Clarification note i.t.o. the Regulations Pertaining to the Financial Provision for Prospecting, Exploration, Mining or Production Operations
2016
ISSUE / CLARIFICATIONChapter 1: Definitions, purpose and application of the Regulations
Clarify the difference between “Holder” and “Holder of a right or permit” / Holder refers to holders of a prospecting right or mining permit or exploration right or production right who were required to make financial provision i.t.o. sections 41 and 89 of the Mineral and Petroleum Resources Development Act 2002 (MPRDA). Hence, those who had these permits or rights prior to 20 November 2015.
Holder of a right or permit refers to those holders whose right or permit was issued after the coming into effect (20 November 2015).
Definition to be revised to address the concern related to all relevant holders and holders of a right or permit.
Holder and holder of right or permit is defined with reference to sections 41 and 89 of MPRDA. / Section 41 of the MPRDA has been repealed. Definition to be revised as per comment above.
Chapter 1: Definitions, purpose and application of the Regulations
Regulation 3: Application of the Regulations
Who does the Regulations apply to? / The Regulations apply to:
- An applicant for a right (prospecting/ exploration/ production right or mining permit).
- Holder of a right of permit i.t.o. the MPRDA.
- Holder (those who have an existing right or permit i.t.o. the MPRDA, to the extent contemplated in the Transitional Provisions (Chapter 4) and General Matters (Chapter 5) of the Regulations.
Chapter 2: Financial provision
Regulation 4: Determination of financial provision
An applicant or holder of a permit or right must determine and make financial provision to guarantee the availability of sufficient funds for the rehabilitation and remediation of adverse environmental impacts to the satisfaction of the Minister responsible for Mineral Resources.
It is likely that current existing financial provision is considerably less than what is required under these Financial Provisioning Regulations. / The intention of the Regulations is to ensure that there is adequate and appropriate provision for managing environmental impacts throughout the life of a mine, as well as for latent/ residual impacts.
Some mines make use of rehabilitation companies, but the Regulations do not provide for this. / The Regulations provide for specific vehicles for financial provision and some of these may be appropriate for use, even in terms of existing practices by making appropriate arrangements.
Chapter 2: Financial provision
Regulation 5: Scope of financial provision
An applicant or holder of a right or permit must make provision for –
- Rehabilitation and remediation,
- Decommissioning and closure,
- Remediation and management of latent/ residual environmental impacts, which may become known in the future (including pumping and treatment of polluted or extraneous water).
Chapter 2: Financial provision
Regulation 6: Method determining financial provision
Financial provision must be determined through a detailed breakdown of all the activities and costs which are calculated and based on the actual cost of implementing measures required for:
−annual rehabilitation,
−final rehabilitation, decommissioning and closure; and
−remediation of latent or residual environmental impact.
Regulation 6 states the method for determining financial provision, but does not state for what period the provision is to be determined. It further only mentions an applicant having to determine FP on that basis.
−Final rehabilitation, decommissioning and closure of operations at the end of the life of operations: Does this mean that provision must be made each year for the full total of final rehabilitation and closure over the life of the operations, even at the start of or during the life of operations?
−Remediation: Similar to the previous question, must provision be made for the full expected future environmental impact of planned operations, even though such operations may not have started or are not fully developed and such potential environmental impacts have not been activated? / The financial provision must indicate the full potential cost that may be incurred, but the amount available must be equal to the next 10 years’ worth of that potential cost. “Provision” does not have to be made for all, but the plans (Annual Rehabilitation Plan, Final Rehabilitation, Decommissioning and Mine Closure Plan and Environmental Risk Assessment Report) must indicate all potential costs as far as it is possible to determine, up to mine closure stage, while “provision” must be equal to the cost for the next 10 years/ unscheduled closure within the next 10 years. The identified costs must be realistically estimated and incorporated as provided for under Appendix 4, section 3(k)(i).
Chapter 2: Financial provision
Regulation 7: Availability of financial provision
Clarify what is meant by “for a period of at least 10 years forthwith.”? / The applicant or holder of a right or permit must ensure that the amount set aside in all of the financial vehicles combined, as set out in the regulations, must be equal to, at any given time, the cost associated with implementing the plans and reports 10 years going forward. The financial provision must be calculated (at present value) for the anticipated liability of the site 10 years from the present i.e. calculate the liability 10 years from now based on the current mine plan, and provide for this.
The financial provision (the total amount required for all rehabilitation associated with the project) gets determined in the beginning (prior to commencement) and reviewed and adjusted annually and is equal to costs indicated in the annual rehabilitation plan, the final rehabilitation, decommissioning and mine closure pan, as well as those costs related to the remediation of latent or residual environmental impacts which may become known in the future, as reflected in an environmental risk assessment report. These plans must be measurable and auditable and must include closure cost estimation procedures, which ensures that identified costs for rehabilitation, decommissioning, closure and post-closure, whether on-going or once-off, are realistically estimated and incorporated into the estimate, as per the sliding scale for accuracy provided for under Appendix 4, section 3(k)(i). The amount representing the cost associated with the first 10 years of the total financial provision is what needs to be set aside and available.
