Water - a major disrupter to copper supply

With many operations having difficulty securing sufficient water for processing, it means that droughts, water rights and access have now become major potential disrupters to future copper output.

While the key driver behind the current water shortages are regional droughts, there are also structural changes in the industry that are boosting water consumption and in turn reducing copper production and lifting costs. There are two key factors driving an increase in water consumption in the copper industry; a change in process route (SXEW to flotation) and a decline in ore grades. The industry is responding in different ways including reductions or stoppages in freshwater abstraction, elimination of water incidents, covering glaciers, desalination plants, dry stacked tailings and water replacements to aquifers.

The primary approach to managing this risk is desalination which has been on a steady rise over the past few years, especially in Chile. There are, however, downsides. The infrastructure required, pipelines and plant, significantly increases the capital expenditure and operating cost of a project or operation. This implies a higher copper price may be required to allow existing mines to remain profitable and encourage new project development.

Despite the disadvantages, the availability of water is a long-term concern for most companies. Water remains critical to a mines operation and it is evident that companies need to commit the necessary capital.

Water now a major consideration for production and planning
Copper is now facing one its largest hurdles as major producers write down 2020 guidance in the face of unprecedented droughts. While the copper industry has continually battled with local communities about revenue sharing, rights and land usage, the problem is now being exacerbated. Prolonged droughts in some of the largest copper producing regions have seen miners go head to head with governments and farmers in relation to water usage, draw- down and dust suppression.

These droughts have not been limited to one region; operations in Chile, Australia, Zambia, the US and Mexico have all been affected. In 2019, Australian rainfall was 40% below the average at just 278mm, while Chile is experiencing its worst drought in more than 60 years.

The question is, what do these droughts mean for the outlook for copper production in 2020 and beyond? How can the industry respond in the face of ongoing social and environmental pressure while still balancing operating and capital costs, and preparing for potential long-term policy effects?

Prolonged droughts: Production at risk in 2020 and the short-to-medium term
The world’s largest copper producer, Chile, faces significant risk to output in 2020. CRU has forecast the South American nation to produce 1.6 Mt of electrowon copper and 4.5 Mt of copper in concentrate in 2020. This equates to 42.1% and 25.5% of world supply respectively. With many operations having difficulty securing sufficient water for processing, the drought, water rights and access have become major potential disrupters to future copper output.

One of the most significant disruptions to production could come from El Teniente. In December 2019, Codelco began implementing water rationing at the giant Chilean operation, while still hoping to achieve its expected 2020 output of 450–460 kt. However, Codelco has cited that if the effects of the drought are not reduced, some processes will have to be partially halted from April 2020. This production risk exists despite Codelco committing to three water initiatives at a cost of US$170 M.

Production has already been affected at Anglo American’s Chilean assets. Production at the company’s Los Bronces mine fell 16% year-on-year in Q3 2019 to 80.4 kt, as a result of the severe drought. Anglo was forced to reduce plant throughput by 15% to 10.9 Mt although higher grades prevented further losses. With the drought continuing into Q4, Los Bronces’ production dropped 28% year-on-year to just 71.7 kt as throughput plummeted 44% year-on-year because of water shortages. With the rainy season for Los Bronces usually starting in April, any production losses will be weighted to Q1 2020. These production losses could happen despite the increase in Los Bronces’ water recycling rate. CRU has estimated 2020 output from Los Bronces to be 310 kt, 3% lower than in 2019. However, if the drought lasts longer than expected, production could fall by as much as 15%.

There are several other Chilean mines that could suffer lower production than planned in 2020, including Los Pelambres and Andina. However, not all Chilean mines will be affected. For example, Freeport is not expecting production from its El Abra operation to be affected, as the water comes from well fields near the border of Bolivia. The operation also utilises SXEW technology and therefore uses 50% less water than a conventional concentrator. However, the move to mining sulphides and associated requirement for a concentrator will require a desalination plant.

Water supply issues are nothing new for Chilean copper mining operations. In 2015, a prolonged drought forced water restrictions on Los Bronces, resulting in an 18,000 t reduction in copper output. This equated to US$90–95 M in lost revenue.

