THE UNITED REPUBLIC OF TANZANIA
MINISTRY OF ENERGY AND MINERALS TANZANIA MINERALS AUDIT AGENCY (TMAA)
REPORT ON FORMS AND RATES OF REHABILITATION BONDS APPLICABLE IN THE MINING INDUSTRY
December, 2009
TABLE OF CONTENTS GLOSSARY OF TERMS ........................................ERROR! BOOKMARK NOT DEFINED. EXECUTIVE SUMMARY ...................................................................................................... 3 1.0
OBJECTIVES OF THE STUDY ............................................................................... 5
2.0
METHODOLOGY ........................................................................................................ 5
3.0
INTRODUCTION ........................................................................................................ 6
3.1
IMPORTANCE OF ENVIRONMENTAL REHABILITATION BOND ....................................... 7
3.2
CASE STUDIES ON POSTING OF ENVIRONMENTAL REHABILITATION BONDS .............. 9
3.2.1 Best Cases ................................................................................................................ 9 3.2.2 Worst Cases - General ........................................................................................... 10 3.2.3 Worst Cases - Project Specific ............................................................................... 11 3.2.4 Posting of Rehabilitation Bonds in Australia and USA...................................... 12 4.0
EXISTING POLICIES, LAWS AND REGULATION GOVERNING REHABILITATION BONDS ................................................................................... 15
4.1
5.0
POSTING OF REHABILITATION BONDS IN OTHER COUNTRIES BY THE PARENT COMPANIES OF THE MAJOR GOLD MINES OPERATING IN TANZANIA ....................... 17 VARIOUS FORMS OF ENVIRONMENTAL REHABILITATION BONDS .... 18
5.1
METHODS USED TO COMPUTE REHABILITATION BONDS .......................................... 24
5.1.1 Case-by-Case Costing ............................................................................................ 25 5.1.2 Predetermined Unit Costs ..................................................................................... 25 5.1.3 Licensee Supplied Rehabilitation Costs ............................................................... 26 6.0
CONCLUSION ........................................................................................................... 28
7.0
REFERENCES .......................................................................................................... 29
EXECUTIVE SUMMARY Prior to enactment of mine closure laws and regulations in different countries, many mining companies used irresponsible mining methods with no regard to protecting the environment and evaded their responsibilities towards environmental rehabilitation by leaving their mine sites un-rehabilitated. This was a common phenomenon with mining companies worldwide. In order to minimize environmental impacts caused by mining operations, it was deemed necessary to introduce environmental rehabilitation financial assurance. The financial assurance provides certainty in that, even in the unlikely event that mining finishes early, and the company walks away from the site, funds will be available to ensure that rehabilitation is completed. The rehabilitation bond is released once rehabilitation of the site is completed. The aim of this study is to evaluate various forms of environmental rehabilitation bonds and its calculation methods commonly applicable in the mining industry. It is aimed at assisting decision makers to choose the best form and rate of rehabilitation bond to be posted to the Government by the mining operators. This report discusses present policies, laws and regulations governing the posting of environmental rehabilitation bonds. The report provides worst and best case studies in the subject matter for illustrative purposes. It discusses different forms of environmental rehabilitation bonds applicable in the mining industry and provides pros and cons of each form. The report also provides computation methods used in determining rehabilitation bonds to be posted by the operator; and proposes the best form of rehabilitation bond on part of the Government and suitable calculation method. The study has revealed that many governments in the world are currently paying huge amounts of taxpayer’s money to rehabilitate abandoned mines since they did not collect rehabilitation bonds from previous owners. Many governments have now introduced laws and regulations to compel mining companies to post rehabilitation bonds to cover the cost of closure of the project whenever that may occur, to leave the site in a safe, stable, and self-sustaining rehabilitated state. The study has revealed that there are mainly seven forms of rehabilitation bonds globally posted by mining operators to governments, which are surety bond, letter of credit, bank guarantee bond, cash deposit, cash trust fund, insurance bond, and self MINISTRY OF ENERGY AND MINERALS
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guarantee bond. Following the analysis of pros and cons of each form and lessons learnt from a few selected countries, it is concluded that: •
bank guarantee form of rehabilitation bond is the best, especially in large scale mining operations;
•
case-by-case rehabilitation cost computation method is the most suitable method for estimating the required financial assurance; and
•
principally, many governments require mining companies to post rehabilitation bonds for closure prior to commencement of mining operations.
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1.0 OBJECTIVES OF THE STUDY The main objectives of this report are: 1. to study present policies, laws and regulations concerned with the environmental rehabilitation bonds in the mining industry; and 2. to study various forms of environmental rehabilitation bonds and its calculation methods applicable in the mining industry so as to come up with the best form and rates suitable to governments and mining companies (winwin situation).
2.0
METHODOLOGY
In order to arrive at the findings of this report, a comprehensive literature review was undertaken through desk research, internet, publications and case studies.
