Mining Security System
Preferred Option Paper
30 March 2011
The Department of Mines and Petroleum invites comments and
feedback on this Preferred Option Paper. Submissions can be made:
• by email: firstname.lastname@example.org
• by mail: Mining Securities Review, Environment Division,
Department of Mines and Petroleum, Mineral House,
100 Plain Street, EAST PERTH WA 6004.
Project contact: Jenny Oosterhof, Principal Policy Officer, Environment
Division, Department of Mines and Petroleum (phone: 9222 0563,
The closing date for submissions is close of business 13 May 2011.
Submissions will be placed on the Department of Mines and
Petroleum’s website unless they are marked “confidential”. The
department will also publish a summary of all feedback provided on
its website, which will not directly attribute comments made by an
individual or organisation where their comments have been identified
In December 2010, the Department of Mines and Petroleum released
for public comment the Preliminary Discussion Paper on Policy Options
for Mining Securities in Western Australia. This paper described three
possible mining security options as part of the department’s review of
mining securities: a full cost environmental bond system, a government-
administered fidelity fund and an insurance-based system.
The department has now reviewed the submissions received, and has
completed further research and investigations into the various options.
The department has concluded that a fidelity fund approach offers the
best option for the State’s future mining securities system. It is proposed
that the Mining Rehabilitation Fund be established within three years as
the primary tool to manage the risk of any company operating under
the Mining Act 1978 not meeting its mine rehabilitation and closure
If a fidelity fund is not pursued, the department considers that the only
other effective alternative will be to progress to a full cost unconditional
performance bond system, as was recommended and adopted following
a previous review in 2008. It is acknowledged that, if this was to occur,
the mineral resources sector would press for a thorough reassessment
of the administration of unconditional performance bonds in Western
This paper presents the basis for the recommendation of the Mining
Rehabilitation Fund, including detail on the structure and governance
of the fund, the sum of money required to cover the government’s
contingent liability and the contributions to the fund required from
industry. A sensitivity analysis has also been applied to compare the key
advantages and disadvantages of the fund with a full cost unconditional
performance bond system. For example, a comparison is made between
the estimated annual costs for the fund with the current bond system
incorporating bank risk ratings and total rehabilitation and closure
liabilities. This comparison indicates that the fidelity fund is the lowest
cost option for the mining industry.
In addition, the implications of each option for the government, mining
industry, financial institutions, the wider economy, community and the
environment are also discussed. While this also shows the fidelity fund
was overall the best option, its preference as a new mining security
arrangement will depend on a number of requirements to ensure it
meets the principles described in the Preliminary Discussion Paper.
The likely requirements are summarised in the final chapter and detailed
in Appendix 2.
The department is now seeking comment on these findings to
advance its review of mining securities in Western Australia. Following
consideration of the feedback on this paper, the department will be
making its final recommendation to the State Government.
Department of Mines and Petroleum Western Australia’s Mining Security System 1
2 Department of Mines and Petroleum Western Australia’s Mining Security System
1. Introduction ........................................................................................................................4
2. Current review of mining securities ...................................................................................4
2.1. Preliminary Discussion Paper ........................................................................................4
2.2 Current focus of the review ............................................................................................5
2.3 Purpose of this paper .....................................................................................................5
2.4 Relationship to mine closure plan requirements ..............................................................5
3. Statement of the issue .......................................................................................................6
3.1 Application of mining securities in Western Australia.......................................................6
3.2 Risk to the State ............................................................................................................7
3.2.1 Industry growth and expansion.............................................................................7
3.2.2 The number of mining operations on care and maintenance .................................7
3.2.3 Transfer of mining projects to smaller, less financially secure, companies ..............7
3.2.4 Summary of the risk to the State ..........................................................................8
4. Objectives of mining securities..........................................................................................9
5. Options to address the issue .............................................................................................9
5.1 Full cost unconditional performance bonds ....................................................................9
5.2 Mining Rehabilitation Fund ...........................................................................................10
6. Evaluation of policy options.............................................................................................12
6.1 Evaluation criteria .........................................................................................................12
6.2 Evaluation of the options ..............................................................................................12
6.2.1 Financial impact on the State’s mining sector .....................................................13
6.2.2 The extent to which mining securities encourage good environmental practice...16
6.2.3 Using a risk-based approach in applying mining securities .................................16
7. Impact Assessment ..........................................................................................................17
7.1 Affected stakeholders ..................................................................................................17
7.2 Impact analysis of the potential options ........................................................................17
8. Preferred option................................................................................................................19
9. Implementation and evaluation strategy .........................................................................19
Appendix 1 ............................................................................................................................20
Appendix 2 ............................................................................................................................21
Appendix 3 ............................................................................................................................25
Department of Mines and Petroleum Western Australia’s Mining Security System 3
1. Introduction 2. Current review of mining securities
The Department of Mines and Petroleum is currently in In identifying options for a future mining securities system,
the process of conducting a major review into the future the department has reviewed the history of the State’s
operation of the State’s mining securities system for environmental bond system and considered systems
Mining Act 1978 activities1. in place in other jurisdictions. Throughout this process,
the department has sought input from key stakeholders.
The principal objective of mining securities is to ensure An industry liaison committee was established and
that sufficient funds are available to the government consultation has occurred with other interested parties
to rehabilitate mine sites in the event of operators not such as financial institutions, other government agencies
fulfilling their mine rehabilitation and closure obligations. and non government organisations.
In doing so, they represent an important regulatory
mechanism that provides confidence to both the 2.1. Preliminary Discussion Paper
government and the community that satisfactory The first significant milestone for the review was
rehabilitation and closure will be achieved. publication of the Preliminary Discussion Paper on Policy
Options for Mining Securities in Western Australia2 in
It is of significant concern to the government that the December 2010 (available on the department’s website).
ability of the current system to provide a reasonable The aim of this paper was to present a range of policy
level of financial security has decreased significantly options, including an overview on how the department
since environmental bonds for the mining industry were considered each option could operate in practice. The
originally introduced in the late 1980s. Bond rates have policy options proposed in the paper included:
not kept pace with the rising costs of rehabilitation, 1. retaining the current environmental bonds system,
resulting in a situation where bond levels are now well but increasing bond amounts to cover the full cost of
below the actual cost of rehabilitation and mine closure. rehabilitation and mine closure;
Additionally, the current system is inflexible, in that bonds 2. replacing the current system with a mining securities
are tenement-based, which means that bonds can fidelity fund; and
only be used for rehabilitation works on specific mining
3. an insurance-based system.
Feedback from industry and relevant stakeholders
A review into the State’s mining securities system was
was sought on these, or any other options, in order
also conducted by the Department of Industry and to assist in identifying further work to develop robust
Resources in 2008, which recommended the retention recommendations for mining securities reform. The
of an environmental bond system with rates increased to feedback has been used to formulate the structure and
levels approaching the full cost of rehabilitation and mine detail of this document, as well as that of the preferred
closure. Such a system would have brought Western fidelity fund model.
Australia’s mining securities generally in line with other
jurisdictions in Australia and other developed countries. Overview of submissions
Submissions on the Preliminary Discussion Paper closed
The government’s implementation of the recommendation on 15 February 2011. A total of 19 submissions3 were
to increase bond rates was put on hold in response to received: nine from industry, two from other government
the global financial crisis, resulting in the current Minister agencies, two from non-government organisations and
for Mines and Petroleum placing a two year moratorium six from other interested parties. A brief overview of the
on the raising of bond rates. key issues raised in the submissions is provided below.
It is recognised that moving to a full cost bond system I. Unconditional Performance Bonds
could have a significant financial impact on the industry The Department of Environment and Conservation
and, therefore, the wider community. For this reason, gave clear support for the use of full cost unconditional
during the period of the moratorium, the department performance bonds in order to offer the best outcome
commenced a review to determine alternatives to a full for government, as did several consultants. The
cost bond system that would provide an equivalent, or Department of State Development noted that full cost
better, outcome for the State at a lower cost to industry. bonds would provide industry with more consistency,
whilst the Pastoralists and Graziers Association were of
While the moratorium expired at the end of 2010 and the view it would provide greater certainty that industry
bond rates have since been increased by 25% and a would meet its obligations towards mine closure.
schedule set for bond rates to reach 50% of full closure
costs by 2014, the government is fully supportive of the Most industry submissions did not support full cost
department’s efforts to investigate suitable alternatives to unconditional performance bonds. Companies were
the environmental bond system and this paper represents concerned that this option significantly overstated the
an important milestone in the development of such a risk of failure, would result in unreasonably high costs to
potential option. the industry and was not a justifiable position.
Western Australia’s current mining securities system applies to all mining operations and higher risk prospecting and exploration activities that are subject to the mining security provisions of the Mining Act 1978. Mine sites
operating under State Agreement Acts that are not subject to the mining security provisions of the Mining Act 1978 are not the subject of this review.
Further detail on the history of Western Australia’s mining securities system, previous reviews of the system and a comparison with other jurisdictions is provided in the Department of Mines and Petroleum’s Preliminary
Discussion Paper on Policy Options for Mining Securities, available at http://www.dmp.wa.gov.au/miningsecurities
For more detail on the submissions received, refer to www.dmp.wa.gov.au/preferredoptionpaper which details all comments and the Department of Mines and Petroleum’s response.