In Australia, the drought is severe. CMOC’s 48 kt/y Northparkes believes that without significant rainfall the operation will be forced to reduce production. The operation, located in central NSW, holds high security water permits but may be told by July 2020 to stop drawing water from the bore fields. While partial drought-induced cuts are becoming more likely there is still the potential for full curtailment. The operation is looking into all viable options including 30km of pipelines to connect existing bore infrastructure to four new bores. The water issue will be exacerbated when Northparkes lifts throughput from 6.4 Mt/y to 7.6 Mt/y, which is expected to happen in late 2020.

Life has not been much easier for Northparkes’ nearby neighbour at Cobar, Glencore’s CSA. The operation is now commissioning a multi-million dollar project to wean itself off river water after it was warned that its high security water rights for the Macquarie river system may be voided in May 2020. The 45 kt/y operation has had to turn to alternate water sources including extracting groundwater from a number of holes. Longer term, CSA is considering the use of a water filtration plant and reverse osmosis to allow more extensive use of ground water. Unlike Northparkes, Glencore sees no production risk for the operation and expects it to run at capacity in 2020.

Newcrest’s 100 kt/y Cadia also sits in a drought affected area of NSW. However, the operation is not expecting production to be impacted. The operation has implemented water saving measures and optimised onsite bores to increase net water recycling rates to 85%. While not a copper producer, another nearby mine, Evolution’s Cowal Gold mine, is now under stage three water restrictions, meaning enough is supplied for operations but there is scope for more extensive limitations. To reduce reliance on surface water and maintain 2020 production, Evolution is increasing its bore water uptake including saline water.

The droughts in Zambia are different to those of Australia and Chile. Low rainfall in the country has reduced water levels at the Kariba hydroelectric dam to their lowest levels in two decades, causing major power shortages and prolonged blackouts. First Quantum noted the water shortage in its Q3 2019 report but stated that there had been no load shedding for miners, only for domestic users. While the rains have now started in Zambia, they are later than in previous years meaning the dam is only 10% full. At this time last year, it was 48% full.

With the dam still low, load shedding for non-miners is expected to continue and power prices will be increased. The question is can Zambia justify exporting power while suffering domestic blackouts and will domestic miners face load shedding in the near-term? Operations that could be at risk if Zambia stopped exporting power include ERG’s Metalkol, MMG’s Kinsevere and China Moly’s Tenke Fungurume. Domestically, operations at risk include Glencore’s Mopani and First Quantum’s Kansanshi amongst others.

Structural changes in the copper industry to increase water consumption and costs
While the main cause of water shortages are regional droughts, there are also structural changes in the industry that are boosting water consumption and in turn adversely affecting copper production and costs. There are two key factors leading to an increase in water usage; changes in process route (SXEW to flotation) and a decline in ore grades.

The supply of copper from SXEW operations peaked in 2014/2015 at ~4.1 Mt, representing ~22% of global copper mine supply. Since then, SXEW output has been falling due to declining reserve quality and lower ore grades. This trend is not expected to change, with committed SXEW projects forecast to add just 200,000 t of copper cathode a year over the medium term. Why is this important for water consumption? SXEW operations are being replaced with brownfield concentrate projects such as BHP’s Spence. Concentrate operations on average consume three to four times more water than SXEW operations despite SXEW mines having lower grades than their sulphide counterparts. 

The higher water consumption is directly relatable to the process route. Froth flotation requires significant amounts of water at multiple stages including the crusher, ball mill, flotation circuit and tailings transportation. While water is typically recovered (70–90%), water is lost along the process, mostly through evaporation and tailings retention, whereas water in SXEW operations tends to have a higher circulation rate and does not require the volume needed for flotation. 

There is another side to the flotation and water consumption story; the ongoing decline in copper head grades. The weighted average head grade of copper operations has declined from 0.71% in 2007 to 0.57% in 2019 as lower grade projects have been commissioned and operations encounter reserve degradation.  This trend is expected to continue as large-scale, low-grade operations such as Sierra Gorda increase throughput and processing rates to maintain copper production and new lower grade deposits are developed. The rise in throughput will increase water usage, as consumption is directly related to ore movements and tonnes processed. 

