Dr. Hakan Arden Kahraman
Technical Director, Türkiye – DMT Group
Introduction
The cement industry, a critical sector for global infrastructure, is increasingly under pressure to align its operations with sustainability goals, particularly those outlined in the Paris Agreement. A key component of this alignment involves the accurate estimation of resources and reserves, guided by the CRIRSCO (Committee for Mineral Reserves International Reporting Standards) templates. This article examines the industry’s readiness to adopt these standards, the implications for mergers and acquisitions (M&A), the role of financial institutions in this process, and how these factors intersect with the Paris Agreement.
CRIRSCO Templates: A Brief Overview
The CRIRSCO templates provide a standardised framework for reporting mineral resources and reserves, essential for ensuring transparency, consistency, and reliability in data across the mining and extractive industries, including the cement sector. These templates classify mineral resources into Inferred, Indicated, and Measured categories, and mineral reserves into Probable and Proved, based on geological confidence and economic viability after applying a number of modifying factors including geology/mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors. A key feature of CRIRSCO standards is the requirement for a Competent Person (CP), a qualified professional responsible for the accuracy of the reports.
CRIRSCO-compliant reporting is internationally recognised and integrated into various national codes, facilitating crossborder investments and mergers. The most preferred code amongst all by the investors and financial institutions is the Australian JORC Code. UMREK code of Türkiye is also a part of the CRIRSCO family. For the cement industry, adopting these standards is crucial for improving investment confidence, ensuring regulatory compliance, and supporting strategic planning and sustainability efforts. However, a recent change in the regulation (1) in Türkiye resulted in Group I, II, III and V minerals being exempt in compliance with the code assessment. The compulsory assessment is now only applicable to Group IV minerals.
Preparedness of the Cement Industry
The cement industry’s readiness to implement CRIRSCO templates varies widely. Major global players, such as LafargeHolcim (2) (CRIRSCO), HeidelbergCement (3) (PERC), and Cemex Regulation (4) (S-K 1300), have integrated these standards into their reporting processes, recognising the importance of accurate resource and reserve estimation for long-term planning and sustainability. However, smaller companies, particularly in emerging markets, may struggle with the technical and financial demands of adopting these standards.
The transition to CRIRSCO-compliant reporting requires significant investment in data collection, geological modelling, and expertise. Companies that lag in this transition risk being at a competitive disadvantage, especially as investors and regulators increasingly demand transparency and accountability.
Financial Institutions and Their Role
Financial institutions are pivotal in promoting the adoption of CRIRSCO standards in the cement industry, particularly through the integration of Environmental, Social, and Governance (ESG) criteria in their decision-making processes. Banks, investors, and other financial entities are increasingly favouring companies that adhere to CRIRSCO-compliant reporting, as it aligns with the growing emphasis on sustainable and responsible investment.
A key factor in this shift is the adoption of the “Equator Principles (EP)” by 130 financial institutions. The EPs are intended to serve as a common baseline and risk management framework for financial institutions to identify, assess and manage environmental and social risks when financing Projects. An updated version of the Equator Principles was released in July, 2020. The other topics in the new version of the EPs include sustainability, human rights, biodiversity and indigenous peoples. These principles provide a minimum standard for due diligence and monitoring to support responsible risk decision-making.
For companies in the cement industry, aligning with CRIRSCO standards and adhering to the EP can lead to more favourable financing terms. Financial institutions adhering to these principles are more likely to offer loans, investment, and credit facilities to companies that demonstrate a strong commitment to sustainability through transparent reporting. This can include lower interest rates, better loan conditions, and higher credit ratings for companies that meet these stringent requirements.
Moreover, as regulators increasingly require companies to disclose their environmental and social impact, financial institutions are placing greater emphasis on CRIRSCO-compliant reporting as part of their risk assessment processes. Companies that fail to adopt these standards may find it more challenging to secure financing or may face higher costs of capital.
