A flood of ills?
In March 2017, as Tropical Cyclone Debbie smashed rainfall records across Queensland, the mining industry was forced into damage control. The deluge surged inland through the extensive coal reserves of the Bowen Basin, shutting down operations and washing away vital infrastructure. Losses racked up and, unsurprisingly, intense insurer attention is now focused on the mining industry’s risk management protocols.
Water management has long been a difficult area of risk for mining companies, not only in Australia but throughout other challenging physical environments such as South Africa and Latin America. Around the globe, miners are investing heavily in technologies designed to help them weather the extremes.
Just 10 years ago, the Bowen Basin had been drought- stricken for a prolonged period. Miners, used to treating water as a scarce resource, focused on and invested heavily in capturing as much rainwater as possible. But since 2008, companies have had to figure out how to deal with the complete opposite, as several flooding events have wreaked havoc on their operations, supporting infrastructure and water stewardship protocols.
The Bowen Basin is a 60,000-square kilometre area of central Queensland and an operational hotspot for a number of global miners, including BHP, Rio Tinto, Glencore and Anglo American. According to media reports published in Cyclone Debbie’s aftermath, the region supplies 80% of the world’s seaborne coking coal, essential to steel production.
Queensland’s mining operators suffered significant flooding events in 2008 and 2010. These floods focused the attention of miners and insurers alike on water management and risk management plans, with miners making enhancements to address the potential impacts of future major rainfall events.
Fig 1 – Queensland rainfall totals (mm), March 20171
1Source: Australian Government Bureau of Metrology (http://www.bom.gov.au):, Licence:
However, Cyclone Debbie went beyond damage to individual mines; it affected something that all miners in the region are largely dependent on, being the rail freight behemoth Aurizon (formerly the Queensland government- owned rail assets) and its Goonyella rail corridor, which transports coal to a number of terminals on the Queensland coast at Bowen, Mackay and Gladstone.
While mining ceased at many major pits during Debbie’s onslaught, actual production downtime was relatively minimal, with the relevant risk management plans operating to design. However, the same couldn’t be said for Aurizon’s infrastructure; there was widespread damage to the 2500km network of lines that would normally move 500,000 tonnes of coal every day, bound for Japan, China, South Korea, India and Taiwan. Reports at the time estimated repairs would take over a month; there were also closures to the Newlands, Blackwater and Moura networks connecting mines in northern parts of the basin ensuring there was no ‘Plan B’ on offer. Never before had a single weather event impacted all four of the networks. As a result, what miners were taking out of the ground had to stay put.
And therein lies a key problem in trying to implement appropriate risk management and mitigation – natural catastrophes don’t discriminate. All miners found their direct operations impacted up to a point and then, when they were able to resume, faced the “double whammy” of having no way of moving their coal to terminals for export. The damage suffered to the Aurizon network was significant, with an assortment of tasks identified as part of the incident management process. These included not only repairs to track and ballast but also vegetation removal, clearing and reinstating drainage systems, repairs to signalling equipment and bridge repairs.
Like the mining companies, Aurizon had a robust risk management and disaster recovery process which saw the downtime minimised. All miners regained access to export facilities within two weeks.
In a public statement made in July 2017, Jason Livingston, Head of Network Asset Management for Aurizon said: “Cyclone Debbie led to the closure of all four coal systems, and across the network we had 844 damaged sites with 184 of these requiring major repairs. However, while the impacts were severe, the speed of recovery was exceptional as a result of thorough preparation, technology and hard work.”2
Cyclone Debbie showed us that while miners’ water management plans were triggered and worked as intended, they were caught out by what was beyond the mine boundary. The inability to move coal was the cause of their major losses, running into the many millions of dollars, but these would need to be covered under specific extensions within their policies and, naturally, future policy negotiations and premium rates would depend on how this risk could be mitigated in future.