​It is not just the processing plant that requires water on a mine site. Dust suppression, drinking, sanitation and reclamation all require water.  The largest consumer of these is dust suppression. Like water usage in processing plants, this is expected to increase as operations move more material. Further complicating this matter is the ongoing debate in Chile over the protection of glaciers and the best way to protect them from mining and dust effects. 

Producers to decrease reliance on surface water
Industry responses to water issues vary depending on producer, operator and region in which they operate. Solutions being touted by producers include reductions or stoppage in freshwater abstraction, eliminate water incidents, covering glaciers, desalination plants, dry stacked tailings and water replacements to aquifers.

In light of water shortages at its South American operations, major producer, Anglo American, has set itself the task of reducing the abstraction of fresh water by 20% in 2020. Furthermore, the company intends to increase water recycling levels by 75% as well as not have any level 3–5 water incidents. This means having no adverse effects on surrounding surface and ground water from mining activities. At present, Los Bronces is recycling more than 78% of available water. The operation is also trialling covers on tailings dams to reduce evaporation. Anglo American believes it loses 25% of its water at Los Bronces to evaporation. Longer term, Anglo American has forecast a global water shortfall of 40% by 2030. With its three copper operations, Los Bronces, El Soldado and Collahuasi, all located in a scarce water region, Anglo American plans to reduce its freshwater abstraction by 50%. To achieve this, the company is looking at artificial aquifer recharging, tailings drainage from underneath, water transfer schemes, targeted comminution (course particle flotation), dry processing and desalination. The development that would make the biggest difference would be the desalination plant being considered for Collahuasi. The project would deliver 400 l/s of water to the operation via a 180km pipeline.

BHP has set the bar higher. The company intends to cease the use of all continental water at its Chilean copper operations by 2030. The primary driver behind the change has been, and will be, the utilisation of desalination plants. Escondida commissioned its first desalination plant in 2006, a 525 l/s plant at a cost of US$350 M. A second desalination plant for the world’s largest copper mine was commissioned in 2018 for US$3,400 M. In 2020, Escondida will commission its third desalination plant at a cost of US$535 M. It must be noted that the cost of these desalination plants includes 180km in pipelines. Once the third desalination plant has been commissioned, Escondida will have an integrated capacity of 3,800 l/s. Prior to the commissioning of the plants, desalinated water use at Escondida was approximately 40%.

The one downside to BHP’s water strategy is cost. The shift towards desalinated water is expensive. Since 2014, Escondida has seen a US$0.09 /lb increase in water and power costs, which equates to 9% of its US$1.15 /lb cash costs. To help alleviate the upward pressure on costs, BHP has signed new renewable power agreements for Escondida which will come into effect in mid-2020. The new agreements will reduce energy prices for the operation by approximately 20%. The switch is part of a US$500 M Escondida provision for its shift to 100% renewable energy. Spence will also rely on seawater, although this will be provided by a 1,000 l/s third party desalination plant, Caitan, for a minimum term of 20 years. The Caitan plant is a 50/50 joint-venture between Mitsui and Técnicas de Desalinización de Aguas. Olympic Dam on the other hand remains reliant on groundwater. BHP has previously considered a desalination plant at Point Lowly for the Australian operation as part of a larger expansion, but the idea was shelved. If the operation did turn to desalination, power would be an issue as South Australia is already under duress. The operation withdraws approximately 11,700 ML/y.

Much like BHP, Codelco will look to desalination plants to meet its water requirements going forward. Despite maintaining production over the last few years, their reliance on surface water has been declining. The Chilean company has been increasingly turning to groundwater. However, this is not the long-term goal for Codelco. The company plans to spend US$40 bn over the next 10 years to redevelop and extend the life of its existing operations and part of this expenditure will be a US$1 bn desalination plant. Construction of the 840 l/s plant was due to start in Q1 2020, but the construction contract awarded to Marubeni, Transelec and Techint was cancelled in December 2019. The plant, which will supply water to the Radomiro Tomic, Chuquicamata, and Ministro Hales mines via Calama, is still expected to go ahead, but the scope of the plant has been adjusted by Codelco. The tendering process is expected to restart in Q1 2020. Codelco had previously estimated that the desalination plant would reduce consumption costs at the supplied mines by more than 30%.