The alignment with the Equator Principles further strengthens the case for CRIRSCO-compliant reporting, as it demonstrates a company’s commitment to managing and mitigating environmental and social risks, which is increasingly critical for maintaining access to capital and ensuring long-term sustainability.
Implications for Mergers and Acquisitions
Accurate resource and reserve estimations are critical in M&A activities within the cement industry. CRIRSCO-compliant companies present lower risks, making them more attractive acquisition targets. In contrast, companies with less transparent reporting may struggle to negotiate favourable terms, potentially leading to discounted valuations.
Due diligence is a crucial process in any M&A transaction, ensuring that the acquiring company fully understands the value, risks, and potential liabilities associated with the target company. In the cement industry, due diligence involves a thorough examination of the target company’s resource and reserve estimates, operational practices, financial health, legal standing, and environmental impact.
Main components of Due Diligence in M&A include:
1. Resource and Reserve Verification: This comprises assessing the accuracy and reliability of the target company’s resource and reserve reports, particularly ensuring compliance with CRIRSCO standards. Particular attention is given to the geological models, sampling methods, and estimation techniques used to derive these figures.
2. Environmental and Social Impact Assessment: Review of the environmental compliance records and sustainability practices of the target company is the fundamental part of the process which also involves ensuring alignment with the Equator Principles and other relevant environmental standards.
3. Financial Analysis: This includes conducting a detailed financial audit to verify the target company’s assets, liabilities, and overall financial health. Assessing the potential financial risks and benefits of the acquisition, including the impact of resource and reserve valuations are also other areas to focus on.
4. Legal and Regulatory Compliance: This ensures that the target company is in compliance with local and international laws, particularly in areas related to environmental protection and resource extraction. Identifying any ongoing legal disputes or regulatory issues that could impact the acquisition is particularly reviewed.
5. Operational Review: This is a thorough inspection process by evaluating the efficiency and sustainability of the target company’s operations, including their extraction, processing, and waste management practices. This also includes assessing the potential for synergies with the acquiring company’s operations.
During due diligence, acquirers increasingly rely on CRIRSCOcompliant data to assess long-term sustainability and environmental liabilities. This trend highlights the increasing significance of ESG factors in corporate strategy. Companies that adhere to these standards are in a better position for successful mergers and acquisitions.
The Cement Industry, Climate Change, and the Paris Agreement
The cement industry is a significant contributor to global CO2 emissions, accounting for approximately 7-8% of total emissions. The industry’s carbon footprint stems primarily from the chemical process of calcination, where limestone (calcium carbonate) is heated to produce lime (calcium oxide), releasing carbon dioxide as a byproduct. Additionally, energy- intensive operations, reliant on fossil fuels, further contribute to the industry’s overall emissions.
Given its substantial environmental impact, the cement industry is a focal point in global efforts to combat climate change, particularly in the context of the Paris Agreement. The Paris Agreement, adopted in 2015, aims to limit global temperature rise to well below 2°C above pre-industrial levels, with efforts to limit the increase to 1.5°C. To achieve this, significant reductions in greenhouse gas (GHG) emissions are required across all sectors, including cement. The challenges faced by the mineral sector under the Paris Agreement are recently highlighted by Kahraman (2023) (5).
Impacts on the Cement Industry include:
1. Emission Reduction Targets: The cement industry is under increasing pressure to adopt low-carbon technologies and practices to meet the emission reduction targets outlined in the Paris Agreement. This includes transitioning to alternative fuels, such as biomass or waste-derived fuels, and investing in carbon capture, utilisation, and storage (CCUS) technologies. Companies are also exploring the use of alternative materials, such as pozzolans or slag, to reduce the clinker content in cement, thereby lowering emissions.
2. Regulatory and Policy Frameworks: Governments worldwide are implementing stricter environmental regulations, carbon pricing mechanisms, and emissions trading systems to drive reductions in industrial emissions. The cement industry must navigate these evolving regulatory landscapes, which often require significant capital investment and operational changes. Compliance with these regulations is not only a legal obligation but also a strategic necessity, as failure to meet emission targets could result in penalties, loss of market access, or damage to corporate reputation.
