Water issues are becoming a considerable factor affecting growth and profitability of companies in many regions of the world. This paper outlines potential water-related risks facing the mining industry and highlights important gaps in water-related disclosure. The purpose is to provide information, questions, and tools to help the financial community better evaluate water-related risks facing mining companies.

This research focuses on global hardrock minerals operations and does not cover industrial or fuel minerals.

World Resources Institute Working Papers contain preliminary research, analysis, findings, and recommendations. They are circulated to stimulate timely discussion and critical feedback and to influence ongoing debate on emerging issues. Most working papers are eventually published in another form and their content may be revised.

Marta Miranda is the Principal of Terra Business & Environment Strategies. martaj lmiranda@gmail.com

Amanda Sauer is a Senior Associate at WRI. asauer@wri.org

Suggested citation: Miranda, M. and Sauer, A. 2010. "Mine the Gap: Connecting Water Risks and Disclosure in the Mining Sector." WRI Working Paper. World Resources Institute, Washington, DC.

Funding for this research was provided by APG Group.

KEY FINDINGS

Water risks span the minerals production cycle and occur in diverse operating environments.

• Water quality problems are among the most serious environmental impacts associated with mining. Toxic waste and mine effluents can be mobilized by water, resulting in regulatory, legal, and reputational risks for companies.
• Work stoppages or mine shut downs can occur if water resources become unavailable. Mining—particularly for precious metals, diamonds, copper, and nickel— requires significant volumes of water.

Mining companies have long been conscious of water risks, as evidenced by their ongoing efforts to address them and related corporate reporting. Indeed, recent analysis has shown that the mining sector is a leader in terms of water reporting.1 However, corporate disclosure often does not provide a comprehensive picture of water risk. Current reporting frameworks do not guide companies to disclose the full scope of potential water risks.

Water quality data is not sufficiently reported. Data on water effluents and waste management practices are either not reported or not detailed enough to understand risk. The impact of mining activities on other water users is also rarely reported.

Water consumption data lacks context. All water is local, thus water usage data is only relevant when placed in the context of local water availability. Competing demands from communities, agriculture, and other industrial users must be factored into assessments of local water availability.

Water reporting is not consistent. Most Asian mining companies report little or no water-related information, even though Chinese and Indian companies account for an increasingly significant share of mining equities and may face serious water constraints. Companies that do report water-related metrics use different approaches to calculating and reporting data, making it difficult to compare performance across companies.

The financial community does not currently have adequate information about the water risks facing mining companies. This paper aims to address this problem by explaining how water issues and trends may create potentially costly water-related risk for companies (Section I) and by providing tools, questions, and information to help the financial community better evaluate water risks in the mining sector (Section II).

1.1. Water-related issues in mining

The mining sector is a significant water user and producer of wastewater. In most countries, the mining industry is a relatively small water user compared to agriculture or other industries. For example, mining accounts for about 1 percent of freshwater withdrawals in the United States.3 However, a mining operation may be the largest water user within a particular watershed (especially of groundwater resources) and therefore may impact the availability of water for other purposes. In addition to direct water consumption, the mining industry can have significant impacts on the quality of local water resources. As a result, mining operations can impact local communities and ecosystems by affecting water supplies.

Water-related issues can arise at nearly every stage of the mining process. See Table 1. The most serious water issues in mining occur in conjunction with toxic waste disposal and as a result of water consumption at the extraction and processing phases. (See Appendix I for an overview of the mineral development process and Appendix II for more information on the broader environmental impacts of mining). Water issues can generally be divided into water availability and water quality concerns.

Water Availability

Mining requires significant volumes of water, especially in the extraction and processing phases. For example, on average it takes 716 cubic meters of water to produce a tonne of gold.4 Most water at the mine site is used to grind and separate minerals from host rocks, to wash and transport materials, to control dust, and to cool drilling machinery.5 Water consumption varies greatly depending on a range of factors including climate conditions, ore mineralogy, mine management and practices, and the commodity being mined.

Table 1: Summary of Water-Related Issues at Different Mining Stages

Even within a particular commodity there is great variation in water use. In general, gold, platinum, diamonds, nickel, and copper are associated with the highest water consumption.6 This occurs because precious metals and minerals are often associated with low ore grades, meaning that low concentrations of ore embodied in waste rock require greater water and energy usage to separate the ore from the rock. Unsurprisingly, arid and semi-arid regions pose greatest water availability challenges for mining companies.

