There has been significant debate amongst key stakeholders including government, mining companies, and environmental lobbyists regarding how mining companies should not only be held accountable for mine closure but also how the often vast sums of money needed to close mines properly, will be made available so that the State does not end up having to remediate and rehabilitate mines that close prematurely or become "ownerless".
There was a radical shift regarding the calculation of total amount needed to carry out mine closure and rehabilitation, and the amount that had to actually be made available at any point in time to achieve the objectives, when the "Regulations pertaining to the Financial Provisions for Prospecting, Exploration, Mining or Production Operations" were published in GNR 1147 of 20 November 2015 ("the Financial Provision Regulations 2015").
Prior to the publication of the Financial Provision Regulations 2015, holders of mining rights were required to comply with Section 41 of the Mineral and Petroleum Resources Development Act, No. 28 of 2002 ("MPRDA") read with MPRDA Regulation 53 and 54. Section 41 of the MPRDA (which has subsequently been repealed) required the holder of a mining right ("the Holder") to make financial provision through the mechanisms and by determining the quantum (amount) in accordance with MPRDA Regulations 53 and 54.
MPRDA Regulation 53 sets out the methods (vehicles) for the financial provision and includes a trust, a financial guarantee, a cash deposit, or any other method as the Director General may determine (this included insurance products, for a period).
MPRDA Regulation 54 sets out the methodology for determining the quantum of the financial provision. The amount (quantum) of the financial provision was determined in accordance with a guideline document published by the Department of Mineral Resources. The last version of the Guideline was published in 2005 ("the DMR Guideline"). The amount required a detailed itemisation of all actual costs required for (a) premature closing regarding the rehabilitation of the surface of the area, the prevention and management of pollution of the atmosphere, the prevention and management of pollution of water and the soil, and the prevention of leakage of water and minerals between subsurface formations and the surface, (b) decommissioning and final closure of the operation, and (c) post closure management of the residual and latent environmental impacts.
In summary, the basis of calculating the quantum was "actual costs" required for the three categories, namely (a) premature closing, (b) decommissioning and final closure of the operation, and (c) post closure management of residual and latent environmental impacts.
The methodology set out in MPRDA Regulations 53 and 54 was acceptable to most mining companies, but came under heavy criticism from environmental lobby groups for not providing sufficient amounts to cover the costs of rehabilitation, generally, and more specifically, on premature closure, and the "ownerless mines".
These concerns were addressed in the Financial Provision Regulations 2015 to some extent, but it became apparent almost immediately, that there were numerous interpretational challenges and that there could be a significant impact on the viability of new mining projects, and existing mines that would now need to both quantify a much higher provision, and make larger amounts available through one of the recognised mechanisms, to meet their responsibilities under the Financial Provision Regulations 2015.
The ink was hardly dry on the Financial Provision Regulations 2015, when stakeholders were again forced into discussions and this resulted in proposed amendments, and the publication of the Proposed Financial Provision Regulations 2017 ("the Proposed Financial Provision Regulations 2017"). The Proposed Financial Provision Regulations 2017 were met with criticism from many stakeholders including the environmental lobbyists, but of course, for vastly different reasons. Further engagement took place, which ultimately resulted in the publication of the "Proposed Regulations Pertaining to Financial Provision for the Rehabilitation and Remediation of Environmental Damage caused by Reconnaissance, Prospecting, Exploration, Mining or Production Operations", on 17 May 2019 ("the Proposed Financial Provision Regulations 2019").
Interested and affected parties had a period of 45 days calculated from 17 May 2019, to submit comments on the Proposed Financial Provision Regulations 2019.
While the Proposed Financial Provision Regulations 2019 have retained some of the general principles that were contained in the Proposed Financial Provision Regulations 2017, there are significant and substantial differences.
The key provisions are (a) to whom do the Proposed Financial Provision Regulations 2019 apply, (b) how is the total amount that must be provisioned for, be calculated, (c) how much must actually be made available at any time, through one of the mechanisms that are recognised in the Regulations, and (d) the transitional provisions.
Comparison to 2017 draft
The Proposed Financial Provision Regulations 2017 were just that i.e. they were proposed regulations. The appropriate point of departure is therefore the Financial Provision Regulations 2015, because the intention is that the Proposed Financial Provision Regulations 2019, will replace the Financial Provision Regulations 2015.
