Canada Emerging as a Preferred Jurisdiction for Green Investments by the Global Mining Industry
Written by Jay Turner at DBRS Morningstar
In response to the economic disruption triggered by the global pandemic, many governments have incorporated a pivot to the green economy in their economic stimulus and tax relief response plans. As part of the economic recovery, DBRS Morningstar notes that global mining companies have increasingly embraced Canada as a preferred jurisdiction for investing in new technologies necessary to achieve net-zero greenhouse gas (GHG) emission targets.
The main focus for most mining companies has been investment in existing operations where the opportunities for incremental reductions in GHG emissions can occur in parallel with upgrading or replacing older equipment and technologies. For investment in new projects, incorporating new net-zero technologies has become part of the social licence for obtaining community consent and regulatory approvals.
As well, the proposed initial Canadian taxonomy for sustainable investing developed by the Sustainable Finance Action Council should provide investors with a strong new tool for evaluating the specific merits of Canadian green investment opportunities compared with alternative jurisdictions. DBRS Morningstar believes that the publishing and implementation of the proposed taxonomy augments the attractiveness of Canada as a centre of research excellence and positions the country to benefit from pools of capital that might otherwise be unavailable to fund these efforts.
Implications for DBRS Morningstar rated mining issuers
That Canada is a favoured destination for the development of clean metals products and the development of critical metals is a positive development. We believe that there are unlikely near-term positive implications for mining issuers from a credit perspective. However, longer term, there could be implications as leaders in the mining industry work to decarbonize their operations and participate in the energy transition pathway.
Why not Canada?
DBRS Morningstar believes that Canada has become more attractive to global mining players due to:
- The abundance of hydroelectric power generation. In 2019, the Canada Energy Regulator estimated that hydroelectric power generation accounted for approximately 60 per cent of Canadian power generation, including Québec, where hydro power accounted for approximately 94 per cent with less than 1 per cent of power generation attributable to fossil fuels. Most of the hydro power generated in Canada is available at lands suitable for industrial development.
- The availability of advanced research and development (R&D) centres in mining and processing industries. These institutions include in-house R&D centres owned by the mining and processing companies. Mining and processing companies also have entered into alliances with government and academic institutions in order to access additional resources, especially developing new technologies.
- An extensive resource base of most of the 31 minerals identified by the Canadian government as critical for driving economic growth in the green economy, including lithium, graphite, nickel, cobalt, copper, and rare earth elements for their potential to spur growth in Canadian domestic manufacturing.
- A highly skilled and experienced labour force for the extraction and processing of critical minerals.
In addition, the Canadian government’s 2023 Budget contained a range of new tax incentives for sustainable investing in Canada. These incentives include refundable tax credits for clean technology, electricity, manufacturing, and hydrogen investments as well as the establishment of a “Strategic Innovation Fund.”
The new Canadian taxonomy for sustainable investing
A taxonomy is a tool for analyzing all of the information related to an activity and determining the appropriate label for that activity. As part of the new proposed Canadian taxonomy, the associated capital expenditure (capex) activities are to be labelled as (1) green activities for new technologies to advance their path towards net-zero emissions, (2) transition activities for reducing GHG emissions as part of establishing a pathway to net-zero emissions, and (3) activities that extend the status quo for existing operations or result in locking in future carbon emissions.
DBRS Morningstar notes that the proposed Canadian taxonomy will augment existing initiatives such as sustainability-linked bonds and ESG overlays on credit arrangements. Additionally, while taxonomies exist in other jurisdictions, most notably in the EU, the proposed Canadian taxonomy is tailored to provide a Canadian filter for evaluating investments in Canada, particularly with respect to Indigenous involvement.
Global mining industry’s response to the green pivot
The largest global mining companies include BHP Group Limited (BHP; rated “A” with a Stable trend by DBRS Morningstar), Rio Tinto Plc & Rio Tinto Ltd. (Rio; rated “A” with a Stable trend by DBRS Morningstar), and Vale S.A. (Vale; rated BBB (low) with a Stable trend by DBRS Morningstar) and have existing operations in Canada. DBRS Morningstar notes that these Canadian operations often experience harsh weather and challenging operating conditions, making them attractive industrial-scale laboratories for developing and commercializing new GHG-reduction technologies.