4 Department of Mines and Petroleum Western Australia’s Mining Security System
One submission noted the difficulties new operators V. General Comments
faced in fully comprehending the commitment required in Most stakeholders called for clarity in relation to the
achieving closure and retiring a bond. The relinquishment application of mining securities to State Agreement
process under the performance bond system was also Act projects. Whilst one submission was of the view
raised as an issue requiring attention. State Agreement Acts provided the government with an
adequate measure of discretion should obligations not
II. Fidelity Fund be met, several submissions viewed this as inequitable.
The key issue raised by industry stakeholders in
providing feedback was that a greater depth of analysis Submissions from non-government organisations,
was needed through further research and investigation, pastoralists and those working in the industry included
in order to form a clear opinion on the most effective general comments on issues and concerns relating to
option for reform. the current system. Industry submissions also made
comment on the Minister’s decision to cease the
Several submissions, including the submissions from moratorium on bond rate increases under the current
the Department of Environment and Conservation bond policy. Whilst these issues have been noted, the
and Cement Concrete & Aggregates Australia, were department considers them to be a separate matter from
not supportive of the fidelity fund option as the sole this review, which is focused on options for reforming the
mechanism for mining securities, citing it as a weaker State’s mining securities system.
system with respect to encouraging companies to
meet their rehabilitation obligations. The Department of 2.2 Current focus of the review
Environment and Conservation provided support for the
fund only on the basis that it be used in combination As a result of this consultation, the department
with unconditional performance bonds. considered that the focus of the review should be limited
to the development of the fidelity fund model to a stage
Industry members and the insurance companies where it could properly be considered as a suitable
that made a submission (Assetinsure and Swiss Re alternative to the environmental bonds system. The work
International) raised concerns regarding the potential conducted by the department to date indicates that
for environmentally responsible companies to effectively the fidelity fund option provides a viable mining security
pay for the rehabilitation costs of irresponsible system for the State, and introduces flexibility that is not
companies. Cement Concrete & Aggregates Australia available under the unconditional performance bond
also cited experience with the South Australian fund system. The department is seeking to consolidate the
for the extractive industry as being overly bureaucratic, detail on such a fidelity fund system through stakeholder
complex and not encouraging companies to meet their consultation (i.e. through the release of this paper) prior
rehabilitation obligations. to making a final recommendation to government.
The establishment of the fund’s structure and It is anticipated that the government will be provided with
governance arrangements were raised as key areas a final recommended policy position by June 2011.
requiring further clarification. Industry was particularly
concerned regarding the protection of the fund 2.3 Purpose of this paper
moneys for the specific purpose of mining securities. The purpose of this paper is to present the department’s
The department also received several comments from preferred fidelity fund option for a future mining securities
industry regarding the absence of consideration of an system, based on research and consultation conducted
incentive system, stating it did not promote enhanced to date. Feedback on this paper will inform the
rehabilitation outcomes. preparation of a final recommendation to government.
The department therefore encourages all interested
III. Insurance-based Securities System parties to provide feedback, particularly in relation to
It was generally accepted that an insurance-based perceived impact of the model, and suggestions for
system is not a viable option and that this should not be improvement. To assist in assessing the financial impacts
pursued further. of the model described in this paper, the department has
developed a cost calculation tool which is available on
IV. Risk the department’s website at
Risk was a major issue commented on by both industry http://www.dmp.wa.gov.au/preferredoptionpaper
and government organisations. Industry requested that
a thorough and transparent assessment of the risk to
2.4 Relationship to mine closure plan
government and industry be carried out. It was further
requested that the flow on impacts be calculated on requirements
potential losses in royalties and jobs versus potential The 2010 amendments to the Mining Act 1978 require
mine closure liability incurred by the State Government. all mining operations (excluding those administered
Beyond a high level risk review, many of the industry under State Agreement Acts) to submit mine closure
submissions requested that options for a risk-based plans by 1 July 2014. These are required to be drafted in
system should be investigated whereby each company’s accordance with guidelines currently being prepared by
risk of failure to meet rehabilitation obligations is reflected the Department of Mines and Petroleum and the Office
in the level of mining security contribution. of the Environmental Protection Authority.
Department of Mines and Petroleum Western Australia’s Mining Security System 5
The aim of mine closure planning requirements is to 3. Statement of the issue
ensure that, for every mine in Western Australia, a
At present, Western Australia’s mining securities system
planning process is in place to close, decommission
exposes the government to an unacceptable level of
and rehabilitate the mine in an ecologically sustainable
manner, consistent with agreed post-mining outcomes
and land uses, and without unacceptable liability to the
Under the current system, if a company fails to fulfil their
rehabilitation obligations, the government may call-in
the bonds. The government is limited, however, to only
The government views mine closure plans as a valuable
spending the bond moneys specifically on the tenement
tool, in addition to mining securities, in minimising
in which the bond was lodged. Any shortfall in funding
closure liability to the State and community. These plans
for the rehabilitation on a tenement must therefore be
will provide summaries of the best available data on
met by the government.
aspects of the physical and biological environment that
can challenge or compromise mine closure outcomes.
The department estimates that current bonds cover,
The completion criteria and performance indicators
on average, less than 25% of rehabilitation and closure
identified in closure plans will be used to form a basis
costs, potentially leaving at least a 75% shortfall in
on which mine closure performance is measured and
expenditure on each tenement. While there is around
$860 million currently established as unconditional
performance bonds for Western Australia, this is not a
As part of the mine closure planning process, companies
single ‘pool’ that can be drawn upon by government.
will be required to demonstrate that financial provisions
On any one tenement, the difference in the bond and
have been made to ensure that adequate funds will be
the actual closure costs currently needs to be met by
available at the time of closure and that the community is
government from general revenue.
not left with a liability.
Whilst the introduction of the mining securities system in
Cost estimates conducted for the purpose of
the 1980s intended to cover the full cost of rehabilitation,
demonstrating financial provisioning for mine closure
a regulatory drift in the implementation of the mining
plans are not intended to be applied in the calculation of
securities policy has been experienced, resulting in a
mining securities. The financial provisioning requirements
system that no longer meets the government’s principal
in mine closure plans are for tenement holders to
demonstrate that they will have funds available in the
future to address their financial obligations for mine
The environmental bond system presently in place is
rehabilitation. Quite separately, the cost estimate
similar to models in other jurisdictions in Australia and
for calculating an appropriate mining security is to
internationally. It is the government’s intention to maintain
determine the actual cost of government being required
this system and increase bond rates to the full cost of
to rehabilitate mine sites. Cost estimates for mining
rehabilitation and mining closure if a suitable alternative
securities will therefore need to be calculated assuming
cannot be determined. Whilst this would ensure the
mines require closure in their current state and would
State’s financial risk is addressed, there could be
need to be re-assessed on an annual basis.
significant impacts on the mining industry and, therefore,
the wider economy. Maintaining the status quo, however,
The questions are therefore different, with financial
not only has the potential to impact the government, but
provisioning being to answer the question of “Will the
the environment and the wider community as well.
tenement holder have enough money to rehabilitate
the mine site at the end of the project?”, and the cost
estimate for mining securities being “How much would it 3.1 Application of mining securities in
cost to rehabilitate the mine site if it shut down now?”. Western Australia
State Agreement Act projects
There is an obvious relationship between the two The current system applies to those mining operations
processes and, in fact, the maintenance of the integrity that are subject to the mining security provisions of the
of the fidelity fund requires that there is improved Mining Act 1978. This excludes most State Agreement
demonstration from tenement holders that they will Act projects that specifically limit the application of the
have adequate access to money to close and rehabilitate Mining Act 1978. State Agreement Acts are project-
their mine site (and not be encouraged to view the fidelity specific legislation passed by the Parliament of Western
fund as a substitute for financially provisioning Australia and can only be changed with the consent
for closure). of both parties as they constitute a bilateral agreement
between the government and the company.
Most of the State’s large projects, such as the main iron
ore producers, operate under State Agreement Acts,
leaving them outside the scope of this review. They
can, however, be subject to securities applied under the
Environmental Protection Act 1986.
6 Department of Mines and Petroleum Western Australia’s Mining Security System
Environmental Protection Act 1986 There are, however, 240 tenements which have
The Environmental Protection Act 1986 provides for been forfeited by the government or surrendered by
a range of securities to be applied to implemented companies, most commonly as the result of an inability
proposals, work approvals, and other licences and to maintain rent and expenditure obligations. These
notices issued under the Environmental Protection tenements have environmental disturbance that has
Act 1986. The amount of the security is based on not been addressed by the mining operator and have
the estimated total costs required to undertake the environmental bonds currently in place amounting to
remediation work. nearly $6 million.
It is generally accepted between the department and In addition to these factors, there are a number of other
the Office of the Environmental Protection Authority risk factors of concern to the government that have the
that, where a project is subject to the Mining Act 1978, potential to increase the State’s actual liability: the extent
mining securities will be imposed only by the Department of industry growth and expansion; the increasing number
of Mines and Petroleum. of mines on care and maintenance; and the incidence
of smaller, less financially secure, companies taking on
Prospecting and exploration activity mature projects with large environmental liabilities.
As is the case with the current environmental bonds
system, it is not the intention of the department to 3.2.1 Industry growth and expansion
apply mining securities to exploration and prospecting While the global financial crisis of 2008 did appear to
activities, except in those circumstances in which have a negative impact on development, the number
there is a history of non compliance; when exploration and area of mining tenements is continuing the strong
activities are undertaken in environmentally sensitive or growth path of recent years. Figure 1 illustrates that, over
conservation estate areas; or where such activity would the last six years, the number of mining tenements in
result in high levels of disturbance. force has increased by a third and the area of the State
under active mining tenement has almost doubled.
The extent of variability in proposed exploration and
prospecting activities means that the department will be There are now more than 4,000 tenements which have
required to assess eligibility for exemption from mining mining securities held against them. Figure 2 shows that
security requirements on a case-by-case basis. In the the number of tenements requiring bonds has doubled
interest of providing certainty to industry, however, it in the last ten years and the total value of the bonds has
is intended that guidelines to indicate when mining tripled over the same period.
securities might apply will be developed.