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3.0
INTRODUCTION
Tanzania Minerals Audit Agency (TMAA) is a semi-autonomous Institution established through Government Notice No. 362 of 6th November, 2009 under the Executive Agencies Act, Cap. 245. It takes over the functions previously undertaken by the Minerals Auditing Section in the Minerals Department under the Ministry of Energy and Minerals. The aim of TMAA is to facilitate maximization of Government revenue from the mining industry through effective monitoring and auditing of mining operations and ensuring sound environmental management in mining areas. The Vision of the Agency is to be “a centre of excellence in monitoring and auditing of mining operations”. TMAA’s Mission is “to conduct financial and environmental audit as well as auditing of quality and quantity of minerals produced and exported by miners in order to maximize benefits to the Government from the mining industry for sustainable development of the Country. One of the functions of TMAA is to monitor and audit environmental management, environmental budget and expenditure for progressive rehabilitation and mine closure. Based on this function, posting of financial provisions for environmental rehabilitation and closure by mining companies to the Government is critical. Section 44(d) of the Mining Act, Cap. 123 states that “whenever required by the Minister after consultation with the Mining Advisory Committee, the holder of a Special Mining Licence shall, as a condition of the licence, provide for the posting of a rehabilitation bond as provided for in the Regulations, to finance the costs of rehabilitation and making safe the mining area on termination of mining operations where the holder of the Special Mining Licence has failed to meet his obligations in this respect”. Regulation 31(1) of the Mining (Environmental Management and Protection) Regulations, 1999 stipulates that the Minister may require a holder of a Special Mining Licence (SML), Mining Licence (ML), or Gemstone Mining Licence (GML) to provide for posting of rehabilitation bond which shall be in any of the following form: Escrow Account, Capital Bond, Insurance or Bank Guarantee Bond, Pledging and Assets, or any other form which may be agreed between the Government and the licensee. Generally, all mineral deposits have a finite life. No matter how long the mine lasts, it will close. Therefore, mining is a temporarily land use. It is important therefore MINISTRY OF ENERGY AND MINERALS
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that each mine should be closed in the orderly, safely and environmentally sound manner so as to be used for other economic activities after closure. In principle, it is the responsibility of the operator to pay for mine closure costs. However, abandoned mines normally become properties of governments. It is a common scenario that closure and rehabilitation occurs at a time when the mine operations are no longer financially profitable. In this case, governments are forced to take on the task of rehabilitating abandoned mines using taxpayer’s money in case the owners did not set aside funds to pay for rehabilitation costs. This is the reason why governments worldwide require mining companies to provide financial guarantees for mining closure prior to mining opening. There are many reasons why mines may close, these include: geological factors whereby an unanticipated decrease in grade or size of the ore body happens; economical aspects such as low commodity prices or high operating costs that may lead a company into voluntary receivership; and policy changes which occur from time-to-time, particularly when governments’ leadership changes. Posting of environmental rehabilitation bonds should be enforced by governments so that the costs of rehabilitating disturbed land at mine sites remain the responsibility of the operators. The bond posted by mining operators will ensure that rehabilitation tasks will be completed as required, or if the mining operator defaults, the Government will be able to accomplish rehabilitation tasks using the fund deposited.
3.1
Importance of Environmental Rehabilitation Bond
The overall objective of environmental rehabilitation bond is to rehabilitate the land to an acceptable post mine closure at no cost to the Government. In order for this to occur, environmental laws and regulations must ensure that environmental rehabilitation bonds cover the total rehabilitation liabilities. For this reason, the amount of rehabilitation bond is dependent on rehabilitation works covered in the approved mine closure plan. In case the mine operator does not post environmental rehabilitation bond to the Government and is abruptly declared bankrupt, the mine will be abandoned and the Government will be responsible for the cost of rehabilitating the mine. Table 1 summarizes examples of abandoned mines from selected countries. MINISTRY OF ENERGY AND MINERALS
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Table 1: Examples of Abandoned Mines in Selected Countries Country
Name or Number of Abandoned Mines, and Reasons for Abandonment in General
Remarks or Status
Tanzania
• Buhemba Gold Mine in Mara Region was abandoned in 2006 following unanticipated decline in grade of the orebody.
It is the responsibility of the Government to rehabilitate these sites to prevent environmental hazards.
• Buckreef Gold Mine in Geita District was abandoned in 1990 due to lack of economic investment and technical expertise in Tanzania at that time. • There are a number of small scale mines within the country, which have been abandoned by their owners without being rehabilitated. China
During the year 2000, about 40,000 coal mines and over 250 state-owned mines were abandoned in China without being rehabilitated.
The Government of China is struggling to rehabilitate these sites through taxpayer’s money.
Republic of South Africa
As of 2006, there were 4,772 officially-listed abandoned mines in the Republic of South Africa, which is five times the number of currently operational mines.
The Government of South Africa has allocated a budget to partly rehabilitate the abandoned mines. The Government has also created funding partnerships with mining companies to fund abandoned mines’ rehabilitation costs.
Canada
In Canada, around10,000 abandoned mine sites exist. Out of these, 5,600 are in the State of Ontario.
A financial liability for closure of these abandoned mines is between USD 300 and 500 million.
Germany
There are 215 abandoned lignite mines in East Germany, which are being rehabilitated by the Government using taxpayer’s money.
Between 1991 and 2005 more than 7.42 billion Euros were earmarked for the rehabilitation of these mines
USA
It is estimated that there are over 557,000 abandoned hardrock mines in 32 states in the USA as reported in 2002.
The cost of cleaning up all the USA’s abandoned mines is currently estimated at USD 72 million.
