"Don't waste a drop" - water in mining
"Don’t waste a drop" - published in Mining Magazine, October 2011
Christopher Gasson explains the complex relationship between the mining industry and global water supply
Water has always been important for mining, but suddenly it has become a board-level issue. Shareholders now expect companies to have identified the operational and environmental risks they face as a result of their water usage, and show that they are pursuing strategies to minimise this risk. It begs the question: what has changed in the world of water?
There is still the same amount of water in the world today as there was ten million years ago – in the same way that there is the same amount of metal in the world 10 million years ago. We are not going to use up all the water in the world, just as we are not going to use up all of the copper, nickel or even oil in the world. All that is going to happen is that it is going to get very expensive to recover.
There are probably some people reading this thinking “Ah-ha. We are in the natural resource business. Water is a natural resource. We should go out and buy water resources now and watch their value soar.” Unfortunately there is one big reason why this strategy doesn’t work, and why water is more of a risk for mining companies than an opportunity. It is the fact that people don’t like paying for water.
Most of the water that is used around the world is taken from nature for free. Farmers – who are responsible for 70% of water use – do not in general pay for the water they use. In fact in some parts of the world governments provide free or heavily subsidised electricity to enable farmers to pump ground water to irrigate their crops. Free water means cheap food, but once the free water runs out what is going to happen?
In India for example there are perhaps 300 million peasant farmers who rely on pumping water from aquifers which are not replenished annually by rainfall. As the water table falls, they need to dig down further to tap into deeper aquifers, and the deeper they dig, the greater the risk that the water will be salty and un-useable.
The over-exploitation of groundwater is a time-bomb which threatens the viability of agriculture across the world – from the plains of North East China, to the bread bowl of America. There are solutions – like reservoirs, pipelines and desalination plants, but they all cost much more money. For example, desalinating seawater today costs as little as US$0.60/m3. To put this in context, one cubic metre of water is enough to grow 1kg of wheat which sells for US$0.26/kilo in Chicago. The world is just not ready to pay a full price for water.
The situation is made worse by the fact that it is a political commodity. Typically water resources are owned and managed by governments. There is strong public opposition to the idea that private companies might be able to own water and make a profit from selling it (indeed in the James Bond film ‘A Quantum of Solace’ the bad guy, Dominic Greene, plots to own and control Bolivia’s water supply). Governments want water to be plentiful and as cheap as possible, particularly in countries which have very little natural availability. In Riyadh, Saudi Arabia, for example, water costs US$0.03/m3, although the actual cost of desalinating water, pumping it across the desert and distributing it to households is likely to be in the region of US$5/m3. That kind of public subsidy encourages waste, and makes it very difficult to justify investment in tapping new water resources. Imagine what the mining industry would be like if people thought that minerals were a free gift from God, and no matter what the cost of extracting and refining the minerals, metals should either be free or heavily subsidised? Private investors would run a mile and the few publicly subsidised mines that did exist would be starved of investment and running well below capacity. US$0.03 water in Saudi Arabia led to a situation in Jeddah three years ago where households could only expect water for one day in every 23.
The mining industry is probably the second largest industrial user of water in the world after the power generation industry. It uses between seven and nine billion cubic metres of water per year, which is about as much water as a country like Nigeria or Malaysia uses in total in a year. This level of usage has growing environmental, social and political impacts.
The environmental impact is through the risk of over-exploiting local natural resources, or producing toxic wastewaters which contaminate rivers and lakes or both. The social impact is because competition for water resources is increasing, and mining businesses are more frequently needing to make claims for access to water resources which might conflict with the claims of farmers and local communities. The political impact is because water is a basic necessity of human life, and any business which finds itself on the wrong side of a debate about water is going find itself pretty rapidly on the wrong side of politicians, regardless of the rights and wrongs of the case.
CocaCola discovered this in India eight years ago, when farmers in a village called Plachimada in Kerala discovered that their wells were running dry and blamed a nearby Coca-Cola bottling plant for their problems. This grew into a global campaign against the soft drinks giant, which has damaged its reputation and forced the company to relocate its plant. No matter that the farmers themselves were in fact the main culprits for over-exploiting the groundwater, or that a judge subsequently ruled that Coca-Cola was using less water than it was entitled to, a big corporation like Coke can never win a political confrontation over access to water.
That is the reason why water has suddenly become a boardroom issue for mining companies. It is not that there is a risk that a mine will run out of water. If you are prepared to pay enough money, it is always possible to get water anywhere in the world. In Chile, for example, the Escondida mine includes a $3.5 billion project to desalinate water at the coast and pump it across the desert and into the Andes. The risk is not so much an individual mine’s access to water. The risk is that if a mine’s access to water, or the wastewater it produces, either despoils the environment or brings it into conflict with local communities, then the politics of water are such that the mining company might lose its right to operate.
For example, Peru’s $1 billion Tia Maria copper project has been stalled after farmers and environmentalists rebelled over concerns that the project would despoil water resources in the region. Three people died in related disturbances in April this year, forcing the government to cancel the project pending a new environmental impact assessment. Even though the project will import desalinated seawater to meet its needs, the mine developer, Southern Copper, has failed to convince the local community that the mine does not represent a threat to the local water system. It is an indication that we are facing a step change in the kind of expenditure miners are going to face in developing new mines. When you combine that with the additional costs of addressing acid rock drainage, it is clear that there is going to be an acceleration in the amount of money mining companies spend on water technology and infrastructure.
This trend is tracked in a new study published entitled Water for Mining: Opportunities in Scarcity and Environmental Regulation by Global Water Intelligence magazine. Compiled on the basis of primary research interviews with leading water experts working in the mining sector it gives an in depth view of the challenges the industry faces. In total the mining industry uses 7-9 km3 of water per year and the annual capital expenditure on managing this water is currently in the region of $7.7 billion, although it is expected to grow to $13.6 billion by 2014.
Essentially what is happening is that as the marginal cost of abstracting water from nature rises, communities and farmers are doing what they can to cushion themselves from that impact. This involves much greater activism to ensure that industrial water users bear the brunt of the additional costs. It will push up some costs for miners, but it will make sure that the political risks of the mining sector are not compounded by the political risks of the water sector.