Natural Hazards Research Spotlight

Global Drought Clustering Could Mean Big Losses for Mining

Long-term climate records could help mining companies and their investors assess the financial risk of water shortages.

Source: Water Resources Research


By Emily Underwood

Mining and water have always been inextricably entangled. During the California Gold Rush of the 1850s, miners used millions of gallons of water to dislodge gold-bearing gravels with high-powered jets. Modern mining operations still use copious amounts of water to extract and refine mineral resources, such as gold and copper.

This need for water often leads to conflicts with local communities. As global water supplies dwindle because of pollution, overallocation, and longer and more severe droughts caused by climate cycles and change, companies face significant financial risks from water shortages. These risks range from the mandate to build expensive desalination plants to augment supplies to partial or total shutdown of mines.

Now Bonnafous et al. present a novel method for mining companies—and their investors—to take stock of financial risk from drought. First, the team obtained historical records of drought frequency and severity using the Palmer drought severity index from 1950 to 2014. Combining those data with annual production values from mines of 15 companies, they calculated a risk index that reveals the likelihood of a severe drought occurring at each location each year and estimated how such an event would differentially affect mines’ annual production values and the companies’ overall portfolios.

For instance, Barrick Gold Corporation, the largest gold producer in the world, has mines all over the world, including Nevada, Peru, Argentina, Saudi Arabia, Australia, Zambia, and Papua New Guinea. Each year, there is a 5% chance that roughly 35% of the value extracted from those mines will be subjected to a major, once-every-10-years drought event, the researchers found. Making the assumption that every such drought event could dock the corporation’s production by about 10%, Barrick would have a 5% chance of losing nearly $1 billion in production value every year. Following a similar thought process, another behemoth gold producer, Newmont Mining Corporation, runs a 5% risk of losing $0.63 billion per year because of drought.

However, for these globally distributed portfolios, the relative (compared to the overall company’s value) value at risk is smaller than for companies whose mines are concentrated in zones likely to suffer droughts. Understanding this climate clustering could help companies better balance their portfolios, the study suggests.

Further, the new approach isn’t intended to help mining companies alone. The disclosure of companies’ water risk management frameworks is required to enable government regulators—or investors whose portfolios include many enterprises subject to drought risk—to use similar approaches to better assess concentration risk from drought or floods, the team says. (Water Resources Research, https://doi.org/10.1002/2016WR019866, 2017)

—Emily Underwood, Freelance Writer

Citation: Underwood, E. (2017), Global drought clustering could mean big losses for mining, Eos, 98, https://doi.org/10.1029/2017EO070397. Published on 28 March 2017.
© 2017. The authors. CC BY-NC-ND 3.0