The increased investment and activity in the State’s
3.2 Risk to the State mining industry has resulted in an increase in both the
The operational life of mines can extend for many years, scale and number of operations.
typically from five to 20 years, and in some cases more
than 50 years. Mine site rehabilitation, closure works and 3.2.2 The number of mining operations on care and
post-closure monitoring can then take some years to maintenance
complete. The recent growth in mining activity has occurred at the
same time as there has been an increase in the number
In the minority of cases where operators are unable to of inactive mine sites where the tenements are placed on
fulfil their mine rehabilitation and closure obligations, this care and maintenance by companies (see Figure 3).
may be attributable to a range of factors including:
financial difficulties, brought on by circumstances There is also anecdotal evidence from pastoral
such as lower than expected commodity prices, lease holders that some mines placed on care
higher operating costs or an unanticipated decrease and maintenance are, to all intents and purposes,
in the grade or size of the mineral reserve; abandoned.
technical or environmental issues, such as adverse
geotechnical conditions or a catastrophic natural 3.2.3 Transfer of mining projects to smaller, less
event; and financially secure, companies
social or community pressures. The history of mining in Western Australia demonstrates
that often another company will take over a failed
While the State’s total contingent liability for mine (or closed) site and assume the previous operator’s
rehabilitation and closure represents a substantial environmental obligations.
amount of money, the State’s actual liability, at this
point in time, is much lower. Instances of companies Many smaller companies purchasing mature mining
going into administration or otherwise failing to fulfil their projects do not always fully comprehend the financial
rehabilitation obligations resulting in bonds being called- commitment that is required in order to satisfactorily
in by the government are low. This has only occurred achieve mine closure. Smaller companies also may
with 59 of the more than 4000 tenements currently not have the financial or technical capacity to deal with
bonded, and represents $2.5 million, or 0.3%, of the unanticipated or complex environmental impacts.
total value of bonds held by the government.
Department of Mines and Petroleum Western Australia’s Mining Security System 7
Reliance on new tenement holders agreeing to assume
control and accept rehabilitation and closure liabilities
resulting from previous mining is considered by the 50
department to have the potential to lead to a large
number of abandoned mines.
Area (millions of ha.)
3.2.4 Summary of the risk to the State 30
The risk to the State relates to the government having to 8000
bear the costs to rehabilitate mine sites. The department 20
is of the view that, because the government would
be required to meet at least 75% of the rehabilitation 10
costs if a company defaults, it is currently exposed to a
potentially ‘catastrophic’ consequence, in that the cost
to government could amount to a huge financial loss in
the case of a large and complex mine site failure.
Determining likelihood is more complex. While, Area of Tenements in Force Number of Tenements in Force
historically, there has been a limited call on bonds to
fund mine site rehabilitation, this figure is distorted Figure 1. Increasing tenements in Western Australia Source: DMP
because government is not likely to call in a bond
when the bond moneys available for each tenement
are inadequate to complete rehabilitation. Fortunately, 1000 5000
the failure to rehabilitate immediately can generally be
managed, considering that many previously worked
mine sites are subsequently reopened for further 800 4000
Number of Tenements with Bonds
mining, thus providing another opportunity to undertake
Value of Bonds ($m)
rehabilitation. This has given a sense that the likelihood
of the government having to take control to rehabilitate a
mine site is ‘rare’ or ‘unlikely’.
The global financial crisis, however, brought the prospect
of the potential for the government to be required to
pay for rehabilitation to light. A number of companies 200 1000
approached the government for bond relief, while others
were placed on care and maintenance (the number of 0 0
inactive sites has continued to increase; see Figure 3).
This experience, coupled with changing community
attitudes towards environmental management and
the rapid expansion in exploration and mining activity Total Value of Bonds Total Number of Bonds
(Figures 1 and 2), suggests the likelihood for the
government having to take control and rehabilitate a Figure 2. Increasing mining securities held against tenements in
mine site should be raised to ‘moderate’. Western Australia Source: DMP
In summary, the risk to the government of having to bear
costs to rehabilitate a large and complex mine site, or a 250
number of smaller mine sites, would be at least medium
using a standard risk assessment framework. This is
considered to be an unacceptable level of risk to be
borne by the government.
No. of Projects
It is recognised that past frequency may not be an
accurate prediction of the future, and consideration
was given as to whether it would be achievable, as part 100
of this review, to undertake a predictive assessment
of the likely number of companies (and therefore 50
resulting tenements) that may fail in the future. It is
the department’s position, however, that it cannot
be involved in assessing the financial position of 0
companies in this manner as such an exercise would
have the potential to impact on the financial standing of
companies. Figure 3. Cumulative number of mining projects made inactive each
year in Western Australia since 2000 Source: DMP
8 Department of Mines and Petroleum Western Australia’s Mining Security System
4. Objectives of mining securities As a result, the department has further investigated
and refined the fidelity fund option. Progression to a
The principal objective of mining securities is to
full cost unconditional performance bond system has
ensure that sufficient funds are immediately available
been retained if the fidelity fund option is found to be
to government to rehabilitate mine sites in the event
of operators not fulfilling their mine rehabilitation and
closure obligations. The government’s position is that
it expects the costs for mine rehabilitation and closure 5.1 Full cost unconditional performance
to be borne by industry and that, accordingly, the State bonds
should not be held financially responsible in cases where This option involves the retention of a mining securities
companies either cannot, or are unwilling to, address system based on unconditional performance bonds,
their environmental obligations. with bond rates raised to cover full rehabilitation and
closure costs (i.e. the cost of a third party conducting
While the degree to which the current system has failed the rehabilitation works and additional funds to cover
to meet its principal objective is debatable, it is widely contingencies, and administrative and monitoring costs
accepted by government and the mining industry that for government).
current bond levels represent only a small percentage
(i.e. in most cases less than 25%) of the full cost of Increasing the current bonds so that they represent the
rehabilitation and mine closure. full cost of rehabilitation and closure would bring Western
Australia’s mining security system broadly in line with
Mining securities may also have secondary objectives or other Australian jurisdictions in terms of methodology
impacts such as encouraging acceptable environmental and level of security provided to government.
outcomes or affecting the ability of the State to attract
mining investment. As bonds would only be triggered (or called-in) in the
case of mining companies being unable to fulfil their
5. Options to address the issue obligations, they must be based on full third-party
The department has reviewed the submissions received closure costs. If not, the government could be liable
on the Preliminary Discussion Paper and conducted for part closure costs. For this reason, the government
additional research to evaluate options considered as would not be considering a discount system for bonds.
worthy of further investigation.
In determining the level of bonds required, it would be
There has been support from industry to further necessary to obtain a reasonably accurate estimation
investigate the fidelity fund option as a possible of rehabilitation and closure costs, as this will directly
alternative to the current environmental bond system. impact both the amount of money it will cost the
Other interested parties, such as environmental company and the degree to which the government’s
consultants, non-government organisations and other financial risk is addressed. There are many sources
government agencies, were generally in favour of of uncertainty that can affect closure costs, including
implementing a full cost bond system. unexpected site conditions, the presence of acid mine
drainage, and the costs of labour and equipment.
While the concept of an insurance-based securities
system was proposed in the Preliminary Discussion Industry stakeholders have expressed a preference for
Paper (and was considered by some stakeholders to project based bonds rather than the current system of
be worthy of further investigation), no insurance policy tenement based bonds. Project based bonds may not
or cover in global markets could be identified that be appropriate for all projects, however, an ideal system
would provide the government with the level of security might allow operators the choice of either tenement or
required. Work on further developing an insurance- project based bonds.
based securities system was therefore not progressed.
The provision of unconditional performance bonds by The implementation of project based bonds could also
insurance companies, however, has been presented reduce the administrative burden for the department,
as an option in the event of a bonding system being financial institutions and companies, whilst supporting
retained. better environmental outcomes through a holistic
approach to encouraging greater progressive
The department also considered the possibility of a rehabilitation.
combination system, whereby companies would be
required to provide unconditional performance bonds Industry has previously highlighted the issue of bond
for a portion of the full cost of rehabilitation and mine reviews not being timely. Under this model, the financial
closure, supplemented by a fidelity fund contribution on burden on industry will be significantly increased, in
the remaining portion of liability. While such a system comparison to the current level of bonding, and the issue
may encourage progressive rehabilitation to a greater of timely bond reviews will be even more important. The
extent than the fidelity fund model and also provide department would therefore need to provide adequate
funds for the rehabilitation of abandoned mine sites, prioritisation to conduct these bond reviews.
these benefits would be outweighed by the increased
costs to maintain two distinct systems.
Department of Mines and Petroleum Western Australia’s Mining Security System 9
In reviewing options for improving the application of industry approved claims on its funds, government
a bonds system, the department is proposing the approved claims on its funds). Approval to determine the
capacity for bonds to also be provided by insurance level of contribution to the funds, however, was required
companies as an alternative instrument. Such bond by a Minister for the industry operated funds, whilst the
arrangements would have the advantage of requiring departmental CEO determined contribution levels for
less up-front collateral, possibly allowing companies the government funds. All four fidelity funds allowed for
that would currently be required to cash-back bank an extraordinary levy to be imposed if the balance was
guaranteed bonds to have access to more investment considered insufficient to satisfy the liabilities of the fund.
capital. Bonds provided by insurance companies could Transparency was provided by all funds through the
also have the advantage of the insurance company publication of activities in their annual reports.
working with mining companies to ensure that they are
complying with rehabilitation requirements. The department proposes incorporation of similar
structural components into the Mining Rehabilitation
As the State’s current Bond Policy includes a schedule Fund following evaluation and consultation with
for the progression to bonds reflecting 50% of total representatives of some of these funds.
closure costs by 2014, the financial comparisons
presented in this paper have included the current The key difference between the fidelity funds examined
bond situation (based on the assumption of bonds and the Mining Rehabilitation Fund proposed in this
representing 25% of actual closure costs), 50% bond paper is the claimant. In all four fidelity funds a member
rates as well as full cost bonds. of the public is the party who has suffered a loss and
is seeking reimbursement or compensation. In the
5.2 Mining Rehabilitation Fund case of mining securities, if a company defaults on its
Establishing a Mining Rehabilitation Fund would rehabilitation and closure obligations the government
represent a new approach to mining securities in would suffer the loss and is therefore the claimant. The
Western Australia. Such a fund would accumulate department has reviewed the various management
over time and be used by the government to meet models for the fund and considers that while the
the occasional failure by a company to meet its mine government is the beneficiary of the fund, it will also
rehabilitation and closure obligations, more closely need to be ultimately responsible for the management
reflecting the overall industry risk to government of failure of the fund. It is therefore proposed that the government
to rehabilitate a mine site. administers the fund and approves all expenditure.