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Table 2 presents estimated closure costs for each major gold mine operating in Tanzania. The cost estimates are as at December, 2008. Table 2: Estimated Closure Costs by each Major Gold Mine as at 31st December, 2008 Name of Mine
Estimated Closure Costs (USD) 829,000
Golden Pride Mine Geita Gold Mine
44,634,355
Buhemba Gold Mine
22,312,668 45,258,482
North Mara Gold Mine
5,892,949
Tulawaka Gold Mine TOTAL
118,927,454
Note: The figures presented in Table 2 are subject to change depending on rehabilitation and mining activities undertaken by the mine from time to time.
3.2
Case Studies on Posting of Environmental Rehabilitation Bonds
In recent years, governments in different countries have adopted strict policies, laws and regulations requiring mining companies to provide for environmental financial assurance to guarantee costs of reclaiming lands affected by mining. The case studies provided herewith illustrate the best and worst cases in the subject matter.
3.2.1 Best Cases 1. Resolute Mining Company Limited of Australia owned the Obotan Gold Mine in Ghana which was closed in 2005. The Obotan Mine produced 730,000 troy ounces of gold and was closed due to low gold prices. Ghana Environmental Assessment Regulations (EAR) requires all mining companies to post a reclamation bond. Pursuant to the Regulations of the EAR, Resolute signed a Reclamation Security Agreement in 2001 with the Ghana Environmental Protection Agency and posted a rehabilitation bond against the reclamation MINISTRY OF ENERGY AND MINERALS
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liabilities. The Obotan Gold Mine was successfully rehabilitated by the operator. The rehabilitation bond was released to the operator once closure of the site was completed. 2. Ranger Uranium Mine in the Northern Territory of Australia has a wellestablished final rehabilitation and reclamation plan. Each year, the company prepares a full rehabilitation program with costs, which assumes that mining will cease that year. The target is to achieve all rehabilitation objectives, including ecosystem viability, radiological safety, and landform stability. The costs are checked and the amount of money involved in rehabilitation becomes the adjusted amount of the company's bond to be held by the Government. In 2006, there was about USD 17 million posted by the mine to the Government as rehabilitation bond. 3.2.2 Worst Cases - General 1. The USA Federal Government audit conducted in 2008 revealed that there were a large number of abandoned mines in the country endangering public health and safety due to failure by the Bureau of Land Management (BLM) to clean-up and properly fence off the abandoned mines. Several abandoned mines were found to have dangerous levels of arsenic, lead and mercury, along with gaping holes at dilapidated hardrock mining sites easily accessible by people. The audit singled out Rand Mining District as an especially hazardous site that needed immediate action. The audit revealed money as the biggest obstacle to a clean-up. The cost of cleaning up all the USA’s abandoned mines is currently estimated at USD 72 million. 2. Abandoned mines in Northern Canada are threatening today’s environment. In the past, Indian and Northern Affairs Canada did not collect enough money for financial security from mining companies operating in the North. Abandoned mines have then become a costly environmental mess left behind by bankrupt mining companies in Canada and Canadian taxpayers are left to foot the bill to fix this serious threat to the environment and human health.
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These sites contain hundreds of thousands of tons of highly toxic chemicals such as arsenic and cyanide, the result of past mining operations which had no financial assurance. The Canadian Department of Environment and Sustainable Development estimates that cleaning up abandoned mines in Northern Canada would cost USD 555 million.
3.2.3 Worst Cases - Project Specific 1. Britannia Mine located 50km North of Vancouver, Canada started production in 1904. More than 60,000 persons were employed. The mine produced over 1,000 million pounds of copper, 270 million pounds of zinc and 484,000 troy ounces of gold. Mining operations ceased in 1974 and since the operator had not posted a rehabilitation bond to the Government, the responsibility of rehabilitating the disturbed sites was left in the hands of the Government. The delay by the Government to rehabilitate the disturbed sites caused acid drainage in large quantities of metals which were dumped into nearby residential areas (Howe Sound), making it one of the largest metal polluting sources in North America. The site is now being remediated under the leadership of the B.C. Crown Contaminated Sites Branch. Total rehabilitation costs are estimated in the range of USD 75 to 100 million. Financial requirements will come from general revenues of the B.C. Government. 2. The Giant Mine was a large gold mine located in Yellowknife, Northwest Territories, Canada. Gold was discovered in 1944. Production commenced in 1948 and ceased in 2004. It produced over 7 million troy ounces of gold. The owner of the mine had not posted a rehabilitation bond to the Government. Mining operations over four decades created a massive environmental liability, a problem which the mine's previous owners left to the Canadian and Northwest Territories governments to sort out. The Giant Mine contains 237,000 tonnes of arsenic trioxide dust produced during the gold roasting process. This dust is water soluble and contains approximately 60% arsenic. The site's 2,300 acres footprint includes 8 open pits, 4 tailings ponds, 325,000m3 of contaminated soils, and approximately 100 buildings including MINISTRY OF ENERGY AND MINERALS
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a roaster/bag house complex that is highly contaminated with arsenic and fibrous asbestos. Estimated remediation cost is USD 300 million and is expected to come from the Federal Government. 3. Buhemba Gold Mine located in Mara Region, Tanzania was closed prematurely in 2006 without performing environmental rehabilitation. The estimated rehabilitation cost is USD 1.2 million. There are a number of small scales mines in Tanzania which were closed without performing environmental rehabilitation.
