Zijin Mining Spill and The Quest For Materiality
By Daniel Cheng 29 July, 2010
China Water Risk asks if investors could have factored for this if they knew where to look.
When news first broke that Zijin Mining Group Co. (2899:HK; 601899:SH) was forced to shut down its copper plant in Shanghang, Fujian province, after a 2.4 million gallon toxic spill contaminated the local river and poisoned 2,000 metric tons of fish, the first question that investors asked was: Is this material? Meaning, will this hurt Zijin’s, China’s largest gold producer, ability to meet earnings expectations, expand current operations, or hurt their competitive position? Zijin’s already weakened stock price plunged 12% on July 13, the day after it announced the leak. The initial share price drop could not be read as much more than a quick change in momentum. Zijin, like most metals companies, is a highly cyclical stock and share price movements always reflect a diverse range of factors, not just the environment.
But in the week that followed, it became clear that the Chinese government was going to make an example of Zijin to show that the government was serious about the new environmental standards for commodity producers issued last year1:
- July 14: Three managing personnel2 of Zijin’s copper plant have been detained. Shanghang county chief Qiu Heqing and top county environmental official Chen Junan were forced to resign.
- July 15: China’s Fujian province indicated it would take legal action against government officials and executives of Zijin, according to a Xinhua news report. The company may be fined as much as 500m RMB for the pollution.3
- July 15: A nine-day delay in Zijin’s disclosure of the July 3 spill prompted the China Securities Regulatory Commission (CSRC) to investigate.
- July 16: Zijin announced its intention to invest 100m RMB (USD 15 million) in a water plant near the mine, in addition to 200m RMB it plans to spend on environmental and risk measures within a year as part of its restructuring plan after the incident4.
- July 20: Ministry of Environmental Protection officials in Guangdong issued an urgent notice to their colleagues in Fujian that the toxic leak at the Zijin copper plant had reached the lower reaches of the Tingjiang River in Guangdong.
One takeaway for investors here is the critical importance of disclosure. Zijin is now under investigation by the CSRC for its delay in disclosing the leak, which some investors have blamed for their financial losses as Zijin’s stock price nosedived. While this nine-day delay will bring sanctions against Zijin, the larger issue is the growing need to capture environmental risks in mainstream investment decision-making.
In the case of Zijin, there were enough indicators if investors knew where to look. Zijin has been cited for environmental violations every year since 2005. In March this year, the China Water Risk released a report authored by the Institute of Public and Environmental Affairs (IPE) and Civic Exchange, which identified Zijin among the 175 companies listed on the Hong Kong Stock Exchange (HKEx) with environmental infraction records on the mainland. The report reveals that from 2005, Zijing Mining Group Co. has had a series of environmental violations and pollution incidents in Hebei, Xinjiang and Guizhou.
China’s Environmental Information Disclosure Measures (EIDM), passed in May 2008, require disclosure from companies that exceed national or local discharge standards, or exceed the total volume quota authorized by local governments, to be made within 30 days through the media. But as indicated in the report, Zijin failed to disclose environmental data relating to its violations in the years after the EIDM was passed. If Zijin had taken its obligations more seriously, and complied with the disclosure standards, it seems safe to assume that it would have addressed its environmental performance gaps more quickly and investors would not be struggling now to assess both this breakdown in trust and its implications for the company’s ability to gain needed regulatory support for continued growth.
Nearly two weeks after the first news piece on Zijin’s mining accident, the shares are beginning to recover. (See graph below.) Bloomberg’s graph tracking Zijin’s stock price, reveals that the lowest point was between the 16th and 20th July, at the height of the media coverage. The rebound is natural as there are investors now betting that all the bad news is out, that the worst is over and that from here on the company will be able to demonstrate their ability to manage the problems. It is interesting to note that investors seem encouraged by the promise of better management.
Responsible investors often view events like this as a validation of the investment community’s growing concern about sustainability issues. But what is more interesting, although nothing new, is that this case tells us that when governments enforce regulations, both investors and companies respond, immediately. In Zijin’s case, the central government needed to step in given the close relationship between the local government and Zijin Mining. According to Xinhua News Agency, Zijin’s senior management is composed largely of former government officials. This is a common scenario—Zijin apparently accounted for 60% of the county’s total revenue in 2009.
So is this toxic spill “material”, in the sense that it will hurt Zijin’s ability to access capital and win government permits to expand operations? On July 28, the Shanghang government ordered Zijin to reduce its gold output by one ton. Is this material? The one ton reduction translates to RMB 254m– but compare this with Zijin’s profits which hit RMB 5.02b in 2009, and you see that it doesn’t account for much.
At the end of the day, it is this longer term positioning which is material, not the short-term price movements. Zijin’s promise to clean up not just the Shangshang spill, but their entire operations across China may help them avoid painful long-term government sanctions. But investors and civil society should know better than to take this at face value. Disclosure of relevant environmental performance data is critical for investors, and utilising this data even more so. Last July 23, eleven environmental non-governmental organizations from mainland China wrote to the Hong Kong Stock Exchange and the Shanghai Stock Exchange calling for greater disclosure5 from listed companies. To read the letter, click here.
Better disclosure will help investors map the risks, and maybe even raise the bar of performance standards in China’s mining industry.
1The new environmental standards for commodity producers were in response to the poisoning of thousands of children by lead, zinc and manganese plants in Yunnan, Henan, Shaanxi and Hunan provinces in 2009.
2Lin Wenxian and Wang Yong, head and deputy head of the plant, as well as Liu Shengyuan, in charge of the plant’s environmental protection, were detained.
3SF Chronicle, China’s Fujian to Charge Zijin, Local Officials over Toxic Leak, July 17, 2010
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