Banking’s role in mining’s energy transition

BANKING’S ROLE

in mining’s energy transition

By Henk de Hoop, resources sector focus lead at RMB

The Intergovernmental Panel on Climate Change has just released its sixth assessment report. “It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.”

Even before the publication, global momentum behind environmental, social and governance (ESG) concerns, and specifically global warming, has been nothing but astounding over the past 18 months or so.

The financial industry in South Africa has similarly seen a strong surge in ESG-related questions and concerns from shareholders, clients, rating agencies, regulators, funding partners and other stakeholders.

For the South African financing industry, these concerns are not necessarily focused on our own direct Scope 1 and Scope 2 emissions, which are relatively limited and not considered too challenging to ameliorate significantly over time. Our main focus will be on Scope 3 emissions, or the banks’ attributable share of their underlying loan portfolio clients’ emissions.

We will be held accountable in time in driving the energy transition within our portfolio, and to measure and report on this appropriately. We are therefore going through an extremely steep and complex learning curve to make sure we align strategy appropriately to the threats and opportunities this new reality brings.

We expect also that transparent reporting on transition plans and the emissions footprint will be expected soon from all large entities wishing to borrow in the capital markets. The Task Force on ClimateRelated Financial Disclosures therefore will highly likely become the market minimum standard, and increasingly will be requested by banks and other stakeholders also in the future.

Henk de Hoop.

South Africa has very specific challenges. Its rich endowment of shallow coal deposits has resulted in its electricity generation being heavily coal-dominated. Many decades of some of the cheapest electricity in the world also saw it attract heavy electricityconsuming industries like aluminium, ferro alloy, PGM and mineral sands smelters.

Sasol became an amazing success story as it managed to develop into a massive industrial complex adding significant and diverse value to millions of tonnes per annum of low-quality coal. And over the past few decades South Africa built a great reputation as a reliable supplier of highquality export thermal coal, becoming one of the largest foreign currency contributors for the country.

But this historical advantage is now putting South Africa at an increasingly real future disadvantage. South Africa is in the top five globally of CO2 emissions per unit of GDP generated for economies with GDP larger than US$100-billion, and its coal share in electricity generation is one of the highest in the world at some 80%.

Weaning the country o coal is hugely challenging in view of the very significant role it plays across our economy currently. At the same time, it also allows for some very quick emission reduction wins, particularly in view of the already planned retirement profile of Eskom’s older coal fleet.

An indirect benefit will come from the seethrough impact on heavy power-consuming industries. This broad set of users will only make real headway in Scope 2 CO2 emission reductions if either Eskom radically changes its power generation mix, or they procure renewable energy independently.

Since the embedded generation limit was increased to 100MW, we have indeed seen a strong acceleration, enlarging and broadening of the pipeline of renewable projects from our client base. Where previously the rising cost and reliability of

SA needs to radically change its power generation mix.

“The financial industry has seen a strong surge in ESG-related questions and concerns.“ – De Hoop

Eskom power was the main investment rationale, now corporate emission reduction targets have made renewables an even more defendable or rather “no brainer” investment proposition.

The South African banking industry is increasingly aware of the broad set of risks that could and will build into our diversified lending portfolios due to climate change. Rising temperatures will see an increase in multi-year droughts which will a ect the agricultural sector base.

A shrinking coal sector could leave it with stranded assets in time. Any export industries could be penalised if the Eskom transition away from coal is too slow in the eyes of the rest of the world. Rating agencies could downgrade the South African banks if we don’t move the needle su iciently with regards to the carbon intensity of our book.

We could be facing future environmental damages litigation if we are not progressing in transitioning our portfolios over time. In working through the complexities and impacts, we are engaging intensely with all stakeholders.

The detailed research work being done by the National Business Initiative (NBI), which we support, has already demonstrated that it is feasible for South Africa to have a Parisaligned energy transition pathway.

South Africa’s unique combination of excellent and complementary solar and wind resources, available on vast amounts of unused land, could become a truly globally competitive advantage as we transition our energy system. Hence, a renewablesdominated energy system looks like the most cost-competitive system for South Africa, according to the NBI.

We do need to get to work urgently though: our annual rate of renewables installation needs to increase by a factor of 10. According to Eskom our transmission and distribution network needs some R180bn in capital for expansion and upgrades to even allow for the sharp increase in renewables generation.

We also need to rapidly develop wheeling frameworks, grid operator capacity and market pricing frameworks. We are acutely aware that working with our client base rather than forcing unrealistic decarbonisation expectations on them before the basics are in place is a far more sensible approach to come to the correct answer for South Africa’s transitioning pathway.

Abruptly constraining funding to the carbon-intensive industries therefore will simply create untold immediate damage to the broader economy as electricity supply destabilises further.

Banks, capital markets and the mining industry need to work in partnership therefore to drive a responsible transition towards the low-carbon world. This should be anchored in facts and data and aligned to researched pathways considering economic and social consequences.

As well as actual implementation timelines that are realistic and achievable, but with a sense of urgency, as the rest of the world looks at South Africa doing its fair share.