Desalination provides one potential alternative to freshwater withdrawals and is used in certain regions of the world, notably in northern Chile. However, water desalination plants are expensive to construct and operate. In Chile, investment in desalination plants is projected to cost between $100 million for small mines to $3.5 billion for large copper projects.7 Desalination also has significant energy requirements, requiring 3 - 10 kWh per cubic meter of water produced and costing $1.8 - $2 per cubic meter of desalinated water in Chile.8,9 Furthermore, reductions in freshwater use as a result of desalination can increase greenhouse gas emissions if fossil fuel derived power is used. Therefore improvements in freshwater consumption may come at the expense of energy and climate change concerns.

Water Quality

Water quality concerns are among the most severe environmental impacts associated with mining. Toxic waste and mine effluents can be mobilized by water, resulting in a substantial decline in local and sometimes regional water quality. One of the most serious environmental impacts from mining is acid drainage, which can occur when sulfide bearing rock is exposed to water or air, leaching heavy metals and polluting nearby water bodies. Excessively humid environments exacerbate the challenges for managing water quality.

Acid drainage, spills, and other water quality concerns can have significant impacts on ecosystems and local communities. Contaminated water caused by mine effluents can pose serious risks to human health and economic welfare. Toxic materials from hardrock mines that get into surface and ground water and soil can lead to declines in fish and crop yields. Furthermore, the metals in contaminated water can harm humans who consume affected drinking water, animals, and plants. Direct impacts on human health include serious conditions such as respiratory disorders, genetic mutations, birth defects, tumors, and cancers.

Contaminated water can originate from:

Waste rock: rock that is deemed unsuitable for processing is usually piled up near the open pit and if left uncovered, may be a source of acid drainage.

• Ore stockpiles: piles of material containing lower quantities of the target metal are usually stockpiled for future processing and may be a source of acid drainage if left uncovered.
• Pit walls: an increased surface area of potentially sulfide-bearing rock can be exposed through construction of an open pit, creating additional opportunities for acid drainage.

Tailings impoundments: tailings from the mining processing phase are typically pumped as a thick sludge to a large impoundment. Depending upon the moisture content of the tailings and waste management practices, toxic materials can leach into groundwater. In addition, major storm events can mobilize tailings, rupturing the dam and causing toxic releases into nearby streams. Tailings pipes: in some cases, mines may release contaminated water in a controlled or uncontrolled manner into nearby streams. Some sites in New Guinea are designed to release tailings directly into rivers (i.e., riverine tailings disposal). Raw sewage: accidental or deliberate releases of untreated sewage from mine camps may contaminate surface waters.

Abandoned pits and mine workings: acid drainage may continue long after mine closure, especially if the site was abandoned, or waste piles and pits were not properly sealed.

While regulators and mine managers recognize the importance of minimizing water use and containing mine wastes, water contamination remains one of the most common environmental impacts associated with mining.11 Furthermore, water quality problems are usually not identified or predicted in the environmental impact assessment (EIA) required prior to mine development: A two year research study on the accuracy of water quality predictions at hardrock mines in the U.S. found that although none of the EIAs prepared for these mines predicted water quality problems, 76 percent of the sites polluted ground or surface waters in excess of water quality standards. Furthermore, nearly all (93 percent) of the sites with acid drainage problems had not anticipated this risk in their EIAs.

1.2. WATER-RELATED TRENDS IN MINING

Water availability and quality issues are likely to increase due to the following trends:

Rising global demand for mineral and metal commodities will increase the industry's impact on water resources. The scale of modern mining is expanding across the globe. Mining projects are typically designed to achieve large ore throughput and therefore generate substantial quantities of waste that need to be managed in order to prevent contamination of local water sources.13 The sheer increase in the number and the size of future mining waste sites will require significant public and private sector oversight that extends well beyond the operable life of the mine.

Mining activities are increasingly taking place in countries facing growing water challenges. North America, Australia, Chile, and South Africa have traditionally dominated global mineral production, with operations often located in water scarce regions. While Australia remains a mining powerhouse, in recent years, the production of major mineral commodities has been shifting toward developing countries (see Appendix III). Asian countries—especially China and India—are ranked among the top three largest producers of most non-fuel minerals.14 Many regions of China and India are considered to be water stressed and face demographic and economic trends that will intensify competition for water resources. While water-related conflicts can occur in any water scarce region, such events may be exacerbated by limited water infrastructure and less stringent water quality regulations that are more likely to affect operations in emerging economies.