The Financial Provision Regulations 2015 identified three categories of persons to whom the Regulations applied, namely (a) an applicant, (b) a holder, and (c) a holder of a right or permit.
In summary, the reference to "applicant" is a reference to an applicant for a new right, while the term "holder" refers to an entity that holds an existing right, prior to 20 November 2015. The term "holder of a right or permit", refers to an entity which acquired the right, after 20 November 2015.
This was extremely important, for holders of historical rights. It meant that they would be "holders", and would only be required to comply with the Financial Provision Regulations 2015, to the extent contemplated in the transitional arrangements set out in Chapter 4 and Chapter 5 only. While the Financial Provision Regulations 2015 were immediately applicable to applicants, holders were allowed to elect the transitional period which was either within three months of their financial year end or fifteen months from the promulgation of the Financial Provision Regulations 2015. The transitional period was extended to February 2020, due to extensive pressure being placed on the regulators, and engagement with stakeholders.
The practical effect of the extended timeline is two-fold, namely (a) a holder is only required to comply with Chapters 4 and 5 by 2020, and (b) in the interim, the holder is required to continue complying with the processes set out in MPRDA Regulations 53 and 54 (including the annual assessments and the method of determining the quantum set out in MPRDA Regulation 54).
The transitional arrangements in the Financial Provision Regulations 2015 require a holder to ensure that a review, assessment and adjustment of the financial provision is conducted in accordance with Regulation 11 read with the necessary changes. Regulation 11 contemplates a review of the requirements for (a) annual rehabilitation as reflected in the Annual Rehabilitation Plan ("Annual Rehabilitation Plan"), (b) final rehabilitation, decommissioning and closure at the end of life of operations as reflected in a Final Rehabilitation, Decommissioning and Mine Closure Plan ("Mine Closure Plan"), and (c) 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 report ("Environmental Risk Report").
In addition to widening the scope of application of the Financial Provision Regulations 2015 to applicants, holders and holders of rights and permits, the Financial Provision Regulations 2015 identified what needed to be included when calculating the overall quantum of the financial provision, and for the first time, there was specific reference to the pumping and treatment of polluted or extraneous water as reflected in the Environmental Risk Report.
In addition, the methodology of calculating the amount that needed to be available increased the financial provision, significantly, because it now required availability of funds, calculated over a ten year period and it included the annual rehabilitation requirements in the financial provision (the annual rehabilitation costs were historically included as operating expenses and not specifically included in the amount needed to be made available or to be held available for rehabilitation). The quantum also increased significantly as a result of a requirement to make provision for the pumping and treatment of polluted and extraneous water as reflected in the Environmental Risk Report.
These changes resulted in severe criticism, primarily because the view was expressed that the significant increases in the overall quantum, and the amount that was needed to be made available through one of the vehicles (trust, cash deposit, or guarantee), would impact on the viability of mining projects, and existing mines.
These criticisms, together with those of the environmental lobbyists, that were proposing that even larger amounts should be made available for rehabilitation, resulted in the Proposed Financial Provision Regulations 2017 being published for comment.
The Proposed Financial Provision Regulations 2017 identified three parties, namely (a) an applicant, (b) a holder, and (c) a holder of a right or permit. The definition of an "applicant" was amended, and included a person who is required in terms of the MPRDA or NEMA to amend or replace the financial provision made in respect of any prospecting, exploration, mining or production operations as a result of an application for consent to cede, transfer, assign, alienate or amend a right or permit as contemplated in Section 11 or Section 102 of the MPRDA i.e. if an entity applied for consent in terms of Section 11 of the MPRDA, or amendments in terms of Section 102 of the MPRDA, these entities would now be regarded as applicants, and would be required to comply fully with the provisions of the Proposed Financial Provision Regulations 2017. Previously, an applicant was restricted to an applicant for a new right.
The definition of "holder" was also amended to mean the holder of the relevant mining right that was issued in terms of the MPRDA prior to 20 November 2015 and where no closure certificate has been issued in terms of Section 43 of the MPRDA.
