There has been significant debate among stakeholders regarding the extent to which mining companies should be held accountable for mine closure, including ways of generating funds for this purpose, to ensure that the State does not carry the cost for mines that close prematurely or become ‘ownerless’, law firm Eversheds Sutherland partner and mining and infrastructure head Warren Beech says.
The latest attempt to end this debate was the May publication of the second draft of the Proposed Regulations Pertaining to the Financial Provision for the Rehabilitation and Remediation of Environmental Damage Caused by Reconnaissance, Prospecting, Exploration, Mining or Production Operations (FP Regulations).
Published in terms of the National Environmental Management Act, the 45-day period for comment on the 2019 FP Regulations lapsed on July 1.
The consensus is that the second draft is an improvement on the first, but Beech and Webber Wentzel environment and natural resources partner Garyn Rapson are sceptical about its applicability in practice.
However, SRK Consulting South Africa partner and principal scientist James Lake believes that the regulations are currently “in a format where the interests of the mining industry and fiscus are considered”, adding that the updated methodologies are, in his view, representative of a “fair and pragmatic” approach on previous versions of the FP Regulations.
Long and Winding Road
“Prior to the 2015 FP Regulations, mining right holders were required to comply with Section 41 of the Mineral and Petroleum Resources Development Act (MPRDA) No 28 of 2002, read with MPRDA Regulation 53 and 54,” Beech explains.
Section 41 – since repealed – required the right holder to make financial provisions, in accordance with MPRDA Regulations 53 and 54, the former setting out the vehicles for provision and the latter describing the methodology for determining the quantum.
Beech says the methodology set out in these regulations was “acceptable” to most mining companies, but was heavily criticised by environmental groups because it did not deliver sufficient funds to cover the costs of rehabilitation – specifically relating to premature closure and “ownerless mines”.
The concerns were addressed, to some extent, in the 2015 FP Regulations, but it became apparent that there were numerous interpretational challenges, Beech states.
Additionally, the regulations posed a significant risk to the viability of new and existing mines, given the costs involved.
The discontent led to the publication of the proposed 2017 FP Regulations. These were met with further criticism from stakeholders, including environmental lobbyists.
Further stakeholder engagement occurred, ultimately culminating in the publication of the 2019 FP Regulations.
Beech notes that the 2019 FP Regulations retain several concepts included in the 2017 FP Regulations, but simplify and clarify aspects that were “contentious”.
Rapson adds that the new draft shows a shift in thinking – from the classic mine closure approach to focusing on ensuring that operations can be brought to a credible “sustainable end-state” at closure.
He comments that the 2019 FP Regulations enable companies to define such a state in the final rehabilitation, decommissioning and mine closure plan, but adds that it must reflect local conditions, regulatory complexities, stakeholder expectations, environmental opportunities and technical solutions for the infrastructure and facilities to support an end-state.
“The shift from classic mine closure – returning the land to its premining state – to focusing on a transitional economy is a hugely encouraging change,” Rapson states, noting that the shift is in line with international trends.
Another major change is that the proposed methodologies for calculating financial provisioning for new and existing operations have been revised and simplified.
Beech adds that the 2019 FP Regulations require that the provision be determined through a detailed itemisation of all activi- ties and costs, based on actual market- related rates for implementing activities in three categories – yearly rehabilitation; final rehabilitation, decommissioning and mine closure; and remediation and management of residual and latent environmental impacts.
The appendices to the regulations provide methodologies to determine the amounts in respect of all three categories.
The 2019 FP Regulations require appli- cants and right holders to set aside funds using the methodologies set out in Appendix 4 or Appendix 5 for new rights and existing rights respectively. The funds that are set aside must remain in place until a closure certificate is issued, unless a withdrawal is allowed, Beech explains.
“Regulation 7 sets out the amount to be set aside or available . . . at any . . . time. It also confirms that, while yearly rehabilitation must be taken into account when determining the total quantum . . . the amounts calculated for yearly rehabilitation are not part of the amount set aside. This means that yearly rehabilitation must be funded from operating expenditure,” he adds.
Companies will now have more leeway to structure their financial provisioning, Rapson says, as previous restrictions on the use of trust fund contributions have been removed.
