annual Report, p. 236-243.

[2] Julia Nelson and Ryan Schuchard, “Adapting to Climate Change: A Guide for the Mining Industry,” Business for Social Responsibility, September 12, 2011, p. 1, https://www.bsr.org/en/our-insights/report-view/adapting-to-climate-change-a-guide-for-the-mining-industry, accessed November 2017.

[3] Pearce, Tristan & David, James & Prno, Jason & Duerden, Frank & Pittman, Jeremy & Beaumier, Maude & Berrang-Ford, Lea & Smit, Barry & David Ford, James. (2011). Climate change and mining in Canada. Mitigation and Adaptation Strategies for Global Change. 16.

[4] Reuters Staff, “UPDATE 3-Australian cyclone shuts Rio Tinto ports, crude output,” reuters.com, January 3, 2013, http://www.reuters.com/article/australia-cyclone/update-3-australian-cyclone-shuts-rio-tinto-ports-crude-output-idUSL4N0AF2RZ20130110, accessed November 2017.

[5] Dr. Elaine Dorward-King, “Rio Tinto’s water strategy” (PDF file), downloaded from Project Wet website, http://www.projectwet.org/sites/default/files/content/documents/conference-2011/Elaine-Dorward-King-CS1.pdf), accessed November 13, 2017.

[6] Canadian Wind Energy Association, “Diavik Wind Farm: Wind energy helps reduce carbon footprint,” (PDF file), downloaded from CANWEA website, https://canwea.ca/communities/case-studies/, accessed November 12, 2017.

[7] Rio Tinto, Climate Change Report (Melbourne: Rio Tinto Limited, 2016), p. 28.

[8] Dr. Elaine Dorward-King, “Rio Tinto’s water strategy” (PDF file), downloaded from Project Wet website, http://www.projectwet.org/sites/default/files/content/documents/conference-2011/Elaine-Dorward-King-CS1.pdf), accessed November 13, 2017.

[9] Rio Tinto, 2016 Annual Report, p. 28.

[10] Julia Nelson and Ryan Schuchard, “Adapting to Climate Change: A Guide for the Mining Industry,” Business for Social Responsibility, September 12, 2011, p. 6, https://www.bsr.org/en/our-insights/report-view/adapting-to-climate-change-a-guide-for-the-mining-industry, accessed November 2017.

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10 thoughts on “From the tundra to the savannah: climate change risk for a global mining company

  1. I found the example of the Canadian diamond mine very compelling as it clearly shows the impact of climate change. Climate change forced the closure of the road, which necessitated flying in fuel (instead of driving it in), which is more expensive. I think if more people heard about real examples like this instead of theoretical examples or complex modeling, more people would care about the issue.

    I am often skeptical of competitors sharing ideas with each other as I think you can lose a source of competitive advantage. However, in this case, I support forming a working group to discuss ways to address the impacts of climate change. The main reason is that this issue affects so many people and companies, and it is of interest to governments, NGOs, and others throughout the world. It is unlikely that one company could address the issue by itself. What is needed is the appropriate experts from all stakeholders engaging in productive discussion and coming up with solutions that work best for all parties and the planet.

    I also found it useful to put myself in the shoes of Rio Tinto’s CEO. Would I really want to celebrate coming up with a solution to climate change that no one else could use? My company might do better financially but if the whole world can’t take advantage of my solution, is it really a cause for celebration?

  2. The essay provides a comprehensive overview of risks related to climate change and suggests crucial steps for management to consider.
    However, I would urge Rio Tinto’s management to look at climate change not only from a risk-mitigation perspective, but also explore this trend through an opportunity lens.

    Some of these opportunities include:
    * Expanded exploration of natural resources: With ice caps shrinking, accessing reserves of minerals will become possible in untapped regions such as Greenland where access has been challenging so far [1].
    * Easier extraction of raw materials: Increasing temperatures and longer summers significantly reduce cost of operating machinery and extracting minerals in cold regions [2].
    * Cheaper transportation: Reduced ice levels opens up access to arctic ports and new shipping routes such as the Northwest Passage, which will considerably reduce transportation cost [3].

    How can Rio Tinto reap the benefits of climate change? The risk perspective is definitely relevant, but a successful mid-term strategy will also aspire to seize new opportunities.
    ______
    [1] https://qz.com/813742/climate-change-is-benefitting-greenland/
    [2] https://www.bsr.org/reports/BSR_Climate_Adaptation_Issue_Brief_Mining.pdf
    [3] https://accelfellowship.wordpress.com/opportunities-and-challenges-economic-social-and-political-impacts-of-climate-change-in-the-arctic/#_ftn1
    (all accessed on Nov 19, 2017)

  3. I would also look into the larger picture of climate change. Another factor that has started to dominate the mining industry is the shift of market demand. During the past decade, China has become the largest market for consuming iron ore and coking coal. Before the China era, Japanese steel industries had long term price agreements with mining companies to stabilize the supply chain. With China in lead now, the dynamics has changed from long term to short term spot markets, increasing volatility of the supply chain and causing unstable earnings for mining companies (https://www.bloomberg.com/news/articles/2017-07-03/iron-ore-market-is-facing-extreme-volatility-for-couple-of-years). Furthermore, Chinese industry are now moving towards cleaner energy from thermal powered energy due to public attention towards gas emission and significant air pollution. All these dynamics sheds a shadow to the future of mining industry. Now is a great opportunity for Rio Tinto to review the energy mix of the company and invest towards resources that is valued in the eco-friendly world.

