Could ESG Could Be Hurting the Energy Transition?
Disruption is a fact of life and is something leaders and the commercial world have always been required to manage. Asia Crisis, GFC, Oil prices, Tech bubble. For the most part, they have been linear. Disruption occurs, economic systems stop humming along, businesses fold, people lose jobs, economies slow. But eventually, in most cases, economies adjust and continue to ebb and flow.
But what happens when there is a confluence of multiple disruptions?
News coming out of Mining Indaba, Cape Town, the southern hemisphere’s largest investment trade conference is that finance has dried up for junior miners.
Justin Boyce Cam, M&A Partner of BDO Australia says “It’s a very difficult equity market for juniors now. There is a dearth of capital for development in public markets and fund managers are moving away from mining for reputational reasons”. Adding to that Adam Myers, Corporate Finance Partner, BDO says “The larger investors are becoming increasingly more passive and are seeking industry participants, principally majors and mid-tier producers to provide exposure to exploration. This leaves small scale investors to fund greenfield exploration and hence the difficulty encountered by the juniors. The question that needs to be resolved is whether the majors will restructure to incorporate early stage greenfields exploration or will funding structures evolve to fund the juniors once more”.
It was acknowledged last year at Indaba that a lot of the traditional risk finance that was normally available to junior miners had moved to medical marijuana, particularly in Canada. It was the hot new thing and returns were high. However, this has since tempered along with the soaring valuations, but it has not brought the investors back.
Investors have moved on again, this time to clean & green projects. ESG (Environmental, Social and Governance) is dominating industry presentations at Indaba and proving to be the reason why investors and finance are thin on the ground. Hampered by its association to coal, mining is suffering an ultimate battle for finance as private equity, funds and banks are withdrawing from the sector in pursuit of investor friendly green projects instead.
The need to transition and decarbonize is becoming a global priority and this shift is having a jarring effect on junior miners. The money is moving in the opposite direction making getting projects off the ground significantly more difficult. Where the marijuana was thought of as a distraction of sorts, even a bubble, the fundamental move towards green projects may have a more profound effect on the junior mining sector. It’s being led by an economic transformation and accelerated by social and consumer concerns. This is looking more like a continued ‘ebb’.
The discord of disruption is that the source of this revolution to renewables, electric vehicles and low-carbon solutions, is mining.
It will be nickel, lithium, copper, cobalt and mineral X (the yet to be discovered mineral) that will help us make the advancements to decarbonize to meet a >1.5 degree world. Without them, and without the continued investment in (ethically) sourced commodities, supply shocks will be likely and the speed in which we transition will be slowed.
The global movement away from fossil fuels and towards a low carbon world means junior miners will have to re-position themselves as part of the solution. For now, they are viewed as a source of wrong.
Sherif Andrawes, Head, Global Natural Resources for BDO says “Mining companies are and need to be seen to be part of the solution in providing the materials to allow us to move to a low carbon world. Working together along the supply chain would help manage a smoother transition”.
Junior miners need to better communicate its purpose and value. Engaging more innovative business models and partnerships could be a solution. Many are carving out ESG led businesses, one being Orion Minerals who have taken great strides to ensure they position themselves as modern, sustainable and community driven. More must do the same to help thwart the flow of funds away.
According to those presenting at Indaba, there is money out there for quality projects, AND those that can prove they can demonstrate ESG (Environmental, Social and Governance) values and practices or if the commodity can be deemed ‘green’ the rewards will be high.
The transition to an electric future should be good news for miners, as they will play an integral role in shoring up stocks and supplies for the manufacturing and production of future technologies. The demand is there.
What does a junior mining project in an age of ‘clean and green’ need to look like for it to win the hearts of investors?
For more information, please contact Catherine Bell, Manager, Global Natural Resources Industry Program - catherine.bell@bdo.global