Moreover, the withdrawal mechanism will enable companies to apply for early access to funds, subsequently allowing for the earlier implementation of an approved, sustainable end-state. “This is a huge positive, as this will enable companies to monitor and improve on the closure end-state prior to reaching actual closure,” he comments.
One of the major concessions that the Department of Environmental Affairs (DEA) has included is limiting provisions to a footprint that will exist only one year in the future, Lake also points out. “Previous iterations of the legislation required mines to project liability between three and ten years into the future. By limiting disturbance to a one-year horizon, authorities have recognised the financial burden that the initial version imposed.”
Compliance with the new regulations is required no later than three months following the holder’s first financial year-end, after February 19, 2020.
“Based on the wording in the appendices, the method of calculation will seemingly be based on volumetric calculations, rather than hectarage,” notes Beech, adding that this is likely to significantly increase the financial provision.
Lake notes that, while it is likely that some mines may have to raise significantly larger provisions, they will reflect the commercial costs of implementing closure measures.
“This protects the mines from incurring unexpected and unplanned costs at the end-of-life of the operation. It also protects the fiscus from having to fund shortfalls,” he comments.
Lake adds that the potentially larger provisions arise from a “firm and clear directive” that the liability estimate has to be based on third-party rates, rather than a set of generic rates that do not necessarily apply to all mining sites.
“There are instances where a mine’s provision will increase significantly to comply with the regulations; however, if yearly rehabilitation is undertaken – and impacts are managed and mitigated through rehabilitation activities – the liability and resultant provision can be reduced.”
Additionally, he notes that, while there will be some marginal operations that cannot comply, operations that have historically prepared appropriate closure plans that reflect true closure liability, instead of ones based on narrow compliance with previous legislation, “will not find compliance with the new regulations overly onerous”.
Rapson posits that the calculation methodo- logies create the potential for overestimation of closure costs, adding that this is a “very real concern”, as the provisional and general costs, contingencies, value-added tax and consumer price index + 2% are all to be included in the calculations.
Additionally, he believes that the provisions that allow for withdrawal – Regulation 11(1) – are “restrictive and impractical”, and that current timeframes place an “unreasonable burden” on holders whose financial year-ends occur shortly after February 19, 2020.
Beech suggests that it is too soon to tell whether the regulations are too onerous. “Calculations are still being made by mining companies and these calculations may reveal that, with the new methodologies, the actual amounts that need to be made available will be significantly higher than those required under the MPRDA Regulations 53 and 54.”
He adds that, if this is the case, then mining companies’ previous criticisms have not been adequately addressed, as any additional amounts that need to be made available will significantly increase the costs of operations, potentially impacting on the viability of new and existing projects.
However, Rapson, Lake and Beech agree that administrative requirements related to department oversight are definitely troublesome. “The current audit requirements for updates on the liability and the provision requires that two specialists – or groups of specialists – generate a liability assessment and then audit the assessment. Thereafter, a financial auditor is required to do further verifications. This level of assessment is, in my opinion, overly onerous for the mines,” Lake states.
He suggests that the double-audit requirement be removed and replaced by a requirement that the specialist signing off on the liability assessment be a registered member of a professional body, as this would place ethical obligations on the specialist and encourage objectivity.
Rapson adds that the requirement for Ministerial approval of yearly submissions is administratively burdensome and impractical. “The general feeling in the industry is that approval is unnecessary and should be limited to specific requests where the Minister is dissatisfied with the financial provision assessment.”
He believes that, while the current version of the 2019 FP Regulations represents “a dramatic improvement and a fantastic example of a robust and working public consultation process”, certain aspects are particularly burdensome and may be unfeasible.
Beech concurs, adding that “the draft is significantly better, from a legal perspective, and any legal challenges would need to be carefully thought through before they are launched”.
This implies that, should the DEA decide to retain most of the current draft, companies might have a difficult time challenging the regulations.
Lake is glad that the protracted process is finally nearing completion. “The regulations have been under development for a long time and there has been a fair amount of uncertainty as to how to advise clients. It will be a relief when the regulations are promulgated, enabling the industry to move forward and comply.”