The framework for the Mining Rehabilitation Fund (as It should be noted that this approval provision will
recommended in this paper) has been substantially be subject to further consultation. If the Mining
altered from that proposed in the Preliminary Discussion Rehabilitation Fund is to be implemented, the
Paper as a result of further research and stakeholder government will prepare an amendment bill to
input. establish the fund which will also clarify the approval
responsibilities for the fund’s operation (i.e. the
Objective contribution rate and size of the balance). The bill will
The objective of the fund is to ensure that there is entail its own consultation process in which stakeholders
sufficient money available to government to manage will be invited to participate and provide feedback.
the reasonably foreseeable financial liability arising from
mining projects operating subject to the Mining Act It is acknowledged that independent expert advice is
1978. It will only finance closure on those mine sites beneficial in operating such a fund. It is proposed that
where all reasonable compliance options have been the department will be supported by an independent
explored, and another operator cannot be found to take advisory panel, comprising of non-government
over the liability. members, which would provide expert guidance
on issues relating to the fund’s operation as well as
Structure and governance prioritising mine sites eligible for rehabilitation.
Following requests from industry, the department
reviewed several fidelity funds in considering the most Industry highlighted in its submissions the need for
suitable structure for the Mining Rehabilitation Fund. stringent controls to be applied to the use of money
Two government-established fidelity guarantee accounts out of the Mining Rehabilitation Fund. This would also
operating in Western Australia for settlement agents, real be addressed through the legislative amendments for
estate and business agents were examined, in addition the funds operation. The legislation would ensure that
to two industry-established legal funds operating in New the money from the fund can only be spent on those
South Wales and New Zealand. Each of these funds activities for which it was established. Public reporting
has been established to enable a member of the public requirements for such a fund would also ensure that the
to make a claim for losses resulting from a solicitor's industry’s environmental performance will be open to
settlement agents, or real estate or business agent’s public scrutiny.
fraudulent actions (see Appendix 1 for further details).
Size of the fund
In each of these fidelity fund models, the operator of As discussed in the ‘summary of the risk to the State’
the fund was also the party to approve the claims (i.e. (section 3.2.4), the department considers there is a
10 Department of Mines and Petroleum Western Australia’s Mining Security System
moderate risk of government having to bear the costs to 4. Once established, the expenditure out of the fund
rehabilitate mine sites. This assessment has influenced will be constrained so that the capital of the fund
the basis for determining the appropriate size of the is predominately preserved, and that scheduled
fund. rehabilitation expenditure equates to the growth of
the fund above the target amount. This ensures that
For the fund’s establishment, the target balance will be the capital of the fund is available for ‘emergency’
based on ensuring there is sufficient money available expenditure.
to government to cover the cost to fully rehabilitate the
Mining Act 1978 project with the largest rehabilitation Contributions
liability. This is currently estimated at approximately The Mine Rehabilitation Fund proposes that mining
$300 million based upon modelling undertaken by the tenement holders operating under the Mining Act 1978
department. Whilst the likelihood of the largest project would contribute a non-refundable amount to a central
defaulting is considered low, adopting this target fidelity account administered by the department. The
means that the fund would effectively cover any Mining Preliminary Discussion Paper proposed to base the fund
Act 1978 site failing. It would also provide coverage contribution for each mining operator on 8 to 10% of a
for several projects defaulting which have a smaller company’s total rehabilitation and closure costs, paid
closure liability. Had the risk been deemed greater than over a period of four to six years. Additional research
‘moderate’, consideration would have been given to and modelling, however, has resulted in the basis of the
increasing the target fund balance beyond the size fund contributions being modified.
of the liability of the largest project. However, the risk
assessment indicates that because the likelihood is no It is considered that a model based on a flat-rate annual
greater than ‘medium’, a fund which will adequately contribution according to each company’s environmental
cover the largest site is appropriate. liability will be more appropriate as it would reduce
administrative complexity for both the operator and
Upon the implementation of mine closure planning, an the department, and align better with the principles
accurate assessment of the total liability for Mining Act sought from this review. Modelling undertaken by the
1978 operations will be determined, as self-assessed department shows that a likely rehabilitation fee of 1.5%
by the industry. Following several years of operation, applied annually to the total cost of rehabilitation and
sufficient historical data will be generated to enable the mine site closure for Mining Act 1978 sites, would result
target size of the fund to be kept under review each year in the minimum fund balance being achieved within 5 to
to ensure it is commensurate with the financial risk to 7 years (provided no major drawdowns occurred). The
government. fee will be set by regulation and reviewed each year.
It is acknowledged that to set the target of the fund at Annual contributions will be payable based upon an
anything less than the combined closure costs of all operator’s actual rehabilitation liability, in accordance with
mine sites means that there remains a potential residual the following formula:
financial exposure to government. However, it is not Annual payment ($) =
considered reasonable to suggest that all mine sites in current rehabilitation liability ($) x rehabilitation fee (%)
Western Australia will fail, and certainly not fail at the
same time. The department is proposing that the fund Annual payments will be self assessed. Companies will
include the following key components which will mean calculate their current liability based upon the cost that
that it is able to be reactive to the performance and would be borne by that operator for rehabilitation. Whilst
financial environment of the industry. the department did consider requiring third party costs
1. The fund is proposed to be established and build up of rehabilitation to be used in the formula, following
to the target amount within a relative short period of feedback from industry stakeholders it was decided
time (5 to 7 years). Therefore, once established the company costs made the calculation of the payment
fund will continue to receive contributions and will be simpler and more equitable. Third party costs will be
able to respond to the anticipated drawdown. applied, however, by the department in calculating the
fund’s target balance (i.e. they will be applied to the
2. The establishment of the fund will provide for an largest project’s rehabilitation and closure liability costs).
extraordinary levy to be imposed on Mining Act Annual payments may also be subject to a third party
1978 tenement holders if a major event occurs and audit.
the target fund balance does not provide sufficient
coverage. This will provide comfort to both the As noted above, annual contributions will be non-
community and government that such a risk can be refundable. It will be the role of the department to
managed appropriately. effectively manage the fund, (with advice from the
3. It is proposed that the rules for the fund will minimise advisory panel) ensuring that the balance is reflective
drawdowns during the build up of the fund to ensure of the State's risk and that an excessive balance is
the target balance is reached within a period of time therefore not generated. However, in the preparation of
that limits the government’s exposure to no more the legislation the department will investigate whether
than the current level. there is a need to include an equitable mechanism to
credit moneys, if the balance of the fund significantly
Department of Mines and Petroleum Western Australia’s Mining Security System 11
exceeds the requirement to meet the State’s foreseeable 3. The mining security is secure and immediately
financial liability. The flexible nature of the proposed accessible by the government, and its administration
model does provide the government with the ability to is cost effective.
alter the rehabilitation fee annually, where required, to 4. The mining securities framework is clear and
control the balance. workable, and is supported by a robust compliance
system to ensure operators do not avoid their mine
The department proposes that any interest earned on closure obligations.
the Mining Rehabilitation Fund will be returned to the
5. The calculation of a mining security is flexible, being
commensurate with environmental risk.
Fund contributions and rehabilitation costs 6. The application and relinquishment processes for
A key concern raised by many stakeholders was mining securities are transparent, predictable and
ensuring that operators contributing to the fund did applied equitably.
not perceive it as payments which will go towards their
own rehabilitation, in that an operator could default on A summary of an assessment of the proposed models
closure and rehabilitation requirements and expect the against these evaluation criteria is provided in Table 1.
fund to cover the costs. The requirement for each mining A more detailed discussion is provided in the following
operator to finance their own rehabilitation and closure sections.
works in accordance with their mine closure plans
remains in force. To ensure progressive rehabilitation Table 1. Summary of evaluation of proposed mining security
is undertaken, it is proposed that the implementation options
of the fund would be accompanied by an enhanced
compliance system under the Mining Act 1978. This Full cost
Evaluation criteria Rehabilitation
will include the ability to impose full cost unconditional bonds
performance bonds on non-complying operators.
Secondary application of funds To ensure that sufficient funds
Moneys from the fund would also be used to carry are immediately available to
out approved rehabilitation works for abandoned mine government to rehabilitate mine
sites4, but does not include the rehabilitation of State sites in the event of operators not
Agreement Acts, or other sites which are not subject to fulfilling their mine rehabilitation
and closure obligations
the mining security provisions of the Mining Act 1978.
