Green loans tied to greenhouse gas reductions and ESG targets can increase access to capital, writes Nivaash Singh, Co-head of Mining and Resources at Nedbank CIB.
Mining companies are leading the charge towards renewable energy, and while load-shedding and rising electricity tariffs form part of the backdrop, the drivers for this change are far more fundamental.
The first is the energy-intensive industry’s sizeable carbon footprint: mining accounts for between 4% and 7% of global greenhouse gases (GHGs). This is becoming an existential issue as investors and lenders increase the pressure on mining companies to tackle climate change more proactively. In response, companies are setting ambitious climate targets such as net-zero operational commitments by 2050, and one of the first steps they take is to make the shift towards renewable energy.
The second driver is increasing scrutiny of mining companies’ environmental and social impacts beyond greenhouse gas emissions. These include land use, impacts on biodiversity, water use and waste production and, on the social side, factors such as the health and safety of employees and surrounding communities, gender diversity, and human rights.
Finally, the sustainability focus is being driven by the crucial role that mining plays in the transition to a low-carbon economy. It is the source of lithium, cobalt, copper, aluminium, steel and rare earth elements that are integral to clean-energy technology such as lithium-ion batteries, electric vehicles, wind turbines and solar photovoltaic (PV) panels. As the energy transition accelerates, demand for metals and minerals, particularly those described as ‘green’, is expected to rise substantially.
Sustainable financing
All three drivers affect mining companies from a financing perspective. They speak to the material environmental, social and governance (ESG) risks that are impacting the industry and can affect companies’ access to capital.
The way companies address these drivers is key and can increase their access to capital, not only by appealing to traditional investors seeking to meet their own ESG thresholds but also by pulling in impact investors and development finance institutions with more specific ESG mandates.
This brings us to the concept of sustainable financing, a lever that mining companies can use to adopt sustainable business practices to preserve and grow their operations, as well as mitigate the environmental and social risks of these operations and promote good governance.
‘Green loans’ are often structured to incentivise and support environmentally responsible practices and may come with more favourable terms and conditions, such as lower interest rates, longer repayment periods and reduced fees, when compared with traditional financing options. These incentives are designed to encourage mining companies to invest in environmentally beneficial projects and facilitate the transition to more sustainable practices.
There are three key types of sustainable finance products that are available to mining companies, starting with use-of-proceeds loans, where the funds raised are deployed in eligible green and social projects or initiatives. For example, the proceeds of a green loan can be used to procure and install a wind or solar farm to power a mine’s operations.
The second option is a sustainability-linked financing structure that incentivises achievement of ambitious, predefined performance targets. These are based on material key performance indicators that are measured on milestone dates. Sustainability-linked structures do not have any limitations in terms of the use of proceeds, and the key performance indicators will be driven by the key ESG risk factors of the particular mining operation, aligned with its sustainability strategy.
Finally, there is transition financing, a type of sustainable finance solution created for hard-to-abate industries such as mining. It is an option to help mining companies attract financing where they would otherwise not typically fit into traditional green or sustainability-linked structures. It is used to support projects and initiatives that will deliver a long-term strategic reduction in GHG emissions.
The Tronox transaction
With its proven track record underpinned by deep sector-specific expertise and experience, Nedbank Corporate and Investment Banking (CIB) has established itself as a leading provider of sustainable financing solutions to the mining and metals industry.
A recent transaction illustrating the impact of sustainable financing involves a R4 billion solar PV installation – one of South Africa’s largest solar projects constructed under a corporate power purchase agreement – that recently started supplying electricity to the South African operations of mining company Tronox.
With CIB as the joint lead mandate arranger, two 100-megawatt (MW) solar farms in Lichtenburg, North West, are producing electricity for Tronox operations in KwaZulu-Natal and the Western Cape.
The two solar farms are expected to generate about 580 gigawatt-hours (GWh) of electricity per year, equivalent to the annual consumption of more than 40 000 households. Tronox, a New York Stock Exchange-listed world leader in the mining, production and marketing of inorganic minerals and chemicals, expects the project to reduce its global Scope 1 and Scope 2 carbon emissions by about 13% when compared with its 2019 baseline.
The company’s energy-intensive operations – which include mines in Mtunzini on the KZN coast and Brand-se-Baai on the Namaqualand coast, concentration plants, and smelters in Empangeni and Saldanha Bay – are expected to draw 40% of their electricity from the solar PV project.
The projects’ total investment is close to R4 billion, with debt financing at about R3 billion. CIB committed roughly R827 million to the debt for these two solar PV projects, handling the associated interest rate hedges. CIB’s involvement showcases its leadership in financing renewable energy projects across Africa, reinforcing its position as one of the leading banks in energy finance.
In these deals and many others, mining companies have relied on the experience, mining knowledge and seasoned sustainability credentials of Nedbank CIB.