viable, high yield projects remains intense. ... intense periods of 'water stress' by 2040 on account of rising temperat
RISK FOCUS MINING BULLETIN DECEMBER 2016 | ISSUE 5: MANAGING CHANGING WEATHER PATTERNS
Managing changing weather patterns Mining companies have for decades operated in some of the world’s most challenging locations as fierce competition to discover new, quality reserves continues to drive the industry. As miners have ventured further into emerging and frontier markets, risks around natural catastrophes and local weather conditions have had to be managed. Changing and more extreme weather patterns, largely attributed to climate change, means that these risks are evolving. This means in some cases that the costs of dealing with weather patterns are increasing, and many miners are finding that a scientific approach to managing these risks is becoming an essential part of business planning.
The mining industry has long been
relating to natural catastrophes and
cannot be entirely mitigated
renowned for confronting the operational
changing meteorological conditions.
and until recently, these risks were
challenges of working in remote, hostile,
Over time, miners have become
largely uninsurable.
under-developed, or politically unstable
highly adept at managing natural
regions head-on. While risk appetite
catastrophe risks, such as earthquake,
varies immensely between companies,
and project feasibility studies will
there is no question that some of the
examine the likelihood and risks of such
environments in which miners operate
natural catastrophes.
are extreme. However, that is simply the strategy required for mining companies to remain competitive as the global race for viable, high yield projects remains intense.
This means that while miners have designed projects, supporting infrastructure, and supply chains with certain weather risks in mind, ultimately the costs associated with the
Yet changing meteorological risks
impact of meteorological conditions
present a new challenge. Despite the
sit on the balance sheet. The need to
fact that techniques for modelling are
assign contingency funds to manage
constantly evolving, which means
increased operational costs on account
Part of this need to explore and exploit
that miners can make more informed
of these risks, while always a challenge,
wherever in the world the most
decisions around the impact of local
has become even more onerous in
promising deposits are located means
weather patterns on their project
recent years as cost cutting and cost
that miners encounter a range of risks
and supply chains, ultimately the risks
management remains a priority.
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MINING BULLETIN | Risk Focus | December 2016
THE CHANGING RISK LANDSCAPE
Impact on rainfall El Niño
With mining projects and their supply chains susceptible to major catastrophes or extreme meteorological conditions (or both), it is unsurprising that climate change is beginning to be seen by miners as an increasingly important risk to quantify and manage, particularly as the world’s weather pattern is about to move from El Niño, into the next La Niña cycle. La Niña
The likelihood of more extreme weather events, and freak weather incidents for certain parts of the world as this transition takes place, is about to increase. The likelihood of more extreme weather events, and freak weather incidents for certain parts of the world as this transition takes place, is about to increase.
Dry
Wet
p Source: International Research Institute for Climate and Society
More extreme weather patterns mean that the risk profile of a mining project,
El Niño and La Niña are opposite phases of what is known as the El Niño-
or portfolio, may have changed since
Southern Oscillation (ENSO) cycle. La Niña is sometimes referred to as the
the time of construction. As a result,
cold phase of ENSO, while El Niño is the warm phase. El Niño and La Niña
the variety of risks that could impact
episodes typically last nine to twelve months, but some prolonged events may
production and overburden removal
last several years. El Niño and La Niña events occur on average every two
planning have become more varied;
to seven years and since the early 2000s, the global climate has been more
potentially resulting in the mining
conducive for La Niña events. In the 1980s and 1990s, ocean and atmospheric
company having to manage costs
conditions were more conducive for strong El Niño events.
which were unforeseen when feasibility reports were conducted. Add to this the pressures of operating in an environment where even a few days’ break in production can be extremely costly on account of rapidly changing commodity price movements, mining companies have a significant challenge ahead in terms of identifying meteorological risks, assigning a cost to managing those risks, then working to refine a risk management strategy to minimise production stoppages, or to stabilise supply chains.
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WATER, WATER EVERYWHERE? Water is essential for the majority of mining projects, yet there is a fine line between too much and too little water; the extremes drought and flood - can cause significant financial loss both at site and across the supply chain as operations are shut down to conserve water, or product shipments are delayed. According to a report published by the World Resources Institute, there are a number of countries that will begin to experience intense periods of ‘water stress’ by 2040 on account of rising temperatures and shifting rain patterns, global population growth and more water intensive industrial techniques. The countries that will face the biggest water shortages by 2040
BASELINE WATER STRESS LOW (0-1)
VERY HIGH (4-5)
p Source: © OpenStreetMap contributors © Carto
Reduced access to water or drought
contentious, mining companies will
Finally, water shortages can also impact
conditions will have an impact on
not be directly competing with local
the process of transporting mined
how miners manage their operations,
communities for potable water supplies.