  4. The example you gave of RT building an entire wind farm to mitigate the effects of the shortening ice road season really speaks to the incredible scale of these mining projects.

    To your question of whether or not Rio Tinto should share their best practices for climate change risk reduction with competitors, I’m not really sure they could even if they wanted. Many times the new practice that a company comes up with to make a process more efficient is just that, a practice. It is a new method or process, not necessarily a new patent-able technology that the company came up with. For instance, back to the wind farm example, Rio Tinto didn’t invent the wind farm. But if another company decided to move into the Canadian Northwest Territories, then they could plainly see that wind-powered electricity is a necessity to sustainable operations in the area.

    However, if Rio Tinto did invent a new climate change risk reducing technology that could be patented, then I would be all for them patenting it and selling it to their competitors at a reasonable rate. There should be an incentive to coming up with new and effective climate change combating technologies and if Rio Tinto did come up with such a technology for it then they should be applauded and rewarded for it.

  5. This is a very interesting article about how companies, no matter how big or powerful, are still exposed to climate change risks. This is an important example to change the mentality of people with regards to sustainability: implementing alternative and more sustainable solutions can improve business and it is better for companies to do it while they still can than waiting for some major event happen, such as it happened to Rio Tinto when the ice road season was shortened.

    I feel that companies will not have an option other than sharing best practices. It is important to think about long term and join forces to improve the environment’s conditions. Otherwise, the consequences might be drastic for all of the companies and it might be too late to do initiatives to repair the damages.

  6. Great essay.

    While I love the idea of the management setting up an international agency to share best practices and to further invest in tech and risk analysis, I wonder if the biggest challenge in this case is the lack of strategic vision on the part of the company. In both the examples you outlined (wind farm and regulation-led water supply measures), they seem to be more reactive than proactive in their approach to climate change. Perhaps setting a vision of doing business in a sustainable way a la Starbucks should be the starting point? Given their size, I’m sure they could also fund research initiatives on climate change mitigation strategies, and lobby governments to embrace responsible climate change practices. All this being said, the fundamental nature of the business makes it such that what’s right in the long-term for the world will perhaps always be in conflict with the short-term need for profit maximization at Rio Tinto.

  7. While it’s understandable that businesses want to withhold information that give them a competitive advantage against their competition, it’s amazing how they can also become collaborative in situations where they need to work together to tackle a common challenge as is the case here. Climate change posses a significant risk not only to RT and given the the current trajectory, it won’t take long for these changes to become major roadblocks in RT’s business. Most of what is done at in the environmental space isn’t new. What is hard is getting buy in from other companies that might not have an equal stake in the game as RT at the moment. In that case, engaging with leaders of other industries that share similar views or pain points on climate change may be a more suitable alliance for sharing their learnings with each other.

  8. Great essay. However, I would argue against the characterization of 2006’s unseasonably warm winter weather as an example of global warming. Rather, I would argue that it instead represents additional volatility that companies will have to contend with.

    In other industries, we have seen additional volatility mitigated through means such as insurance, hedging, risk-pooling, and buffering. How can these principles be applied to global warming?

    One way that immediately comes to mind is insurance. Companies highly exposed to climate risk could pool money in an insurance vehicle, and use it to offset additional costs of climate change. However, it might be difficult to identify whether or not a situation is caused by climate change.

  9. Really interesting essay. Given the reliance of the mining industry on traditional energy sources, it is in some ways surprising that these behemoths have been more reactive than proactive in addressing the risks associated with climate change.

    For Rio Tinto in particular, I am most concerned by the sheer breadth of its operations, across such varied geographies. Because of this, I would worry that localised reactions (such as building a wind farm to service the Diavik Diamond Mine) are simply not scalable – RT cannot build new energy sources everywhere that it operates. Despite what I assume would have been huge capital expenditures to build that wind farm, it seems like a short-sighted approach – only affecting one of RT’s numerous operations – and smacks of desperation rather than innovation.

    I would argue that RT’s position as an industry leader does not only give them the opportunity to develop new technologies to tackle climate change-related risks, but the obligation to do so and to set a new industry standard. This leads me to your final question. I do believe that they have a responsibility to share learnings for the greater good. I like the suggestion of another commentator to form a working group comprised not only of competitors, but also of governments, regulators, and other key stakeholders.

  10. An informative and thought-provoking essay. Indeed, a lot of industries are directly exposed to the huge risk incurred by climate change and many others are influenced indirectly. Mitigating the risk posed to supply chain can be costly and time-consuming.

    I don’t think RT has to share its best practice in dealing with the climate change supply chain issue with their competitors. They invested a lot of money and other resources to come up with a solution. If others can have access to it free, RT may lose the incentive to work hard on the solution in order to deal with the climate change issue and gain a competitive edge, just like the essence of a patent. However, climate change is a systematic issue and the mere effort of the certain company won’t suffice to tackle it. I think RT can try to influence the government to come up with some support so that all the players in the industry can benefit.

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