Mining companies are spending billions on water
The issue is especially crucial for copper -- often mined under dry, mountainous areas -- and costs for water are rising.
Two years ago, Freeport-McMoRan (FCX), one of the world's top copper miners, paid 69-year-old cowboy Richard Kaler $1.3 million for 280 acres of rocky ranchland in the eastern Arizona desert.
Freeport isn't interested in his minerals. Instead, it wants his rights to fresh water, which it needs to expand production at North America's biggest copper mine, spread across 65,000 acres nearby.
Freeport aims to unearth almost one billion pounds of copper a year -- 37 percent of current U.S. annual output -- at the Morenci, Ariz., mine by 2016.
The success of the Phoenix-based miner, which had profit of $2.7 billion on revenue of $20.9 billion last year, hinges on its ability to secure and maintain water supplies in arid areas where copper is found. It requires heavy spending and delicate negotiations to minimize potential conflicts with local farmers and others who also need water.
It's not alone. As mining companies probe remote areas for increasingly scarce minerals, they are investing billions of dollars for water. Moody's Investors Service estimates that mining companies spent $12 billion in 2013, three times as much as 2009, on water management, including treatment facilities and pipelines.
The issue is especially crucial for copper. Around half the world's copper comes from a belt running from Utah to Chile under mountainous, dry areas, and costs for water are expanding. The Chilean parliament is considering forcing mining companies to build desalinization plants, which remove salt from ocean water, rather than use fresh ground and surface water for their operations.
BHP Billiton (BHP), another top copper producer, and its partners agreed to build a $3.43 billion desalinization plant for its massive copper mine in Chile's Atacama desert. Freeport in Chile recently completed a $315 million desalinization plant and pipeline. And in Peru, it is building a $340 million sewage treatment plant.
"Water is a critical issue in places like Northern Chile and Southern Peru, and here in New Mexico and Arizona," Freeport Chief Executive Officer Richard Adkerson said in an interview.
Water management costs are adding to pressure on copper miners amid a slide in prices -- down 32 percent since highs reached in 2011 -- deflated by weaker demand, especially in China. But at about $3 a pound, prices are still higher than Freeport's extraction costs in North America of $1.87 a pound, and up from prices that hovered around $1.50 a pound in the 1990s.
Analysts say copper prices are relatively resilient, because quality deposits are limited and the metal is essential to a wide variety of goods, from water pipes to iPhones. Analysts say Freeport isn't at risk of having to close mines for lack of water, but having to increase spending on water could drive up miners' costs.
China, the world's second-largest copper producer at 1.65 million tons a year in 2013, has tripled production since 2003. The country doesn't have water problems in its copper-mining areas. No. 1 producer Chile, at 5.7 million tons a year, has increased output 17 percent in that time.
Production growth in the U.S., the world's fourth-largest copper producer with 1.22 million tons in 2013, has been flat in the past decade. Two-thirds of that annual output is pulled from Arizona.
Freeport's Morenci mine and its other four mines in Arizona produce 30 percent of the company's copper output, and all are at risk of losing currently available water supplies. If they do, Freeport would be forced "to curtail operations, preventing us from expanding operations or forcing premature closures, thereby increasing and/or accelerating costs," the company said in a February SEC filing.
In the U.S., mineral extraction consumes around four billion gallons of water a day, roughly the same as households. For comparison, industry uses 18.2 billion gallons and agriculture uses 128 billion gallons, according to the U.S. Geological Survey.
Context is important, though. "It's not that mining companies use a lot of water, but they tend to mine in rocky places without a lot of water," said Mike Lacey, the director of water resources for Arizona.
Water is needed to control dust kicked up during open-pit mining and to extract minerals from rock using various flotation methods in which minerals float or sink.
As most available minerals are taken, what is left tends to be of lower grade, meaning that more rocks must be extracted and more water used to process them. "If you extract 100,000 tons of raw copper with 0.2 percent instead of 2 percent grade copper, you need 10 times as much rock and 10 times as much water," said Paul Gait, an analyst at Bernstein. "Water is one of the biggest things mining companies have to worry about, and it's going to get worse."
Water's scarcity in Arizona has drawn mining companies into conflict with other big consumers of water, mainly farms. In Saharuita, near Tucson, Green Valley Pecan Co., one of the world's largest pecan farms and one of the state's biggest water consumers, has filed legal motions to try to block Canada's Augusta Resource Corp. from building a planned mine.
