21 February, 2016
The global resources boom that has dominated recent decades has seen a strong focus from government and industry on how best to promote mining development.
Less attention has been paid to the question of mine site rehabilitation when mining operations come to an end. This is an important issue, as the cost of rehabilitating a mine site can run to tens of millions of dollars. It is also a question that will become increasingly pressing as falling commodity prices place mining companies under nancial pressure, leading to more mine closures and more companies entering administration or liquidation. This article considers whether the existing legal regimes for securing mine rehabilitation obligations are up to the challenge.
Introduction
Until the 1980s, Australian States had either weak or non-existent regulations for the rehabilitation of mines. Now, States have comprehensive regulatory schemes to ensure the costs of rehabilitation are met by mining companies. Performance bonds, which are designed to secure performance of rehabilitation obligations, sit at the heart of the regulatory system in Australia, and in a number of jurisdictions around the world. One Australian State has, however, recently moved away from the performance bond system and adopted a “pooled fund” model, which is seen as offering a more exible and sustainable way of securing mining rehabilitation obligations. This new system has been seriously tested in its rst years of operation by the shutdown of the Ellendale Diamond Mine in Western Australia that has left the State facing a rehabilitation liability of up to AU$40m. In this article, we explain how the existing performance bond systems operate and contrast that with the new pooled fund model introduced in Western Australia. We also highlight the bene ts and risks of pooled funds and examine how the implementation of the Western Australian scheme presents a cautionary tale for other jurisdictions considering moving to a pooled fund model.
Rehabilitation liabilities
In Australia, the States have the power to regulate the minerals situated within their boundaries. While there are differences between each State,1 there are a number of common features between each of the regimes for mining rehabilitation obligations. In each State, companies that own mining tenements and conduct exploration and extraction activities have primary liability for the rehabilitation of their mines. Mining rehabilitation obligations are primarily enforced by a system of ongoing mine closure planning and reporting, commencing at the grant of the tenement and continuing throughout the life of the mine. The content of those obligations is prescribed either under mining and environmental legislation or as conditions on mining leases.
For example, in New South Wales, it is a condition imposed on the grant of every mining lease under the Mining Act 1992 (NSW) that the applicant submit a Mining Operations Plan prior to the commencement of any operations, as well as Annual Environmental Management Reports.2 These reports must explain how a mine will be developed and must speci cally address progressive and end-of-mine rehabilitation. Similarly, in Western Australia, the Mining Act 1978 (WA) obliges every mining lease applicant to lodge a Mine Closure Plan for approval by the Department of Mines and Petroleum (DMP), detailing plans for the closure, decommissioning and rehabilitation of the mine. The Mine Closure Plan must be updated and reapproved every three years. In Queensland, mine rehabilitation plans are required as part of the environmental approval process under the Environmental Protection Act 1994 (Qld) rather than as a condition of a mining lease.
These regimes illustrate that the primary means of enforcing mine rehabilitation obligations is through a system of reporting and planning that commences when a tenement is rst granted and continues throughout the life of the mine.
Financial assurance systems
While mine closure planning is the first line of regulation used by States, the potentially heavy nancial burden of rehabilitation has led States to impose additional measures compelling companies to meet their rehabilitation obligations. In most States, mining tenement holders are required to provide a security payment, usually in the form of a bank guarantee or cash, that covers the estimated cost of rehabilitating the tenement. The security can be used to fund the cost of rehabilitation if the tenement holder is unable or unwilling to rehabilitate the land. Securities are held by the State until it is satis ed that the tenement holder has met its rehabilitation obligations.
For example, under the Mining Act 1992 (NSW), any authorisation to conduct mining or exploration may be accompanied by a condition requiring the holder to provide a security deposit that covers all estimated rehabilitation costs. As a matter of policy, the State requires a security deposit for all coal, mineral and petroleum exploration and production activities.3 The titleholder must provide the Department of Resources and Energy with an estimate of rehabilitation costs, which the Department considers when determining the amount of the security deposit. In deciding whether to release a security deposit, the Department will consider whether the requirements of the rehabilitation and closure plan have been met, whether environmental and safety obligations have been met, and who is responsible for ongoing management of the site.4 If the rehabilitation obligtions have not been met to the satisfaction of the Minister, then part or all of the security deposit may be forfeited under the Mining Act 1992 (NSW).