Clarify what “actual cost” refers to? / The cost refers to the actual cost tied to the rehabilitation and remediation of all impacts identified, including the implementation of measures related to annual and final rehabilitation, decommissioning, closure and any latent/ residual impacts and the monitoring thereof, as calculated i.t.o. Appendix 4. Consider having to implement the 3 plans today- the financial provision must hence be enough to implement actions identified for 10 years.
In many instances the provision of actual costs associated with estimated contractor rates will be used. Will the determination of actual costs based on industry rates as published by the South African Institution of Civil Engineering (SAICE) or other contractor used databases (e.g. inmine.com) be acceptable to be utilised by a holder of a right or permit? / Yes, the determination of costs should be in line with external contract rates according to general practice, although the Regulations do not specifically provide for this.
Regulation 7 provides that ‘the applicant or holder of a right or permit must ensure that the financial provision is, at any given time, equal to the sum of the actual costs of implementing the plans and report contemplated in regulation 6 and regulation 11(1) for a period of at least 10 years forthwith.’
How does this provision work in relation to the annual rehabilitation plan which is premised on an annual assessment? / The financial provision should be assessed/ reviewed annually and adjusted accordingly, taking in consideration the requirements contemplated in Regulation 11(1). The annual rehabilitation plan will indicate costs required for year 1. The final rehabilitation plan and latent defect (environmental risk assessment report) will indicate the rest of the total costs for rehabilitation, and will be used, in addition to the annual rehab plan amount, to make up the determination of the amount needed to cover 10 years’ costs.
Is it correct that the operation will also be required to provide financial provision for the rehabilitation costs relating to the annual rehabilitation plan as this costs will also form part of an operations OPEX budget on a yearly basis? / Since the cost of rehabilitation has already been provided during the first determination of financial provision, the benefits are realized in the following years, when considering closure costs, as the holder will be able to get the benefit of the rehabilitation in the closure costs. The final closure cost will be the amount calculated the previous year, minus the amount which was spent on rehabilitation (plus of course any new amount for new areas to be disturbed in the year under consideration). The amount set aside for closure cost therefore can potentially reduce because the amount already spent on rehabilitation gets deducted from that total and less rehabilitation work is required over time.
Chapter 2: Financial provision
Regulation 8:Financial vehicles used for financial provision
The applicant or holder must make financial provision by one or a combination of a:
−Financial guarantee, which must comply with the format requirements set out in Appendix 1 to the Regulations.
−Deposit into an account administered by the Minister; or
−A contribution to a trust fund established in terms of applicable legislation.
- Such contribution to a trust fund may only be in relation to financial provision made for the remediation of latent or residual environmental impacts, and not for annual rehabilitation or final rehabilitation, decommissioning and closure of the operation.
- The trust fund option may also not be used by an applicant/ holder for a mining permit in terms of the MPRDA.
- Such contribution to a trust fund must be established by a deed of trust and must comply with the requirements set out in Appendix 2 of the Regulations.
Do the financial vehicles provide an opportunity for the holder of a right or permit, to amend or transfer the current financial vehicles with the DMR to a new financial vehicle to provide for additional requirements under the new regulations? / The Regulations apply to all holders of a right or permit and, as such, their financial provisioning must comply with Regulations now in force. There are specific transitional provisions under the Transitional Arrangements {Regulation 17(5)}, which providesfor holders to allow them time to comply with the new requirements.
Where existing financial provision do not comply, they must be brought into compliance. Whether an investment was "approved" by DMR in the past is not relevant, as the current legislation overrides any such past administrative act.
As regards to trust funds, existing trust funds can be managed as before. However, the use of new trust funds are to be limited to costs related to the remediation and management of latent or residual environmental impacts which maybecome known in future, including the pumping and treatment of polluted or extraneouswater.
Generally, adjustments to the funds in existing vehicles can be done as required, especially if an annual revision indicates that such an adjustment is required. Adjustments will be necessary for existing holders if their current provision does not comply.
Trust funds
8(1)(c)(i) determines that a trust fund cannot be used for annual or final rehabilitation; i.e only financial guarantee or cash can be used.
Appendix 2 should also exclude final rehabilitation (it only excludes annual rehabilitation).
It may not be possible to withdraw excess funds from existing trusts to move to financial guarantee.
Are existing holders limited in the same fashion? There are existing trust funds making provision for this- do holder/ holders of a right or permit need to cancel that and provide financial provision in the form of financial guarantee or cash? / −Existing trust funds may be used as previously specified.
−New trust funds can only be used for remediation of latent or residual environmental impacts.
−New trust funds cannot be used for annual or final rehabilitation.
Concern as regards tax implications of withdrawal from existing trust funds, acknowledged and the DEA to take up discussions with SARS and the National Treasury as regards a way forward.