Doing nothing will certainly impact both the clients’ and the banking industry’s ability to access competitive funding in time. ■

IS A UNIFIED ENVIRONMENTAL REGULATORY SYSTEM POSSIBLE IN SA MINING?

The South African mining industry a right or permit has been accepted by the has become one of the most relevant regional manager in terms of the regulated in the country over MPRDA. the past few years. Carefully ■ Written consent from the landowner or considered regulation can be person in control of the land on which principal environmental practitioner. powerful and provide interested parties with the mining or prospecting activity is to be equal and fair opportunity to explore and undertaken must now be obtained. mine in South Africa – but when the rules The requirement to submit the EA of engagement contradict one another, application only a er an application for a regulation becomes a confusing deterrent. right or permit has been accepted in terms

Despite an intensive focus on further of the MPRDA is in complete contradiction to regulating the environmental impacts caused the provisions of the MPRDA, which requires by mining, there have also been various that such an application be submitted amendments to legislative instruments that simultaneously with an application for a are intended to streamline certain processes right or permit. in the Mineral and Petroleum Resources On a correct interpretation of the MPRDA, Development Act, 2002 (MPRDA). But ever- the regional manager would be prohibited changing regulations may keep this ambition from accepting the application otherwise. out of reach. It is generally accepted that landowner

During March 2020, the mineral resources consent is not a requirement for the and energy minister published amendments purposes of applying for a right or permit in to the Mineral and Petroleum Resources terms of the MPRDA. In fact, in terms of the Development Regulations, 2004 (Revised MPRDA, the holder of a right or permit merely Regulations). needs to provide the landowner with notice

The purpose of the revised regulations prior to commencing operations. was, among others, to streamline The amendments to the EIA regulations environmental aspects of the regulations require, however, that landowner consent is with the relevant environmental legislation required prior to a right or permit even being as these regulations had not been amended granted under the MPRDA. This is not only in a er the One Environmental System came contradiction of the terms of the MPRDA, but into e ect on 8 December 2014. is onerous and may discourage any future

This was recently followed by the applications being submitted for rights or forestry, fisheries and environment permits. minister publishing amendments to This would contradict (perhaps the Environmental Impact Assessment inadvertently) the objectives of the MPRDA Regulations, 2014 (EIA Regulations) in June and constitutional right to equitable access 2021. Among others, the amendments to all South Africa’s natural resources. contemplate that: The amendment to the EIA regulations ■ An application for an environmental heightens the tension between the right to authorisation (EA) may, where applicable, property versus the right to access to natural only be submitted a er an application for resources, potentially stifling the ability for

NSDV

NSDV is deeply committed to advancing the SA mining industry – so committed in fact that it has its own Chantal Murdock. Minnette Le Roux. further exploration and mining in South Africa. These recent amendments to the EIA regulations (which is subordinate legislation) contradict the provisions of the MPRDA (which is primary legislation) and is causing much angst amongst role players as it leaves the following questions unanswered: Is it in fact possible to have a One Environmental regulatory regime? And which department is actually controlling the mining industry? These contradictions appear to require the two departments to reconsider how they will engage the sector in unison. ■

HERE COMES THE BOOM

Mark Gilbert

CEO at NSDV

In October 2009, first world governments chose to print money in an attempt to curb the unfolding global debt crisis. It was the embarkation of the greatest monetary experiment of all time. As cash and financial assets start to devalue, people will look for alternative stores of wealth.

Here’s the good news. Value ultimately ends up in real, tangible assets. These assets remain as they are, regardless of the currency they’re denominated in. They cannot be printed (replicated), and therefore cannot be devalued.

One of the greatest cyclical reallocations of capital from intangible financial assets into real assets is upon us, and the ultimate winner will be commodities. As an example, timber prices were up 72%, iron ore was up 60%, and platinum group metals were up by 40% in 2020 based on US-dollar values.

The performance in rand was even more spectacular. Northam Platinum was up 80%, Sibanye-Stillwater nearly 100%, and Anglo American just reported their best financial results in 104 years!

Today, Amazon trades on an over 1 000-to-one price-to-earnings ratio, and it’s one of the many companies that are considerably overvalued, while commodities businesses are by contrast undervalued. If you buy Amazon shares this year, you can get your money back out of earnings in 3021.

At NSDV, we focus on the di erence between where we perceive value (speculation) vs actual value (investment). NSDV has decades of experience in investing, advising, and working alongside the continent’s key commodities businesses at the C-suite level.

Terror Firmer

Until recently, so-called “growth companies” were considered solid ground for investors. But with the South African economy reeling, many are now running scared. It’s likely that physical assets – including precious metals – are going to become an increasingly attractive option, which will see those commodities outperforming others in the short term.

It’s time to strike while the iron – or copper, gold, platinum or vanadium for that matter – is hot, and partnering with NSDV will enable you to do just that.

To find out how our second-to-none expertise and remarkable agility can help you capitalise on trends ahead of the curve for optimal results, visit nsdv.co.za today.

Nupen Staude de Vries