The term "holder of a right or permit" was amended to mean a holder of the relevant right which was issued after 20 November 2015, or the holder of the right issued after the coming into force and effect of the Proposed Financial Provision Regulations 2017.
Some of the more important amendments that were proposed in the Proposed Financial Provision Regulations 2017 were the following:
- No financial vehicle is proposed for annual rehabilitation i.e. this is a change from the Financial Provision Regulations 2015, where the annual rehabilitation was included in the Financial Provision quantum. Under the Proposed Financial Provision Regulations 2017, annual rehabilitation will be included under OPEX (this may expose the DMR to liability is the holder of the rights do not comply with the obligations in the early stages of the mining operations. However, the annual rehabilitation costs and the risk associated with premature closing may nevertheless be included in the final rehabilitation costing where the methodology set out in Appendix 2, is applied);
- The restrictions on the financial vehicles that may be used, has been lifted. The only restriction is that a financial guarantee cannot be utilised for the Environmental Risk Report costing i.e. residual and latent costs. A further financial vehicle has been identified, namely contributions to rehabilitation companies;
- The care and maintenance provisions in the Financial Provision Regulations 2015 have been removed in their entirety;
- Under the Financial Provision Regulations 2015, a holder is required to ensure that the Financial Provision required was at any time equal to the sum of the actual costs of implementing the Annual Rehabilitation Plan, Mine Closure Plan and Environmental Risk Report, and the amount that needed to be available at any one time, was for a ten year period. This has now been reduced to three years for holders i.e. holders of mining rights granted / issued prior to 20 November 2015;
- The requirement relating to costs for post closure pumping and treatment of polluted and extraneous water remains in place (this was not required under the MPRDA Regulations);
- A distinction is made between new and existing mining operations in the methodologies used for determining the financial quantum i.e. Appendix 1 and Appendix 2;
- The Financial Provision must be clearly linked to a right and permit.
The generally accepted view amongst legal practitioners was that the amount actually required to be available, would be less than the amounts calculated in terms of the Financial Provision Regulations 2015, under the Proposed Financial Provision Regulations 2017 for two primary reasons, namely (a) the time period was reduced from ten years to three years, and (b) the costs associated with the Annual Plan are no longer included, because they are part of OPEX.
The Proposed Financial Provision Regulations 2019 retain several of the concepts that were included in the Proposed Financial Provision Regulations 2017, but simplifies a number of these concepts, and clarifies a number of aspects that were previously contentious.
Some of the more important amendments set out in the Proposed Financial Provision Regulations 2019 include the following:
- The purpose is set out clearly, namely to regulate the manner in which an applicant or holder is to determine, provide, set aside, maintain and management financial security for undertaking progressive rehabilitation, decommissioning, closure and post closure activities associated with reconnaissance, prospecting, mining, exploration and production operations;
- Only two entities are identified, namely (a) an applicant, and (b) a holder. An applicant is defined to mean a person who applies for or requires a right, or consent in terms of Section 11 or Section 102 of the MPRDA, or a renewal of, amongst others, a prospecting or mining right. The scope has therefore been widened to include any entities that apply for renewal of prospecting or mining rights;
- The holder is defined to now specifically include the holder of an old order right, rights such as prospecting and mining rights, or any consent in terms of Section 11 of Section 102 of the MPRDA, and for which no closure certificate has been issued;
- The purpose of the financial provisioning is also clarified and the stated purpose is to ensure that, amongst others, a prospecting or mining area can be brought to the approved sustainable end state at the scheduled or unscheduled closure of operations, and to manage the related rehabilitation of residual and latent impacts post closure;
- A distinction is still made between (a) determining the financial provision i.e. the total quantum that is required to achieve the approved sustainable end state, and (b) what amount needs to be made available, at any time through one of the financial provision vehicles / mechanisms. Regulation 6(2) will require the applicant or holder to determine the financial provision through a detailed itemisation of all activities and costs based on actual market-related rates for implementing the activities for (a) annual rehabilitation, (b) final rehabilitation, decommissioning and mine closure, and (c) remediation and management of residual and latent environmental impacts. A methodology to determine the amounts, in respect of each of the categories, is set out in Appendix 1 (Annual Rehabilitation), Appendix 2 (Decommissioning and Mine Closure), and Appendix 3 (Residual and Latent Liability);
