Australia: Queensland takes significant next step towards financial assurance and rehabilitation reforms of mineral resource projects

WHO SHOULD READ THIS

  • All stakeholders in the Queensland resources sector, including Environmental Authority (EA) holders, providers of third party sureties, providers of resource sector site rehabilitation services.

THINGS YOU NEED TO KNOW

  • From 1 July 2018, major changes to the financial assurance regime and the requirement to carry out progressive rehabilitation will occur if the Parliament supports the FA Bill.

WHAT YOU NEED TO DO

  • Consider the implications for any projects at the feasibility or planning stage, particularly impacts on planning of final land forms.
  • Consider the timing and implications of any amendments to existing EAs, the plan of operations submissions and whether additional work is required to transition your current EA rehabilitation conditions to a Progressive Rehabilitation and Closure Plan (PRCP).

This week, Treasurer Curtis Pitt introduced the Mineral and Energy Resources (Financial Provisioning) Bill 2017 (Qld) (FA Bill) which, if passed, will make broad sweeping changes to the State's financial assurance (FA) and rehabilitation regime. The changes affect every resource project in Queensland and are expected to commence in mid 2018. The proposal was well telegraphed, having been flagged initially though a series of discussion papers released in May 2017. Key elements proposed are:

  • pooled rehabilitation fund – a fund is established to cover the rehabilitation costs if eligible companies default on rehabilitation obligations
  • ERC Decision – the estimated rehabilitation cost (ERC) decision replaces the FA decision, and will apply for an ERC period nominated by the EA holder of between 1-5 years. FA discounts are removed
  • scheme manager – the position of 'scheme manager' is established. The scheme manager is responsible for assessing a company's risk rating, and managing the rehabilitation fund
  • risk rating – companies will be allocated a risk rating and this will determine fund eligibility and contribution rates. A merits review is not available for this decision
  • corporate groups – companies (including corporate groups) with more than $450 million of the State's total rehabilitation liability in Queensland will only be eligible to the participate in the fund up to that threshold
  • method of providing FA – some companies will not qualify for the rehabilitation fund, as their rehabilitation risk is considered too high. They must provide an FA, which may be provided as an insurance bond, freeing up cash for those that currently have cashed backed guarantees
  • tenement transfer or change in control – a registered dealing or change in control will trigger a review of the risk allocation by the scheme manager. Otherwise, it is subject to an annual review
  • plans of operations – mining companies will no longer be required to submit a plan of operations, but they are retained for holders of petroleum leases
  • PRC Plan and PRCP Schedule – existing mines will be required to 'translate' their existing EA rehabilitation conditions into a binding progressive rehabilitation milestones. Every EA in Queensland will require amendment, and
  • residual voids and floodplains – areas that cannot support a post-mining land use will face particular scrutiny. For new mines, voids will not be approved in floodplains.

Key Issues - FA Reform

Established to fund rehabilitation if either a resource company fails to meet its rehabilitation obligations or if a tenement is disclaimed, the Financial Provisioning Scheme (Scheme) introduces major changes that affect every resource company operating in Queensland. Key aspects of the Scheme include:

  • it will be managed by a new statutory officer dubbed the Scheme Manager who will report annually on the Scheme, including on the Scheme's revenues and costs
  • all resource projects will be allocated by the Scheme Manager to either a very-low, low, moderate or high risk category. This will determine whether it sits in:
    • the Rehabilitation Fund Pool (Pool), or
    • the Surety Division
  • Selected Partner Arrangements for very large entities have been dropped, these entities may now have projects sit in both the Pool and Surety Divisions. If a corporate group's FA is above the fund threshold – proposed to start at $450 million, these will be assigned to the Pool up to the threshold with the remainder sitting in the Surety Division
  • KPMG have been engaged to design the risk assessment that will apply to resource projects under the Scheme. Its report, Design of the Risk Assessment Process for the FA Scheme ( Risk Report) recommends that risk not be based solely on external credit ratings, instead the Scheme Manager should consider:
    • the financial strength of the EA holder and its parent company
    • the remaining resource, and
    • the extent of rehabilitation effort on site.
    • This has carried through to the FA Bill, however much of the detail of the Scheme Manager's considerations will be deferred to the Scheme Manager Guidelines.
  • as expected, the amount paid to the Pool is calculated based on the ERC decision (which replaces an FA decision), and the risk allocation. As yet, Government has not made the contribution costs public however they may range from 0.5% to 2.5%. Without knowing the costs, it is difficult for companies to properly assess whether they are financially better off under the Scheme. Adding to this challenge, the previous FA scheme used a system of discounts to reduce the amount of FA payable by up to 30%. The Scheme removes this discount mechanism.

