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An extensive change that has resulted in the ‘carving out’ of environmental authorisation legislation from the Mineral and Petroleum Development Act (MPRDA) into the National Environmental Management Act (NEMA) came into effect on 20 November 2015 with the publication of the Financial Provisioning Regulations. This has signalled a radical change in how mining companies provide for, calculate and report on their mining rehabilitation liabilities, writes Chantelle Kotze.

In 2007/8, the Department of Environmental Aff airs (DEA) and the Department of Mineral Resources (DMR) agreed that environmental regulation would be removed from the purview of the MPRDA and would be wholly regulated under NEMA.

The aim of this was to give rise to the ‘One Environmental System’ of laws relating to the entire suite of environmental authorisations, including management plans and programmes which would, in essence, govern the mining industry’s rehabilitation obligations.

According to Kate Swart, an associate at Clyde & Co and a specialist in insurance and environmental law, the key changes centre on when mine rehabilitation is carried out as well as on how fi nancial provision for rehabilitation costs is made and calculated.

Three phases of rehabilitation in a mine’s life

Under the old regulations mines had to submit unforeseen closure and fi nal closure plans. NEMA, however, requires three types of rehabilitation plans, the minimum content of each being prescribed by the regulations.

The first is the ‘annual rehabilitation plan’, which lists the on-going rehabilitation activities required during the operational life of mine.

The second is the ‘final rehabilitation, decommissioning and closure plan’ which includes details of the final rehabilitation and ‘use of land’ following the mine’s closure. “This plan focuses on bringing the mine to a point where it can close and must consider how the land will be used post-closure,” says Swart. This stage typically accounts for the bulk of rehabilitation costs and activities, and was traditionally funded through trust funds. However, this will no longer be the case.

Phase three occurs post-closure and requires that the mine conduct an environmental risk assessment of latent and residual environmental impacts, covering an indefinite post-closure period.

Under NEMA the liability of the mine continues post-closure, indefinitely, especially where the treatment of water is concerned – a new provision that was previously not a requirement.

“This necessitates that an environmental risk assessment, which includes the treatment of extraneous and polluted water, be done for the post-closure period of the mine, and that fi nancial provision be made for such rehabilitation and water treatment – for an indefinite period,” she explains.

Financing rehabilitation costs

“The complexities introduced by NEMA will force a change in the way in which mines approach the funding of their rehabilitation liabilities,” Sanlam Investments institutional segment head Andrew Rum below notes.

Traditional funding vehicles include bank guarantees, guarantees issued by an insurer, depositing funds with the DMR or the setting up of a trust fund. These vehicles remain the same – but the rehabilitation for which they can be used during the mine’s life and afterwards has been significantly restricted. The type of funding vehicles allowed, specifically how Section 37A Trusts are used, have been impacted.

NEMA only allows the use of trusts to make financial provision for latent or residual environmental impacts post-closure, and requires that the underlying investments in this trust be of a capital guaranteed nature. Bank guarantees and guarantees issued by an insurer will only be allowed to make financial provision for on-going and final rehabilitation, and these will expire upon the issuing of a closure certificate.

Mining rehabilitation guarantee solutions provider Cenviro Solutions’ MD Leentie Smit indicated that according to some of her larger clients, the expected increase in the total liability provisions that a mining house would have to make could increase by up to 50% of what is currently being budgeted, resulting in an obligation that could be difficult to meet taking the current economic environment into consideration.

Rum below suggests the use of tailor made mining rehabilitation investment solutions that optimise current 37A trust structures. Smit iterates this, suggesting that mining houses now partner with specialists in mining rehabilitation who are able to off er structured finance solutions and investments in order to meet the open-ended financial liabilities proposed by NEMA in the most efficient manner.

Of greatest concern is that the trust fund can only be used for post-closure funding. Funds in the trust can therefore only be utilised once the final rehabilitation and closure plans have been carried out. “The trust fund is there to sort out latent defects, or latent environmental liability and treatment of water only – and that is a major change,” says Swart. It is unclear what will happen to the funds which have already been amassed in existing trust funds.

Additional requirement

Apart from the changes to permissible funding vehicles, more involvement will also be needed from both auditors and environmental specialists to ensure compliance with the new regulations.

As a result of the description of the liability now being much broader and including 10 years’ post-closure (future) implementation costs, attempting to calculate the quantum of the ‘guarantee’ at the onset will be extremely challenging. Not only will experts need to be brought in for this calculation, but auditors will also need to check the process for accuracy.

This suggests that the overall costs of the liabilities that they have to explicitly provide for are likely to be materially higher. This in itself carries a whole set of unique challenges, Swart believes.

In addition to the requirements for new financial provisions, the regulations require that existing provisions be reviewed and aligned with the new regulations. “Such review must take place within 15 months of the regulations taking effect, or within three months of a company’s financial year-end, after which all mining companies must be fully-compliant with the Act or face harsh non-compliance penalties,” Swart notes. Another significant amendment that came into effect relates to a change in the wording of the guarantee required by the DMR.

Smit explains that this amendment in wording has resulted in a change in the underlying nature of the guarantee, changing from a performance guarantee to an on-demand guarantee.

She notes that in the event of a call received from the DMR, the guarantee provider will have only two days in order to make payment. This leaves little time to assess the reasonability of the claim.

“Even if it is the view of the guarantee provider that a call on the guarantee made by DMR was not in accordance with the trigger events as stated in the guarantee, the guarantee provider has no choice but to make good the obligation in terms of the guarantee provided and pay over the required funds,” she explains.

One of the trigger events for calling on the guarantee (as stipulated in the new guarantee wording) is where the mine “has failed to make adequate progress with execution of such final rehabilitation, decommissioning and mine closure plan”. Smit raises her concern that the phrase “adequate progress” is a very subjective term and that it is hardly a measurable concept, making any call by the DMR in terms of this phrase difficult to oppose.

Penalties for lack of compliance

DMR director of mine closure Ruben Masenya warned that mine management face severe sanctions for contravening NEMA.

Fines of up to R10 million, 10-year prison sentences or both can be imposed on a company and its directors for noncompliance.

Masenya explains that the DMR has implemented these harsher penalties as a measure to ensure that the mining industry works with the DMR in ensuring that rehabilitation takes place, and that sufficient financial provision has been made in order to ensure that where mines fail, the state is not left to bear the cost of the required rehabilitation. “It is a means to encourage compliance rather than penalise the company,” he said, highlighting the need for this action owing to the number of derelict and owner less mines, which is currently in the order of 6 000 mines.

However, should the rightholder be unable to meet the revised fi nancial provision in time, a payment plan may be entered into with the DMR. MRA