ESG Focus: BHP And Rio Defy “S” In ESG – Part 1

ESG Focus | Mar 03 2021

This story features RIO TINTO LIMITED, and other companies. For more info SHARE ANALYSIS: RIO

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG focus: BHP and Rio defy “S” in ESG – Part 1

Rio Tinto and BHP Group are again in the indigenous spotlight, making a mockery of the "S" in ESG, after winning a land grab for Apache land in the US to build the world’s largest copper mine – a critical material for the green transition

-Green priorities trump social priorities
-Copper is critical to the green transition
-A matter of national security
-What now for the “S”, and even the “E” in ESG?

By Sarah Mills

Rio Tinto ((RIO)) and BHP Group ((BHP)) have again grabbed the headlines for disrespecting indigenous and general community land rights and expectations, after President Donald Trump in January fast-tracked approval for the pair’s bid to gain control of Apache land in Oak Flat, Arizona, to build the world’s largest copper mine.

The news is interesting from an ESG perspective because, despite the “social” rhetoric which many investors have found confusing, it appears investors can expect that it will be business as usual in instances in which indigenous land rights conflict with transition-critical projects.

It also raises the spectre of competition between environmental and social priorities, and even between environmental versus environmental priorities, going forward; and the prospect of many trade-offs.

Mostly, it suggests the mining sector, with the exception of carbon producers, will continue to win most general community property disputes for the foreseeable future, particularly in instances such as Oak Flat, where there is no middle ground – the project will leave behind a massive crater, destroying the area.

But it doesn’t mean the “S” in ESG is dead and buried. FNArena addresses the issue of social materiality in the Part 2 of this series.

First some background

BHP and Rio Tinto’s joint venture Resolution Copper sits on Apache land at Oak Flat in Arizona. Oak Flat is considered sacred to tribal groups including the San Carlos Apache Tribe.

Mining the area is also considered a threat to the broader community and environment given its impact on local water sources in arid Arizona. So there is an environmental trade-off here as well.

The 1,500 jobs the project proffers are paltry in comparison to the United States population of 250 million; and the project will take a heavy environmental toll.

The Oak Flat deposit is the largest undeveloped underground copper resource in the world, according to the US Forest Service.

BHP and Rio Tinto proposed a land swap for the deposit more than five years ago but met considerable resistance.

More recently, the House Natural Resources Chairman Raul M Grijalva (D-Arizona) asked then President-elect Joe Biden to block the federal land exchange that was being fast-tracked in the dying gasps of Trump's presidency. 

Biden passed on that opportunity.

This was not surprising given the proposed transfer was initially included by Republican Senator John McCain in the National Defense Bill, which was filed under Barrack Obama’s presidency.

And the project is the world’s largest undeveloped copper resource.

And copper is the critical material for the green transition.

Institutions mum

The share prices of both companies rose leading up to the approval before taking a breather, suggesting that, as was the case with the Juukan Gorge, institutions are extremely reluctant to materially punish large miners for indigenous land rights infractions of a certain nature.

A quick scan of the Internet suggests institutions have not even criticised the Oak Flat transfer, unlike Juukan Gorge.

Perhaps that is because the project was scheduled to have been passed mid last year, well before the “green” President Biden ascended to power, and a done deal.

The press did cry foul, and attempted to lay the blame at the feet of Trump. 

But as noted above, the decision was essentially bi-partisan and investors aren’t so naïve as to swallow the rhetoric from the Democrat/Republican Punch and Judy puppet show. 

It is also possible that the powers that be may have chosen to transfer the project at the beginning of the ESG reign, before the era of enforcement really begins. 

Copper: the critical transition metal

None of the above is surprising given what is at stake.

Copper is critical to the energy transition and global copper demand is forecast to at least triple this decade. Electric vehicles alone use four times as much copper as conventional vehicles: for batteries, inverters, stator windings, rotors (in the motors), wiring, busbars and charging infrastructure.

Not to mention its use in other green industries: solar photovoltaic cells; wind turbines; charging stations; construction wiring and piping for urbanisation; electrical transmission lines and the imminent 5G rollout. 

Given the massive recent pledges on both sides of the Atlantic and Pacific to urbanisation and the green transition, analysts everywhere are forecasting a massive squeeze in the metal.  But analysts estimate that if the copper prices rises above US$10,000 a tonne, the green transition could be compromised, placing EV penetration targets in jeopardy.

According to Merrill Lynch, the copper price must also stay above US$5000 a tonne to ensure continued investment in copper, which doesn’t seem too hard a target given the impending demand surge.

Such is the situation that BHP is barely considering mining the gold at Olympic Dam at the moment, focusing all of its resources there on copper production to feed and stabilise the green transition: and profit.

A matter of national security

Which takes us to the next issue: defence.

It is not surprising the Oak Flat transfer was tagged on to the US National Defense Bill.

The Wall Street Journal writes: “The rise of rechargeable batteries is now a matter of national security and industrial policy. 