3.2.4 Posting of Rehabilitation Bonds in Australia and USA 1. Australia is one of the leading countries in the mining industry with long history of mining from the 18th Century. In the 1980s, mining industry became increasingly influenced by public concerns for the quality of environment. The Australian Government was then forced to rehabilitate many abandoned mining areas by reshaping and re-vegetating the disturbed land so that the site would be used for other economic activities. The Government also introduced mandatory posting of rehabilitation bonds to all mining operators. Securities held by the Australian Government as at June, 2006 were AUD 2.03 billion (Table 3). Table 3: Value of Securities Held by Australian Authority as at June, 2006 State or Territory
Total value of security (AUD million)
North South Wales
460
Northern Territory
115
Queensland
785
South Australia
88
Tasmania
27
Victoria
110
Western Australia
480
Total Value
Source:
2,035
Department of Industry and Resources, Government of Western Australia
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2. In the United States of America, the Government requires a financial guarantee from mining operators to ensure that the site is rehabilitated on termination of mining operations. The Government provides incentives for mining companies to undertake the needed rehabilitation and reclamation after closure so that company’s obligations tied up in financial guarantee can be released. By July 2004, a total of USD 836,721,336 was held by 12 States in the USA as financial assurances (Table 4).
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Table 4: Type and Amount of Financial Assurances from the 12 USA States with Existing Hardrock Operations as of July, 2004 State
No. of Opera tions
Surety Bond (USD)
Letter of Credit (USD)
Self Guarantee s (USD)
Certific ate of Deposit (USD)
Cash Account s (USD)
Alaska
240
-
Arizona
185
California Colorado
State Bond Pools (USD)
Trust Fund (USD)
Proper ty (USD)
Negotia ble US Securiti es (USD)
Negot iable US Bonds (USD)
Saving Accou nts (USD)
-
-
-
-
1,000,000
3,802,763
571,907
-
113,085
239,343
303
3,986,000
737,000
-
184,000
132
1,600,000
19,313
-
116,000
Total (USD)
-
-
-
-
-
1,000,000
-
-
-
45,900
-
-
4,772,998
27,800
-
-
-
-
-
1,000
4,935,800
1,600
-
-
-
-
-
-
1,736,913
140,969
77,173
-
-
-
-
30,000
-
795,532
55
242,340
305,050
-
Montana New Mexico
180
103,831,894
3,996,803
-
708,081
153,452
-
-
617,700
-
-
-
109,307,930
35
307,406
921,293
-
61,009
9,281
-
-
-
-
-
-
4,308,289
Nevada
774
230,769,986
192,058,810
200,000,000
1,932,761
2,526,893
1,187,015
1,030,000
-
180,000
-
-
629,684,465
Oregon
175
34,000
-
-
16,000
2,000
-
-
-
-
-
-
52,000
Utah Washingt on
216
1,719,343
365,699
122,000
393,034
128,109
-
-
-
-
-
-
2,728,185
139
-
-
-
-
-
-
-
-
-
-
-
-
Wyoming
56
34,213,132
39,318,254
3,410,920
443,000
23,218
-
-
-
-
-
-
77,408,524
2,490
383,506,864
238,294,129
203,532,920
4,106,939
3,188,869
2,187,015
1,030,000
617,700
225,900
30,000
1,000
836,721,336
Idaho
Total
Source: US Government Accountability Office – Financial Assurance for Hardrock Operations
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4.0
EXISTING POLICIES, LAWS AND REGULATION GOVERNING REHABILITATION BONDS
In many nations with long history of mining, mining companies are required to post rehabilitation bonds to the Government to guarantee rehabilitation of the disturbed land at the mine site on termination of mining operations. This has mainly been achieved by many governments through formulation of appropriate policies, laws and regulations governing the posting of rehabilitation bonds for mine closure. Table 5 summarizes existing environmental rehabilitation bond policies, laws and regulations from seven selected countries. Table 5: Summary of Policies, Laws and Regulations on Environmental Rehabilitation Bonds Country
Policy, Laws, Rules and Regulations
Tanzania
•
Section 44(d) of the Mining Act, Cap. 123 states that “whenever required by the Minister after consultation with the Mining Advisory Committee, the holder of a Special Mining Licence shall, as a condition of the licence, provide for the posting of a rehabilitation bond as provided for in the Regulations, to finance the costs of rehabilitation and making safe the mining area on termination of mining operations where the holder of the Special Mining Licence has failed to meet his obligations in this respect.
•
Australia
Regulation 31(1) of the Mining (Environmental Management and Protection) Regulations, 1999 stipulates that the Minister may require a holder of a Special Mining Licence, Mining Licence, or Gemstone Mining Licence to provide for posting of a rehabilitation bond which shall be in any of the following form: Escrow Account, Capital Bond, Insurance or Bank Guarantee Bond, Pledging and Assets, or any other form which may be agreed between the Government and the licensee.
State of Queensland: Environmental Protection Act (EPA) of 1994 requires the holder of an environmental authority (granted to entities conducting mining activities) to post or amend the required amount of financial assurance and the EPA may discharge and use a financial assurance under Sections 364 - 367 of the EPA. State of Western Australia: The Mining Act of 1978, the Environmental Protection Act of 1986 and the National Environmental Protection and Biodiversity Conservation Act of 1999
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Country
Policy, Laws, Rules and Regulations require all operating mines to post a rehabilitation bond or mining securities to protect the State from financial liabilities should a mineral tenement owner fail to comply with mine site rehabilitation requirements. Tasmania: Sections 14, 53 and 75 of the Mineral Resources Development Act, 1995 stipulate that applicants of mineral rights must lodge security deposits (bonds) with the Crown before the Minister can grant either an exploration license, retention license or a mining lease.