Globally declining ore grades for many major commodities are likely to increase water demands for most future mines.15 The ore grades of most mineral commodities are in decline, particularly for precious metals. 16 Low ore grades do not contain a high proportion of valuable metal and minerals to waste rock. This means that each unit of production results in greater quantities of waste and higher water and energy consumption. While technological and process advancements may mitigate these increases to some extent as established companies employ water recycling technologies, it is likely that the extractive industries will depend on greater water use in the years to come.

Climate change impacts are expected to increase water-related issues in many metal and mineral rich regions. Arid and semi-arid production regions will be most affected by water shortages, although flooding will likely create problems in water-rich areas. Less rainfall and declining water renewals from glaciers or mountain snowpack are expected to impact India and Chile;18,19 China and South Africa are predicted to receive decreased precipitation;20,21 Australia and the Western United States are projected to experience more serious and frequent droughts;22 and Indonesia and Brazil are likely to remain water abundant but may face more frequent and severe flooding.23 While this paper provides general observations about global climate change impacts, an understanding of more precise consequences on water resources requires data at the local level. The actual impacts of climate change on water quantity and quality for mining operations will vary greatly within a country or even a watershed.

Mining companies based in emerging Asian economies are increasingly significant yet their water-related disclosure may be limited or lacking. Although the largest mining companies are still based in industrialized countries, corporations headquartered in emerging economies have come to prominence in recent years. One third of the world's top 100 mining equities ranked by value are headquartered in China, India, and Indonesia.24 Water disclosure from major companies in emerging economies varies widely, however most Asian mining companies report little or no water-related information. See Section 2.2 and Appendix V for further information on corporate water disclosure in the mining industry.

1.3. WATER-RELATED RISKS IN MINING

Water availability and water quality issues have the potential to financially impact company performance. In general, water-related risks can be broadly classified into the following categories:

• Physical Risks
• Regulatory and Legal Risks
• Reputational Risks

Physical risks are usually tied to water availability issues, while regulatory, legal, and reputational risks can stem from either water availability or water quality concerns.

Physical Risks

Given the high water demands of mining, companies may find that a lack of available water creates challenges in maintaining production. Demand for water in arid and semi-arid regions could result in work stoppages or mine shut downs if water resources become unavailable, resulting in revenue losses from lost production, high prices for emergency water supplies, and potential loss in market share due to unreliability of product supply.25 Chile's copper industry, for example, is particularly affected by water scarcity concerns. A copper industry report released in 2009 projected that water consumption by the mining industry would increase by 45 percent by 2020.26 Water demand in the country—of which mining is the largest industrial component —is six times greater than water renewals.27 In Chile's arid north, mining threatens to deplete groundwater resources, which could ultimately result in the collapse of copper production— one of Chile's chief exports.

Water shortages can lead to power outages, especially in operations dependent on hydroelectric power to maintain operations. Most thermal power is also dependent on steady In a recent example of an accidental spill, Zijin Mining Group was forced to shut down its Zijinshan copper smelter in Shanghang after 2.4 million gallons of acidic copper was spilled into the Ting River on July 3, 2010. The toxic pollution killed 2,000 metric tons of fish, enough to feed 72,000 residents for one year.33 The company is currently undergoing extensive investigation by the government and it is unknown when the smelter will be permitted to reopen. The financial impacts of the event are likely to be significant as output at the smelter accounts for 15 percent of Zijin's total production.

Companies are responsible for complying with regulations to prevent and treat water pollution even after the mine is no longer operational. It is expensive to properly anticipate and manage closure liabilities. Newmont Mining has estimated its total closure liability to be in the hundreds of millions of dollars, of which two thirds is attributed to waste management. Much of this has been allocated to preventing and treating acid drainage into local water resources at its facilities.35 However the costlier problem is when such liabilities are not properly managed. In some cases in the United States, clean-up costs from acid drainage have already caused smaller and medium sized companies to declare bankruptcy, leaving taxpayers to pay for clean-up costs. For example, Galactic Resources in Colorado had to declare bankruptcy and abandon its Summitville mine in 1992 because it could not afford to clean up a massive spill of toxic mine waste. The waste was dumped into the headwaters of the Alamosa River, causing a massive fish kill and pollution of streams used to irrigate nearby ranches and farms.