Similarly, in Queensland, the Department of Environment and Heritage Protection has the power under the Environmental Protection Act 1994 (Qld) to impose a condition on an environmental authority requiring that nancial assurance be provided before any mining operations are carried out and, as a matter of policy, imposes such a condition wherever there is “resource activity” that may result in “signi cantly disturbed land” under a mining lease.5 Uniquely, Queensland allows a mining company to discount its nancial assurance below 100 per cent of the estimated rehabilitation liability in recognition of good environmental performance and a low risk of default.
A large number of countries outside Australia also use the nancial assurance model to secure rehabilitation obligations. To give some idea of the scale, a World Bank Report in 2009 conducted case studies of ten different jurisdictions that operated a financial assurance system – Ontario, Nevada, Queensland, Victoria, Botswana, Ghana, Papua New Guinea, South Africa, Sweden and the European Union.6
While there are variations between these jurisdictions about the type of security that is accepted, the amount of security that is required, whether administration costs are included in the liability estimate and whether the security is applied by tenement or by project, the core aspects of the schemes are similar.
Pooled fund model
In 2013, Western Australia became the rst Australian jurisdiction to introduce a pooled fund for its mining industry. The Western Australian Mining Rehabilitation Fund (MRF) requires tenement holders to make regular contributions into a central fund administered by the State. The MRF operates in accordance with the Mining Rehabilitation Fund Act 2012 (WA) (MRF Act) and Mining Rehabilitation Fund Regulations 2013 (WA) (MRF Regulations).
The reform of Western Australia’s security bond system was driven by State and industry concerns.7 The State’s main concern was that bonds were inadequate to cover its potential rehabilitation liability. In a 2011 policy paper, the State estimated that bonds secured less than 25 per cent of the total potential rehabilitation liability for mines in Western Australia. As a result, the State increased the minimum amounts bond holders were required to pay, leading to industry complaints that the bonds were too onerous. Industry also expressed concern that the system was in exible, particularly because a bond could only be applied to the rehabilitation costs of the speci c tenement to which it related, as opposed to the rehabilitation costs of a whole mining project.
The MRF Act imposes an obligation on all holders of a mining tenement to pay an annual levy. A miner’s rehabilitation liability is determined by multiplying the size of the tenement by a “rehabilitation rate”, which re ects the likely rehabilitation cost of a project based on the intensity of the mining operations. Holders of tenements with a rehabilitation liability of AU$50,000 or above are required to make an annual, non-refundable payment into the fund at the contribution rate of one per cent of the calculated rehabilitation liability. MRF funds can be used to rehabilitate any tenement in respect of which the levy was payable. Additionally, income earned from the MRF can be used to rehabilitate any abandoned mine site in the State.
After the introduction of the MRF, it was unclear how it would interact with the existing security bond system. Initially, the Western Australian Government began releasing performance bonds on the basis that rehabilitation liabilities would be covered by the MRF.
However, in July 2014, the State announced that, regardless of whether a levy payment is required under the MRF Act, it would still impose performance bonds on tenements where there is a high risk of the rehabilitation liability reverting to the State.8 This includes where the tenement holder is in administration or liquidation, has breached its environmental obligations or its reporting and payment obligations under the MRF Act, or has failed to make royalty payments to the State.
The pooled fund model illustrated by the MRF is seen as a more exible and sustainable way of securing environmental performance and is likely to be examined closely by other Australian jurisdictions. For example, Queensland is currently considering replacing its performance bond system with a pooled fund model.9 Despite this, serious questions about the effectiveness of the MRF have emerged following the shutdown of the Ellendale Diamond Mine in Western Australia.
Ellendale Diamond Mine10
In 2015, the Kimberley Diamond Company Pty Ltd (KDC), a subsidiary of Kimberley Diamonds Ltd (KDL), shut down its Ellendale yellow diamond mine after it was unable to nd a buyer for the mine. KDC was put into liquidation after the mine closed with a number of outstanding liabilities, including unpaid wages, more than AU$10m in creditor debts, AU$1.5m in unpaid royalties and an estimated rehabilitation cost of AU$28m–40m.
With KDC in liquidation, it was revealed that the State had released AU$12.1m in performance bonds to KDC when it signed up to the MRF in 2013. KDC contributed a total of AU$818,826.40 to the MRF, leaving a signi cant gap between its rehabilitation liability and money contributed to the fund.