3. Sustainable Construction Practices: The demand for sustainable construction materials is growing as stakeholders across the value chain seek to reduce the carbon footprint of buildings and infrastructure. The cement industry must innovate and adapt to meet this demand, focusing on the development of eco-friendly products, such as low-carbon cements and concretes. The adoption of circular economy principles, such as recycling concrete and reusing industrial byproducts, is becoming increasingly important for reducing waste and conserving natural resources.
4. Investor and Stakeholder Pressure: Investors, driven by ESG considerations, are increasingly scrutinising the environmental performance of cement companies. Those that fail to demonstrate a commitment to reducing emissions and aligning with the Paris Agreement may face divestment, increased cost of capital, or exclusion from sustainable investment portfolios. Customers, governments, and communities are also placing greater demands on the industry to contribute to climate goals, prompting companies to adopt more ambitious sustainability targets and transparent reporting practices.
5. Innovation and Research: To align with the Paris Agreement, the cement industry is investing in research and development (R&D) to discover and implement new technologies that can significantly reduce emissions. This includes exploring breakthroughs in cement chemistry, alternative raw materials, and innovative production processes. These include, for example, CarbonCure Technologies (injecting captured CO2 into concrete during the mixing process), LafargeHolcim’s EcoPact Concrete (a low-carbon concrete that uses recycled materials and supplementary cementitious materials (SCMs) like fly ash and slag to reduce clinker content), HeidelbergCement’s Project LEILAC (Low Emissions Intensity Lime and Cement which aims to capture CO2 emissions directly from the calcination process), Cemex’s Vertua Concrete (a range of net-zero CO2 concrete products), Solidia Technologies’ CO2 reduction, Calera Corporation (carbon-negative building materials). These innovations represent significant steps toward reducing the cement industry’s carbon footprint.
In addition, collaboration with academic institutions, technology providers, and industry stakeholders is critical to accelerating the development and deployment of these innovations. By embracing such technologies, the industry is better positioned to meet the Paris Agreement targets, ensuring a sustainable future while maintaining its critical role in global infrastructure development. These innovations represent significant steps toward reducing the cement industry’s carbon footprint.
By embracing such technologies, the industry is better positioned to meet the Paris Agreement targets, ensuring a sustainable future while maintaining its critical role in global infrastructure development.
Conclusion
The cement industry’s preparedness for resource and reserve estimation according to CRIRSCO templates is a critical factor in its future success. As the industry faces increasing scrutiny from regulators, investors, and financial institutions, accurate and transparent reporting will be essential for maintaining competitiveness, securing financing, and achieving sustainability goals. The implications for M&A are significant, with CRIRSCO-compliant companies likely to command higher valuations and attract more favourable terms.
Additionally, the industry’s impact on climate change and its alignment with the Paris Agreement are central to its long-term viability. Companies that invest in low-carbon technologies, adopt sustainable practices, and engage in transparent reporting will be better positioned to meet the challenges ahead. Additionally, the adoption of these standards, supported by frameworks like the Equator Principles, will be crucial for the industry’s efforts to reduce carbon emissions and align with the Paris Agreement, ensuring its long-term viability in a rapidly changing world.
References:
1. https://www.resmigazete.gov.tr/eskiler/2024/05/20240511-1.htm
2. https://www.holcim.com/sites/holcim/files/2023-03/holcim_minimum_control_standards_2023.pdf
3. https://www.heidelbergmaterials.com/sites/default/files/2023-03/HM_Annual_and_Sustainability_Report_2022.pdf
4. https://www.cemex.com/documents/d/cemex/20-f-report-2023-eng
5. Kahraman Arden H. 2023. Balancing Act for the Developing Countries Between the Use of Thermal Coal and the Paris Agreement. s.70-82. In the Proceedings of 40th Annual International Pittsburgh Coal Conference 2023 İstanbul, Türkiye. 4 – 6 Ekim 2023. ISBN: 978-1-7138-9227-4.