- Regulation 7 sets out the amount that needs to be available, at any point in time, through one of the recognised mechanisms. Regulation 7 confirms that, while annual rehabilitation must be taken into account when determining the total quantum for financial provisioning, the amounts calculated for annual rehabilitation, do not form part of the amount which must be made available, under Regulation 7 i.e. annual rehabilitation, must once again be funded from OPEX;
- Regulation 7 requires the applicants and holders to set aside funds, using the methodologies set out in Appendix 4 or Appendix 5. Appendix 4 applies in the case of all new rights, while Appendix 5 applies in respect of existing rights. The funds that must be set aside or available, must remain in place until a closure certificate is issued unless a withdrawal as contemplated in Regulation 11 is allowed;
- Regulation 8 sets out the financial vehicles that can be used for setting aside the financial provision i.e. making the relevant amounts available from time to time. These vehicles or mechanisms include a cash deposit, a trust fund, the establishment of a closure rehabilitation company, or a financial guarantee. Regulation 8 sets out a number of new requirements relating to the various financial mechanisms, which are likely to come under severe criticism, by the financial institutions and other entities that provide guarantees for financial provisioning;
- Based on the wording in the appendices, it also seems that the method of calculation and the amounts to be made available, will be based on volumetric calculations, rather than being calculated on surface distances i.e. hectarage. This is likely to increase the financial provision amounts, both in respect of the total amount, and what needs to be made available from time to time, significantly.
The proposed changes are still likely to result in robust debate, but the changes are clearer in relation, particularly, to the methodology for calculating the total quantum of the financial provision, and the actual amounts that must be made available from time to time, through one of the relevant mechanisms. The emphasis is now on calculating the amounts with reference to the current disturbed areas, anticipated disturbance for the next year of mining operations, and the residual and latent impacts associated with the current disturbed areas, the anticipated disturbance for the next year of mining operations, and the impacts of inflation on the costs of a third party closure. While this may not be as simple as the mechanisms under MPRDA Regulations 53 and 54, it is far simpler in comparison to both the Financial Provision Regulations 2015, and the Proposed Financial Provision Regulations 2017. It also seems that the actual amount that must be provisioned for through one of the mechanisms, will be less than the amounts which need to be made available, under the Financial Provision Regulations 2015, and what was calculated or contemplated under the Proposed Financial Provision Regulations 2017.
In summary, the Proposed Financial Provision Regulations 2019 are a significant improvement on both the Financial Provision Regulations 2015, and the Proposed Financial Provision Regulations 2017, because they are much clearer in relation to who needs to comply with them, how to calculate the total liability, and the basis on which the provision that needs to be made available at any point in time, is calculated.
This does not however mean that the mining industry will be better off – calculations are still being made by mining companies, and these calculations may reveal that, with the new calculation methodologies in the Proposed Financial Provision Regulations 2019, the actual amounts that need to be made available, will be significantly higher than those required under MPRDA Regulations 53 and 54. If this is the case, then the previous criticisms have not been addressed, to the satisfaction, certainly, of the mining companies i.e. that any additional amounts that need to be made available, including those that are made available under guarantee, will increase the costs of operations, significantly, and this may impact on the viability of both new mining projects and existing mining operations.
To the extent that there are any sticking points, this will be around whether or not the total quantum impacts on the viability of both new mining projects and existing mining operations, and the costs of making the financial provision available, as required under Regulation 7. There are significant costs associated with, for example, making guarantees available to guarantee the required amount. It is logical that if the amount that needs to be available, increases, the mechanisms such as the guarantees, need to be increased, and there are costs associated with the increase of the amounts under a guarantee.
The potential change to a volumetric calculation, is likely to increase the costs substantially. Typically, accounting provisions, as opposed to "DMR calculation", are based on hectarage, and not volumetric calculations. While it is not crucial for the accounting principles to be entirely aligned with the DMR calculations, applying new methodologies which are not aligned with financial and accounting calculations, could prove challenging for mining companies.
As a result, there have been significant improvements in the Proposed Financial Provision Regulations 2019, the methods of calculation, may yet prove too costly for certain mining companies.
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.