06 Sep 2010

Increase in environmental bond rates for WA miners

by Kevin O'Sullivan, Francesca Coli

A higher bond rate means higher costs of conducting mining and exploration activities in WA.

The rate of environmental bonds on Western Australian mining tenements is set to increase at the beginning of 2011, meaning that the costs of conducting mining and exploration activities in this State would rise accordingly.

What are environmental bonds?

Environmental bonds were introduced as a form of security in WA in the late 1980s, to insulate the State against financial liability if mine operators failed to meet the rehabilitation requirements of their tenements. Environmental bonds are administered by the Environment Division of the Department of Mines and Petroleum (DMP).

Under the Mining Act 1975 (WA), the Minister for Mines and Petroleum may require the holder of a prospecting licence, exploration licence or mining lease to lodge with the mining registrar a security for compliance with the conditions imposed in relation to that lease or licence. Failure to lodge a security can lead to the forfeiture of the tenement.

The following types of environmental bonds may be required:

  • Security - for low impact mining or exploration activities, with limited ground disturbance, where the calculated bond amount is on the lower end of the scale;
  • Bank guarantee - for smaller mining and exploration operations, utilising limited infrastructure; and
  • Unconditional performance bond issued by a financial institution - where there is significant, or potentially significant, ground disturbance and infrastructure in place and therefore the calculated bond amount is significant.

Calculating environmental bond amounts

Bond amounts are calculated by reference to a minimum set of bond rates and criteria published by the Western Australian DMP that reflect the estimated cost of rehabilitation. The mining security is traditionally set at approximately 25% of the total estimated cost of rehabilitation.

A December 2006 review of environmental performance bonds in Western Australia noted that other Australian jurisdictions hold securities representing 40-50% of the total estimated cost of rehabilitation. The Western Australian Government appears to accept a higher level of financial risk exposure concerning rehabilitation of mining operations than other States and Territories.

Despite the observations in the review, in mid-2008 the State Government enacted a moratorium on bond rate increases to help the resources sector weather the global economic crisis. The moratorium resulted in the standard environmental bond rates remaining unchanged until the end of 2009. With adverse economic conditions persisting, the State Government has extended the existing moratorium until the end of 2010.

A new policy on environmental bonds

As the moratorium is due to expire at the end of 2010, the State Government is in the process of developing a new policy with regard to environmental bonds.

In an announcement made by the DMP on 27 July 2010, Environment Director Dr Phil Gorey stated that a key consideration is that any change will not unnecessarily constrain development in the sector. However, Dr Gorey then observed that the moratorium was a temporary measure and higher bond rates are needed to bring Western Australia into line with the rates applicable in other States and Territories.

The DMP has formed a taskforce to review mining securities and make suggestions for reform of the application, tracking, enforcement and relinquishment of bonds.

DMP has stressed that it will take a collaborative approach and consult with industry representatives and other stakeholders in the lead-up to announcing the new policy, which is scheduled to be released before the end of 2010. An industry-based Mining Securities Liaison Committee has been established, which will comprise industry representatives and officers within the Environment Division of the DMP. The purpose of the Committee is to provide a forum between Government and industry concerning the proposed reforms.

Mines and Petroleum Minister Norman Moore has observed that the Government would not impose conditions that would discourage investment in Western Australia. However, Dr Gorey acknowledged, in accordance with previous DMP statements, that "higher bond rates were inevitable to more accurately reflect public expectations on mine site closure and rehabilitation".

 

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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 communication. Persons listed may not be admitted in all States and Territories.