Financial provisions for mine closure
Tommi Kauppila, Geological Survey of Finland, PO Box 1237, 70211 Kuopio, Finland; tommi.kauppila(at)gtk.fi
Mine closure requires considerable resources and funding. These costs should be taken into account already in the feasibility planning stage although it is tempting to view them as a distant future expense having little effect on the Net Present Value or the Internal Rate of Return of the project (ICMM 2008). Nevertheless, an essential element of a Closure Management Plan is always the estimation of the costs of completing each of the required closure actions. The sum of these is then the minimum amount of funds required for mine closure. Because mine closure is in progress throughout the life of the mine, the outstanding and upcoming costs constantly change. This is one of the reasons why most MCPs are updated at regular time intervals, to provide data for the annual or quarterly financial planning and reporting of the mining operation.
Different financial sureties are often employed to ensure that enough funds will be available for mine closure at all times, including the early phases of the project. Details of such financial arrangements may be included in the mine closure plan, in addition to estimations of the cost of closure. Various financial surety instruments are available that can be used to ensure that funds are available for mine closure, rehabilitation and monitoring when needed. The most common of these have been reviewed in the context of mining waste facilities in European Commission’s Guidelines on Financial Guarantees and Inspections for Mining Waste Facilities (MonTec 2007). This reference addresses many questions pertinent to mine closure because waste facilities are a major closure issue in most cases. The selection of the mix of financial surety instruments is usually agreed between authorities and the mining company and may be to a large degree dictated by legislation in certain jurisdictions (e.g. Canada and see the discussion on collaterals in the section on Finnish legislation on mine closure). However, the surety should fulfil certain general requirements for it to be effective (modified from World Bank 2008):
- Correct amount
- Available early in the project
- Reasonably liquid
- Accessible and controllable; shared control of the funds as appropriate
- Dedicated and earmarked for closure
- Healthy guarantors with adequate financial capacity
- Public involvement
- Not a substitute for the operators mine closure obligation, but an incentive
Determining the amount and scope of the financial surety
The level of the financial surety is of major interest but is difficult to determine. World Bank (2008) lists general approaches to calculating the level of financial surety:
- Use of a formula based on the type of project, rehabilitation plan and/or track record of the company
- Specified in legislation on standard rates and unit costs
- A percentage of capital costs
- Negotiated based on the feasibility study
- Negotiated on a per tonne basis
Certain cost estimation tools also have been developed to help estimate the costs of mine closure (see World Bank 2008, Yukon Water Board & Yukon Energy, Mines, and Resources 2013). These provide useful estimates and structured approaches to estimating the costs of closure although they may need to be modified to accommodate for regional variations. In general, the cost of mine closure is typically some tens of millions of USD but the amount of the surety will vary considerably between projects and also depends heavily on the country and location (World Bank 2008).
Importantly, the level of surety should be calculated assuming that the original mining company is in absence. This means that the amount should be based on third party costs including administrative, maintenance and monitoring costs (World Bank 2008, ICMM 2006). The costs should be projected to the future as well, taking factors such as inflation and the trends in rehabilitation unit costs into account.
As described above, there are several uncertainties that need to be taken into account when estimating the level of financial surety at any time during the life of a mining project. These can never be completely eliminated and it may be advisable to include a contingency or estimate the amount generously. However, this should not be done at the expense of profitability and realistic estimates are preferred. Closure Management Plans with their implementation sections form a good basis for estimates of the immediate costs of closure.
The scope of the surety
A major factor that determines the required amount of financial surety is the scope of the surety. This is intimately connected to the scope, extent, and level of ambition of the Closure Management Plan. Intuitively, the scope of financial surety should correspond to the objectives of the CMP to ensure that these are met when the mine has been closed. The same standards or criteria that have been set to the closure of any individual mine should also form the basis for the scope of the financial surety. The emphasis in financial sureties for mine closure should be on ensuring that the closed site facilitates the planned post mining land uses, i.e. on the physical, chemical, biological, aesthetic, and safety aspects of closure. However, social and economic issues should be considered as well when closure actions of this type are needed. A high quality CMP based on extensive stakeholder engagement is a good basis for defining the scope of the surety.
Financial considerations in the Closure Management Plan
As described in the section covering the Mine Closure Implementation Plan, these plans should include both the timing and cost estimates for all individual closure actions required to meet the closure objectives. These estimates should in most cases cover a major part of the final cost of mine closure and provide a general view of when the costs incur during the life of the mine. This means that the timeline for the expenditures is known to a certain degree. However, a separate section on the costs of closure and the financial arrangements is warranted in the CMP. As stated above, this section needs to take into account the extra costs involved if the mine has to be closed by a third party in the absence of the mine operator. This differs from the Implementation Plan that is based on the assumption that the mine operator carries out the closure actions. In addition, allowance should be made for engineering redesign and inflation (World Bank 2008). Furthermore, the list of Closure Actions focuses on the immediate actions needed to meet the closure objectives and, therefore, rarely include any management, administrative and other overhead expenses that incur during the closure phase. These need to be incorporated in the estimates of the final cost of closure. Yukon Water Board & Yukon Energy, Mines, and Resources (2013) provide tables that can be used in reclamation and closure costing.
Regular reviews of the CMP and the practice of continuous closure form a good basis for regularly updating the financial surety. Mining companies aim at constantly reducing their outstanding closure-related liabilities and this should be reflected in the surety as well. Mechanisms should be in place to do this in a structured manner.
ICMM 2006. Guidance Paper: Financial Assurance for Mine Closure and Reclamation. International Council for Mining and Metals, 8 p.
ICMM 2008. Planning for Integrated Mine Closure: Toolkit. International Council on Mining and Metals, London, UK. 84 p.
MonTec 2007. Guidelines on Financial Guarantees and Inspections for Mining Waste Facilities, Final Report, 2007/S 49-059670, European Commission, DG Environment, 97 p.
World Bank 2008. Guidance notes for the implementation of financial surety for mine closure. The World Bank Group; Oil, Gas and Mining Policy Division. 61 p.
Yukon Water Board & Yukon Energy, Mines, and Resources 2013. Reclamation and Closure Planning for Quartz Mining Projects. Plan requirements and closure costing guidance. 41 p. http://www.emr.gov.yk.ca/mining/pdf/mml_reclamation_closure_planning_quartz_mining_projects_aug2013.pdf