2From the Aurizon Network Review Event – 2018 Tropical Cyclone Debbie http://www.qca.org.au
Fig 2 – Severe Tropical Cyclone Debbie: March 25 – 29 20173
3Reproduced by permission of Bureau of Meteorology, © 2018 Commonwealth of Australia-website http://www.bom.gov.au
Achieving best practice water management is at the forefront of miners’ minds all over the world. Chile’s Atacama desert, one of the world’s driest regions, saw flooding rains in 2015. Characterised as a 1-in-100-year event, the downpour didn’t convince BHP to shelve plans to build a 180km pipeline to bring water from the Chilean coast, together with a desalination plant to service its Escondida copper mine. Other miners have similar pipelines in operation or under construction to maximise the reclamation and re-use of water.
During the 2010/2011 wet season, rainfall across Queensland’s mining areas severely impacted the industry. Huge volumes of water poured into pits and underground operations, with miners forced to pump excess water into operational pits to prevent more widespread flooding. The severity of the event saw eighty-five per cent of Queensland coal mines restrict production or close entirely. The economic repercussions of these events were estimated to run to in excess of AU$5 billion.
In January 2015 it was estimated that around 250,000 megalitres of ‘legacy water’ was still stored in pits across Queensland4.
Indeed, the technologies being developed have signalled a further business opportunity – exporting water management protocols across the mining life-cycle to other countries. The federal government’s trade and investment promotion agency, Austrade, is actively marketing itself to Australia’s mining industry as an early adopter of innovations in water management – not only as part of its risk protocols but a recognition that good water resource management is an environmental, social and commercial imperative.
4https://www.qld.gov.au/environment/pollution/management/disasters/flood-impacts
Environmental issues remain highly sensitive. The BHP Mitsubishi Alliance (BMA) in the Bowen Basin is Austlia’s largest coal producer, according to the Queensland Resources Council, accounting for more than a quarter of Australia’s annual coal exports. In 2015 BMA announced research on the impact of mine water releases into the surrounding environment.
The climactic volatility meant water quality release thresholds imposed by Queensland regulators were restricting BMA’s ability to discharge excess water during extreme rain events. BMA partnered with the University of Queensland’s Sustainable Minerals Institute and the Central Queensland University Centre for Environmental Management to establish the aquatic ecosystem health research program.
The report, released in 2015 before the impact of Cyclone Debbie, monitored three years and two wet seasons, collecting data from over 150,000 points to monitor and measure the effects of mine water releases5. BMA said it found the eco-system impact was lower than previously believed and was the catalyst for the company to work with regulators to amend release conditions.
Miners continue to develop and employ automated solutions to sense when waters are in flow, along with if and when the pre-approved volumes can be released. Environmental staff are certainly aware of the risks if mine operators don’t comply with the regulatory framework. Quite apart from the monetary and reputational damage (which is uninsurable), is the very real possibility of losing their licence to mine.
Given the size of the Bowen Basin and the number of miners both operating there and impacted by the infrastructure failure, insurers are feeling the pinch from Cyclone Debbie.
There are a relatively minimal number of insurers offering capacity in mining risks and they are getting hit with multiple losses from the same event, impacting both their loss ratios and reinsurance costs. Understandably we’re seeing a lot more scrutiny on how mining companies provide information about their risk management protocols and their systems for managing the aftermath of natural catastrophe events.
Still, there is significant capacity available – in the region of A$1.5 billion across all global markets. Water management is not the only risk weighing heavily on the market; we’re seeing impacts from earthquakes and fire losses as well. Combined, the catastrophe risk and operational risk markets probably engender around AU$800 million in premiums from across the mining world and there is currently upward pressure on premium rates.
However, as the premium pool begins to run dry, there’s no doubt that insurers will try to make good some of their losses through increased rates and batten down the hatches for the next major claims event.
Every drop of comfort a mining company can bring to the insurance market in demonstrating their risk management systems and preparedness is therefore vital to minimise any increase in premiums and avoid reduction in coverage and restrictions in sub-limits.
Willis Towers Watson is working closely with clients in the sector to raise awareness of the changing marketplace. By commencing renewal strategy discussions early and assisting in the preparation of robust marketing documentation that clearly articulates their risk awareness and risk management protocols we have been able to deliver outstanding results in the face of challenging market conditions.
Gavin Wilby is an Account Director for Willis Towers Watson based in Melbourne, Australia, responsible for developing and implementing insurance and risk management strategies for key Australian clients. Previously he was Risk & Insurance manager at BHP Billiton.
5 https://www.bhp.com