Controls would be implemented to ensure expenditure Evaluation Principles
on abandoned mines did not result in the fund balance 1 Investment in the State’s mining
falling below the target amount. sector is not unnecessarily 3 333
Appendix 2 contains a detailed description of the 2 Encourages good environmental
model’s operation, with Appendix 3 providing a practice, including progressive
proposed legal framework for the governance of the 333 3
rehabilitation, and compliance with
fund. legal obligations
3 Security is secure and immediately
6. Evaluation of policy options accessible by the government, and 333 333
6.1 Evaluation criteria administration is cost effective.
The principal objective of mining securities is to 4 Cost calculation is flexible and
ensure that sufficient funds are immediately available commensurate with environmental 3 3
to government to rehabilitate mine sites in the event risk
of operators not fulfilling their mine rehabilitation and 5 Framework is clear and workable
closure obligations. and supported by a robust 333 333
The suitability of the proposed options was also based 6 Application and relinquishment
on principles listed below: processes are transparent, 333 *
1. The quantum of mining securities does not predictable and applied equitably
unnecessarily deter investment in the State’s
mining sector, ensuring Western Australia remains 6.2 Evaluation of the options
competitive in attracting investment to the resources The key criterion in considering any option for a future
exploration and development sector. mining securities system is that it provides for sufficient
2. Mining securities continue to encourage operators funds to be made available to government to rehabilitate
to apply good environmental practice, including mine sites in the event of operators not fulfilling their
progressive rehabilitation and reporting, and to mine rehabilitation and closure obligations. In doing so,
comply with all legal obligations under the Mining Act the new system will address the unacceptable financial
1978 for exploration, mining and mine closure. risk currently faced by the government.
Mines where reasonable responsibility for rehabilitation cannot be allocated to any individual, company or organisation responsible for the original mining activities.
12 Department of Mines and Petroleum Western Australia’s Mining Security System
While the two options are principally designed to meet Even large companies, that are not required to provide
this criterion, it is expected that the fidelity fund option direct cash or asset security for bonds, are adversely
would not meet this objective until the fund has been affected in that the full value of the bond is allocated
operating for a number of years. as credit utilisation by the banks and capital markets,
effectively reducing their capacity to raise debt to fund
There would always be a difficulty in balancing between existing and new operations.
minimising government’s risk and applying too great a
financial penalty on companies. In this sense, both the In general, large companies operating profitable projects
options in this paper will present a degree of financial risk are considered to be low risk by the banks and are
to the State (directly and indirectly). required to pay the lowest direct costs to service bonds
(around 0.6%), which would be unlikely to change in a
Some of the evaluation principles applied to the full cost bond scenario.
assessment of the proposed options provide context
for the best practice administration of whichever system For companies with a medium level of financial risk (as
is implemented. Ensuring that the mining securities determined by the banks), the level of security required
framework is clear and workable, and is supported by depends upon the company’s financial position. Where
a robust compliance system to ensure operators do banks determine that bonds can be provided without
not avoid their mine closure obligations, is a priority for security, a higher annual service fee (around 2%) will
the government. Once a decision has been made on be applied in comparison with lower risk companies.
the actual mining securities system to be implemented, Companies that provide either asset or cash-backing
the legislative framework will be reviewed to ensure that receive lower annual service fees. The requirement
the legislative compliance framework is appropriate. to post full cost bonds would be likely to result in the
(although suggestions are included for the fund in majority of medium risk companies being required to
Appendix 2). Similarly, a clear and workable compliance cash-back the full value of their bonds, considerably
system is required, and this will also be addressed prior increasing the level of indirect costs associated with
to the implementation of the new system. bonds.
Likewise, the administrative procedures for application Higher risk companies will continue to be required to fully
and relinquishment processes, not only for a future cash-back their bonds if bond rates are increased. There
mining securities system, but for the present system, is the potential however, that some of these companies
need to be addressed to ensure they are transparent, will not be able to do so unless they can raise the funds
predictable and applied in an equitable manner. through a capital raising exercise.
Determining the most appropriate mining securities Estimating the financial impact of the proposed
system for Western Australia, therefore, essentially models
comes down to the following key factors (noting the Table 2 provides a summary of the estimated annual
principle objective is met by each of the options): the costs for the proposed options in comparison with
financial impact on the State’s mining sector; the degree the current bond system. Figures are provided for a
to which the government can be assured that the number of different levels of liability in accordance with a
desired environmental outcomes will be achieved; and hypothetical bank risk rating approach.
the extent to which the mining securities system can be
applied in an equitable manner across the industry. In assessing the relative cost of the proposed options,
the key determining factor is not the direct costs, but
6.2.1 Financial impact on the State’s mining sector the indirect costs. The comparison exercise applies
In reforming the State’s mining securities system, a opportunity cost factors of 8.8% for cash-backed bonds
key consideration of the government is to ensure that and 5.5% for asset-backed or unsecured bonds, derived
Western Australia remains competitive in attracting from the Capital Asset Pricing Model, which describes
investment to the mining sector. Many companies are the relationship between risk and expected return (refer
operating on a global level and each mining jurisdiction’s to the assumptions attached to Table 2 for more detail).
policy climate has therefore taken on increased
importance in attracting investment. Any tenement holder can calculate the financial impacts
of the two options described in this paper by using
Costs of maintaining bank-guaranteed unconditional the cost calculation tool which is available on the
performance bonds department’s website at http://www.dmp.wa.gov.au/
The main criticism from industry of bank guaranteed preferredoptionpaper. Both the cost calculation tool, and
unconditional performance bonds is that they can the examples in Table 2, are derived from the following
require considerable set up and maintenance costs for formulas:
operators. Companies may also be required to provide
either cash or asset backing for the full amount of the
bond, representing significant indirect costs for the
Department of Mines and Petroleum Western Australia’s Mining Security System 13
Calculating costs for full cost bonding: assumed in this comparison exercise if the interest on
Annual cost to tenement holder ($) = (L x A) + B the term deposit securing the bond is lower than the
where: assumed rate of 6%.
L is the current rehabilitation liability for the site ($)
A is the annual service charged by the bank (%), plus the cost of
In summary, the fidelity fund option would result in the
equity (Re) (%) minus the interest which is paid by the bank to
least additional cost to companies compared to the
the tenement holder for any cash used to cash-back a bond (%)
current bond rates, regardless of their bank risk ratings,
B is the annualised cost ($) of other charges required to set up and may actually result in cost reductions, as the cost is
the bank guaranteed bond (such as lawyer fees or set-up fees limited to the direct cost of the annual fund contributions.
charges by the bank) The cost of full cost bonds, on the other hand, would
be much higher, generally at least four times the current
Calculating costs for the Mining Rehabilitation Fund: cost across the board.
Annual cost to tenement holder ($) = L x R
where: Nevertheless, it can be surmised that the cost of
L is the current rehabilitation liability for the site ($) implementing full cost bonds would be expected to have
R is the annual contribution rate set by the government a significant impact on the industry, and therefore the
(proposed to be 1.5%) wider economy. The Mining Rehabilitation Fund would
have a much lesser adverse impact while still having the
Comparing the financial impact of the proposed capability of addressing the government’s financial risk.
In comparing the relative costs of the proposed options
to current costs, implementation of the full cost bond
option would see costs rise by a factor commensurate
with the degree to which current bonds reflect the actual
cost to government of completing mine rehabilitation and
closure works. Assuming current bond rates represent
25% of total environmental liability, moving to full cost
bonds would result in an increase in annual costs by
a factor of at least four for all companies. Medium
risk companies required to move from an unsecured
or asset-backed bond arrangement to cash-backing
would be the most adversely affected in a full cost bond
Assuming that current bond rates represent 25% of
total environmental liability, the fixed rate contributions
for the Mining Rehabilitation Fund would be roughly
equivalent to the cost of maintaining current bonds rates
for low (financial) risk companies. Companies that would
obtain the greatest benefit from the implementation of
this option would be those that are currently required to
cash-back bonds, with estimated annual costs reducing
by 40 to 50%.
In attempting to compare the relative costs of the two
options, there are many other variables to consider,
including the method of calculating third-party costs for
full rehabilitation and closure costs.
There are also significant differences in the method
companies employ to raise capital. The cost of raising
debt is traditionally regarded as a cheaper source of
capital than raising equity, and tends to disadvantage
smaller, less financially secure companies. This is largely
due to the transaction costs involved in the raising of
equity capital, such as management, underwriting,
selling, legal and accounting fees.
The opportunity cost to companies required to cash
back their securities can also be much higher than
14 Department of Mines and Petroleum Western Australia’s Mining Security System
Table 2. Estimated annual costs for the Mining Rehabilitation Fund in comparison to the bond system
Bank risk rating (financial and Total rehabilitation and Rehabilitation
environmental perspective) closure liability ($M) Current bond system Fund 50% bonds Full cost bonds
large, global company 300 4.6 (unsecured) 4.5 9.2 (unsecured) 18.3 (unsecured)
good financial history
operating profitable projects
environmentally low risk commodity
150 2.3 (unsecured) 2.2 4.6 (unsecured) 9.2 (unsecured)
Medium 7.2 (cash backed)
mid cap company 300 5.6 (unsecured) 4.5 14.3 (cash backed) 28.6 (cash backed)
sound balance sheet 5.2 (asset backed)
proven financial history
operates a single project or multiple 3.6 (cash backed)
operations in single commodity 150 2.8 (unsecured) 2.2 7.2 (cash backed) 14.3 (cash backed)
2.6 (asset backed)
2.4 (cash backed)
100 1.9 (unsecured) 1.5 4.8 (cash backed) 9.6 (cash backed)
1.8 (asset backed)
relatively new borrower 100 2.7 (cash backed) 1.5 5.4 (cash backed) 10.8 (cash backed)
single asset company
developing new project
50 1.4 (cash backed) 0.8 2.7 (cash backed) 5.4 (cash backed)
mid-cap company, environmentally
5 0.1 (cash backed) 0.08 0.3 (cash backed) 0.6 (cash backed)
1. Rates for the current bond system assumes only minimum rates are applied.
2. Bond facility establishment fees are assumed to be zero.
3. Current bond rates represent 25% actual liability.
4. Annual service fees for low risk bank guarantees: 0.6%.
5. Annual service fees for medium risk bank guarantees 2% (unsecured), 1.5% (asset-backed), 0.75% (cash-backed).
6. Full cost bonds result in all medium risk companies being required to cash-back, with 0.75% annual service fee.
7. High-risk companies will be required to cash-back and pay 2% annual service fees under both the current system and in a full cost bond scenario.
