Australia: Performance bonds on WA mining tenements - not all forgiven

Clayton Utz Insights
Last Updated: 23 February 2014
Article by Brett Cohen

Key Points:

For the most part, the introduction of the Mining Rehabilitation Fund will lead to the retirement of some – but not all – unconditional performance bonds.

Draft guidelines have been released that clarify when Western Australian mining tenement holders may still be required to provide unconditional performance bonds to secure rehabilitation obligations, notwithstanding the introduction of the Mining Rehabilitation Fund. The deadline for submissions on the draft guidelines is 20 March 2014.

Background: The Mining Rehabilitation Fund

The Mining Rehabilitation Fund (MRF), under which Western Australian mining tenement holders contribute an annual non-refundable mining rehabilitation levy to the State, comes into effect on a compulsory basis on 1 July 2014.

Prior to the establishment of the MRF, unconditional performance bonds (UPBs) were the primary form of mining security required from tenement holders to protect the State against holders failing to rehabilitate their mining operations.

A UPB is a form of contract between the Minister for Mines and Petroleum and a reputable financial institution (typically a bank), that commits the bank to pay an agreed sum where a tenement holder fails to meet its environmental rehabilitation commitments.

In consideration for providing a UPB on behalf of the tenement holder, the bank will either charge the holder financing fees or, in the case of holders of lower financial standing, require the face value of the UPB to be deposited with the bank. According to the DMP, by 2013 there were nearly 5000 bonded tenements in Western Australia with a total face value of more than $1.2 billion.

What happens to existing UPBs from 1 July 2014?

For the most part, the introduction of the MRF will result in UPBs being retired, with tenement holders no longer having to wear the (not insubstantial) costs of procuring UPBs. However, there are certain circumstances where UPBs will still be required.

To provide clarity and certainty to the mining industry as the compulsory commencement of the MRF draws closer, the Western Australian Department of Mines and Petroleum (DMP) has released draft guidelines on the administration of mining securities outlining:

  • the factors the DMP will consider in determining whether to retain or impose a requirement for a UPB on a tenement; and
  • how the DMP determines the value of an UPB which is to be imposed in respect of a tenement.

The draft Guidelines provide that regardless of whether a levy is to be paid by a tenement holder under the MRF, the DMP may retain or impose an UPB where it considers that there is a high risk of the rehabilitation liability reverting to the State. This includes where:

  • a tenement holder has been the subject of an enforcement action under the Mining Act 1978 for failing to comply with environmental obligations;
  • a tenement holder fails to lodge production reports or royalty returns, or fails to pay royalties owing to the DMP within the prescribed time and manner; or
  • a tenement holder has breached reporting or payment obligations under the Mining Rehabilitation Fund Act 2012.

UPB obligations will not be removed if, at the time of the levy assessment, any of the following criteria apply:

  • a tenement holder or controlling business entity is subject to an event of insolvency, reorganisation or under external management (eg. under administration, subject to a receiver or manager, in liquidation, the subject of a winding up order, is under deed of company arrangement or scheme of arrangement, or is in the process of being deregistered);
  • a tenement holder has failed to lodge production reports or royalty returns, or fails to pay royalties owing to the DMP within the prescribed time and manner.

Furthermore, a tenement holder who has been the subject of enforcement action under the Mining Act, has been subject to fines or has been issued with modify or stop work orders, or if the relevant tenement is due for renewal before 1 July 2014, must show cause why UPB obligations should not continue.

The draft Guidelines provide that the DMP will consider whether to apply an UPB on a tenement on a case by case basis, however the type of commodity or the type of disturbance activity undertaken will not be considered in determining whether to impose an UPB.

Under the draft Guidelines, if the DMP determines that a tenement should be subject to an UPB, the tenement holder will be notified in writing outlining the reasons for the application of the bond. The tenement holder will have an opportunity to submit a written response before the due date when the UPB must be provided. A tenement holder can seek a review of the application of an UPB by lodging a written submission to the Director General of the DMP.

A tenement holder under UPB requirements may request that the obligation be removed by outlining details of how the risk factors that led to the UPB being imposed have been mitigated.

How does the DMP calculate the value of an unconditional performance bond?

In determining the value of unconditional performance bonds, the DMP states that it will use the area-based rates set out in the Mining Rehabilitation Fund Regulations, that may be varied in certain circumstances.

Public comments on the Guidelines

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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