KDC’s liquidator initially sought to find a buyer to take on the mine and the rehabilitation liability. When this failed, the liquidator lodged a “disclaimer of onerous property” with the Australian Securities and Investments Commission. It seems that this is the rst time this provision of the Corporations Act 2001 (Cth) (Corporations Act) was used in relation to a mining tenement in Western Australia. The effect of the disclaimer of onerous property provision is the company’s rights, interests and liabilities in the disclaimed property are terminated from the day the disclaimer takes effect. The purpose of this provision has traditionally been to enable a liquidator to rid a company of burdensome nancial obligations which might otherwise continue to the detriment of those interested in the liquidation. The DMP did not exercise its right to challenge the notice and, as a result, the cost of completing the rehabilitation now falls on the State, rather than on the liquidator of KDC.
The interaction between restrictions on the surrender or transfer of mining tenements and the power to disclaim onerous property has not been considered in Australia. The Mining Act regime in Western Australia is designed to prevent tenement holders from simply walking away from their rehabilitation obligations. A mining lease can only revert to the State where the holder applies to surrender it, the Minister orders that it be forfeited for breach of a covenant in the lease, or the Mining Warden orders that it be forfeited (on application by a third party) for non-compliance with the prescribed expenditure conditions. Similarly, mining leases cannot be transferred without the Minister’s consent. The liquidator of KDC effectively avoided these restrictions by using the power to disclaim onerous property under the Corporations Act.
A similar issue has, however, been considered in the UK, which has a similar provision for the disclaimer of onerous property.11 In Re Celtic Extraction Ltd,12 an of cial receiver sought to disclaim waste management licences under the Environmental Protection Act 1990 (UK), under which the companies would have been liable for over £300,000 in clean-up costs. The Court of Appeal found that the receiver was entitled to use the power to disclaim onerous property to dispose of the waste licences. The Environmental Protection Act 1990 (UK) provided that a waste management licence would continue in force until it was revoked or surrendered in accordance with the Act, and the Environment Agency argued that this excluded the operation of the power to disclaim. The Court of Appeal rejected this argument and held that the Environmental Protection Act did not exclude termination of a licence by external statutory force, including by the power to disclaim. In reaching this conclusion, the Court of Appeal said that the “polluter pays” principle, which underpins the waste management licence scheme, should not be applied where the polluter cannot pay. Applying polluter pays to a company in liquidation would undermine the principle that the property of insolvent companies should be divided equally among unsecured creditors and not entirely to a creditor who holds the rights to onerous property.
Although the issue has not been considered in Australia, the reasoning of the Court of Appeal could be applied to a mining lease. As discussed, the Mining Act 1978 (WA) has a number of provisions which prescribe the circumstances in which a company can surrender, forfeit or transfer a mining lease. Following the reasoning in Re Celtic, the existence of such provisions would not stop a company from invoking the power to disclaim onerous property, as was done by the liquidator of the Ellendale Mine. In fact, the conclusion would be even stronger under the Mining Act 1978 (WA) because, unlike the Environmental Protection Act 1990 (UK), the Mining Act does not contain any provision that expressly provides that a mining tenement shall continue in force until it is terminated under the Mining Act. The UK’s experience provides a strong argument that could be made in Australian courts if the DMP sought to challenge the validity of the exercise of a disclaimer of onerous property in relation to a mining lease.
Lessons
Given the prevalence of nancial assurance systems around the world, Western Australia’s early experience with a pooled fund system provides an insight into the bene ts and challenges it presents as an alternative model.
The pooled fund model provides a number of advantages over nancial assurance systems. First, it imposes a much less onerous obligation on tenement holders because they are only required to contribute a small percentage (one per cent in Western Australia) of the estimated rehabilitation cost on an annual basis, rather than 100 per cent of the estimated liability. Second, it addresses concerns that nancial assurance systems are not able to keep up with the rehabilitation bill that different States have accumulated.
For example, Queensland currently holds AU$5.38bn in rehabilitation securities in the form of cash or bank guarantees and New South Wales holds AU$1.8bn. However, estimates suggest that the actual rehabilitation costs will be three to ten times that amount,13 with one study putting the combined bill for New South Wales and Queensland in excess of AU$17.8bn.14 Third, pooled funds can be used for a wider range of purposes rather than simply securing the rehabilitation commitments of one holder of one tenement. In this way, a pooled fund provides a way of meeting the cost of rehabilitating abandoned mines that escaped the obligations imposed under mining or environmental legislation.