8. The cost of equity (Re) is estimated to be equal to the current return on government bonds (5.5%), plus the average risk premium on a market portfolio scaled by a risk factor
for a typical junior mid-cap company (7.5%). The cost of equity of 13% indicates the return that a company could have earned by investing in its next best investment. Hence,
the opportunity cost factor for cash-backed bonds would be the difference between this cost of equity and the interest after tax on the term deposit securing the bond (at 6%
interest, this is calculated to be 4.2% after tax), which returns an overall opportunity cost of 8.8%. Similarly for asset-backed or unsecured bonds, the opportunity cost factor
would be the difference between the cost of equity and the cost of borrowing (7.5% is used in this impact analysis), which results in a figure of 5.5%.
9. Fidelity fund contribution – calculated as 1.5% of total rehabilitation and closure costs.
Department of Mines and Petroleum Western Australia’s Mining Security System 15
6.2.2 The extent to which mining securities its ability to satisfactorily address its environmental
encourage good environmental practice obligations.
The full cost bond option clearly has the greatest
potential, from a price incentive point of view, to ensure A mining security system comprising solely of
compliance with environmental obligations. This is environmental bonds must necessarily consist of bonds
particularly the case if bonds are responsive to the level applied which will cover the full cost of rehabilitation and
of environmental disturbance, providing companies with mine closure. This is not a position of ‘risk elimination’
direct incentives to practice progressive rehabilitation. on the part of the government, as there will always be an
element of risk for the government in any security system
In a full cost bond scenario, mining companies would employed. Applying a risk-based approach to the
be required to demonstrate that rehabilitation has been application of bonds for individual projects is considered
performed satisfactorily in order to decrease the level of to be likely to result in an elevated cumulative risk, and
bonds. This means that companies are required to prove therefore financial liability, for the government.
to the regulator that environmental standards have been
met, rather than the regulator having to demonstrate that The principal objective of the future mining securities
standards are not being achieved. system is to ensure that the government will not be
held financially responsible for mine site rehabilitation.
A full cost bond system can also encourage finalisation This is addressed, to a certain extent, through the
of closure works through a relinquishment process. The assessment process conducted by financial institutions
difficulty with this process, however, is that the length of when determining whether or not to provide a bond
time required to provide the regulator with a reasonable facility (and thus allowing a project to proceed) and in the
degree of certainty that future problems will not occur setting of annual fees and security requirements.
can take many years.
It is the government’s position that it cannot be involved
It is acknowledged that a mining securities system in assessing the financial position of companies for the
based on a fidelity fund arrangement would not provide purpose of determining either the contribution rate for a
the same price incentive of the full cost bond option, fidelity fund or unconditional performance bonds. Such a
although the contribution would be linked directly to the practice has the potential to impact the financial standing
level of environmental liability. The extent to which the of companies, in the event of such assessments being
Mining Rehabilitation Fund option could encourage good made public, and would also add to the complexity of
environmental practice would be much more dependent the administrative process.
upon increased compliance activity.
The nature of the Mining Rehabilitation Fund option
The transparency and accountability requirements for allows for less than the full cost of rehabilitation and
a fidelity fund arrangement, however, would provide an closure provided for each operation, essentially as
important incentive for compliance with environmental such a fund could be used for any mine site, rather
obligations for both the industry and the department. than contributions being tied to individual projects or
tenements. The approach taken to fund contributions,
6.2.3 Using a risk-based approach in applying however, treats all companies as having the same risk
mining securities of non-compliance, with contributions under the current
Regardless of the mining security option decided upon model based on a flat percentage applied to each
by the government, industry has requested that options project’s total environmental liability.
for a risk-based, incentive focussed system should be
investigated. It is argued that, without the use of risk Comments received from industry on the fidelity fund
management methodologies, all mines are effectively model (as described in the Preliminary Discussion Paper)
treated as having the same risk of non-compliance, suggested the rate of contributions should reflect each
irrespective of the characteristics of individual mining company’s risk of non-compliance, taking into account
operations, and the financial standing and environmental both financial and environmental performance factors.
performance of the company.
It is acknowledged that a flat rate method of
It has been suggested that the best way of achieving calculating fund contributions based solely on the
this outcome is for the department to assess each level of environmental liability does not account for the
company’s risk of failure to meet rehabilitation obligations differences in risk between individual companies and
and ensure that this probability is reflected in determining that it could be seen as a system where environmentally
the security rate set for each company. responsible companies will effectively be subsidising
environmentally irresponsible, or less financially
Determining the risk that a mining company will default capable, companies. For the same reason as detailed
on its mine rehabilitation and closure obligations, above, it is not appropriate for government to conduct
however, would be an extremely complex task. A risk assessments on individual companies, and the
company’s past environmental and/or financial record department’s position is that a flat rate is the most
is of no assistance to the government if external factors suitable method for determining fund contributions.
outside the company’s control suddenly impacts
16 Department of Mines and Petroleum Western Australia’s Mining Security System
7. Impact Assessment Financial institutions
The current environmental bonds system represents
7.1 Affected stakeholders a revenue stream for banks.
The following stakeholders have been identified by the
department as being impacted by the review of mining A future mining securities system that retains the
securities reform: use of environmental bonds provides insurance
companies with the prospect of a potential source of
An effective mining securities system would address
the government’s current level of financial risk from Wider economy
exposure to the mining industry’s environmental Any system that has the potential to financially
liabilities but would also, preferably, not unnecessarily impact current operations and future investment in
deter investment in the State’s most economically the State’s most economically important industry will
important industry. have a corresponding effect on the wider economy.
Mining industry Community
An effective mining securities system would An effective mining securities system would ensure
accommodate the risk of companies failing that the costs of mine site rehabilitation and closure
to meet their environmental obligations, while are borne by the industry and is always completed to
ensuring satisfactory environmental outcomes, thus an acceptable standard.
maintaining the industry’s ‘social licence to operate’. Environment
An effective mining securities system will ensure that
funds are available for the government to complete
mine site rehabilitation and closure to an acceptable
standard in the event of mining companies being
unable to do so.
7.2 Impact analysis of the potential options
The following tables provide an analysis of the impact of each option on affected stakeholders.
Table 3. Advantages and disadvantages of the full cost bond option
Government Existing legislative and administrative processes in place. Underestimating the real cost could leave the government with
significant environmental liabilities, even if the intent is to set them
Provides for immediate access to funds for rehabilitation and at a level that would fully cover rehabilitation and closure.
closure if required.
Implementation may result in a number of companies entering
administration, effectively resulting in an increased environmental
liability being transferred to the State.
Mining industry For compliant companies – knowledge that non-compliant High cost (both direct and indirect) to industry. Financial burden
companies are much more likely to be held accountable. would be inequitable and onerous.
Good for industry’s reputation (‘social licence to operate’), access All companies are treated as if they have the same potential for
to industry by non-compliant/less financially capable operators non-compliance with environmental obligations.
limited, thereby minimising bad publicity for the rest of the
industry. Costs would not be seen to be commensurate with environmental
Some companies would not be able to obtain additional guarantees
from financial institutions.
Financial institutions Increased fees adding to bank profits. Adverse impact on credit availability (banks).
Possible creation of a new market for the insurance sector in the Increased administrative burden (full cost bonds may result in an
provision of surety bonds. individual company’s bonds being spread between more than one
Wider economy Market stability arising from certainty of obligations. A significant amount of investment capital would be unable to be
accessed by the industry, thereby reducing economic activity.
Reduced likelihood that government expenditure on services
needs to be redirected to mine site closure.
Community Model is seen as holding companies fully accountable for their Funds cannot be used to rehabilitate abandoned mine sites.
Environment Inherently encourages progressive rehabilitation (assuming the The costs of maintaining bonds are not used for rehabilitation
ability of the department to adjust bond rates on time). (payment to financial institutions only).
The financial impact on a company of defaulting on a bank Funds cannot be used to rehabilitate abandoned mine sites.
guaranteed bond provides a significant incentive for compliance
with tenement obligations.
Department of Mines and Petroleum Western Australia’s Mining Security System 17
Table 4. Advantages and disadvantages of the Mining Rehabilitation Fund option
Government Addresses the government’s financial risk (assuming appropriate Inherently weaker in encouraging industry compliance with
legislative and administrative processes are in place to environmental requirements than the full cost bond option thus
ensure industry meets its environmental obligations) while not requiring more resources to ensure compliance.
unnecessarily deterring investment in the State’s mining industry.
Different to other States.
Funds can be utilised for the rehabilitation of any Mining Act
1978 site and are not restricted to the tenement upon which the Implementation would require significant legislative and
contribution was paid. administrative amendments (although there are existing
Funds could be used to rehabilitate abandoned sites.
Flexible system allowing the contribution rate to reflect risk profile Government will continue to experience financial risk in the early
(of the industry overall). years of the fund.
Increased exposure to government in the case of significant and
widespread failure across the mining industry.
Mining industry The most cost effective option for all sectors of the mining Different to other States.
industry (from high risk to low risk operators).
Perceived ‘free rider’ effect. Potential for environmentally
Industry image enhanced as funds will be used to rehabilitate responsible companies to effectively pay for the rehabilitation costs
abandoned mines. of irresponsible companies.
Liability is self assessed on an annual basis (waiting on bond
reviews by the department are not required).
Contributions remain current as it is directly linked to the amount
of actual disturbance.
A bond relinquishment process is no longer required.
Financial institutions Credit availability would be increased (banks). Banks – decreased profit.
Insurance companies – loss of potential source of revenue.
Wider economy State’s investment attractiveness impacted favourably. No disadvantages identified.
