Australia’s coal sector has been warned that water-related risks can no longer be overlooked. Doubling as significant financial threats, the mining sector’s water risks are significant and will only increase over time with the ongoing impacts of human-induced climate change.
Meanwhile, although the frequency of water contamination and theft in the coal industry is significant, many miners have yet to receive large financial penalties for these offences.
It is possible, however, that this may change given government agencies have the ability to raise the penalties imposed for these occurrences under existing legislation. Furthermore, water management and impact modelling requirements for mine expansions and new developments are rising, meaning projects are now more likely to be delayed, rejected or cancelled due to increased scrutiny over their potential impacts on water resources.
Concurrently, community opposition to coal mining over water concerns is also rising, thus affecting a proponent’s social licence to operate.
Additionally, due to the lack of transparency on water accounting data in the industry, it has been difficult for investors to accurately identify all the risk components in their investment portfolios.
These are some of the findings in the Institute for Energy Economics and Financial Analysis’ The Hidden Costs of Coal Mine’s Unquenchable Thirst report authored by Anne-Louise Knight.
In her analysis, Knight said environmental, social and corporate governance (ESG) data screening and disclosure requirements are beginning to highlight the exposure to climate-related risks for investors, but water-related ones are frequently overlooked and under-reported.
This situation, however, has to change, especially as water consumption is an integral part of all Australian coal operations.
In this regard, the major uses of water in the sector relate to material handling and preparation, dust suppression, evaporation, finding potable water for onsite facilities, vehicle washing and equipment cleaning, cooling tools and rehabilitation irrigation.
All of these activities, though, are being hampered by a slew of issues, including access and increasing costs; severe weather, flooding and operational disruption; contamination, salination and pollution; community opposition; tighter regulations and approval processes; as well as rehabilitation and legacy issues.
“As reporting requirements become tighter and better data becomes available, the water-related impacts and risks of these investments could be incorporated into reviewing ESG investment strategies,” Knight said.
“As Australian governments implement new company climate- related disclosure requirements, mandatory standardised water reporting frameworks may also become a requirement.
“This would bring greater attention to the water use and consumption of coal mining in Australia. “Additionally, the actions of even a small number of shareholders exercising voting rights could have a significant impact in driving mining companies to improve their reporting and valuation of water resources.
“Improvements in water accounting data by mining companies will enable improved analysis in this space in the future.”
Regarding water scarcity and higher access costs, Knight pointed out that periods of drought could translate into financial impacts for coal mines by increasing or decreasing water availability in the marketplace on top of changes in the price and volumes of allocations under water access licences.
Furthermore, these are more acute when commodity prices fall and then compounded by other inflationary pressures. Like any other input, the expenses coal miners must pay to access water becomes more of a risk when the market value for thermal and metallurgical coal decreases.
Combined with the likelihood of water cost increases over time, this places greater risk on an operator’s underlying cash balance, which again is affected by other inflationary pressures.
In effect, this could lead to higher diesel and explosives prices, further port fees and royalty rates as well as labour shortages (which in turn leads to increased staffing costs).
In terms of dust suppression, Knight said failure to comply with relevant regulations could result in financial penalties.
Therefore, while miners could invest in more water recycling to increase reticulated water for dust suppression and thus increase consumption efficiency, the water needed for this part of the operation remains a mandatory fixed input.
These requirements are typically higher for open cut operations than underground and since Australia has a preference for surface mining, this leads to increased water consumption for dust suppression activities due to mining processes such as blasting, extraction, hauling and crushing taking place in the open air.
“The impacts of climate change on the increasing frequency and intensity of heatwaves and higher average temperatures mean dust suppression requirements are likely to increase over time, as the amount of coal dust increases in hot and dry conditions,” Knight noted.
Moreover, coal mines face the challenge of maintaining critical water supplies while minimising excess water as either could incur costs. In this regard, both water shortages and excesses could decrease mine production, transforming water into a liability rather than an asset.
“Coal miners incur costs associated with managing excess water because this can result in flooding and disruption to production and transport, as well as increase the risk of contaminated water discharges,” she said.
“Coal mines require continuous investment in upgrading and installing water infrastructure onsite to increase storage capacity, improve water efficiency and reduce risks of unintentional spillages or seepage of contaminated water.
“Mine operators respond to these risks by increasing capital expenditure on water infrastructure and securing dams onsite, such as installing remote monitoring systems and upgrading dams by increasing wall heights and drainage works.”
Another consideration, Knight said, is water transport since most operations require both a pipeline connection and a long term water supply agreement.
While this could be cheaper than trucking in water, it could also tie miners to long term financial “take or pay” commitments for their water.
In this regard, about 15 per cent of raw water supply is sourced from commercial suppliers through take or pay contracts in 16 mines analysed in Queensland’s Bowen Basin. These contracts, however, are inflexible to both supply and demand fluctuations.
Ultimately, this means buyers assume the majority of risk as they pay for a set quantity of water over a fixed term, independent of water storage levels during wet and dry periods.
With all of these considerations to take into account, Knight suggested, one thing is certain – coal miners need to improve their water accounting data.