Republic of South Africa
The Minerals Act (50 of 1991) requires that an environmental management program report containing rehabilitation plan be submitted and approved by the authorities before any mining activities can start, and that finances be set aside for this purpose.
United States
The USA Federal Law governing the rehabilitation of mines is the Surface Mining Control and Reclamation Act of 1977. This legislation is enforced by the Office of Surface Mining, a Section of the Department of Interior. In terms of the legislation, operators are required to apply for a permit to mine. The permit contains, amongst other things, a detailed reclamation plan, the requirements of which are listed in Section 508 of the Act. The amount of the bond required for each bonded area depends on the reclamation requirements of the approved permit; reflects the probable difficulty of reclamation giving consideration to such factors as topography, geology of the site, hydrology, and re-vegetation potential. The amount of rehabilitation bond to be posted by the operator is determined by the regulatory authority.
Canada
State of Ontario: Chapter M.14 of the Mining Act, Revised Statue of Ontario of 1990, requires each mining operator to post a rehabilitation bond for mine closure to the State of Ontario. Section 145 of the Act specifies the forms and the amount of financial assurance required in the closure plan. State of British Colombia: Section 10 of the Mines Act, Revised Statue of British Columbia of 1996, requires the owner, agent or manager of a mine to post a rehabilitation bond to the State of B.C in the amount and form to be specified by the Chief Inspector of Mines.
Ghana
The Environmental Protection Act of 1994 and the Environmental Assessment Regulations of 1999 require disturbed land by mining companies to be rehabilitated as per approved closure plan. Mining companies are required to post a rehabilitation bond for environmental reclamation before commencement of mining activities. As of 2003, a total amount of USD 3 million was posted by mining companies to the Ghanaian Government as rehabilitation bond.
Namibia
The Minerals Policy of Namibia of 2003 states that the Government will ensure that the development of Namibia’s mining industry proceeds on an
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Country
Policy, Laws, Rules and Regulations environmentally sustainable manner. In order to reduce the burden on the taxpayer to fund the rehabilitation of the abandoned mines, the Government has adopted a polluter pays principle to ensure protection of the environment both during and after mining operations. This is achieved through the development and implementation of internationally benchmarked, Environmental Trust Funds or Bonds.
4.1
Posting of Rehabilitation Bonds in other Countries by the Parent Companies of the Major Gold Mines Operating in Tanzania
Currently, there are three multinational gold mining companies operating in Tanzania, which are Barrick Gold Corporation, AngloGold Ashanti and Resolute Mining Company Limited. These mining companies have operations in different countries wherein posting of a rehabilitation bond is mandatory as indicated below: •
Resolute Mining Company Limited of Australia posted a rehabilitation bond against the reclamation liabilities for the closed Obotan Gold Mine in Ghana in 2001. Furthermore, Resolute Mining Company Limited conducts mining operations in Australia where the requirement for posting of environmental rehabilitation bond is in place.
•
AngloGold Ashanti have mining operations in the Republic of South Africa, Ghana, Mali, Australia and, USA, wherein the requirement for posting of environmental rehabilitation bond is in place.
•
Barrick Gold Corporation has 27 operating mines and 10 development projects in the Republic of South Africa, Australia, North and South America. Environmental legislations from these countries require posting of environmental rehabilitation bonds.
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5.0
VARIOUS FORMS OF ENVIRONMENTAL REHABILITATION BONDS
The study has revealed that surety bond, insurance bond, cash deposit, cash trust fund, bank guarantee bond, self guarantee bond and letter of credit are the common forms of rehabilitation bonds employed globally in the mining industry. The choice of a particular form of rehabilitation bond depends on the risk of default, magnitude and nature of a mining project. Small scale mining operations would normally disturb small areas of land, but the risk of default is high. Hence, small scale miners need to post to the Government a “hard guarantee” form of rehabilitation bond (letters of credit, cash deposit and cash trust funds). On the contrary, large scale mining operations disturb considerable big areas of land but the risk of default is low. Hence, large scale miners need to post to the Government a “soft guarantee” form of rehabilitation bond (self guarantee bond, bank guarantee bond, surety bond and insurance bond). Other factors which are considered by governments in choosing the appropriate form of rehabilitation bond include history of performance or track record of the mining company, environmental management system in place, financial strength of the mining company and characteristics of the mine site. In short, financial assurance instruments must guarantee the completion of environmental rehabilitation and reclamation activities. Table 6 summarizes types of environmental rehabilitation bonds applicable in different countries and their pros and cons.
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Table 6: Types of Environmental Rehabilitation Bonds Applicable in Different Countries Type
Characteristics
Pros
Cons
Examples Countries using it
Surety Bond
•
•
•
USA
•
• •
It is a written promise by a “guarantor” to pay the Government a specified amount in case the mining company fails to fulfill its obligations to rehabilitate the disturbed land at the mine site as per approved closure plan. A premium is normally paid by the mining company to the underwriting institution (i.e. the guarantor). It is the mostly used instrument in many countries. It has been used for at least two decades in the USA.