"It would be adding new, unlimited use of water," said Nan Walden, vice president of Green Valley Pecan. "We're all going to have to pay more for water," but a new copper mine added to the two others nearby, including one owned by Freeport, would exhaust supplies, she said.
Augusta Resource says it is minimizing water impact with a new tailings method, planting grass and grazing cattle, and by building a $22 million water pipeline into the mine from 9 miles away. "We want zero net impact on the local aquifer," said spokesman Dan Ryan.
Mines' voracious appetite for water drives up prices and occasionally pollutes local water supplies, said Roger Featherstone, director of the Arizona Mining Reform Coalition, an environmental and mining watchdog group. "But mining companies always have a way of getting the water they need," he adds.
Freeport's Mr. Adkerson said managing water sustainably for the surrounding community and preventing pollution "are just as important as the technical aspects of our business."
Morenci, a dusty mining outpost of 4,000 set among cactuses and mesquite, receives an average of 10 inches of rainfall a year, compared with 40 inches for New York. Residents say all but one piece of property -- a small bar -- in the little community is owned and controlled by Freeport. Everything else, from the RadioShack and the motel to the Chinese restaurant and the pizza parlor, is on Freeport land. There is no mayor.
Two of Freeport's principal strategies in Arizona, it says, are buying private farmland, and cutting water-rights deals with local Native American tribes.
"It's a question of finding ways we can make an arrangement for [Native Americans] to give us access to some of their unused water rights," said Mr. Adkerson. In January, Freeport hired the state's former water director to help secure rights.
For decades, Freeport and its predecessor company, Phelps Dodge, have had agreements to buy water rights from the San Carlos Apache tribe, which is centered in the town of San Carlos about two hours from the mine. The 15,000-member tribe occupies 1.8 million acres in southeastern Arizona and is one of the poorest communities in the nation with median household income of $27,000 a year.
In early 2013, as part of its latest pact, Freeport agreed to pay the tribe over $43 million to help Freeport "increase its water supply by 75,000 acre-feet" in total, according to documents the tribe shared with The Wall Street Journal. The deal means Freeport has the right to use that amount of water, which is enough to cover 75,000 acres of land with a foot of water and can supply a normal-size copper mine for three years, according to mining engineers. Freeport declined to comment on the deal, citing a confidentiality agreement. Tribal chairman Terry Rambler declined to add further details about the deal.
Freeport also committed to training 16 Apaches every month for three years for its Morenci, Safford and Miami mines, and helped convert a local school into a training center -- the football field is now stacked with bales of hay that are used to train people to use Caterpillar forklifts.
The training plan would amount to about 550 people, but few San Carlos Apaches end up among the 2,900 who work at the Morenci mine. The two-hour drive to Morenci makes it expensive and cumbersome to get to work there, say tribe members.
Alexander Baylish, 31, completed the course and quickly found a job working in smelter maintenance for Freeport for $17 an hour. He currently works at the Miami mine, which is only 40 minutes away, meaning he can live at home, where he has four children. He said others working at the Morenci mine only come home on weekends. "This is the best job you can get around here," he said. "A quarter of the people taking classes don't have high-school degrees."
In addition, Freeport said it has paid around $81 million for 23,000 acres in the past five years "for the primary purpose of acquiring water rights." Arizona law allows mining companies to use as much groundwater as they can, and then allocates water from rivers and lakes based on how much landowners have used in the past. After Freeport transfers the land's water rights to the mine, it leases the acreage to farmers and ranchers.
Mr. Kaler, the 69-year-old rancher, was a career phone technician from Illinois when he bought his ranch along the San Francisco River in 2002. He rode horses and learned how to herd cattle. "After my whole life of dreaming about it, I finally became a cowboy," he said.
In 2009, when copper prices jumped, Freeport asked him if he wanted to sell. Mr. Kaler said the 90 acre-feet of water a year attached to his plot of land were especially valuable because they were essentially permanent -- they predated Arizona statehood in 1912 and thus couldn't be lost in a legal challenge.
Mr. Kaler was on the fence, but after his wife was killed in a car accident in 2011, he decided to sell. Freeport paid him $1.3 million, according to county records, which he used to buy another ranch. He also leased his old land back from Freeport, and uses both ranches to farm about 200 head of organic Angus beef cattle. "I'm still a cowboy," he said.
—Chuin-Wei Yap contributed to this article.
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