commodity to market. In those countries
particularly adjustments of water management plans. Average annual rainfall is no longer a reliable measure, as cyclical patterns of rainfall means planning must now use longer timeframes. Historical mine designs for dams, culverts, spillways and drains, may no longer be suitable. Tailings may evaporate far quicker during periods of drought. Seepage may also need to be better managed in order to retain water for drier years. Miners still relying on ‘clean’ water will need to switch to grey water, or purified sewage effluent water, for processing. Despite the costs associated, one advantage to more robust water management plans is that as access to water becomes increasingly
Water shortages also have severe implications for supply chains. In many emerging markets, hydro power has become an important part of the energy
where miners have to rely on waterways to get to major urban centres or ports for onward shipment, water shortages can hinder or prevent transportation altogether.
mix as countries, many of them in
There are then costs associated with
emerging markets such as Democratic
delays in shipments, or additional costs
Republic of Congo and Zambia, seek
with using an alternative logistics route.
to upgrade their power infrastructure
While such risks tend to be more typical
to increase capacity Yet more frequent
in emerging markets, where mines
periods of drought are the Achilles Heel
operate in remote areas lacking road
of these projects. Drought conditions
and rail connectivity, the issue can
plus competing demands from a growing
occur in developed economies. In 2012,
consumer and industrial demand means
drought in the southern US states saw
power blackouts in some countries have
the Mississippi river fall to historically
become more common – and as every
low levels, forcing shipping freezes.
mining company knows, power blackouts
Commodities, including coal, could not
mean lost production time and revenues.
be moved.
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MINING BULLETIN | Risk Focus | December 2016
On the other end of the scale, flooding
rises, snow melt risks for those miners
coal faces, such as the Hazelwood coal
can be equally costly to manage.
operating in remote, mountainous zones,
mine fire in 2006 and 2014. Similarly,
The risks revolve around damage to
will be ongoing operational challenge
forest fires in Alberta, Canada earlier
infrastructure and facilities from water
to manage.
this year saw oil production halted, and
or subsequent mudslides, flooding of
the blaze also saw one mineral sands
pits or shafts, inability to access site and
mining project suspended and another
produce, delaying overburden removal,
While heavy rainfall is the
curtail production. There are also risks
ruptures of tailings dams, and again,
predominant cause of such
to employees around operating in high
and delays in transporting product to
disruption, cyclone (or tropical
fires. Heat stress in the mining industry
market as water routes, ports, and
depression) and snow melt can
potential disruptions to power supplies,
other transport networks are damaged, inaccessible or shut down.
also create flood-like conditions.
has been a formally recognised issue of concern for many decades; it reduces productivity, inhibits decision-making, and increases risks of accidents, and
While heavy rainfall is the predominant cause of such disruption, cyclone
temperatures, even in the absence of
heat related strokes.
(or tropical depression) and snow melt
TOO HOT, TOO COLD
can also create flood-like conditions.
Temperature can also have a detrimental
considerable financial loss for mining
Only three years after the Queensland
impact on mining operations, and
companies. For miners operating in
floods, 2011’s cyclone Yasi and ensuing
changing global temperatures will
the Arctic Circle, such as the diamond
flood shut down 85% of all coal mines in
mean more extremes of cold and
mines in Canada’s Northwest Territories,
Queensland, costing AUD2.5bn,
heat. Hotter and drier conditions can
the seasonal ice road network is critical
as ten miners had to declare force
mean heightened risk of bush or forest
for stockpiling materials necessary for
majeure. In Kazakhstan in 2014, rapid
fires, that can spread quickly over
snow melt saw several uranium mining
operations. Warming temperatures
large areas, forcing shut down and
projects suspended as access roads
and subsequent thaw of permafrost
threatening property and employee
were damaged. As climate change
threaten the seasonal availability of ice
safety. In extreme circumstances, bush
intensifies and the global temperature
roads and the structural integrity of other
fires have also been known to ignite
transport infrastructure.
Extremes of cold can also cause
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MANAGING THE RISKS Over time, particularly as technology
Parametric weather products
has advanced, the mining industry has
are flexible; they can take
become adept to managing certain types of natural perils, in order to minimise
various forms either as traditional
risks of property damage and, more
insurance policies, swaps (risks
crucially, costly production stoppages.
for premium), or bonds.
Miners operating in those areas prone
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industry can rarely be offered in a costeffective way by the capital markets offering these niche products. Instead, these parametric weather products may be best viewed as a way of removing any potential limitations in traditional coverage, protecting aggregates and captive retentions, and to manage the cost of risk. While parametric products
to seismic activity, flood, tsunami,
have a reputation for being expensive, their
hurricane, volcano, storm will have
Parametric weather products are
thoroughly assessed the risks and the
strategic use can deliver significant cost
flexible; they can take various forms
potential impact on operations. From an
savings. Expensive parametric products
either as traditional insurance policies,
insurance perspective, risk engineers
tend to be applied across portfolios, or
swaps (risks for premium), or bonds.