•
•
•
The cost of getting it is relatively low. Costs associated with setting it up is expensed as a tax deductable item. Once in place, only a minimal amount of administration cost is required. There are many ways of initiating and releasing surety bonds through phased implementation and phased release.
• •
Often a letter of credit is required to back-up the bond, which makes it more expensive. Its availability may be restricted by a company’s credit and its environmental risks. The full face value of the surety may be required.
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Canada Philippines Eritrea Fiji
Type
Characteristics
Pros
Cons
Examples Countries using it
Letter of Credit (L/C)
• •
•
•
It is issued by a bank and usually for a larger sum of money than originally estimated for closure. A fee is paid to the lending institution to cover the transaction (even if draw-down does not occur). The availability of an LC may be restricted by a company’s credit and its environmental risk. It may restrict company access to other credit. It is issued for a period of one year - short-term solution for a long-term problem. Reduction of the company borrowing power.
USA
It is often considered by financial institution to be part of working capital, thereby reducing available operating funds. Bank Guarantees are provided with fixed life. Bankers are normally unwilling to provide
Australia
•
It is similar to surety bond. The content of a letter of credit reflects the terms and conditions agreed between the mining company and the government with respect to a specific closure plan. LC normally has a one year term, usually extended following review by the issuer. If not extended the beneficiary (government) is notified and has the option of drawing down the full value.
•
•
It is relatively inexpensive for the operator to establish. Low initial cost (about 1% per annum of the face value). Costs associated with opening an LC is expensed as a tax deductible item. Once in place, only a minimal amount of administration cost is required.
•
•
• •
Bank Guarantee Bond
•
•
This is an agreement between the company and the bank whereby the bank will provide cash funds to the authorities if the company defaults. It is required to be unconditional and/or
•
•
It is flexible enough to allow the companies with good commercial credentials to gain competitive rates. It requires environmental rehabilitation works of
•
•
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India Canada Australia Sweden
RSA Sweden
Type
Characteristics
Pros
irrevocable.
•
• • • Cash deposit
Normally deposited direct with Government and only usually accepted for small operations.
•
•
Cons
a mine to be completed successfully before guarantees are discharged. It has full backing of financial institution (funds available on demand). It is transparent and operation specific. It cannot normally be withdrawn by the issuer. It can be altered as requirements change. It provides an advantage to the Government which has direct control over funds and has sole responsibility for making funds available if required. The cash is returned to the company, normally on completion of closure works.
open ended guarantees because fixed bank guarantee gives them the opportunity to revisit the credit of the mine at the end of each term.
•
•
•
Providing cash ‘upfront’ is a financial impediment to the operator and potential loss of income through interest on funds. If operator goes bankrupt cash may be classed as a company asset and available to all creditors. Government must have a system to ensure segregation of
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Examples Countries using it
Type
Characteristics
Pros
Cons
Examples Countries using it
funds for their intended use. Cash Fund
Trust
•
•
•
Insurance Bond
•
It is a fund set aside by the mining operator to help pay for the rehabilitation costs of disturbed areas at the mine site. Normally, the Government ensures that the funds are structured in such a way as to give reasonable assurance that it will meet the expected closure costs. It is administered by a third party trustee with a defined investment policy. It is intended to cover the costs of a specific closure plan through a structured series of contributions. Surplus funds are returned to the operator. It is highly desirable that the income earned by the fund should be tax protected until it is withdrawn.
•
It is a special form of surety bond.
•
•
•
The company has control over its fund, since any surpluses created or earned is returned to the company. The company has the incentive to ensure sound management of the fund. It is more visible and often better understood by governments and the public than other bonds.
•
It may require smaller up-front cash
•
•
•
Great uncertainty about the size of the fund in view of the long timeframe involved. If large amount is required, a transition period is necessary to allow time to the company to build up the required financial guarantee. Administrative requirements (similar to a pension fund) can be cumbersome.
USA
It is only valid premium is paid.
USA
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if
annual
Australia Canada RSA India
Type
Characteristics
•
The premium paid is a function of the estimated closure cost with actual calculations to annual payout levels and the total amount of the insurance.
Pros
• •
commitments than a cash trust fund. Premiums would be tax deductible. Less administration is required than with a cash trust fund.
Cons
Examples Countries using it
•
Initial premiums may be very high to ensure substance of the insurance. In addition to premium amounts, there could be taxes and insurance brokerage fees. Recourse to finance assurance often takes place some years after the operator becomes inactive and is unable to pay the premium. It is a new form of rehabilitation bond. Hence, not well tested.
Australia
Require long history of financial stability and an annual financial statement prepared by accredited accounting firms. Gaining access to assets may be problematic in the case of firms facing bankruptcy.
USA
• •
•
Self Guarantee Bond
• •
It is also known as Corporate Guarantee or Self-Insuring. It is based on an evaluation of the assets and liabilities of the company and its ability to pay the cost of closure requirements.
It is the financial instrument mostly preferred by the mining companies.
•
•
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Canada
Canada
In consideration of the pros and cons of the main seven types of rehabilitation bonds commonly used in the mining industry, bank guarantee form of rehabilitation bond is the best, especially in large scale mining operations. This conclusion is based on the following facts: 1.
2. 3. 4.