Community Funds will primarily be used for mine site rehabilitation, rather May not be sufficient to cover liabilities generated through an
than contributing to bank profits. extended and severe economic downturn scenario which may
result in a large proportion of the industry defaulting on their
Reporting requirements of the fund will enable community closure obligations.
scrutiny of the industry’s compliance with environmental
Environment Funds could be used to rehabilitate abandoned sites. Inherently weaker in encouraging industry compliance with
environmental requirements than the full cost bond option thus
Compliance costs contribute to remediating environmental requiring more resources to ensure compliance.
18 Department of Mines and Petroleum Western Australia’s Mining Security System
8. Preferred option b. Administration
In recommending a policy position for the State’s future Administrative requirements for the fund
mining securities system, the challenge is in balancing will be formalised including the governance
the advantages and disadvantages of each policy option arrangements, reporting requirements,
so that it will satisfactorily take into account a number of determination of the resourcing needs of a
different, and sometimes competing, considerations. departmental fund management unit, and
establishment of an advisory panel.
Ideally, a mining securities system would:
An appropriate fund target level and a structure
provide a system that maximises the State’s for review and indexation will be determined.
attractiveness for investment due to factors such as
administrative simplicity and cost minimisation; Procedures will be developed to determine which
sites are the State’s liability. An assessment will
ensure that all mine sites achieve acceptable closure
be undertaken and rehabilitation priorities will be
without requiring government funding;
treat all companies in an equitable manner; and
minimise government administration and compliance c. Transitional Arrangements
costs. Transitional arrangements will be finalised. It is
currently envisaged that as companies submit
The Mining Rehabilitation Fund is the recommended
their Mine Closure Plans and commence
option as it:
paying into the fund, their bank guaranteed
substantially addresses the government’s
financial risk (assuming appropriate legislative and unconditional performance bonds will be retired
administrative processes are in place to ensure in full.
industry meets its environmental obligations) while Guidelines for estimating closure costs will be
not unnecessarily deterring investment in the State’s established which will include a self-calculation
most important industry; tool. The tool will be developed and made
is a flexible system allowing the contribution rate to available by the end of 2011 and may also be
reflect risk profile; used for mine closure cost estimates.
is the most cost effective option for all sectors of the All operators will be transitioned into the fund,
mining industry; subject to any exemptions from the requirement
enhances the State’s investment attractiveness; to pay a mining security.
enables greater community scrutiny of the industry’s It is envisaged the fund will be established by 1
compliance with environmental requirements; and July 2013.
would be used to rehabilitate abandoned sites.
d. Associated Issues
Whilst it is recognised that the Mining Rehabilitation Procedures for managing sites on care and
Fund is not inherently as strong in encouraging industry
maintenance will be established.
compliance with environmental requirements as the full
Working arrangements with other agencies who
cost bond option, this will be addressed through the
implementation of a robust compliance system through administer legislation which includes securities
legislative amendments. will be developed.
e. Communications Strategy
9. Implementation and evaluation
A communications strategy will be developed
for industry, the community, private land holders
The implementation of the preferred option will and government agencies in order to educate
commence upon government’s approval. On the basis
stakeholders on the new system and provide
that the Mining Rehabilitation Fund is supported, the
certainty in relation to the new processes that will
implementation strategy will be undertaken as follows:
be introduced and their timing.
a. Legislation and Regulations
The legislative framework for the fund’s f. Fund Evaluation
establishment and operation will be reviewed and
Actuarial principles will be used to evaluate and
monitor the target fund balance and contributions
The compliance mechanisms required for the
to the fund.
effective operation of the fund will be assessed.
Evaluation of the implementation and operation
Departmental compliance policies and
procedures will be reviewed and amended where of the fund will occur in line with the department’s
required. current strategic planning process.
Department of Mines and Petroleum Western Australia’s Mining Security System 19
Examples of Fidelity Fund Governance Arrangements
Legislation Interest Cap on the
Administrator governing Contributions Extraordinary Claim decision returned to Investment contributions Fund can Audited
Fidelity Fund of the fund the fund Account set-up determined by: levy Claimants maker the fund of moneys paid be insured annually
WA Settlement Agents Government Settlement Agents As an agency special CEO, Department Levy can be Members of the CEO, Department Yes Yes in same manner No Yes Yes
Fidelity Guarantee Account* (Department Act 1981 (WA) purpose account under of Commerce imposed by the public of Commerce as trust funds may be
Provides financial reimbursement to of Commerce) s16 Financial CEO invested in (WA Auditor
people who suffer pecuniary loss or Management Act 2006 accordance with General)
loss of property through the criminal or with the approval of Part III of the Trustees
or fraudulent actions of a licensed the Treasurer at a bank. Act 1962 Financial
settlement agent statements
published in the
(*as at 1/7/11) annual report
WA Real Estate and Business Government Real Estate and As an agency special CEO, Department Levy can be Members of the CEO, Yes Yes in same manner Yes Yes Yes
Agents Fidelity Guarantee Ac- (Department Business Agents purpose account under of Commerce imposed by the public Department of as trust funds may
count* of Commerce) Act 1978 (WA) s16 Financial CEO Commerce be invested in Exemptions apply (WA Auditor
Provides financial reimbursement to Management Act 2006 accordance with for existing fund General)
people who suffer pecuniary loss or or with the approval of Part III of the Trustees members once a
loss of property through the criminal the Treasurer at a bank. Act 1962 minimum fund Financial
or fraudulent actions of a licensed balance is reached statements
real estate or business agent or their published in the
employees. annual report
(*as at 1/7/11)
NSW Law Society – Legal Industry Legal Profession As a separate account, Law Society Levy can be Members of the NSW Law Society Yes Yes in accordance No Yes Yes (accountants
Practitioners Fidelity Fund (NSW Law Act 2004 (NSW) operated in the manner Council with the imposed by the public Council with Division 2 of Part approved by the
Provides compensation to members Society Council) determined by the Law approval of the Law Society 2 of the Trustee Act Attorney General)
of the public who successfully claim Society Council Attorney General Council 1925 as if the money
financial loss due to a solicitor’s or were trust funds, or Financial
firm’s dishonest failure to pay or on deposit with the statements
Department of Mines and Petroleum Western Australia’s Mining Security System
deliver trust money or property. Treasurer. published in the
submitted to the
Mining Rehabilitation Fund project with the largest rehabilitation liability. The
commencement fund balance target currently is
Introduction estimated at approximately $300 million based upon
The fidelity fund model proposed in the Preliminary modelling undertaken by the department.
Discussion Paper has been modified to reflect further
investigations and research undertaken by the depart- 9. Upon the implementation of mine closure planning,
ment. This new model proposes operators contribute a an accurate assessment of the total liability for
flat percentage of their current rehabilitation liability on an Mining Act 1978 operations will be determined,
annual basis into a government managed fund. The fund as self-assessed by the industry. Following several
will be called the Mining Rehabilitation Fund (the fund). years of operation, sufficient historical data will be
generated to enable the fund balance to be more
The following description summarises the proposed rigorously determined.
structure and operation of the fund which will be used 10. The fund’s income will comprise of operator
in the development of recommendations for legislative contributions. Interest that is generated from
amendments as well as changes to the department’s investment of fund moneys will be returned to the
administrative processes. Appendix 3 provides more fund.
specific detail on the potential framework of the fund.
11. Expenditure from the fund will include:
The Model a. Approved Rehabilitation Claims
1. Mining tenement holders operating under the Mining i. Rehabilitation claims that have been reviewed
Act 1978 contribute a non refundable amount by the fund advisory panel and approved by
to a central fidelity account administered by the the Director General in accordance with the
department. fund operating guidelines.
2. Tenement holders remain responsible for ensuring ii. Rehabilitation claims are deemed to have
that they maintain separate finance provisioning occurred if:
to fund their rehabilitation and closure works in it is an existing rehabilitation claim
accordance with their mine closure plans. i.e. mines in which responsibility for
rehabilitation cannot reasonably be
Objectives of the Fund allocated to any individual, company or
3. The aim of the fund is to maintain adequate organisation responsible for the original
provisioning to meet the State’s financial risk arising mining activities; and
in the event that operators which are subject to the a tenement holder subject to the Mining
Mining Act 1978, do not fulfil their mine rehabilitation Act 1978 does not fulfil their mine
and closure obligations. rehabilitation and closure obligations.This
is only on the basis that all reasonable
4. The fund will only finance closure on those sites
where all reasonable compliance options have been compliance options have been explored
explored and another operator cannot be found to and another operator cannot be found to
take over the liability. take over the liability.
iii. Rehabilitation claims will only include State
5. The fund will also provide money to government Agreement Act mines for those State
to rehabilitate those mines where responsibility for Agreement Acts subject to relevant Mining
rehabilitation cannot be reasonably allocated to any Act 1978 conditions.
individual, company or organisation responsible for
the original mining activities. iv. To preserve the capital of the fund, scheduled
annual expenditure on rehabilitation claims
Fund Balance will be limited in any year to the following
6. The fund balance will be structured to ensure that
there is sufficient money available to government to Fund Contributions ($) + Interest ($) LESS
manage the reasonably foreseeable financial liability Fund Administration Costs ($) LESS
arising from mining projects operating subject to the The growth required in the Fund Target Balance
Mining Act 1978. This rehabilitation claim will include to take into account CPI and escalation costs of
provision for third party costs so that government rehabilitation (%)
will not be required to meet any of the costs through
v. The capital of the fund will be available for
expenditure in circumstances deemed as an
7. Fund contributions will initially allow the target fund ‘emergency’ upon approval by the Director
balance to be reached within approximately five to General (‘emergency claim events’ to be
seven years (assuming no significant drawdowns are defined in the operating guidelines).