Teck’s water goals are simple. The Canadian company plans to reduce freshwater consumption at its Chilean operations and reduce water related incidents. The reduction in freshwater consumption in Chile will be handled by the Quebrada Blanca phase two desalination plant.

Glencore has not set specific targets. Instead, the swiss company will manage water issues on an asset by asset basis. This will involve reducing evaporation, switching to low-quality water, improving water recovery from tailings, increasing water reuse and examining the potential of desalination plants.

Antofagasta Minerals is lowering its surface water consumption by increasing the use of sea water. In 2018, 45% of Antofagasta’s water consumption came from seawater, a major increase from only 9% ten years earlier. Antofagasta will reduce its reliance on groundwater and surface water further with the commissioning of its 400 l/s desalination plant in Los Vilos. The US$520 M project is expected to commission in 2021.

Freeport-McMoRan plans to manage water risk via five key areas; efficiency, recycling, replacement, evaporation and desalination. At Cerro Verde, this is being achieved by utilising wastewater from a treatment plant in Arequipa. At its Arizona operations, Freeport is developing water pipelines for access to alternative water sources, as well as storing excess renewable water for future Colorado river replacement or for long-term storage credits. In addition, the expansions of El Abra will see the construction of a desalination plant. Freeport is also examining the feasibility of a joint venture to bring desalinated water to its arid operations in the southern part of the United States.

Lundin has set itself the goal of solely relying on desalinated water by July 2025 at its Candelaria copper operation. The operation already sources more than 83% of its water from its 121 l/s desalination plant. The remainder primarily comes from treated municipal waste water, which is being reduced in accordance with regulatory requirements.

Desalination is the primary method for large-scale water management
To achieve these water goals and manage water risk, there are five main technologies being explored; desalination, relocation pipelines, water treatment, recycling and dry stacking tailings.

The primary approach to managing water risk and requirements is desalination. The use of desalination has been rising steadily over the past few years, especially in Chile, where according to Cochilco, seawater extraction has risen from only 7% of Chile’s total in 2012 to more than 23% in 2018. Many operations and projects feel desalination plants are necessary not only to meet company targets but also to manage social unrest or environmental scrutiny.

There are, however, downsides. The infrastructure required, pipelines and plant, significantly increase the capital expenditure of the project. For example, Teck’s Quebrada Blanca Phase Two project has a capital cost of US$4,700 M. The desalination plant and pipelines make up more than 9% or these costs or in other words, $449 M of the capital costs. This suggests that projects will require a higher incentive prices, while at the same time their IRR will be reduced.

It is not only the capital cost that must be considered. Operating costs for desalination plants are significant. CRU estimates that the utilisation of a desalination plant adds approximately US$0.03–0.06 /lb to payable copper cash costs. This represents an increase of approximately 3% over CRU’s estimation of Chilean 2020 average cash costs. The primary driver behind the additional costs is the energy required for desalination and pumping. Power costs make up approximately 50% of the operating costs which also puts a strain on other environmental targets such as emissions. However, Chile’s copper producing companies have continued signing long-term contracts with energy suppliers to provide 100% renewable energy at competitive prices. For example, Collahuasi and Zaldivar mines will become the first two Chilean companies to use 100% renewable energy to produce copper and replace emissions of around one million tonnes of greenhouse gases per year. Land requirements must also be considered. The corridors or land required for the pipelines is often extensive, meaning a number of communities are impacted, resulting in additional negotiations. 

Dry-stacking tailings can also reduce water consumption
Water lost through tailings is one area the operators and developers continue to assess because of storage losses, seepage and evaporation. One proposed solution is the use of filtered or dry stacked tailings. Dry stacking tailings removes most of the water from the tailings for re-use while also allowing smaller tailings footprints and flexibility in tailings design. However, there are constraints, including grind size, throughput, initial capital and operating costs. The two main limitations are throughput and operating costs. The largest dry stacked tailings operation is Karara Iron Ore which pushes through 36,000 tpd of ore, which equates to approximately 13 Mt/y, well short of the requirements for large scale operations in Chile.