"Control of the minerals and manufacturing processes needed to make lithium-ion batteries is the 21st-century version of oil security.

"The flow of batteries is currently dominated by Asian countries and companies. Nearly 65% of lithium-ion batteries come from China. 

"By comparison, no single country produces more than 20% of global crude oil output.”

Unsustainable situations need sustainable solutions

The situation illuminates more than just the relative weakness of certain social issues in comparison to environmental issues.

It also raises a question mark over the long-term use of copper in the green transition. 

Copper production is highly polluting and water-intensive, placing mining companies in direct conflict with governments and many social and environmental imperatives.

The Chilean government, for example, has said it will double the number of areas off-limits to mining from 30 to 70, after a study showing more water is leaving the salt flats in northern Chile than is returning with the annual Andes melt.

Droughts also increase copper miner’s costs and risks.

BHP, for example, has committed to stop drawing water from aquifers in Chile by 2030 and is commissioning desalination plants and pumping water in from the coast – a billion-dollar investment.

At the moment, there is no alternative to copper, but the race is on to change all that.

The market can expect an avalanche of alternative technologies over the next two decades, many of which FNArena will cover in its upcoming series on renewables.

The European Union Commission recently approved E2.9bn of funding for "European Battery Innovation", hoping to incentivise another E9bn in private investment.

The EU aims to “revolutionise the battery market by focusing on beyond-state-of-the-art lithium-ion batteries as well as on next-generation post-lithium-ion battery technologies".

The Great Race

Disruption and innovation are expected to come thick and fast. Flow batteries, and other alternatives, are expected to compete with lithium-ion batteries in the very near future. Rival materials to copper are also being developed.

Scientists have discovered that even the humble hemp plant can be transformed into “ultrafast” supercapacitators that are better than the graphene gold standard, and one thousandth of the price, according to the BBC.

The technology still requires tweaking but hemp is everything that copper, and graphene for that matter, are not: relatively clean and circular.

It is also useable in many other green industries: hemp-crete, bio-plastic, bio-diesel; the list goes on. 

It is also an immature market in which production can barely meet existing demand, let alone hope to power up in time to support the initial stages of the green transition. 

Yet circularity is, supposedly, the holy grail of the green transition, and it is likely that the safest long-term impact investments during the coming disruption will be in companies and technologies that combine a circular focus with a competitive advantage and a degree of maturity: i.e. the product is ready or nearly ready for market. 

Similarly, for “best-in-class” stocks, it will be those in low-disruption industries with a competitive advantage that use their green issuance funding to manage their waste, water and energy useage throughout their supply chains most effectively that attract capital; given the prices of many inputs are expected to rise.

Copper to be targeted as a disruptable industry

Copper investors will need to stay alert. Most analysts expect the copper price to be well bid for at least the next three to five years. But the pace of disruption often surprises – just ask media companies.

Given the plight of fossil fuels, copper miners and investors would be keeping a close eye peeled to that US$5,000-a-tonne floor and weighing their mid-to-long-term prospects.

All this casts another light on the Resolution Copper project. 

The starting date is 15 years away. While that’s a relatively short term within the investment cycle, the pace of change in the green market is surprising. 

It also raises questions about the environmental narrative. 

How successful will the green transition be if highly polluting copper, which is totally recyclable, is still being excessively mined in 15 years? Resolute Copper is, after all, being billed as the largest copper mine in the world. 

What happened to circularity? The Resolute Copper transfer suggests it is going nowhere fast.

Hemp, as a circular input in many industries is an interesting comparison in this respect. 

There appears to be some tolerance to legalising marijuana for medicinal purposes but big capital is exhibiting a clear reluctance to encourage hemp for other applications. 

This is confusing given the proclaimed urgency of the climate battle; and given hemp is an incredible carbon sink and would be a solid contender for bio-diesel over trees alone.

Is hemp simply too cheap and too abundant? And does big capital really want a precipitous end to the impending mining supercycle given the money to be made from the transition?  

The humble hemp is truly an outside contender but there are many innovations in many markets that are much more likely to see the light of day.

Again, much will depend on the will of big capital and every step will be a test of institutional commitment to ESG and a test of the ESG narrative. 

Twice now, institutions have back-tracked from indigenous rights issues, sending a very clear signal to markets.

Other options

Of course there are always other conclusions to be drawn from an incident such as Oak Flat.

Given the 15-year lead-in, Biden could yet be planning to use it as a shining example of his government’s commitment to a social agenda by blocking the transfer, pending developments in the battery market. 

But the recent unfolding of events doesn’t support that hypothesis, especially given the resounding crickets from institutions. 

At least the Juukan Gorge incident was met with C-suite resignations. 

So, what’s the Resolute Copper project going to be: a shining example of Biden’s commitment to a social agenda; or the straw that topples the “S” in ESG. 

Part 2 of this series takes a closer look at which social issues are likely to gain the most institutional support.

For now, it appears Oak Flat is in the pocket; hemp is there as a bio-diesel backstop; and there are a thousand alternatives in between.

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms