Will insurers have to foot the bill for mining rehabilitation?

The government's Department of Minerals and Energy (DME) is currently examining the millions of Rands worth of guarantees that it holds for mining rehabilitation liabilities. All existing guarantees were issued in terms of the Minerals Act of 1991, replaced by the Mineral and Petroleum Resources Development Act of 2002. The DME is now calling on mines to replace these guarantees with new guarantees containing wording prescribed by the new Act.

This raises two issues that require careful consideration by insurers: firstly, guarantees might have been issued on mines where the owners are no longer in business so there is no right of recall if the guarantee is called in (and the DME may well do so in the course of its housekeeping exercise). Secondly, insurers may find themselves being asked to reissue guarantees and this should not be treated merely as an administrative exercise. Insurers must ensure that all the implications and consequences of these guarantees are considered before they are reissued.

Unfortunately, insurers might not have the appropriate records in place for verifying the details of guarantees issued and returned. In addition, even if insurers choose to cancel guarantees previously issued, they will still be held liable if the DME calls up the guarantee within 90 days of cancellation.

The Mineral and Petroleum Resources Development Act, 2002, requires that every mine makes financial provision throughout its life for the environmental costs associated with mine closure. There are four approved mechanisms for doing so: a trust fund, a cash deposit with the DME, partial exemption by the Minister, or a bank or insurance guarantee.

A trust is inflexible both in terms of over funding and investment options - the South African Revenue Services governs where investments may be made and it is fairly complicated to remove excess funds from the trust. Furthermore, the trust deed itself is prohibitive because contributions to the trust are determined by a formula that often doesn't provide sufficient funds, especially in the event of premature or unplanned closure.

The cash option merely requires the deposit of funds with the DME, with investment income accruing to the Department, and this option is therefore not favoured by larger mining operations.

Exemption by the Minister is considered on a case-by-case basis and either full or partial exemption may be granted, in the case of the latter the mine?s liability may be reduced.

Guarantees - issued either by banks or insurance companies - are undoubtedly the most suitable mechanism, providing a more attractive option to mining companies.

Bank guarantees do have a disadvantage in that they tie up the client's facilities and do not provide an efficient mechanism whereby the client can provide for the eventual closure liability.

In the case of insurance guarantees the insurer effectively takes a credit risk on the client. Insurers issuing guarantees have two choices: either put in place an efficient risk retention mechanism, or take a pure credit risk for a short period of time.

But it is important that insurers fully understand the implications of issuing guarantees. The guarantee can be called up if the mine fails to rehabilitate according to its Environment Management Programme (EMP), goes insolvent or abandons the site, or if the guarantee is cancelled. Unfortunately, insurers don't always have the skills necessary to assess either the long-term creditworthiness of the mine or whether it is complying with its EMP.

There is also the concern that the insurer may be unable to recover that guarantee either because the client doesn?t replace it or because the original document is misplaced (since it is an irrevocable guarantee it must be returned in its original form).

Alternative Risk Transfer facilities can provide the benefits of both a trust and a guarantee, offering mines a novel way of dealing with funding and guarantee requirements.

ends

Herman Schoeman

Guardrisk

(011) 669-1000 / 082 376 3821

Melanie Davis

PR@Work CC

Tel: 011 615-3309 or 083 225 7450