Mining and Sustainable Development II - DTIE

Mining
funding life cycle of a mining operation is shown
in Figure 1. Gold mining, for example, may have
a relatively short life-cycle of some 10-20 years.
The geotechnical and geochemical nature of mining
projects may result in a continuation of significant,
long-term, and wide ranging
environmental and health and safety impacts even
after all operations are terminated. The adverse
post-operational impacts associated with gold
mining projects, for example, may typically
include release of acid mine drainage or other liquid
discharges into the environment. This, in
turn, can mobilize sediments, heavy metals and
reagents in nearby surface and groundwater, or
generate dust containing heavy metals. 2 Mining
activities, more generally, can result in a number
of other potentially significant adverse environmental
impacts which are not covered in this article.
Examples include subsidence, impacts on
biodiversity and on the lives of local and indigenous
populations. These impacts can normally be
controlled and mitigated by implementing a mine
rehabilitation and closure programme, which
should typically be outlined and costed as part of
the environmental impact assessment (EIA) and
the feasibility study of the mining project.
The objective of mine closure is to provide
long-term stabilization of the geochemical and
geotechnical conditions of the disturbed mining
areas to protect public health, and minimize and
prevent any additional or on-going environmental
degradation. Mine closure is, typically,
required at a time when the operation is no longer
economically viable, when cashflow is often
severely restricted or negative, and when the value
of assets is below the expenditures required to
achieve the environmental objective of mine closure.
The objective of securing mine closure funding
at an early project development and
implementation stage is to reduce the risk of an
enterprise being either unwilling or unable to
undertake mine closure due to lack of funding.
International practice
In the absence of other regulatory requirements,
accounting provision is preferred by the mining
industry to address mine closure liabilities. This
practice is an accounting transaction which allows
a company to make non-cash provisions for future
mine closure costs. However, this does not result
in any actual cashflow for the purpose of accumulating
closure funds or payment of related expenses.
Unless the company has chosen to set aside
actual funds for closure, when the project
approaches the closure date closure liabilities are
likely to exceed the project’s and the company’s
tangible book values, assuming the typical scenario
of a ring-fenced special purpose mining
company which is operating one mining project.
Any attempts to raise additional funds for closure
at this stage by selling the company’s assets would
be unlikely to raise sufficient funds to meet the
closure requirements. A ‘one-project-company’
may declare bankruptcy at this stage rather than
attempting to raise and invest additional funds for
the terminal stage of the project with no prospect
of a return on such an investment. Declaring
Relative value
Figure 1
A conceptualized funding life cycle of a mining operation
Development cost
Debt service
Time
Profits
Closure
bankruptcy would ‘externalize’ the costs associated
with mine closure and result in the financial
burden being passed on to the authorities. Government
funding may well be inadequate to mitigate
potential long-term environmental and
safety impacts.
‘Good mining industry practices’ in Australia,
Canada, and the USA, for example, are typically
guided by: industry stewardship, i.e. “self-policing”
as a result of good corporate governance;
following company policies and reflecting shareholder,
employee, and NGO pressure; relatively
recent regulatory frameworks; and sophisticated
financial and insurance markets to integrate and
address mine closure activities and their financing.
In these countries, accounting accruals alone
are typically no longer considered adequate to
mitigate the risk of non-performance of mine closure
activities. Instead, companies are required to
secure the necessary funding by providing guarantees
for mine closure funds prior to commencing
construction and operation, and prior to
generating any cashflow from the operation. The
available guarantee options include bonding, corporate
surety and guarantees, letters of credit,
deposits of cash or gold, insurance and other
methods. Key considerations during the selection
process by both industry and regulators include
the costs associated with each option, the creditworthiness,
and the track record of the owner/
operator.
Some environmental pressure groups or nongovernmental
organizations (NGOs) consider the
relatively recent developments in the US, 3 – for
example, requiring financial guarantees (rather
than accounting accruals alone) – an invaluable
step towards risk reduction of non-performance
of mine closure. However, these NGOs also point
out that permitting agencies in the US have commonly
underestimated reclamation costs by failing
to account adequately for permit violations
and incidents, off-site pollution, administrative
costs, and inflation. This view is echoed, to some
extent, by industry consultants and mining companies
who believe that a number of issues, such as
the extent and period of aftercare required for
post-operational activities, and the related cost
estimates have often been underestimated in the
past. However, they also believe that these issues
are now much better understood, allowing for
much more reliable definition and costing of the
issues.
The Economies in Transition
In contrast to Australia, Canada and the USA, the
Economies in Transition comprising Central and
Eastern Europe (CEE) and the Former Soviet
Union (FSU), have yet to develop a similarly
sophisticated corporate governance, regulatory
framework or financial and insurance markets to
address the funding of mine closure. This is further
complicated by
◆ environmental liabilities resulting from ongoing
operations;
◆ involvement of some ‘junior investors’ which
have, unlike many major mining companies, limited
resources to back-up the mining company’s
obligations and, sometimes, exhibit a more limited
appreciation of reputational risks;
◆ the involvement of state-controlled enterprises,
sometimes with very limited access to financial
resources and state-of-the-art know-how;
◆ some agreements explicitly or implicitly allocating
closure related liabilities to the local partner or
government towards the end of the economic life
of the project, by, for example, transferring all
assets;
◆ lack of enforcement of local environmental regulations;
◆ lack of awareness and influence on the part of
the potentially affected public; and
◆ lack of transparency, as contractual arrangements
addressing mine closure activities and related
costs are generally treated as confidential.
Risks which may preclude mine closure
Many international financial institutions and
investors as well as sponsors, borrowers, and regu-
UNEP Industry and Environment – Special issue 2000 ◆ 55