Financial assurance, mine rehabilitation and closure – a new perspective on an old issue (Part 1 of 2)

May 2017 | Energy & Resources

Part 1: Financial Assurance Review

Introduction

The Queensland Government is concerned that some 220,000 hectares of land has been disturbed by current and historical mining activities. It is estimated that only 8% of this land has been rehabilitated. This poses a key risk to the State, both in terms of environmental concerns and potential financial impacts in circumstances where the State becomes responsible for rehabilitating the land.

In order to address the concerns regarding the financial and environmental challenges for mine rehabilitation in Queensland, the government commissioned the Queensland Treasury Commission to undertake the ‘Review of Queensland’s Financial Assurance Framework’ (FA Review). In response to the FA Review, the Department of the Premier and Cabinet has released two discussion papers: ‘Financial Assurances Framework Reform’ and ‘Better Mine Rehabilitation for Queensland’. Submissions on the discussion papers close on 15 June 2017.

In this two part series, we will review the proposed changes to the financial assurance regime in Queensland, and separately consider the mine rehabilitation proposals that form part of the reform package.

Current FA position

In order to manage environmental risk at mine sites, financial security, called a Financial Assurance (FA), is required to be provided by resource companies to the government prior to commencing mining activities. Queensland’s current FA framework applies to mining and petroleum activities where a site-specific environmental authority is required. The amount of the FA is determined by the likely cost of rehabilitation for the area of disturbance, using the Queensland Government’s FA calculator.

Current process for FA submission1

FA Reform – the review

The FA Review was undertaken to provide the government with a better understanding of the current FA regime, and to conduct an assessment of a range of alternative FA models that could be implemented in Queensland, focussing on reducing risk for government and industry.

The review included significant targeted consultation with a range of stakeholders, including representatives of industry, land groups, environmental groups, and the finance sector. The FA Review set out some of the key risks and concerns highlighted by each group. These included the following:

  1. Industry advised that for some medium projects, the cost of the bank guarantee to support the FA requirement is almost equal to the investment required to secure tenure and develop the project.
  2. The finance sector stated that, in the US, two-thirds of guarantees are supported by insurance companies. Concerns regarding the Chain of Responsibility amendments in Queensland were also cited.2
  3. Land groups are concerned about the long term sterilisation of land caused by the failure to properly rehabilitate mine sites.
  4. Environmental groups raised transparency and an ‘expectation gap’ between community expectation and the ‘on the ground’ rehabilitation occurring in Queensland as a key concern.

The review ultimately demonstrated that the existing FA regime has significant scope for improvement with respect to both financial impacts on the State and industry proponents, as well as environmental outcomes. The FA Review recommended a new FA regime, as well as a number of other reforms including a focus on better progressive site rehabilitation.

FA Reform – the recommendation

The FA Review recommended that a ‘Tailored Solution’ be adopted, to allow a more flexible approach to financial assurance and increased risk management.

The Tailored Solution contemplates an assessment of resources companies against four separate categories, which are intended to reflect the risk that a particular company poses, having regard to its financial risk profile and site rehabilitation estimate.

Tailored Solution table3

Once a company is classified, then its FA arrangement will be one of four options:

  1. Rehabilitation Fund – contributions are to be made to a fund, which will pool contributions and allow the State to use those funds to rehabilitate an abandoned mine site, if required. Companies classified as ‘representative resources entities’ will be required to pay into the Rehabilitation Fund. It appears this category will be the most common within the resources sector.
  2. Selected Partner Arrangement – an amount will be paid to the Government similar to the rehabilitation fund, but these funds will be directed to other environmental initiatives by the Queensland Government (such as the abandoned mines projects). This type of FA arrangement will only be available to companies with large rehabilitation liabilities but extremely low risk of financial failure.
  3. Third Party Surety – resource companies with an elevated risk profile will be required to provide a financial surety for the full amount of the estimated rehabilitation obligation. Possible forms of sureties are being reviewed to consider expansion beyond bank guarantees or cash. The FA Review noted insurance companies as a potential option to provide a new type of surety.
  4. Small Operator Arrangement – smaller resources companies will fall into either the Third Party Surety or the Rehabilitation Fund, depending on the risk profile. However, the amount of the surety or payment required will be reduced in comparison to larger resources companies.

Other reform areas

In addition to the proposed amendments to the FA framework, other areas of reform are also considered as part of the review, including:

  1. Revising the Mine Rehabilitation Policy, to provide industry with clear and enforceable expectations. We will address this further in part two of this series.
  2. Expanding of the types of surety that can be provided, including a wider range of banks and insurance companies.
  3. Expanding the Abandoned Mine Lands Program to manage public safety in relation to historic abandoned mines, with a focus on mines on government land.
  4. Better management of mines in care and maintenance. Improved oversight is proposed, which may include provision in the regulation for ‘care and maintenance’ obligations.
  5. Review of the ability for the State to consider the sale of shares in a company that holds mining tenure and an environmental authority.
  6. Improved data analysis and information systems, particularly with regard to the collection and use of the pooling funds and FAs.
  7. Clarifying the role of residual risk payments after the surrender of relevant tenure.

Next steps

Submissions on the FA reform discussion paper are due before 15 June 2017. As part of the continued stakeholder consultation relating to the entire financial assurance framework reform package, feedback will be sought regarding the other reform agenda items progressively until mid 2018.

In part two of this series, we will take a closer look at the ‘Better Mine Rehabilitation for Queensland’ discussion paper, which forms a key part of the overall reform agenda in Queensland.

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1 Refer to Figure 2 in the Financial Assurance Framework Reform Discussion Paper - https://www.treasury.qld.gov.au/projects-infrastructure/initiatives/improving-outcomes-resources-sector/financial-assurance-framework-reform-discussion-paper.pdf
2 Refer to our previous newsletters, Carter Newell Planning & Environment Newsletter October 2016 ‘Are you personally liable? Lessons on environmental law and personal exposure’ and Carter Newell Planning & Environment Newsletter February 2017 ‘CoRA Guideline approved - But is it just a bandaid solution?’.
3 Refer to Figure 3 in the Financial Assurance Framework Reform Discussion Paper - https://www.treasury.qld.gov.au/projects-infrastructure/initiatives/improving-outcomes-resources-sector/financial-assurance-framework-reform-discussion-paper.pdf

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