5.
5.1
It gives bankers the opportunity to revisit the credit of the mine at the end of each term and thereby maintaining realistic environmental rehabilitation costs for mine closure plan. It is sufficient to meet the full costs of closure and aftercare and will protect the Government from closure liabilities. It encourages progressive rehabilitation by the operator during the life-ofmine. It reflects current liabilities and is regularly reviewed. It may be reduced based on progressive rehabilitation work undertaken during the life-of-mine; and It takes into account the operator’s track record, past performance, financial strength and investment ranking.
Methods Used to Compute Rehabilitation Bonds
The study has revealed that there are three commonly used methods for computation of cost estimates for mine closure. These calculation methods vary depending on the nature and magnitude of the mining activities conducted by the operator. The computation methods of environmental rehabilitation bonds commonly applied globally are: • Case-by-Case Costing; • Predetermined Unit Costs; and • Licensee Supplies Determined Costing.
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5.1.1 Case-by-Case Costing This computation method is undertaken by calculating the total rehabilitation costs for each operation unit of a disturbed area based on the conditions and reclamation criteria of the site. The unit costs are not used from one site to another and hence no standard costs to mine reclamation. The rehabilitation bond can be reviewed and agreed by each party from time to time.
Environmental rehabilitation cost (Case-by-Case Costing) = function of {volume of material to be moved, costs of equipment hiring, labor charges, costs of materials needed for rehabilitation, time required for rehabilitation}
5.1.2 Predetermined Unit Costs In this type of computation method of rehabilitation bond, the amount of bond is usually set to a level equal to what can be expected to be ‘normal rehabilitation costs’. Generally, a case study at a particular mine is conducted through which each unit cost is determined and then used as a standard cost from site to site. This computation method saves considerable time and is appropriate for bond auditing but doesn’t account for specific site conditions that can vary due to the type of mining operation; the competence of the mine operator; the topography; climate and soil types; and the rehabilitation plan. Table 7 provides the Western Australian Department of Minerals and Energy minimum pre-determined bond rates used to calculate rehabilitation costs.
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Table 7: Minimum Pre-Determined Bond Rates Used to Calculate Rehabilitation Costs in Western Australia Risk Level
Structure/Activity
Minimum rate (USD/ha)
Higher Risk
Tailings storage facilities and waste dumps with acid mine drainage.
12,000
Moderate
10,000
Low Moderate
ROM pads, normal tailings storage facilities, high waste dumps, plant sites, adits, shafts and special heaps. Camp infrastructure.
Low
Roads and hard-stand.
3,000
Lowest
Exploration involving clearing of native vegetation, metal detecting, dry blowing, prospecting.
2,000
5,000
Source: Department of Industry and Resources, Government of Western Australia
5.1.3 Licensee Supplied Rehabilitation Costs In this type of computation method of rehabilitation costs, normally the Licence Holder or Mine Operator submits detailed rehabilitation costs to the Government for approval. This computation method is not widely used, specifically to large scale mining operations since it lacks some information or clarification during the review process to provide for more accurate rehabilitation cost estimates. Table 8 summarizes the pros and cons of the three methods commonly used in the computation of the amount of rehabilitation bonds to be posted to the Government by mining operators.
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Table 8: Pros and Cons of the Methods Used in Determining the Amount of Rehabilitation Bonds Computation Method
Characteristics
Pros
Cons
Case-by-Case
Total rehabilitation cost for a disturbed area is calculated from each operation unit based on the conditions and reclamation criteria of the site and interim time.
The rehabilitation bond can be reviewed and agreed by each party from time to time.
It takes longer time to come up with the agreed rehabilitation costs since there are no unit costs used from one site to another, i.e. there are no standard rehabilitation costs.
PreDetermined Unit Costs
The amount of bond is usually set to a level equal to what can be expected to be ‘normal rehabilitation costs’.
•
Each unit cost can be determined and be readjusted to a reasonable digit and to be used from site to site. It saves considerable time and is appropriate for bond auditing.
It does not account for specific site conditions that can vary due to: the type of mining operation; the competence of the mine operator; the topography; climate and soil types; and the rehabilitation plan.
It is easily accepted by the mining operators since it is favorable to them.
It lacks some information or clarification during the review process to provide more accurate reclamation estimates.
•
Licensee Supplied Rehabilitation Costs
The Licence Holder or Mine Operator submits detailed rehabilitation costs to the Government for scrutiny and approval.
In consideration of the pros and cons of the common three methods of computation applied globally in the mining industry, Case-by-Case Computation Method is the best of all. It is a good practice for rehabilitation bonds to be reviewed on annual basis.
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6.0 CONCLUSION •
The study has revealed that lack or poorly managed mine closure plans leads to mine operators avoiding rehabilitation obligations, hence leaving the liability to the Government on termination of mining operations.
•
The study has established that the bank guarantee form of rehabilitation bond gives governments and mine owners or operators the opportunity to revisit the bonds at the end of each term; thereby maintaining realistic environmental rehabilitation costs for mine closure. It is therefore the most suitable form of rehabilitation bond, specifically for large scale mining operations.
•
The study has revealed that Case-by-Case method of computation of rehabilitation costs is the best method as compared to other computation methods in that it ensures that the bond posted by the operator to the Government covers fully the costs of rehabilitation and reclamation of the mine after closure. This type of calculation is deemed sensible because the total rehabilitation costs for a disturbed area of an individual mine is calculated separately based on the prevailing physical conditions of a particular mine site.
