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* Assets in "sustainable funds" have doubled in 5 years
* Metals sector accounts for 10% of impacts on climate
change
* New technology seen cutting costs in long term
By Eric Onstad and Zandi Shabalala
LONDON, Oct 25 (Reuters) - Metals producers, from miners to
smelters, are grappling with
increasingly tough and costly environmental demands imposed by
banks seeking cleaner investments.
While the transition may prove overwhelming for smaller
producers, larger companies are playing a long game, casting
ahead to a period where greener technology helps slash their
costs.
Sustainability has been a long-standing issue in metals,
covering a wide range of issues including corruption, board
structure, jobs, communities around mines and mine waste.
But environmental concerns have moved to the top of the
agenda in recent years with heightened awareness of climate
change amid public protests.
Metals and mining are responsible for 10% of the total
impact on climate change, according to the United Nations
Environment Programme.
"We're turning down lots of stuff. Being green is a
precondition for lending," said Laurent Charbonnier, global head
of metals and mining at HSBC, speaking ahead of LME
Week when the world's metal industry gathers in London.
Mine operators now face extensive checklists from
lenders before they release funds and listed companies are being
screened by fund managers before they buy their shares.
Assets in global "sustainable" funds have doubled over the
past five years to $844 billion by end June, according to
research firm Morningstar.
"For us, the scrutiny is all around us," said Shishir
Poddar, executive chairman of Tirupati Graphite plc, which plans
to list in London.
HUGE INVESTMENT NEEDED
The metals and mining industry will need around $240 billion
of investment over the next decade to produce key base metals
and gold, according to consultancy Wood Mackenzie.
More funding, however, is conditional on meeting
environmental, social and governance (ESG) guidelines, burdening
operators with extra investment.
"You may have to take another 25% to create the right
societal engagements and environmental designs," said Simon
Morris, global head of metals at Wood Mackenzie.
"So will investors accept lower returns? I think it's
probably causing a bit of head scratching around the industry in
this tug-of-war of priorities," added Morris, who formerly
worked for global miner Rio Tinto plc.
Bigger metals groups have the financial bulk to absorb the
higher investment.
BHP Group , the world's biggest miner,
signed four renewable energy contracts earlier this month to
supply all its Chilean copper operations from 2021.
But the new contracts came at a price - BHP took a provision
of about $780 million related to the cancellation of existing
coal contracts.
Such costs are more challenging for smaller companies.
"The problem for these companies is raising sufficient funds
to build the mine," said analyst John Meyer at boutique
investment bank SP Angel. "To add another $50 to $100 million to
put in a solar power plant is quite difficult."
LONG-TERM COST BENEFITS
In many cases, bringing mines in line with environmental
standards is moving hand-in-hand with new technologies that will
boost efficiency and cut operating costs in the long term.
Large mining groups like BHP and Anglo American are
investing in solar power, automation and water-saving
technologies, betting that substantial up-front investment will
both burnish their green credentials and raise efficiency.
"Following sustainability goals doesn't necessarily equate
to an increase in costs," said Rachael Bartels, senior managing
director at consultancy Accenture.
Although BHP had to take a big hit to cancel its coal
contracts in Chile, the group says the new renewable power
contracts, beginning in 2021, will cut energy costs by 20%.
Replacing diesel generators with electric motors in new
underground mines could cut upfront costs by about a third
because it cuts out ventilators that extract the diesel fumes, a
study by EY found.
Anglo American has been testing new mining processing
technology in Chile that is expected to lift productivity by as
much as a third and could also slash capital costs for new
mines.
Capital intensity, ratio of initial capital expenditure to
annual production capacity, for new copper mines has tripled
over the past 36 years to about $18,000 per tonne, according to
Morgan Stanley.
But Anglo's new technology has the potential to almost slice
capital intensity in half below $10,000 a tonne, the bank said
in a note.
Anglo declined to release capital intensity figures, but
said in an email the new technologies were "game-changers" in
terms of both the environmental footprint and costs.
(Additional reporting by Pratima Desai; editing by David Evans)
