The sixth in a series of articles prepared by HFW (Holman Fenwick Willan) which answer frequently asked questions regarding foreign investment in Australia’s mining sector. This article looks at the requirement for mining companies to hold environmental performance bonds as security against any failure to adequately rehabilitate a mine site. We compare the regime that applies in Victoria, which is indicative of regimes in most other Australian jurisdictions, with that of Western Australia, which has recently adopted a new levy-based approach. It is important to note that each jurisdiction has its own set of rules.

IN all Australian jurisdictions mining security (or environmental) bonds are held as security against companies failing to adequately rehabilitate mine sites. In some cases, the bonds cover a proportion of mine rehabilitation costs and the State Government is required to contribute any further amounts needed for the rehabilitation. It is generally accepted by governments and mining companies that environmental bonds need to be effective in terms of environmental protection but should not unduly depress capital availability or damage the investment climate.

In Victoria mining activity is regulated by the Mineral Resources Development (Sustainable Development) Act 2006 which contains requirements for a Rehabilitation Plan and an environmental bond. The former is submitted as part of the Work Plan approval of a mining project and the latter must be lodged before work on site can commence. The Victorian Government is non-discriminatory with respect to land tenure and requires bonds to be lodged for operations on both private and Crown (government-owned) land. Early engagement with the Government is recommended to properly understand a project’s rehabilitation requirements.

In Victoria the amount of the bond is calculated to address in full the rehabilitation liability based on works specified in the approved Work Plan. This is consistent with most other states except Queensland where the quantum ranges from 30% to 75%, and Western Australia where it stands at about 25%. However, in January this year the Victorian Government announced it would overhaul the mining approvals process to improve competitiveness and would seek to reduce the environmental bonds by about 50% during the initial stages of local mining projects.

In determining the rehabilitation liability state governments generally assume the operator is unable to complete the reclamation works and therefore rehabilitation must be managed using a third party. Foreign companies looking to invest in a new or existing mining project should ensure their due diligence appropriately deals with the significant costs involved with environmental bonds.

Victoria only accepts rehabilitation bonds in the form of an unconditional bank guarantee whereas most other jurisdictions accept cash and unconditional bank guarantees. An unconditional performance bond is a contract between the Minister and reputable financial institution, providing for the financial institution to unconditionally pay an agreed sum where the tenement holder fails to comply with agreed environmental commitments.

Environmental bonds are periodically reviewed during the life of an operation to ensure the financial security remains at an appropriate level. This regular assessment is an incentive for the operator to minimize environmental impacts and undertake progressive rehabilitation as this can lead to the Government reducing the amount of the bond. The environmental bond will be returned by the Victorian Government when it is satisfied the land has been rehabilitated in accordance with the Rehabilitation Plan or relevant code of practice.

Rehabilitation Levy
The Western Australian Government has adopted a levy rather than an environmental bonds system as security against companies failing to adequately rehabilitate mine sites. The Mining Rehabilitation Fund requires holders of tenements under the Mining Act 1978, and certain other authorizations relating to mining operations, to make annual contributions based on a percentage (1%) of their total closure liabilities, which will then go into a pooled government-administered fund. The levy contributions become compulsory for tenement holders as of July 1, 2014.
For existing mining projects the introduction of the fund will generally result in environmental bonds being retired, which can amount to a significant cost saving for mining companies (however bonds may be required for projects that are in breach of their legislative obligations).

Interest earned from the fund would be used to fund the rehabilitation of legacy abandoned mine sites predating the establishment of the fund while the capital will only be used to rehabilitate mine sites levied through the fund. Each person found liable for failure to comply with an obligation requiring rehabilitation of the land will be jointly and severally liable to pay to the fund the amount applied.

In Australia the environmental bond is the preferred financial instrument to provide the level of financial security required to ensure government will not be liable for rehabilitation costs where an operator fails to comply with their rehabilitation obligations. However the fund is a robust alternative which has the advantage that the pooled money can be drawn upon to restore an abandoned mine, whereas in some circumstances an environmental bond will not have the sufficient funds to cover all rehabilitation costs.

To ensure companies looking to invest in the mining industry are aware of their obligations with regards to post mine closure rehabilitation we recommend completion of appropriate due diligence and early engagement with the relevant State Government.

HFW is a law firm advising businesses engaged in international commerce. For more information, please contact Robert Desmond, Partner, on +61 3 8601 4500 or [email protected]; or Andre Maynard, Associate, on +61 8 9422 4700 or [email protected]

Disclaimer: Whilst every care has been taken to ensure the accuracy of this information at the time of publication, the information is intended as guidance only. It should not be considered as legal advice.