•
The study recommends amendments to the existing environmental policies, laws and regulations in the area of rehabilitation bond so as to ensure that the burden of rehabilitating mining sites remains to the operator and not the Government after closure of the mine.
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7.0
REFERENCES
1. The Tanzania Mineral Policy of 1997 2. The Mining Act, Cap. 123; the Mining (Environmental Management and Protection) Regulations, 1999. 3. Hernani Mota de Lima, 2003, Financial Guarantee for Mine http://www.scielo.br/scielo.php?pid=S03704672003000300006&script=sci_arttext&tlng=es [Accessed on 02/02/2009]
Closure.
4. UNEP, UNDP, OSCE and NATO, 2005, Mining for Closure – Policies and Guidelines for Sustainable Mining Practice and Closure of Mines, www.goodpracticemining.org/search.php?Query=frameworks [Accessed on 12/02/2009] 5. Mineral & Petroleum Division, State of Victoria-Australia 2004, Rehabilitation Bonds for the Mining and Extractive Industries Position Paper. www.minerals.org.au/__data/assets/pdf_file/0006/30021/MCA_Submission_Bond_Calc_ 030708.pd [Accessed on 09/02/2009] 6. Department of Industry and Resources, Government of Western Australia, December 2006, Mining Environmental Management Guidelines, Review of Environmental Performance Bonds in Western Australia, http://www.dmp.wa.gov.au/836.aspx [Accessed on 25/02/2009] 7. NSW Department of Primary Industry, Mineral Resources Division, June 2006, Rehabilitation Security Deposit Requirements for Mining and Petroleum Titles, www.dpi.nsw.gov.au/__data/assets/pdf_file/0020/96131/esb20-Rehabilitation-SecurityDeposit-Requireme... - 2008-11-06 [Accessed on 27/02/2009] 8. W.R Cowan and W.O Mackasey, Crown Minerals Ltd. October 2006. Rehabilitating Abandoned Mines in Canada: A Toolkit of Funding Options. www.abandonedmines.org/pdfs/ToolKitFundingReport.pdf [Accessed on 12/02/2009] 9. George Miller, International Council on Mining and Metals, February 2005, Financial Assurance for Mine Closure and Reclamation. www.icmm.com/document/282 [Accessed on 12th Feb 2008] 10. Paul Sowley, Resolute Amansie Limited, Sustainable Closure through Stakeholder Involvement, Resolute’s Experience in Ghana www.minerals.org.au/__data/assets/pdf_file/0005/9860/SD05Program_Mon12Sept.p [Accessed on 12th Feb 2008] MINISTRY OF ENERGY AND MINERALS
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11. Allen L. Clark et, An International Overview of Legal Frameworks for Mine Closure: www.elaw.org/system/files/11198931391clark_jcclark.pdf [Accessed on 2nd Feb 2008] 12. South Africa, Department of Minerals and Energy, September 2003, International Practice in The Determination of the Quatum of Financial Provision for Mine Rehabilitation and Closure www.dme.gov.za/minerals/documents.stm - 52k [Accessed on 10th Feb 2008] 13. United States Government Accountability Office G.A.O, June 2005, Hardrock Mining, BLM Needs to Better Manage Financial Assurances to Guarantee Coverage of Reclamation Costs. www.gao.gov/cgi-bin/getrpt?GAO-05-377 [Accessed on 12th Feb 2008] 14. State of Alaska, Department of Natural Resources, Division of Mining, Land and Water, Mining Reclamation Bond (Personal Bond) http://www.dnr.state.ak.us/mlw/mining/largemine/fortknox/pdf2/fgmibond.pdf [Accessed on 8th Feb 2008] 15. NSW Department of Primary Industries, Mineral Resources Environmental Sustainability Branch, June 2006, Rehabilitation Security Deposit Requirements for Mining and Petroleum Titles. http://www.dpi.nsw.gov.au/__data/assets/pdf_file/0020/96131/esb20-RehabilitationSecurity-Deposit-Requirements-for-Mining-and-Petroleum-Titles.pdf [Accessed on 12th Feb 2008] 16. USDA – Forest Service, APRIL 2004, Training Guide for Reclamation Bond Estimation and Administration. For Mineral Plans of Operation authorized and administered under 36 CFR 228A http://www.fs.fed.us/geology/bond_guide_042004.pdf [Accessed on 12th Feb 2008] 17. Asian Development Bank, Examples of Environmental Performance Bonds from the Mining Industry. http://www.adb.org/water/topics/dams/dams0915-15.asp [Accessed on 16th Feb 2008] 18. Dipl.-Ing Johannes Pastor, September 11th 2007, Abandoned Mine Site Rehabilitation in Germany, ww.bmu.de/english/soil_conservation_contamined_sites/doc/pdf/40418.pdf [Accessed on 5th March 2009] 19. Save the world technologies. http://savetheworldtech.com/NEWS_AND_EVENTS.html [Accessed on 20th Feb 2009]
20. 17. Jonathan Spencer Jones: March 2003; A likely source of new gold production in
Tanzania, Mining Review Africa http://www.miningreview.com/archive/033/38_1.htm [Accessed on 20th Feb 2009]
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