Mining pressed to overcome barriers to secure greater renewable presence

TORONTO (miningweekly.com) – The pace of renewables uptake by mining companies has been weighed down by the economic downturn, excessive capital costs and cultural barriers, an audience at a recent Canadian German Chamber of Industry and Commerce renewables in mining conference heard.

These issues had been compounded by the failure to properly assess the economic viability of renewables with regard to a specific project or operation. Financiers backing projects shied away in response.

However, the financial community understood that renewables could offer important efficiencies and savings. Companies had to argue the case for integration with care and attention to detail, particularly with regard to rates of return.

“There are a lot of elements at play when bringing a mine and renewable assets together. But the capital will flow if you get the risk-adjusted returns right,” said Deutsche Bank director Vinod Mukani.

PARALLEL LINES
Savings and performance improvements had never been more important for the sector as it continued to face the economic downturn. Done correctly, renewables delivered value and could help unlock untapped financial resources.

“And that’s an opportunity. I think both industries (mining and renewables) are looking to structure around this and create path forward,” noted Oleg Popovasky. Popovasky was a director for American Vanadium and global strategic partnerships director at SunEdison.

The similarities between the two sectors were noteworthy, he added. For example, project planning for both involved phases of dedicated development, implementation and long-term operation/offtake.

Both sectors also had to grapple with large upfront costs that dominated their financing requirements, itself dependent on a deposit or energy resource, such as wind or solar. “[In addition], they both compete on scale and for the commoditisation and consolidation of the marketplace,” said Popovasky.

With so many similarities it should have been a “slum-dunk” for both industries to work together and advance renewables uptake, he added. “But you’d be surprised how few mining projects use renewable energy products.”

Part of the problem was cultural: many of those involved in financial planning and mine engineering still found the technology unfamiliar. That made them risk-averse, despite renewables no longer being immature, unproven or untested technologies.

An important step in overcoming this was to consider renewable energy as indivisible from energy in general. All power options should be considered, with planners given the remit to model renewables if they thought it was appropriate for the project.

Final decisions on installation and integration then needed to be based on team opinion and insight. “There’s not a single investor, engineer, operational guy or CEO that can sit down and look at all the moving parts and make a confident decision independently,” Popovasky said.

Incentives and risk reduction based on geographic location also played a notable role in renewables, particularly with reference to tax structures or how a nation’s currency related to capital expenditure (capex) in dollars or euros.

However, there was the risk of disappointment for those who considered renewables to be viable based on the backing of credit-worthy governments.

“Oftentimes those projects didn’t move forward. I’ve seen projects in African nations achieve quicker viability because economic development or international development groups offered assistance through credit guarantees and other instruments,” said Popovasky.

CARRY THAT WEIGHT
The most opportune time for renewables planning was during project development, when a company could use advanced modelling before capex. The process afforded engineers and financial planners a better understanding of the potential benefits renewables could deliver.

But some companies would be unable to cope with the level of detail demanded, notably those that failed to have even a basic grasp of their cost structures.

“Talk to some CFOs and ask them about the level of cost incurred because of energy – which usually ranges between 30% and 60% depending on the mine site – and you might be met with a blank stare,” said Popovasky.

However, despite the many inherent advantages of renewables and the progress that had been made, it was impossible not to consider the downturn and its weight on the technology’s uptake in mining.

“The credit thesis of many assets might not have changed, but investor confidence has deteriorated,” mused Mukani.

The tough conditions dominated capital investment decisions, which meant that it was essential that both sides, mining and renewables, had risk-adjusted rates of return firmly in mind before seeking financial backing and the opening of purse strings.

“You can’t just turn up and say: ‘We have this renewable energy idea that may or may not work. It’s kind of unproven and it is up in the territories.That’s not an honest way of dealing with the issue,” said Popovasky.

VALUE PLUG-IN
Value had to be represented in readily understood terms, such as reduced costs based on kilowatt-hour savings. The benefits could then be “plugged-in” to the rate of return and assessed appropriately.

Companies also needed to remember that financiers judged viability on a project-by-project basis; what could have worked at one operation might not be appropriate a second time around.

“Each asset is considered on its own merits. If you’re a corporate investor – whether through debt or equity or anything in between – you’ll be looking for a risk-adjusted return that makes sense,” said Mukani.

Operational expenditure (opex) was important as well. For example, renewables at a project might deliver reduced energy costs but involve opex at a rate considered overly expensive. Mukani pondered whether renewables would make sense in that light, especially if the project was already considered marginal.

Companies also needed to think about their working relationships with financiers and how their management teams were perceived. From a risk-allocation perspective, financiers had to be certain that a company was in safe hands and soundly run, particularly when it came to capital allocation decisions. 

“I’m not saying any of this is a simple process. The question is whether the hurdles have been overcome and that the project looks attractive enough for the deep pockets out there,” concluded Mukani.