may also have been used to establish
single assets with a large footprint (for
Some products can feature a two-way
and quantify a range of loss scenarios,
example, the operations of mining majors
payment with multiple triggers which
with their findings accompanied with a
which incorporate mine infrastructure such
offers mining companies a different
range of risk recommendations that the
as ports and railways). Assets that are
way of thinking about risk transfer other
mining company will need to consider.
more geographically contained, such as
than the traditional premium and claims
A Property Damage and Business
a single project site, are easier to model,
payout model. If a miner is concerned
Interruption insurance (PDBI) policy
and therefore attract a lower rate, as they
with aggregate weather events, then
will act as the safety net for losses
benefit from the laws of probability.
a two way payment structure may be
associated with natural catastrophe
appropriate, while other innovative
levels, yet of course for those losses
structures can utilise secondary
falling below policy deductibles, there is
triggers, such as commodity prices.
still a cost impact on the balance sheet.
The parametric structures can not only
In addition, those that have experienced
transfer weather related risks, but can
windstorm or earthquake only.
a series of natural catastrophe losses are
also limit business interruption, including
likely to experience premium increases at
contingent business interruption risks.
These products can be competitively
renewal – adding to the cost of risk.
These solutions are not necessarily
In addition to parametric products, it is also worth noting that increasingly, certain PDBI insurers are offering multi-year single limit policies that cover
priced and provide price certainty for longer terms than typically available in
While undoubtedly there is still an
designed to replace the need for PDBI
the standard PDBI market, in which
important role for the insurance markets
cover, particularly as the large volumes of capacity required by the mining
month basis.
to play in insuring large scale natural disasters, a niche market has developed in recent years for weather solutions. Costs reserved on the balance sheet for operational delays due to weather can be managed with ‘parametric’ products. These products enable a mining company to specifically name certain perils that impact their business (temperature, rainfall, snowfall, wave height, wind speed etc, depending on the operations) and establish which perils could cause loss or delay. Some mining companies use these products in a strategic way to manage the costs around production stoppages caused by weather events that cause losses that fall below the deductibles of a PDBI policy, or losses not covered by the PDBI policy.
policies are usually placed on a twelve
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MINING BULLETIN | Risk Focus | December 2016
The JLT mining team is a specialist broking division, with an exclusive focus on risks spanning the entire mining project lifecycle. We manage a large and established client base of mining companies, contractors, traders, and financiers, across a range of commodities and regions. Acknowledged as placement leaders, our brokers know how to position complex mining risks to deliver the broadest coverage terms, for the best possible rate. We deliver local service, but with global reach, by leveraging JLT Group’s network of 10,000 specialists across 135 countries. Our in-house claims division has collected over GBP3bn since 2010, while our consultancy team helps clients identify, understand, and mitigate risk more effectively. Our objective is simple: to provide a competitive advantage by enhancing our clients’ resilience and empowering them to take risks.
PARAMETRIC CASE STUDY A mining client had experienced three natural catastrophe losses over the course of a decade, incurring significant property damage losses. The client’s premium for the PDBI cover had increased considerably as a result, and some markets were refusing to renew the risk due to the ongoing natural catastrophe exposures. The client removed their natural catastrophe exposure from their PDBI policy to bring down the premium cost, and then structured a parametric solution to manage their cyclone risk, with the primary trigger being wind speed. The capacity requirements for the insurer in question were not significant and therefore pricing was surprisingly more competitive.
For both traditional PDBI policies and newer parametric weather solutions, understanding risk profile is essential. JLT Group has teams of analysts, modellers, actuaries and engineers that can identify and quantify risk across a range of natural catastrophe and meteorological perils, enabling mining companies to compare and contrast which risk transfer structures would be most appropriate from both a risk management
CONTACTS Amy Gibbs Head of Global Mining, JLT Specialty +44 (0) 20 75558 3958
[email protected] JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW www.jltspecialty.com Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96.
and a cost of risk perspective. JLT Group has the ability to structure these solutions and to also provide access to specialist insurance and capital markets. JLT Specialty in London can provide risk modelling and analytics services, while JLT Capital Markets in the US can design parametric solutions through a variety of insurance, derivative and bonding structures.
Ryan Fitzpatrick COO & CFO, JLT Capital Markets Inc. +1 646 362 4654
[email protected] JLT Capital Markets 600 5th Avenue, 16th Floor New York, NY 10020 www.jltre.com Jardine Lloyd Thompson Capital Markets Inc. is a member of FINRA and SIPC, and is regulated by FINRA. © December 2016 273712
This publication is for the benefit of clients and prospective clients of JLT Specialty Limited and Jardine Lloyd Thompson Capital Markets Inc. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this bulletin, you should first seek specific professional advice. The JLT mining team comprises brokers operating in various JLT insurance and reinsurance broking entities and divisions globally. Certain of the services outlined in this bulletin may need to be provided to clients through one or more of JLT’s regulated businesses.
