By Lili Nupen and Lia Bolz

Section 41 of the Mineral and Petroleum Resources Development Act (MPRDA), No 28 of 2002, as amended, read with regulations 53 and 54 of the regulations published under the Act, previously regulated the obligation of a holder of, inter alia, a mining right to make the prescribed financial provision for the rehabilitation or management of negative environmental impacts associated with mining operations.

As part of the introduction of the so-called ‘One Environmental System’, section 41 of the MPRDA was repealed with effect from June 7, 2014, and financial provision for environmental rehabilitation is now regulated by the National Environmental Management Act (Nema), No 107 of 1998, as amended.

The amendments to Nema provide that, where a holder of, inter alia, a mining right fails to rehabilitate or to manage any impact on the environment, or is unable to undertake such rehabilitation, the Minister of Mineral Resources, and not the holder of the mining right, may use all or part of the financial provision for the environmental rehabilitation in question. A holder of a mining right is, therefore, prohibited from accessing or ‘drawing down’ from the funds that have, for example, been placed in a rehabilitation trust for environmental rehabilitation.

On November 20, 2015, the regulations pertaining to the financial provision for prospecting, exploration, mining or production operations were published in order to give effect to the requisite provisions of Nema. The financial provision regulations outline the manner in which financial provision is to be determined from November 20, 2015. As at the date of this article, all mining companies are required to comply with the financial provision regulations.

Unlike the previous regime under the MPRDA, where financial provision was required for mine closure and latent and residual environmental pollution, three distinct forms of financial provision are now required under the financial provision regulations, namely:
•annual rehabilitation, as reflected in an annual rehabilitation plan;

•final rehabilitation, decommissioning and closure (mine closure rehabilitation) at the end of the life of operations, as reflected in a final rehabilitation, decommissioning and mine closure plan; and

•the remediation of latent or residual environmental impacts which may become known in the future, including the pumping and treatment of polluted or extraneous water, as reflected in an environmental-risk assessment report.

The financial vehicles that may be used for financial provision in terms of the financial provision regulations include financial guarantees, insurance policies, a deposit into an account administered by the Minister of Mineral Resources and a contribution to a rehabilitation trust.

It must, however, be noted that the financial provision regulations expressly provide that rehabilitation trusts may not be used for, inter alia, financial provision which is required for annual rehabilitation and mine closure rehabilitation and may only be used for purposes of future rehabilitation. There was no such limitation under the MPRDA.

Existing mining right holders are, in accordance with the financial provision regulations, required to review and align existing financial provision with the financial provision regulations by no later than February 20.

In the past, rehabilitation trusts were used by mining companies as a vehicle to house their financial provision for environmental rehabilitation because of the tax benefit of having such a rehabilitation trust that was introduced by Section 37A of the Income Tax Act (ITA), No 58 of 1962, as amended. A financial provision review will require a mining company with a rehabilitation trust to secure an alternative financial vehicle for annual rehabilitation and mine closure rehabilitation, as a rehabilitation trust is now only permitted for future rehabilitation. Mining companies that have rehabilitation trusts will now be required to make financial provision for mine closure rehabilitation by means of a financial guarantee, an insurance policy or a deposit.

A significant concern for mining companies with existing rehabilitation trusts is whether the funds in the existing rehabilitation trust (which have been set aside to fund the closure of the mine concerned) can now be withdrawn from the rehabilitation trust and used as collateral for purposes of obtaining a financial guarantee for annual rehabilitation and mine closure rehabilitation in terms of the financial provision regulations. From an interpretation of the financial provision regulations, the first difficulty with such a withdrawal is that it would be in contravention of the provisions of Section 37A(7) of the ITA and may result in the company being punitively taxed for such withdrawal. It is yet to be seen whether the South African Revenue Service holds an alternative view and will permit the withdrawal of funds from a rehabilitation trust without tax consequences. This, however, is unlikely.

In addition to the above concern, as part of a financial provision review, an existing rehabilitation trust deed is required to be amended to ‘align’ with the standard form trust deed in Appendix 2 to the financial provision regulations. The difficulty with such an amendment is that the Appendix 2 trust deed does not conform to the provisions of Section 37A of the ITA. As a result, the tax benefit afforded by Section 37A of the ITA will no longer apply to rehabilitation trusts established in terms of the financial provision regulations.

Further, the financial provision regulations provide that, where financial provision is made for future rehabilitation, all the funds in the rehabilitation trust must be ceded to the Mineral Resources Minister when a closure certificate is issued in accordance with the provisions of the MPRDA. The financial provision regulations are, however, silent on the period for which such funds are ceded to the Minister, where those funds are to be deposited by the Minister or whether such funds are ringfenced to the particular mining operation.

The limitation on the use of a rehabilitation trust for mine closure rehabilitation and the restrictions on the removal of funds from these rehabilitation trusts will likely have significant economic implications for mining companies, particularly, for example, where a mine is unable to access funds in an existing rehabilitation trust for purposes of providing adequate collateral for a financial guarantee. Noncompliance with the financial provision regulations is a criminal offence and both the company and the directors of the company may be held criminally liable for such noncompliance.