The limitation as regards trust funds also applies to existing holders of a right or permit. Transitional provisions require holders of a right or permit to convert to the new requirements (except the limitation on the use of trust funds as per regulation 8(1)(c)) by February 2017. This date is based on the Regulation 17(5)(b) which refers to 15 months after the coming into effect of these Regulations (20 November 2015). Should the holder choose to comply Regulation 17(5)(a) – within three months of its financial year end - that period would be shorter than February 2017.
Please note that this transitional provision will be amended to extend the 15 months provision of regulation 17(5)(b) to a period of 24 months.
Also note, however, that this date will be extended by a few months, as per the correction note to be published by the Department.
Furthermore, if a holder of right or permit is unable to meet these requirements immediately, they have the option of entering into a payment agreement with the Minister, for a maximum of 5 years.
Consolidation of financial provision [Sub-regulation 8(1)(a)(c)]
Some holders of a mining right often may have a number of mine rights issued to them under the MPRDA. Does each right or permit require its own financial vehicle for provisioning, or may a holder of more than one right combine all into one financial vehicle and proportion the correct amount to each right or permit, as holders are allowed to do currently? / As long as the holder of a mining right or permit makes provision for the cost of rehabilitation and remediation of all environmental impacts, including any latent/ residual impacts related to its activities, they may choose to combine it into one financial vehicle or provide for it separately, as long as the different proportions are clearly distinguished
How would the Regulations deal with instances where the DMR issued directives to different mining entities to work together to achieve a specific common goal / A combination of the financial provision is possible, however each entity must be able to demonstrate that financial provision is in place for each separate operation.
Consolidating funding for operational day to day management of environmental impacts/ concurrent rehabilitation with the actual financial provision for premature closure made by holders of a right or permit, with the actual financial provision creates a problem i.t.o. double funding, since funds are to be locked away in the financial provision, while it is expected that such holders also fund the implementation of measures agreed to i.t.o EMP and the environmental authorisation.
Annual rehabilitation, in practice, is reflected on the balance sheet and on the income statement of the mine, which results in double accounting. / Financial provision must consist of funds for annual (A), final closure (B) and latent defects (C) rehabilitation, i.e. A (annual) + B (final closure) + C (latent) = D (FP). D must be sufficient for a 10 year period looking forward.
D must be sufficient for A+B+C.
It is foreseen that there is only a very limited potential for double provision, and this is limited to the first year when rehabilitation is to be undertaken, as the rights holder must have funds in pocket to fund annual rehabilitation actions during the first year of undertaking such rehabilitation. It is, however, very unlikely that any rehabilitation actions will be undertaken in year 1. It is also important that liabilities for the mine is reflected for awareness by the board of directors et al. of a mine.
Funds set aside for annual rehabilitation can be provided in either cash deposit in an account managed by DMR or in a financial guarantee. The latter does not require the payment of a lump sum but rather ensures that the rehabilitation cost is guaranteed to be paid out in certain events through payment of a monthly premium. However, note that these Regulations have not been written for premature closure, specifically. The amount to be guaranteed should reduce annually if annual rehabilitation takes place. Annual rehabilitation reduces the rehabilitation to be done at final closure and for residual/latent impacts. Any annual review thereafter for year 2 onwards will require a review of A, B and C and should result in an adjusted D.
If any funds out of D were utilised for annual rehabilitation in any given year, the fund for annual rehabilitation for that year will reduce the total for financial provision (D), while the provision for annual rehabilitation for the new year 10 will be added.
The calculation of D will therefore entail deducting from A (for current year expenses spent) and adding to A (expenditure for the new year 10). Any funds utilised for annual rehabilitation should automatically result in a deduction of FP for final closure rehabilitation (B). This is because B (final closure rehabilitation) is made up of 10 years of A (annual rehabilitation) plus any specific final closure actions that can only be undertaken at final closure.
Would the financial provision also include the cost of monitoring in relation to the plans? / The cost of monitoring as it relates to annual rehabilitation and remediation, decommissioning and closure activities at the end of mining operations and the remediation and management of latent or residual environmental impacts, which may become known in future, should be included in the financial provision, as per Appendices 3,4,5 and 6 of these Regulations.
Chapter 2: Financial provision
Regulation 9: General requirements for financial provision
The general requirements of financial provision include, but are not limited to:
- The determination, review and assessment of the financial provision must be undertaken by a specialist.
- The financial provision liability may not be deferred against assets at the mine closure or the mine infrastructure salvage value.
- Where the making of or adjusting of the financial provision had been undertaken in terms of a financial guarantee, such undertaking must be accompanied by a verification of registration of the financial institution.
- Where the financial provision was undertaken by a deposit into an account administered by the Minister, if any interest is earned on the deposit, such interest will not be paid back to the holder of a right or permit who contributed to the account. However, correction to be made to the regulation text, which says interest must be used against bank charges.
- Where the financial provision applies to the remediation of latent or residual environmental impacts which may become known in the future, upon the issuance of the Closure Certificate in terms of the MPRDA, such financial provision must be ceded to the Minister.