Mining for Closure: Policies, practises and guidelines for sustainable mining and closure of mines

Box 2 Accounting provisions and “good practice” (Nazari, 1999)

the industry position, and deeper explanations have been removed from the original. In closing, it appears that financial assurance for mine closure and reclamation has progressed rapidly in recent years and will become more and more accepted in coming years. It is absolutely nec- essary to stress however, that its success is depend- ent upon the soundness of the governing bodies that put such mechanisms in place. 2.3.2 seveso ii and its implica- tions 39 The Seveso directive 40 was first put in place in 1982 to help prevent and control major accidents involving dangerous substances. The directive was adopted in direct response to, and received its name from the Seveso accident in 1976 at a chemi- cal plant manufacturing pesticides and herbicides. Although no immediate fatalities were reported, kilogramme quantities of dioxin(s), a substance In the absence of other regulatory requirements, accounting provision is preferred by the mining industry to address mine closure liabilities. This practice is an accounting transaction which allows a company to make non-cash provisions for future mine closure costs. However, this does not result in any actual cashflow for the purpose of accumulat- ing closure funds or payment of related expenses. Unless the company has chosen to set aside actual funds for closure, when the project approaches the closure date, closure liabilities are likely to exceed the project’s and the company’s tangible book val- ues, assuming the typical scenario of a ring-fenced special purpose mining company which is operat- ing one mining project. Any attempts to raise ad- ditional funds for closure at this stage by selling the company’s assets would be unlikely to raise sufficient funds to meet the closure requirements. A ‘one-project-company’ may declare bankruptcy at this stage rather than attempting to raise and invest additional funds for the terminal stage of the project with no prospect of a return on such an investment. Declaring bankruptcy would ‘exter- nalise’ the costs associated with mine closure and result in the financial burden being passed on to International practice in the absence of regulatory requirements

lethal to man even in microgramme doses were widely dispersed. More than 600 people had to be evacuated from their homes and as many as 2000 were treated for dioxin poisoning. In order to broaden the scope of the Directive, and in particular to include the storage of dangerous sub- stances, the Seveso Directive was amended twice, in 1987 41 by and in 1988. 42 It was then replaced in De- cember 1996, by the Seveso II Directive 43 in order to achieve a further widening of its scope and better risk-and-accident management. Important changes ‘Good mining industry practices’ in Australia, Cana- da, and the USA, for example, are typically guided by industry stewardship, i.e. “self-policing” as a result of good corporate governance, by following com- pany policies and reflecting shareholder, employee, and NGO pressure, relatively recent regulatory frameworks, and sophisticated financial and insur- ance markets to integrate and address mine closure activities and their financing. In these countries, accounting accruals alone are typically no longer considered adequate to mitigate the risk of non-per- formance of mine closure activities. Instead, com- panies are required to secure the funding by pro- viding guarantees for mine closure funds prior to commencing construction and operation, and prior to generating any cashflow from the operation. The available guarantee options include bonding, corpo- rate surety and guarantees, letters of credit, depos- its of cash or gold, insurance and other methods. Key considerations during the selection process by both industry and regulators include the costs asso- ciated with each option, the credit-worthiness, and the track record of the owner/operator. 39. This discussion is summarised from http://europa.eu.int/ comm/environment/seveso/. 40. Council Directive 82/501/EEC on the major-accident hazards of certain industrial activities (OJ No L 230 of 5 August 1982) 41. Directive 87/216/EEC of 19 March 1987 (OJ No L 85 of 28 March 1987) 42. by Directive 88/610/EEC of 24 November 1988 (OJ No L 336 of 7 December 1988) 43. Council Directive 96/82/EC on the control of major-accident haz- ards (OJ No L 10 of 14 January 1997) the authorities. Government funding may well be inadequate to mitigate potential long term envi- ronmental and safety impacts.

23

MINING FOR CLOSURE