Partly as a result of their strong performance and outlook, miners now face heightened expectations and increasing pressure from governments, regulators, shareholders and other stakeholders to balance short-term returns with environmental stewardship and contributions back to host countries and communities. They’re also managing risks that could impact their ability to sustain their rising performance, including geopolitical uncertainties, tax and regulatory reform, increasing costs and climate change considerations.
Heading into the fourth quarter of 2021, Monica Banting, our Eastern Canada Mining Leader, sat down with Robert Johnston, Managing Director and Executive Advisor for Energy, Climate and Resources at the Eurasia Group, to explore the pressures facing Canadian mining companies and the unique opportunities awaiting those able to navigate these uncertain times successfully.
“It’s the best of times and the worst of times” for the Canadian mining industry, says Johnston. “It’s a great commodity environment, but there are still a lot of difficulties.”
Johnston says miners can capitalize on buoyant commodity prices and the industry’s strengths if they can simultaneously manage the risks they’re facing, such as geopolitical uncertainties, head-on.
While certain risks may feel out of their control, companies aren’t powerless against them. Canadian miners need to be proactive to work through the challenges and the uncertainties, says Johnston, emphasizing the growing importance of securing and maintaining social licence for their projects—whether in Canada or abroad—as a way to pursue growth with confidence while navigating risk. This only reinforces the focus on environmental, social and governance (ESG) performance, which will be key to earning and maintaining that social licence in the years ahead.
One way for Canadian miners to navigate these risks is to incorporate them into their decision making and planning from the start. When looking at potential acquisitions, for example, miners face long-term geopolitical considerations that could affect valuations and should be part of their due-diligence considerations.
“If you’re looking at a 20- or 30-year project, you’re probably going to have two or three cycles of resource nationalism that will align with the local election dynamics but also with the global commodity environment and how much perceived wealth there is for governments to take a share of,” says Johnston.
This makes it critical for miners to monitor these risks over the long term and determine the best ways to approach engagement with stakeholders like governments and regulatory bodies. “When you shift from political risk assessment to political risk management, it’s an investment in developing the relationship with the home government and the host government and making sure that you’re getting support on both sides,” says Johnston, emphasizing the important governance role for Canadian mining companies’ boards of directors in assessing how management is approaching key relationships and the more significant risks a miner is facing in the jurisdictions where it operates. “You have to have a board-level commitment to very high-level ESG practices.”
Key risks to pay attention to include tax reforms as some host countries look to capture a greater share of mining revenues when prices are high. This is an area where a focus on tax transparency can help miners set the stage for success as they pursue growth around the world. By producing detailed and candid transparency reports, Canadian mining companies can highlight the full value of the taxes they pay while building relationships with governments and tax authorities. This can help address miners’ rising concerns about tax policy uncertainty and give them a greater role in helping develop the stable and effective tax systems they want to see.
Amid heightened concern about sustainability issues like climate change, Canadian mining companies are paying close attention to their environmental performance and the role it plays in securing social licence over the long term. While reducing the environmental impacts of their own operations is critical, the focus on transitioning to a low-carbon economy is also creating new possibilities for miners to grow.
Battery metals are a significant opportunity for Canadian miners, particularly given the medium-term global shortage of these commodities amid projections that demand will grow significantly in the future. Johnston notes that as governments in places like Canada and the United States show strong interest in critical clean energy minerals and the need for more supply, miners are looking at how they can best position themselves to play a role.
But many large mining companies are still figuring out the way forward, with ongoing questions about how these minerals could fit into their portfolios given their typical investment criteria and focus on longer-term projects in the lowest quartile of the cost curve.
And while mining companies continue to assess the business case for investments in battery metals, the good news is there are deposits with attractive grades that can deliver solid medium-term returns, although they may still have a shorter life than big miners tend to look for. This can offer an early advantage to companies that can quickly bring these smaller-scale assets into production, particularly if the minerals produced attract premium prices from customers, like automakers and their suppliers, that need them. As miners watch for signs of the inflection point at which a bigger focus on battery metals truly becomes viable, bold decisions to invest more in this area today could position them well in the years ahead.
But in exploring these opportunities, miners will need to focus on community acceptance of these projects by building strong relationships with local stakeholders. “When it comes down to the local level, there’s still a sense that some of these projects are going to tie up capital for 10 or 15 years before you see any returns,” says Johnston, citing concerns about securing permits and developing mines in some jurisdictions due to the different ESG considerations that can arise.
Johnston notes that in Canada, it will be particularly important for miners to build strong relationships with Indigenous communities, which need to be consulted throughout the full mine life cycle. “I think Canada is an interesting case because you do have such strong government alignment behind critical metals production. A lot of these critical metal projects are going to be involving Indigenous partners, and I think that the current government is very focused on Indigenous partnerships and northern development, so this is a very promising area of opportunity.”
And looking beyond Canada, mining companies can also bolster social acceptance by working with influential global bodies, like the World Bank, on projects focused on the energy transition. “The energy transition metals, critical minerals, broadly defined, are a priority for them. They’re looking for deals,” says Johnston, citing the potential for partnerships with these bodies to help miners build support for their expansion plans.
While miners will be carefully assessing the opportunities and risks emerging from this changing business landscape, Johnston emphasizes that the urgency to get ahead of issues like ESG performance is only growing. Investors are paying close attention to social licence considerations when making decisions and evaluating risks, says Johnston, noting they’re increasingly looking for companies to move beyond setting ESG targets to showing how they’ll meet them. “Over the next few years, there’s going to be more pressure for making a commitment and then getting to the tangible steps towards your ESG goals as quickly as possible. That’s where I think it’s headed, and that will be challenging for a lot of companies.”
Investors will also be taking a keen interest in the fine details of miners’ ESG performance. “I think this will mean that there’ll be more openness where lenders and shareholders want to get into the operational nitty-gritty of asking key questions around ESG performance,” says Johnston, citing issues like employee compensation, diversity and inclusion and environmental footprints. And with some investors wanting to take a closer look to verify the numbers themselves, miners will need to invest in their data analytics capabilities, which are key to proper measurement and reporting and ensuring the reliability of their ESG metrics.
As the shift to a low-carbon economy leads many Canadian miners to explore what the future looks like for them, some are already shifting how they do business. Many, for example, are focusing on skill sets related to supply chain management, shareholder relations and traceability of metals and minerals, all of which will be increasingly important to miners’ success.
The rising importance of many of these ESG matters coincides with another key challenge creating not only uncertainty but also fresh momentum for Canadian miners to embrace change and transformation: increasing costs, especially for key inputs like fuel, materials and labour. But a broad focus on transformation centred on sustainability considerations should help miners work through many of the challenges, from lowering costs and carbon emissions to contributing to the low-carbon future. “I think it will create some unique opportunities,” Johnston says of today’s business environment, citing the possibilities available to companies able to navigate a complex landscape for Canada’s mining industry.