The Nickel Report

An independent panel of academics, engineers and other experts, in November 2019, released a draft set of international standards for tailings storage facilities (TSF). During mining operations, ore is reduced into sand-sized particles and mixed with water before the valuable minerals are removed and the remaining milled rock slurry—called tailings—flows to the TSF, an engineered impoundment. It is estimated there are over 3,500 TSFs globally.

The driver for these draft international standards is two recent catastrophic failures of TSFs in Brazil. In January, a TSF owned and operated by Vale in the state of Minas Gerais, near Brumadinho, collapsed, sending a tidal wave of mid and other debris downstream that killed over 250 people. Another TSF owned and operated by Samarco failed in Minas Gerais at Mariana in November 2015, killing 19 people and spreading pollutants over 400 miles of surface waters, eventually reaching the Atlantic Ocean.

The panel drafting the TSF standards is backed by the United Nations Environment Programme, the International Council on Mining and Metals (ICMM) and the Principles for Responsible Investment. Each of these entities must approve any final standard. The panel is solicited feedback through the end of 2019, with a target to finalize the standards in early 2020.

The goal is to establish a common set of international standards to prevent another failure of a TSF like those recent catastrophes in Brazil. The draft standards focus on six core areas: improve the knowledge and information on TSFs; increase engagement with affected communities living and working near the TSFs; standardize the design, construction, operation and management of the TSFs that embodies a precautionary approach; elevate the environmental, health and safety decision making associated with TSFs within the company; create emergency response and long-term recovery plans in the event of a TSF failure; and publicly disclose information associated with TSFs. It would be the obligation of each ICMM-member company that owns or operates a TSF to comply with these standards.

The development of the international TSF standards aligns with the trend of industrial sectors and nongovernmental organizations, more generally, developing standards, guidelines and frameworks to address global operations and the management of environmental, health, safety and social risks. The Roundtable on Sustainable Palm Oil, for example, is a global, multi-stakeholder organization made up of plantation companies; processors, traders, manufacturers and retailers of palm oil products; financial institutions and environmental NGOs. Palm oil plantations are located in biologically diverse environments in the tropics, and the Roundtable on Sustainable Palm Oil, for example, has developed a certification process for sustainable palm oil based on environmental and social criteria. The United Nations and the World Bank, with the support of the IPIE-CA, the global association for the upstream and downstream oil and gas industry, launched the Zero Routine Flaring by 2030 Initiative, which commits endorsers to the reduction and eventual elimination of flaring of greenhouse gases, like methane. This initiative is aligned with the Global Gas Flaring Reduction Partnership, a public-private partnership comprised of governments, oil companies and multilateral organizations working to end routine gas flaring.

The draft TSF standard, like many of these international frameworks, has no independent, international enforcement mechanism. The TSF standard would guide the conduct of the operators of the mine and mineral processing facilities who adopt the standards and it would be left to each nation to determine the specific rules for managing TSFs. This would include ICMM member companies, but, notably, many of the mining companies from China, India and other nations are not members of the ICMM. However, notwithstanding these limitations, the TSF standard will be highly relevant to all companies who own or operate TSFs given other trends, as noted below, related to managing legal, commercial and reputational risks.

In the context of financing extractive industry projects, the World Bank Group’s International Finance Corporation and several major international financial institutions developed the Equator Principles. The Equator Principles apply globally, including over 90 financial institutions in over 35 countries, covering the majority of international project finance debt within developed and emerging markets. The Equator Principles provide a framework to assess and manage environmental, health, safety and social risk; a due diligence standard; and monitoring protocol supporting responsible risk assessment and decision making. The Equator Principles oblige member financial institutions to make informed investment decisions and withhold financing on projects or assets not conforming with good international industry practice. Notwithstanding the lack of national laws adopting the TSF standard or the company not being a member of the ICMM, a mining project that does not adopt the TSF standards may be denied financing by the major global financial institutions. Further, given the costs associated with a TSF failure, insurance companies may decline coverage unless the TSF standards are adopted. The TSF standard could also become legally binding on a company through a project-specific contractual obligation, lease, concession or permit.

The TSF standards would also likely be relevant to corporate valuation and investment risk in the context of the trend of environmental, social and governance (ESG) investing, which is the consideration of ESG factors alongside financial factors in the investment decision-making process. This aligns with the draft TSF standard on public disclosure and access to information, e.g., provide public access to information on tailings, facility decisions, risks and impacts, management and mitigation plans, and performance monitoring. In the context of TSFs, a company that decides to not adopt the international TSF standards may be viewed through the lens of ESG investing as carrying additional environmental, health, safety and social risks that may impact the value of the company and third party investment decisions.

Given the liability and financial and reputational costs associated with a failure of TSF, it would be logical for investors, armed with the relevant and comparative information, to question an investment in a company that does not, for example, adopt the TSF standards as part of its environmental, health, safety and social risk management. In the context of the Mariana TSF failure in Brazil, for example, Samarco’s operations were immediately suspended. Samarcao’s joint owners are obligated to pay billions in penalties, clean-up costs, compensation and socio-economic programs, among other financial obligations. The owners face shareholder class action lawsuits in multiple jurisdictions to recover shareholder losses associated with the TSF failure and subsequent impacts and other ongoing criminal and civil cases in Brazil. Only recently, on October 25, 2019, the State Environmental Council in Minas Gerais issued a new corrective operation license allowing Samarco to resume operations, which the company estimates will occur by the end of 2020 (i.e., approximately 5 years after the TSF failure).

The ability of financial markets and investors to make these decisions will become increasingly easier given the trend of public disclosure and access to information. MSCI, an index provider, for example, in November 2019, released ESG ratings for thousands of companies, with more expected in 2020. MSCI uses a “rules-based methodology” to identify industry “leaders” and “laggards,” rating companies on an “AAA to CCC” scale according to their exposure to ESG risks and how well they manage those risks relative to peers.

The finalization of the TSF standards will be important for the global mining and mineral processing sector. However, the TSF standards are also an important reminder of the trends associated with global environmental, health, safety and social frameworks and their relevance to multinational corporation risk management strategies and the operational and financial implications.