Operating and capital costs is the other big issue for dry stacking tailings. For example, Torex Gold’s El Limon utilises dry stack tailings. The filtering and tailings cost of the operation works out to be approximately US$4 /t of ore processed. This is significantly higher than a comparably sized copper operation which uses a conventional tailings method, such as Lundin’s Neves Corvo whose tailings cost is only US$1.80–1.85 /t processed. While it does have a significantly higher operating expense, it does benefit from a lower sustaining cost. For example, KGHM was considering dry stacking for its Ajax project.

While the limitations are evident, the economic, environmental and social benefits nevertheless persuade miners to pursue dry stacking of tailings. Hudbay’s Rosemont intends to utilise the method, disposing of up to 98 Mt/y into tailings. It has chosen the method for its lower water usage and reduced dust generation. It is however, struggling with permitting. The project was approved in early 2019, only to have its Final Record of Decision overturned in July. Much of the contention surrounding the project centred on water usage. To help alleviate concerns, Hudbay had planned to replace all water used from aquifers. Coupled with its dry stacking of tailings, Rosemont was expected to be one of the lowest consumers of water on a per pound of copper basis.

Relocation pipelines are nothing new in the copper industry, they are simply moving water from areas with excess to areas of need. The only downside to relocation works is the initial capital cost. For example, Los Bronces has planned a 56-kilometre pipeline from the Las Tortolas tailings dam to the operation. The tailings dam has more than 200 million cubic metres of wastewater which could be used for processing. Los Bronces will begin trialling the project in 2020. Capital costs have been estimated at US$30–75 M.

Recirculation, recycling and thickened tailings can be categorised into the same water saving category. Thickened tailings allow the mine to handle tailings more efficiently while reducing the water requirements. It does however, come with a higher operating cost, as highlighted in the KGHM example above. Recycling water can be achieved in a number of ways including tailings water recovery and mine dewatering reuse.

Water treatment plants are also high on miners’ agendas. Part of the driver behind this is acid mine drainage and its effect on water usage. Operations like Glencore’s CSA believe the utilisation of water filtration or treatment plants can drastically reduce a mine’s reliance on fresh water. Filtration plants can now raise the quality of the water to a level where it can be used in almost all areas of the mine.

Long-term solutions could involve greater collaboration
The availability of water is a long-term concern for most companies. Water remains critical to a mines operation and it is evident that companies are willing to commit the capital. Desalination and other water measures are not only becoming a necessity for sustaining operations, they are now becoming important in order to meet social and environmental expectations. Going forward, social unrest, wage negotiation and grade/recovery issues are still going to be greater disrupters to copper production. For example, social unrest in Chile reduced Antofagasta’s fourth quarter production by 5.8%. Drought and water issues were not quoted by the company to cause any effect. Instead, Antofagasta continues to optimise water usage.

Water plays a large consideration in investment decisions due the capital required for desalination plants. The additional capital for these facilities has the potential to push projects from being economic to being uneconomic. Additional water costs also have the potential to lower reserve estimates due to higher operating costs. This means in the long term the industry requires a higher copper price not only to keep operating mines profitable but also to incentivise new ones.

The larger operations of the future have the potential to build the infrastructure to prolong the life of their operations. But what about the smaller ones? They may have to look to governments to build infrastructure and to third parties to supply water, similarly to the aforementioned Spence. By signing a third party, BHP reduced the upfront capital cost for the operation but will be beholden to another company for water.

Third party water supply is rising. In 2018, the Chilean government approved TRENDS Industrial's 2,630 l/s ENAPAC project plant. If built, the project would be one of Chile’s largest and would supply water to numerous operations in the Atacama. This may be the future for smaller operations, which are forced to rely on third parties such as the rail industry. As discussed previously, the reliance on third parties increases operating costs.

Alternatively, operations may look to share infrastructure to reduce capital costs. Teck and Goldcorp have proposed this approach with their Project Corridor, which is joint venture looking to join two standalone projects, El Morro and Relincho. In 2011 and 2013, capital development costs for the two projects had been estimated at US$3.9 bn and US$4.5 bn respectively. A new estimate, joining the two projects, has reduced the capital estimate to just US$3.5 bn by utilising a single port, desalination plant, concentrator and tailings facility.

