Mining’s big hangover

Mine closure and the funding thereof has for years been a battleground between mining companies, environmentalists and government. The recently revised National Environmental Mining Act attempts to redress some of these challenges, but it will have significant implications for mining companies.


The Department of Mineral Resources (DMR) recently completed an extensive legislative review that resulted in the ‘carving out’ of environmental authorisation legislation from the Mineral and Petroleum Resources Development Act (MPRDA) into the National Environmental Management Act (NEMA). The amended NEMA was effective from 20 November 2015 and will be administered by the DMR.

Amendments to NEMA will radically change how mining companies provide for, calculate and report on their mining rehabilitation liabilities. According to Kate Swart, an associate at Clyde & Co and a specialist in insurance and environmental law, the key changes centre on how and when mine rehabilitation is carried out as well as on the calculation of and provision for rehabilitation costs.

Traditional methods to fund rehabilitation costs included bank guarantees, guarantees issued by an insurer, depositing funds with the DMR or a setting up a trust fund. “The complexities introduced by NEMA will force a change in the way in which mines approach the funding of their rehabilitation liabilities,” says Andrew Rumbelow, institutional segment head at Sanlam Investments.

Rumbelow suggests that mining houses will have to partner with specialists in mining rehabilitation, structured finance solutions and investments in order to meet the open-ended financial liabilities proposed by NEMA.

NEMA has introduced several new challenges, compounded by ambiguous wording around the post-closure (latent) liability guarantee, which will present some challenges for the issuer of the guarantee:
• Limited funding opportunities: New wording suggests that the investable universe for trusts is now more restrictive than in the past, and the use of trusts as a funding mechanism is limited to the post-closure (latent) liability portion only;
• Intricate, more detailed calculations: Because the description of the liability is now much broader and includes 10 years post-closure (future) 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 liability that they have to explicitly provide for are likely to be materially higher. This in itself carries a whole set of unique challenges;
• 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.

Mines that set up trusts under the previous regulation are in limbo because it is not clear whether they can continue using these structures or if funds need to be pulled out of the trust and redistributed elsewhere. If the latter applies, the question remains whether the surplus capital in those trusts can be withdrawn without incurring tax penalties. It is also not clear whether the new trust structures qualify for relaxations in term of section 37A of the Income Tax Act.

“There is also some ambiguity on the tax benefits for contributions to guarantee funds too – we are not sure how these will be addressed nor whether any amendments to the taxation legislation is proposed,” said EY tax expert, Tricha Icharam.

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