Form of surety

Currently FA is either in cash or by way of a bank guarantee provided by a regulated banking entity. The Scheme adds a third option – insurance bonds – which must be irrevocable, allow on-demand and unconditional payment and be governed by Queensland law. We anticipate that insurance companies will enter the market to provide these once the Scheme is established. The Government has decided not to add escrow arrangements or non-cash collateral.

Transition to the new scheme

  • the target date to commence the transition to the new Scheme is 1 July 2018, and existing resource projects will be transitioned into the new Scheme over a three year period, although there may be company/ project specific negotiations around transition, and
  • risk assessments will be conducted annually and EA holders who move, say, from the Pool to the Surety Division will be given a 12 month notice period.

Other key provisions

  • certain tenement transfers or a change in control (defined by reference to the Corporations Act 2001 (Cth), will trigger a review of the risk allocation by the Scheme Manager. The FA Bill establishes a mechanism for an indicative risk categorization – say where a company is considering purchasing an operation and requires certainty of the cost of being part of the Pool
  • a company must notify the Scheme Manager if production ceases for more than 6 months, effectively a notification of entering care and maintenance
  • the petroleum and gas sector will sit under the same Scheme as the mining sector
  • there will be no 'opting out' for those entities assigned to the Pool – despite some entities providing evidence they can achieve third party surety costs well below proposed Pool levies, and
  • industry FA calculators will be removed as an option.

The impact of the Scheme on joint ventures and other complex corporate structures has been a concern to a number of industry participants. The FA consultation report states that 'Government is working with legal and accounting advisors and industry members to ensure complexities such as JV arrangements are appropriately taken into account.' Otherwise, these arrangements are not given any special consideration in the FA Bill. There may be an opportunity to nominate a holder for the purpose of Pool eligibility – which may help some companies overcome the $450 million threshold, and centralise joint venture risk rating considerations.

Better Mine Rehabilitation

Life of mine plans have been renamed the 'Progressive Rehabilitation and Closure Plan' (PRCP). The Government is proposing to develop detailed guidance material on development of PRCPs and milestones with appropriate rehabilitation completion criteria, but for now we know that:

  • plans of operations – mining companies will no longer be required to submit a plan of operations, but they are retained for holders of petroleum leases
  • PRCP and PRCP Schedule – existing mines will be required to 'translate' their existing EA rehabilitation conditions into a binding progressive rehabilitation milestones. This change will require that every mining EA in Queensland is amended. The FA Bill allows for this transition to occur gradually over 3 years, with companies provided a notice to provide the PRCP and then 6 to 12 months to deliver the PRCP. The PRCP will be required as part of the environmental assessment for major new projects, usually through the EIS. Once approved, the PRCP Schedule is binding and it will be an offence not to comply with it. Amending a PRCP Schedule will follow a similar process as an EA amendment, including public notification requirements
  • non-use management areas – this concept has appeared in the FA Bill, and applies to areas that cannot be rehabilitated to a stable condition and suitable post-mining land use. The concept will particularly apply to mining voids, but could equally apply to other mining areas. Non-use management areas will require approval through the PRC Plan process, and
  • residual voids and floodplains – areas that cannot support a post-mining land use will face particular scrutiny. For new mines, voids will not be approved in floodplains.

Where to from here

Considerable detail has been deferred to supporting regulations and guidelines, making it difficult for industry to fully assess the overall impacts of the new Scheme and associated mine rehabilitation reforms.

The streamlining of the tailored solution into two divisions, the Pool and Surety Division, makes sense, as does the ability of larger entities to sit in the Pool, up to a limit. Those entities that believe they can achieve surety costs below proposed Pool levies will not be able to opt out. So, if you are assigned to the Pool, then all that remains in play is your risk assessment.

The pool should unlock cash and potentially borrowing capacity for companies with large amounts of cash tied up to back their guarantees.

While industry participants will be understandably focused on the financial impacts (positive or negative), there are also the 'social licence' benefits to be considered of moving beyond the long-running debate about whether the State carries sufficient FA to protect taxpayers.

The target date to begin the transition to the new Scheme is 1 July 2018.

Looking from the vantage point of October 2017 and an intervening election, the target commencement date for the new arrangements of 1 July 2018 seems ambitious.

While the Labor government remains well and truly committed to these reforms, it is unclear whether they would survive a change of government. Industry will remember that the LNP government's Risk Evaluated Financial Assurance model had been close to being implemented in 2015 when an election intervened and the incoming Labor government decided to put the changes on hold. Both parties have invested considerable effort and resources into FA reform. However, the lesson is that it is very difficult to complete implementation of a reform package inside a three year term of government. Bipartisanship is important if reforms are going to succeed.

While industry weighs up the pros and cons of supporting the reforms, it will also be looking ahead, at the potential implications of the State election.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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