Teck and Goldcorp are not the only ones considering joint ventures or co-operation. By developing significant infrastructure in collaboration, including desalination plants and ports, unnecessary duplication of equipment and high costs are avoided. It also lowers the reliance on third party operators, which some mining companies may not be willing to get involved with, especially if contracts follow the same route as the coal take-or-pay rail contracts. Despite the concern, smaller operations may not have a choice because of the inherently shorter mine life of smaller scale copper operations.

There are also environmental concerns with desalination. The volumes of brine produced require specific handling. Currently, most plants simply discharge the untreated brine directly into the environment. Given that brine is effectively salty water, its higher density means it settles on the seafloor, which can affect plant and marine life. There are simple solutions and methods (brine diffusion) that can help resolve the issues. It is likely, with the substantial number of desalination plants being developed in Chile, that they will introduce specific rules for the treatment and disposal of brine which could potentially create operational issues.

The other downside risks are emissions and power requirements. Desalination requires significant amounts of power, as does pumping the water large distances and elevations, which in Chile is often in excess of 150km to over 3,000m. For example, Teck has estimated that its port facilities (loading, filtering and desalination) will require 107 GWh/y. Its pipeline facilities are expected to require 501 GWh/y, almost half what is required for its 52 Mt/y concentrator. This substantial additional power puts a strain on a company’s ability to achieve its ESG policies and abide by Chilean laws for miners, where 20% of their power must be from renewable sources by 2025.

Despite the environmental impact, operations and future projects may be forced to turn to desalination anyway. The Chilean government has been proposing that the use of desalinated water be mandatory for copper operations over a certain size. This would be a drastic shift for Chilean miners whose water rights are often attached to the mining permit, meaning that they can utilise any water within the mining area. While water has always been scarce in Atacama, increasing socio-political pressure from communities is likely to see this rule changed in the future. Other future environmental or water policy pressure in Chile is stemming from glacial protection. A new bill being proposed in parliament aims to legally protect the extensive glaciers that cover the country. If passed, the bill could have significant cost and operating effects on a number of Chilean copper operations that operate close to glaciers, including Andina and Los Bronces.

Other drought affected areas are also under similar governmental pressure. Operations in Western NSW have high security water licences, but they have been forced to reduce their intake to 70% of their entitlement. In the US, the Department of Water Resources is looking to tackle the ongoing drought through co-operation from the agriculture, mining, development and the NGO community. The Colorado River Drought Contingency Plan is set to be a balancing act between several states and large water users to stave off shortages that would enforce cutbacks or restrictions.

Mexico looks like it will handle the drought completely differently. In August 2019, Mexican president, Andrés Manuel López Obrador, stated that Mexico will not issue any new mining concessions because of the drought. While no specific policy has been set for the country, it does not bode well for future mining investment in the country.

Other changes to water consumption may come from other industry bodies such as the LME or the International Copper Association (ICA). When the LME included environmental considerations in its responsible sourcing proposal, it expected LME brands of copper to move towards ISO 14001 certification or equivalent. A broader scope incorporating a wider range of environmental concerns such as water was not included. They have, however, not ruled out introducing stricter environmental policies in the future. The Copper Mark, introduced in 2019 by the ICA, uses the United Nations Sustainable Development Goals. The goals focus on 2030 targets of increased water efficiency, better management, protection of water-related ecosystems, and access but give no specific rules or requirements for water draw-down or desalination. These activities are merely encouraged.

Alternatively, pressure on water withdrawals may come from local populations where the threat of protests or blockades may force companies to look for alternate sources or methods. However, desalination may not always be enough, such as in the case of Tia Maria.

Water to remain an integral part of copper producers’ plans
While regional droughts may be at the forefront of producers’ minds at present, it is clear that long term decisions are also being made to secure water supplies. In part, these decisions are being driven by ESG goals and government legislation. However, they are also a reflection of structural changes in the industry, namely declining ore grades and increasing reliance on flotation rather than SXEW. Both of these developments require more water.

To meet the demands for increased water, producers are primarily looking to desalination. But this leads to additional capital expenditure on plant and equipment, as well as higher power consumption and operating costs. In the future, however, operations may have no choice as water drawdown rules become stricter or desalination becomes mandatory. This means the industry will need a higher incentive price to encourage new project development. In summary, it is clear that water will be an integral factor in long-term planning for current and future copper producers.