How might ‘green premiums’ impact the value of ASX mining shares?

The market might be willing to pay a premium for shares in carbon-conscious miners.

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Key points

  • One of the largest mining fund managers believes the market will eventually pay a premium for commodities with net-zero emissions.
  • This is good news for several ASX mining shares that are making big investments to reduce their carbon footprint
  • Some of these miners include Rio Tinto, South32, and Bellvue Gold

The market might be willing to pay a premium for ASX mining shares that leave no carbon footprint in their operations.

While experts are divided on this topic, the world’s most influential mining investor is supporting the argument, as reported in the Australian Financial Review.

The fund manager from BlackRock, Inc. (NYSE: BLK), Evy Hambro, believes commodities will be increasingly priced according to how they are produced.

Carbon conscious ASX mining shares could trade at a premium over time

He manages more than $20 billion in his World Mining, World Gold, and Circular Economy Funds. The “green premiums” will allow carbon-conscious ASX mining shares to increase value without having to increase production.

Hambro was quoted in the AFR saying:

There is a decision that companies are going to have to take between investing for growth in volumes and investing for decarbonisation, and our view is that over time we will see commodities increasingly being priced on how they are produced rather than necessarily the commodity itself.

If you can produce a commodity with lower emissions and it meets all the related ESG requirements you might end up with premium pricing for that commodity, or those commodities become the market price and ones that have high carbon emissions trade at discounts.

ASX mining shares embracing net-zero targets

His comments follow statements from several ASX miners about this issue. The previous chief executive of Rio Tinto Limited (ASX: RIO) asked investors if they are willing to suffer lower returns to allow the iron ore giant to increase investment in climate action.

Rio Tinto is committing to US$7.5 billion in carbon reduction projects over eight years. Most of this money won’t produce a financial return if measured against traditional valuation yardsticks. But some projects could pay for themselves if you factored in the voluntary US$75 a tonne carbon price.

Green premiums vs. brown discounts

Meanwhile, the chief executive of South32 Ltd (ASX: S32), Graham Kerr, said he sees early signs that commodities are being priced against their environmental impact, according to the AFR.

This could be both good and bad for the South32 share price. It’s good as the diversified miner is aiming to nearly double its “green aluminium” production in Brazil and Mozambique. This refers to aluminium made with renewable power.

Kerr said:

We have seen small [price premium] increments, you are seeing more of a buyer preference. We do believe over time that green premium does come into play.

In aluminium, you are probably looking in the longer term, there will be a green premium somewhere between $US300 and $US350 per tonne.

However, he also noted that buyers are demanding a discount for South32’s nickel from Cerro Matoso. The nickel from the mine is less suitable for battery production.

Perhaps the most bullish ASX miner when it comes to “green premiums” is Bellevue Gold Ltd (ASX: BGL). The small-cap miner told investors its gold could fetch higher prices as it planned to make its Western Australia mine net-zero by January 2026.

Motley Fool contributor Brendon Lau has positions in Rio Tinto Ltd. and South32 Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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