Miners are targeting massive carbon reductions over the next 10 to 15 years on the path to achieving net-zero emissions by 2050, with equity research company Jefferies warning that this implies higher costs and capital expenditure (capex), but also a trend of less supply, higher commodity prices, higher free cash flow and higher share prices.
The commitment to net-zero emissions is a result of mining companies coming under increasing pressure to make explicit and sizable capital commitments for initiatives that target the reduction of greenhouse-gas (GHG) emissions in line with global plans to meet the Paris Agreement target of limiting global warming.
Some miners – like Fortescue, Rio Tinto, BHP, Newmont and Vale – have given explicit guidance about investment in such initiatives, Jefferies says in its equity research report for metals and mining, published on January 6.
However, for others, “initiatives to address de-carbonisation are bundled within ongoing projects to improve operational performance”.
While miners generate GHGs, they also produce the metals and minerals that are critical for the transition to a low-carbon economy, which Jefferies says bodes well for potential demand for copper demand in the renewable energy and electric vehicle (EV) sectors, as well as other metals like nickel, zinc, cobalt, aluminum, lithium, vanadium and platinum-group metals (PGMs).
“All else equal, the miners that produce these metals are well positioned, whereas those that produce fossil fuels and, possibly, iron-ore, face structural demand risk as the world goes green,” the report notes.
The upshot, however, is that mining companies will need to reconfigure their portfolios and make significant investments to reduce scope 1, 2 and 3 emissions, which means that operating costs will increase, as will the capital intensity for new projects.
Supply growth should also slow as a result, the report states, noting that the marginal cost of production for most commodities should increase, meaning that the end result will likely mean higher commodity prices; higher earnings before interest, taxes, depreciation and amortisation, as well as free cash flow; and higher mining share prices, on average.
Scope 3 emissions will be a problem for iron-ore and coal miners, Jefferies laments, but says that it will be “less problematic” for copper and other base metals miners.
In addition, based on current technologies, the transition to a low-carbon economy requires copper, nickel, zinc, aluminum, cobalt, PGMs and some other metals, meaning that mining companies will increasingly rely on renewable energy sources and new technologies to reduce energy consumption and, in so doing, Scope 1 and Scope 2 emissions.