Frequently, mining companies focus on ‘climate-improving’ their portfolios by, for example, reducing exposure to coal and increasing exposure to lithium.
On the face of it, that would seem to make enormous sense. But the answer is not so simple.
After all, divesting coal assets only shifts the problem to another owner, and several mining companies have destroyed value by over-committing to battery metals such as lithium.
Read more about battery metals
Adding to the complexity is that the true impact of climate change is far from certain and so companies need a sound strategy adaptable to a range of possible scenarios.
To structure their approach to this complexity, mining company executives should consider three key questions:
- How will climate change affect demand, supply and implied pricing for various commodities?
- What specific impact will those changes have on my company’s business?
- Which innovations or new material offerings might benefit our customers, and how can we turn those into new business opportunities?
By conducting scenarios and simulations—usually three to five – mining companies can start to gauge various implications on the company’s portfolio and build strategies for responding effectively.
The more diverse their options for responding and rebalancing their portfolio to minimize exposure the better. And to carry out these strategies effectively, companies need to align incentives correctly and hold people accountable.
For example, to manage their portfolios, mining companies need to understand how profit pools will shift in the future as emissions are curbed.
Copper, for example, looks to benefit from different abatement scenarios, while the story is much more mixed for other commodities.
Some leaders have been very adept at scanning the market, tracking leading indicators and listening to “weak signals” for clues about how to restructure their portfolios.
For example, early movers picked up on weak signals about the thermal coal business and decided to exit early.
That probably gave them an advantage over companies that decide to exit later, especially if the pool of eligible buyers shrinks or if tougher global carbon regulations crush coal’s profitability.
On the other hand, demand for coal will likely remain significant in the foreseeable future. And given that coal capacity expansions are limited, operators that remain in the coal business may cash in.
In grappling with portfolio decisions, miners must fully understand the specific context they’re operating in.
Exiting coal might be the right choice for some companies, while entering or enhancing exposure to coal could benefit companies owned by specialized PE investors.
Read more about coal
Shifting towards new green-energy metals is another example of portfolio innovation—and a very effective way to build resilience and optionality into the portfolio.
Rio Tinto and Alcoa, for instance, have developed a new method to produce carbon-free aluminum (expected to be sold by 2024), with support from the Canadian government, the province of Quebec and technology giant Apple.
A climate-change friendly strategy is at the core of transforming the environment that mining companies operate in.
AUTHOR: Hans Kuipers, MD and Partner at Boston Consulting Group