Given the uncertainty surrounding the interpretation of the National Environmental Management Act’s (Nema’s) financial provisioning regulations, most mining companies have decided to wait until the regulations have been finalised before allocating resources to become compliant, says underwriting managing agent Cenviro Solutions, which is underwritten by its parent company, Centriq Insurance Company.
Cenviro MD Leentie Smit says compliance with the regulations in their current form could result in significant cost, hence, the “wait-and-see” approach. They may also incur additional costs if existing financial structures have to be amended in future to ensure compliance with the financial provisioning regulations.
The regulations came into effect on November 20, 2015. Smit explains that, in terms of compliance, mining right applicants and those awarded mining rights after the 2015 gazetting of the Nema regulations are required to immediately comply with the Act.
Meanwhile, holders who obtained their mining rights prior to November 2015 are required to comply with these regulations by February 2019. Smit notes that the second iteration of the Nema regulations should be published in the near future and provide more clarity.
Under the old regulations, mines had to submit unforeseen closure and final closure plans, but Nema requires
an annual rehabilitation plan; an environmental risk assessment report; and a final rehabilitation, decommissioning and mine closure plan, with the minium contents of each prescribed by the regulations, says Smit. Each document has cost implications for mining companies, specifically because they need to be validated by an independent consultant.
Smit explains that the permissible financial vehicles for rehabilitation that were set out by the Mineral Petroleum Resources Development Act, of 2002, included the deposit of funds with the Department of Mineral Resources (DMR); financial guarantees, which include both a bank and insurance guarantee; and 37A Trusts.
The Nema regulations (in their current form) limit the use of 37A trusts to provide for post-closure rehabilitation. It is Smit’s understanding that this restriction has been reconsidered by the Department of Environmental Affairs and may change.
“Currently, the most preferred method of providing for the mining rehabilitation liability is a financial guarantee, which is immediately issued to the DMR. Financial guarantee solutions allow mining clients to fund the mining rehabilitation liability over a period that takes into consideration life-of-mine (LoM).”
Regardless of potential improvements to the regulations, Smit notes, “all the additional requirements set out by the Nema regulations will have a significant financial impact on companies”, and that this should be acknowledged and budgeted for by the company.
She notes that companies should also engage with environmental specialists to determine the most efficient rehabilitation methods as it will directly impact on the required financial provisioning.
There are several financial implications when implementing new, or amending existing, financial structures. “For example, sometimes changing the method of financial provisioning might have an impact on the company from a tax perspective. It would, hence, be imperative that the company consults with a legal and tax specialist before embarking on such a process.”
Smit says the regulations and the current economic environment have resulted in a new mindset for many mining companies, aiming for a cost-efficient, flexible solution that will preserve cash.
She says the reassessment of existing financial vehicles has resulted in some companies deciding to “change their method of financial provisioning to one that is most suitable for their specific needs”.
Cenviro specialises in the structuring of mining rehabilitation liability guarantee solutions. The company structures corporate liability solutions that meet clients’ needs and ensure compliance with the DMR financial provisioning requirement for mining rehabilitation liabilities.
Smit explains that mining rehabilitation liabilities are calculated by environmental specialists. Cenviro uses this information as presented by the mining client and its environmental specialist to structure the most effective insurance and funding solution.
Cenviro – through Centriq Insurance Company – then issues the insurance guarantee to the DMR for the full rehabilitation liability at inception of the policy period. “The client will then be allowed to build up sufficient funds over a predetermined period to achieve a fully funded liability scenario at closure.”
Smit stresses that it is vital that the solution structured for the client follows an asset-liability-matching strategy, taking into consideration the amount of funds that will be required at closure. This strategy also takes into consideration LoM.
“Once a mine has reached closure, after consultation with the environmental specialist, the DMR and the mine, funding should be made available to carry out rehabilitation in accordance with the mine’s approved mine closure plan.”
Smit notes that it is advisable that, during the closure process, as the rehabilitation liability diminishes, lower-value insurance guarantees are issued to the DMR to replace the higher-value guarantees. This will ensure that the solution remains cost effective.