BHP Group Limited
BHP is the world’s largest mining company by market capitalization, and its presence in Canada is currently focused on developing its Jansen potash mine in Saskatchewan, which is expected to have the smallest carbon footprint of any potash operation globally.
In August 2021, BHP approved a $7.5 billion budget for the development of the first stage of the Jansen mine, which is expected to be operational by 2026. Jansen is initially expected to produce between 4.3 to 4.5 million tonnes of potash per year with an expected operating life of approximately 100 years.
In January 2023, the Government of Canada announced an investment of $100 million to support development of Jansen as a global leader in low-emission potash production. The Jansen budget includes the design, engineering, and construction of an underground potash mine and surface infrastructure, including a processing facility, a product storage building, a continuous automated rail loading system, and the port infrastructure necessary to ship the Jansen product through Westshore Terminals in Delta, B.C. As well, BHP plans to incorporate battery electric vehicles as part of the underground operations to minimize its workforce’s exposure to diesel exhaust.
Rio Tinto Plc and Rio Tinto Ltd.
Rio is the second largest, publicly traded mining company globally and currently has the largest operational footprint in Canada, primarily in Québec through its acquisition of Alcan Inc. in 2007. As such, the Company is in a unique position to pursue zero-emissions technologies at its aluminum and titanium operations. These operations are located in Québec and have access to hydroelectric power that can eventually be used to produce green hydrogen as both a fuel and reductant for producing green metals.
Rio’s Canadian titanium operations are located at the Rio Iron and Titanium Quebec Operations (RTFT) in Sorel-Tracy, Québec. Rio has entered into a partnership with the Canadian government to spend $737 million over the next eight years to decarbonize the Sorel-Tracy operations. A demonstration plant is currently using Rio’s proprietary BlueSmelting technology to process ilmenite, a titanium-bearing ore, to produce titanium dioxide feedstock, steel, and metal powders while reducing RTFT’s overall GHG emissions by up to 70 per cent.
Rio has been working with Alcoa Inc., Apple Inc., and the Canadian and Québec governments since 2018 on the ELYSISTM project to further develop its proprietary technology for eliminating GHG emissions during aluminum smelting, replacing them with oxygen. This technology uses an inert anode to replace traditional carbon anodes as the main reductant. In 2021, ELYSISTM successfully produced green aluminum at the Industrial Research and Development Centre in Saguenay, Québec. Construction of the first commercial-scale prototype cells using ELYSISTM has begun at Rio’s Alma smelter in Saguenay–Lac Saint-Jean, Québec.
DBRS Morningstar notes that Rio’s aluminum operations in Québec use hydroelectric power to produce relatively low-carbon aluminum compared with other jurisdictions such as the U.S. and South Africa. On April 13, 2023, Rio announced that construction had begun to increase capacity to cast low-carbon aluminum billets by 202,000 metric tonnes at its Alma smelter by spending approximately $240 million. Rio indicated that existing operations would be expanded to include new state-of-the-art equipment, such as furnaces, a casting pit, coolers, handling, inspection, sawing, and packaging systems, with commissioning expected in the first half of 2025.
Vale S.A.
Vale is the fourth largest, publicly traded mining company in the world and the world’s second-largest nickel producer, primarily due to its acquisition of Inco Limited in 2006. Vale’s nickel operations are currently located in Canada as well as Brazil and Indonesia. The Canadian operations produce low-carbon, high-purity nickel (known as Class 1 nickel), which has been designated by the Canadian government as a critical mineral for the green economy.
In order to capitalize on its Class 1 nickel production, Vale recently completed a prefeasibility study for the construction of a nickel sulfate plant at Bécancour, Québec. Nickel sulfate is used in the production of precathode active materials for nickel-based lithium-ion batteries. DBRS Morningstar notes that Bécancour has well-developed industrial park infrastructure that offers deep water access to the Saint Lawrence Seaway with rail, road, and air access and a reliable green energy supply through access to three hydroelectric networks.
In order to de-risk the proposed project, in November 2022, Vale announced that its subsidiary, Vale Canada Limited, had signed a term sheet with General Motors Company (GM; rated BBB (high) with a Stable trend by DBRS Morningstar) for the long-term supply of battery-grade nickel sulfate. The agreement calls for Vale to supply battery-grade nickel sulfate containing the equivalent of 25,000 tonnes of Class 1 nickel with deliveries expected to start in 2026.