On the other hand, the pitfalls of moving to a pooled fund model are illustrated by the Ellendale Diamond Mine case. The State’s decision to release the AU$12m performance bonds it held over the Ellendale Mine has left it with little recourse to recover the costs of rehabilitating the site. For Western Australia, the problem extends well beyond the Ellendale Mine because, as part of transition to the Mining Rehabilitation Fund, 4,581 performance bonds have been retired and only 201 remain in effect across the State.15
While the Ellendale case raises questions about the pooled fund model, it also invites scrutiny of the DMP’s implementation of the MRF. Under the DMP’s policy, performance bonds were to be retained for mines with a “high risk of the rehabilitation liability reverting to the State”, including where there had been a failure to pay royalties. Arguably, KDC’s performance bonds should not have been released under this policy, given that it had fallen behind on its royalty payments. However, it is unclear what information was provided to the DMP prior to the release of the performance bonds, and the Chairman of KDL has subsequently been charged with four offences relating to making false and misleading statements to the Australian Securities Exchange. This illustrates some of the challenges that need to be addressed in the transition from a nancial assurance system to a pooled fund model.
Conclusion
Ultimately, performance bonds provide States with the greatest level of security for the performance of mine rehabilitation obligations. However, performance bonds are facing increased scrutiny as questions are raised about whether they impose too much of a burden on companies and whether they can meet the true cost of rehabilitation. Pooled fund models offer a potential solution to these problems but, as the Ellendale case demonstrates, will not be effective unless regulators can accurately estimate potential liability and raise a suf cient amount of funds to cover that liability. The Ellendale case, which could cost Western Australia up to AU$40m, illustrates the cost of getting it wrong and provides a cautionary tale for other jurisdictions considering a pooled fund model.
1 Land (Planning and Environment) Act 1991 (ACT); Mining Act 1980 (NT); Mining Act 1992 (NSW); Mineral Resources Act 1989 (Qld); Mining Act 1971 (SA); Mineral Resources Development Act 1995 (Tas); Mineral Resources Development Act 1990 (Vic); Mining Act 1978 (WA).
2 ESG3: Mining Operations Plan (MOP) Guidelines, 3, Department of Trade and Investment, Government of New South Wales, September 2013.
3 EDP11 – Rehabilitation Security Deposits, Department of Industry, Resources and Energy, Government of New South Wales, January 2012.
4 Ibid.
5 Guideline: Financial assurance under
the Environmental Protection Act 1994, Environmental Protection Act 1994 (Qld), Department of Environment and Heritage Protection, May 2013.
6 Guidance Notes for the Implementation of Financial Surety for Mine Closure, Oil, Gas and Mining Policy Division, The World Bank Group, 2009.
7 See Western Australia’s Mining Security System – Preferred Option Paper, Department of Mines and Petroleum, March 2011 and Preliminary Discussion Paper – Policy Options for Mining Securities in Western Australia, Department of Mines and Petroleum, December 2010.
8 The administration of mining securities for mine sites by the DMP, Department of Mines and Petroleum, Government of Western Australia, July 2014.
9 Reform of Queensland’s nancial assurance system: Discussion paper, Department of Environment and Heritage Protection, Government of Queensland, June 2014.
10 The facts relating to the closure of the Ellendale Diamond Mine are taken from the following sources: Peter Williams, “State picks up $40m Ellendale bill”, The West Australian, 3 November 2015; Nick Evans, “Bit-by-bit sale for Ellendale”, The West Australian, 3 September 2015; Ben Hagemann, “Kimberley Diamonds leaves a poor legacy”, Australian Mining, 6 July 2015; Jessica Kidd, “Former Kimberley Diamonds boss arrested for allegedly misleading stock market over yellow diamond prices”, Australian Broadcasting Corporation, 15 September 2015; Hon. Robin Chapple, Parliamentary Debates, 3290, Western Australia, Legislative Council, 11 August 2015.
11 Insolvency Act 1986 (UK) s 436.
12 [2001] Ch 475.
13 Lisa Main and Dominique Schwartz,“Industry insider warns taxpayers may foot bill for mine rehabilitation unless government, industry step up”, Australian Broadcasting Corporation, 19 September 2015.
14 Lachlan Barker, “Who will pay the more than $17.8 billion mining rehabilitation bill?”, Independent Australian, 1 June 2015.
15 Hon. Robin Chapple, Parliamentary Debates, 3290, Western Australia, Legislative Council, 11 August 2015.
For further information, please contact:
Christopher Barry, Ashurst
christopher.barry@ashurst.com
