Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Ratings agency Moody’s has released new environmental, social and governance (ESG) issuer profile and credit impact scores for the global metals and mining sector, which could negatively impact companies lagging behind.
They come on the heels of the agency’s ESG scores for a range of corporate issuers, utilities and US governments earlier this month and for sovereign issuers published in January.
With the ongoing transition to green energy set to boost demand for key materials including copper, cobalt, nickel and lithium, many miners have trumpeted their green credentials. Companies, however, have not been assigned scores for their undertakings nor for how they would impact their risk exposure, until now.
“Nearly all metals and mining companies, including coal companies, have exposure to environmental considerations that carry very high credit risks,” Benjamin Nelson, Moody’s VP-senior credit officer, said in a statement.
Moody’s is integrating more ESG in its credit analysis, which provides greater clarity, consistency and differentiation on risk exposure and the degree of credit impact.
Most metals and mining companies have good financial strategy, risk management and management track records, the rating agency says, naming BHP (A2 stable) and South32 (Baa1 stable) as examples of strong governance.
For eight metals and mining companies, the impact of ESG considerations is more severe than for their peers: highly negative (CIS-4). Moody’s names Vedanta Resources (B2 negative) as miner for which the impact is very highly negative (CIS-5).
By contrast, Chile’s Codelco, (A3 negative) is the only metals and mining company for which ESG considerations have a neutral to low rating impact (CIS-2).
Environmental groups, who have tended to target the energy industry, are now turning their attention to big energy-consuming industries, especially mining, which is responsible for about 4% to 7% of global greenhouse gas emissions.
For nearly all companies rated, exposure to ESG factors is very highly negative
Climate advocates are also looking at likely impacts of mining the metals used in digital and other devices, spreading attention from the resources sector to technology groups.
Carbon transition is the biggest environmental risk for thermal coal companies, especially in the US, which is driven by growing global demand and policy support for less carbon-intensive and cleaner energy.
Not surprisingly, the impact of ESG considerations is very highly negative (CIS-5) for nearly half of the coal companies Moody’s scored.
For Yanzhou Coal (Ba1 stable), Adaro Indonesia (P.T.) (Ba1 stable) and SUEK JSC (Ba2 stable) the impact is moderately negative (CIS-3)
Moody’s says Glencore (Baa1 negative) is a mixed case. “It has a conservative financial strategy and strong risk management. But it also has legacy legal exposure with regards to investigations by a number of authorities including the US Department of Justice,” the agency says.
Moody’s believes that metals and mining companies face the most risk from their dependence on natural capital and the physical damage that mining can cause.
For nearly all companies rated, exposure to ESG factors is very highly negative (E-5). Six companies are less exposed because of their modest physical footprints – mostly small diamond and met coal companies operating only underground mines.
Still, their exposure is highly negative, as reflected by their E-4 scores. Examples include Mountain Province Diamonds (Caa3 negative), Petra Diamonds (Caa1 positive) and Warrior Met Coal Inc. (B2 positive).
The firm also says that social risks are significant in the sector. “[They are] driven by health and safety issues and responsible production risks, with some differentiation by commodity and location of operations,” Nelson said.
Whether it be inequality, damaging the environment or labour rights, companies are now called out when they are perceived as doing wrong.
Peabody Energy (Caa1 stable) fairs poorly when factoring the responsible production item. Its North Goonyella mine in Queensland, Australia caught fire in 2018 and the company has not been able to obtain the necessary permits to restart production.
A company’s ability to mitigate these various ESG considerations and their significance relative to other credit drivers determines the degree to which the considerations affect its credit rating.
Strong governance is an important mitigant for many highly rated companies in the metals and mining and coal sectors, says Moody’s.
Moody’s ESG issuer profile scores are opinions of an issuer’s exposure to ESG considerations that could be material to credit risk. ESG credit impact scores communicate the impact those ESG considerations have on an issuer’s credit rating.
Both scores use a five-point scale – one is positive, two neutral to low, three moderately negative, four highly negative and five very highly negative.