Tightened regulations resulting from mining-related pollution incidents have had a wide-reaching effect on the mining industry. Water pollution incidents can spur new restrictions and regulations for the mining industry. As a result, responsible mining companies have an interest in encouraging good practices to prevent tightened regulatory reactions that affect all companies in the sector.

In one example, the Baia Mare incident in Romania—when a tailing spill into the Lupes, Somes, and Tisza Rivers contaminated drinking water for 2.5 million people and resulted in massive fish kill—prompted the European Union to pass and enforce stringent mine safety and waste disposal requirements.37 In December 2009, the Hungarian Parliament passed a law banning the use of cyanide in mining. Similar referenda are being considered in the EU parliament, which passed a resolution in May 2010 proposing a complete ban on the use of cyanide mining technologies in the EU before the end of 2011.38 If passed, these measures could put an end to much of the industrial-scale gold mining in Europe, which accounts for approximately 1 percent of global production.

Such events would not be the first time water pollution from mining resulted in more stringent regulations. In 1998, the citizens of Montana passed a ballot initiative calling for a ban on the use of cyanide in heap leach mining after residents suffered repeated losses from contaminated ground and surface waters. Initiative 137 (I-137) passed by a 53 percent majority and calls for phasing out open pit, cyanide leach mining in Montana. The law has survived numerous legal challenges by the mining industry, including an appeal to the US Supreme Court in 2008.

Beyond regulatory compliance costs, mining companies responsible for water contamination face legal risks from affected communities. Mining companies have been found legally and financially responsible for providing restitution to local communities affected by mine-related pollution. For example in 1996, BHP Billiton reached an out-of-court settlement with villagers living along the Fly River in Papua New Guinea. According to the agreement, the company paid nearly $50 million to compensate for the contamination of local water sources with tailings and mine waste from the Ok Tedi mine.42 In light of its experience, the company vowed never to develop another mine requiring riverine tailings disposal and to date has honored this commitment. The Ok Tedi mine continues to operate under management by a government-run company (Ok Tedi Mining Limited) and not BHP.

In another high profile case, 151 kilograms of elemental mercury was spilled by a transport contractor of Newmont's Yanacocha mine near the town of Choropampa and two neighboring villages in Peru. Approximately 900 people claimed compensation from Newmont.43 The Peruvian government fined Newmont Mining $500,000. The company says it has paid $18 million more. Furthermore, a class action lawsuit was filed against Newmont on behalf of 1,000 residents near the mine and the case was settled in April 2009.

Reputational Risks

Major mining-related impacts on water resources have damaged companies' reputations, disrupting operations and losing access to future reserves. Most reputational damage for mining companies stems from water quality problems, however in arid and semi-arid regions, water withdrawals can also exacerbate competition for scarce water resources and create community opposition. A history of pollution incidents at Newmont's Yanacocha mine created local unrest and ultimately resulted in work stoppages. As a result of firm opposition from local communities and concerns over future water pollution, Newmont was forced to cancel its planned exploration of a nearby mountain (cerro Quilish), which caused the company to re-classify 3.7 million ounces of gold from probable and proven reserves to mineralized non-reserves.

A poor reputation can lead to loss of investment attractiveness and value destruction.47 A company's reputation can play a key role in gaining access to new reserves in sensitive areas and the ability to obtain permits and approvals on a timely basis. As such, it impacts a company's ability to generate financial returns and growth. In addition, high profile incidents can generate negative media attention and international scrutiny that may turn away potential partners and lenders with impacts on the company's ability to develop new projects and obtain financing. Water management is not the only consideration in how a community perceives a mining operation but it can play an important role. Large international financial institutions are increasingly assessing whether their potential clients have good reputations in the communities where they operate due to the scrutiny the institutions may themselves face from shareholders and activists concerned about the social and environmental impacts of mining.

Reputational risks may extend beyond a single company. A legacy of pollution from mining-related activities can cause local communities to become highly suspicious, if not resistant, to future mines in their local areas. In 2001 the residents of Tambogrande, Peru voted overwhelmingly against a proposed gold, zinc, and copper mine. Cognizant of mining companies' records in Peru, residents worried that a new mine would seriously damage or deplete the water resources needed for agriculture.48 Similarly, the Summitville Mine in Colorado—an abandoned mine site that resulted in a bill of $150 million in clean up and water treatment costs for U.S. taxpayers—has become the poster child for environmentalists opposing future mine projects.