made). b. Administration
8. The fund balance will be based on ensuring there is Administration costs will include:
sufficient money available to government to cover i. Salaries and operating costs for a small,
the cost of fully rehabilitating the Mining Act 1978 dedicated unit to administer the fund. The
Department of Mines and Petroleum Western Australia’s Mining Security System 21
unit’s activities will include: 18. Payments will be calculated on tenements but can
managing the operation of the fund be spent on any approved expenditure item.
carrying out the reporting requirements 19. The department will make a self-calculation tool
and guidelines available to assist operators in
providing a secretariat to the advisory
calculating their current rehabilitation liability. This
tool will be subject to periodic benchmarking with
administering rehabilitation works other jurisdictions to ensure the liability is accurately
including the development of a rolling calculated.
three year rehabilitation work plan,
coordination of tenders and contract 20. Contributions to the fund will be non-refundable.
management. Once a payment has been made the record of the
payment will remain with the tenement regardless of
ii. Operating costs of the advisory panel. whether a change in corporate ownership occurs.
iii. Expenditure to develop and maintain
computer systems to manage: 21. If the fund balance significantly exceeds the
requirement to meet the State’s foreseeable financial
fund contributions and expenditure; and liability, credits may be considered for future
rehabilitation risk assessment. This scheduled payments. This will be further investigated
system will maintain a database of during the preparation of the legislation for the fund.
new and existing claims to assist in
the systematic prioritisation of sites for 22. The Director General may, with the consent of the
remediation. Minister, set and impose on tenement holders an
extraordinary levy for payment into the fund, if:
iv. Publication costs to produce fund guidance
a. the amount in the fund, following the deduction
and information material.
of the target fund balance and administration
12. Income from the fund can be expended on any expenses, is insufficient to rectify any actual and
approved expenditure item (listed at paragraph 11), prospective rehabilitation claims; or
and is not attached to a specific tenement. b. an emergency event occurs and the balance of
the fund is not sufficient to meet the requirements
Contributions for rehabilitation required on the mining tenement.
13. The fund will receive contributions from all mining
operators who are required to provide a mining Rehabilitation Fee
security under the Mining Act 1978. The following 23. The rehabilitation fee is the percentage of the
exceptions are proposed: State’s total closing liability, which when applied to
i. Prospecting and Exploration: operators each operator’s current rehabilitation liability, will
carrying out prospecting or exploration generate and maintain the target fund balance. The
activities will not be subject to the fund rehabilitation fee is applied to an operator’s current
except in circumstances in which there is a liability as set out in the contribution formula (see
history of non-compliance, or when activities paragraph 16).
are assessed as environmentally high risk.
24. It is proposed that the rehabilitation fee will initially
For example, in environmentally sensitive or
be set at 1.5%. The rehabilitation fee will be set by
conservation estate areas or where activities
regulation and reviewed each year.
involve high levels of disturbance. This will
be assessed on a case-by-case basis.
Review of the Fund
Guidelines to inform the application of the
25. It is currently proposed that the fund balance and
fund to these activities will be developed
the rehabilitation fee will be reviewed and set as
as part of the implementation process to
part of the normal government budget process and
provide greater certainty. published prior to the start of each financial year.
14. Uranium operators will be treated in line with all other This annual assessment will take account of
commodities and will be subject to the fund. operators entering and exiting the fund, changes in
15. Contributions will be payable annually, based upon the State’s total Mining Act 1978 rehabilitation liability
an operator’s actual rehabilitation liability. and drawdowns on the fund.
16. Contributions will be made in accordance with the 26. In order to establish the fund, the government will
prepare an amendment bill which will also include
clarification of the approval responsibilities for the
Annual payment ($) = operation of the fund (i.e. who will approve the
current rehabilitation liability ($) x rehabilitation fee (%) rehabilitation fee and size of the balance). This bill
17. The current rehabilitation liability will be self assessed will entail its own consultation process in which
by individual companies based on that company’s stakeholders will be invited to comment.
rehabilitation costs (i.e. it will not be based upon third
27. Increases to the target fund balance will not exceed
party estimated costs) and may be subject to audit.
5% per year i.e. the rehabilitation fee in the second
year cannot exceed 1.6% if the previous year’s fee
22 Department of Mines and Petroleum Western Australia’s Mining Security System
was 1.5%. The cost of inflation will be applied to 37. The department will be the government agency
the balance to ensure the fund keeps pace with responsible for carrying out the rehabilitation works
any changes in costs. There will be no limit to the for approved claims.
magnitude of reduction in the rehabilitation fee in any
38. Transparency will be maintained through the
publication of an annual review of the fund’s
Governance activities. Financial statements will also be published
28. It is proposed that a special purpose account in the department’s annual reports and the State’s
be established in accordance with section 16 of budget papers.
the Financial Management Act 2006 which will
specifically hold moneys for the purpose of the fund. 39. Objections regarding payments into the fund will be
heard by the Director General of the department.
29. Regulations will set out the governance
arrangements for the fund. Legislative Amendments
30. The fund will be administered by the irector General 40. The department will propose amendments to the
of the department. Mining Act 1978 to establish the fund. These will
31. An independent advisory panel will be established
a. the establishment of an agency special purpose
upon the commencement of the fund. The
account under section 16 of the Financial
government will appoint up to four advisory panel
Management Act 2006; and
members, independent to government, to provide
expert advice. In appointing the members, the b. provision for regulations to be made.
government will ensure that the members of the 41. The regulations may deal with:
panel collectively possess suitable skills, expertise or
a. the governance arrangements for the fund;
knowledge relating to:
b. the reporting requirements;
a. mine rehabilitation;
c. the circumstances in which liability to pay the
b. mining industry management;
contribution is imposed;
c. the environment; and
d. how the liability is to be assessed including the
d. financial and legal matters. calculation of the fund balance, rehabilitation fees
32. The role of the advisory panel will be to provide and the contribution formula;
expert advice to the Director General on matters e. the review mechanism which details the
including: government’s ability to adjust the fund balance
a. rehabilitation claim priorities and scope for on- and the rehabilitation fee, in addition to the
the-ground rehabilitation works; maximum increases allowable and extraordinary
b. the target fund balance and rehabilitation fee;
f. on whom the liability is imposed to pay the
c. expenditure on existing rehabilitation claims; and
fund contribution including; when the payment
d. administrative issues. becomes due, how the payment is to be made,
33. The advisory panel will meet at least biannually. if and when relief from payment may be applied,
and the circumstances in which a credit for
34. The Mining Industry Liaison Committee will be the payments may occur;
forum for industry to raise general issues with the
g. who is exempt from liability to pay a fund
department regarding the performance of the fund.
contribution and the conditions to which an
35. Mines approved for rehabilitation will be rehabilitated exemption is subject;
with moneys from the fund. h. rights to object and how the objection is to be
36. Operating guidelines will be developed by the dealt with;
department, and reviewed by the advisory panel, to i. circumstances in which the State will use moneys
specify: from the fund to rehabilitate mines;
a. the criteria by which claims will be assessed for j. fund income and expenditure including the
rehabilitation, including consideration of the level treatment of interest and provision of the
to which they will be rehabilitated; investment of money held in the fund; and
b. the process by which claims will be selected for k. transitional arrangements including the retirement
rehabilitation works, including recommendations of current bank guaranteed unconditional
from the advisory panel; performance bonds.
c. the requirement to develop and maintain a rolling 42. To underpin the operation of the fund, the following
three year rehabilitation work plan; amendments to the Mining Act 1978 will be
d. the process for awarding contracts to manage recommended:
and carry out rehabilitation projects; and a. Change penalty provisions to incorporate:
e. reporting requirements. i. penalties for non-payment of fund
Department of Mines and Petroleum Western Australia’s Mining Security System 23
ii. penalties for providing false or misleading misleading rehabilitation costs to the department,
information; and or underestimating the extent of rehabilitation
iii. increased penalties for the breach of work required.
conditions of a lease (as an alternative to the c. The department will be able to request third party
forfeiture of a lease). audits of calculated rehabilitation costs.
b. Changes to mine closure requirements so that: d. Penalties will apply to operators who are failing
i. it is clear mine closure plans are required for to meet their rehabilitation obligations. Ongoing
miscellaneous and general purpose leases; non-compliance may result in the department
issuing a direction to stop work, or direction that
ii. the department can request an audit of
the tenement holder is to lodge a unconditional
performance bond to cover the full cost of mine
iii. provision of mine closure costs can be rehabilitation.
required of a tenement holder;
45. The department will be able to determine whether an
iv. mine closure plans and/or details of all
operator can self-assess their liability or whether the
environmental impacts requiring closure are
department’s calculation tool will be utilised.
provided to a new lease holder at the time of
transfer; 46. When a tenement is transferred or sold, a copy of
v. orders for closure works can be issued; the company’s mine closure plan will be required to
be provided by the seller, to ensure the new lease
vi. access is allowable to third parties to
holder is aware of the existing liability.
undertake rehabilitation works even if land is
vii. tenement holders are required to report 47. A transition period will occur to implement the
abandoned mines on their tenements if they fund, with the introduction of a self-calculation tool
become aware of them. occurring by the end of 2011, with the fund being
c. Change forfeiture provisions to: established by 1 July 2013.
i. provide the Minister powers to forfeit 48. As companies submit their mine closure plans
tenements at any stage of a mining lease if a and commence paying into the fund, their bank
tenement holder is deemed unsuitable; and guaranteed unconditional performance bonds
ii. provide the Minister powers to prevent a will be retired.
director of a company from holding any
49. The powers to require bank guaranteed
tenements once a tenement has been
unconditional performance bonds will remain in
the Mining Act 1978, with bonds being able to
d. Change liability provisions enabling: be demanded of tenement holders if they fail to
i. proceedings to be taken against a parent progressively rehabilitate their tenements.
company for the liability of a subsidiary; and
50. A communications strategy will be developed
ii. directors to be liable for offences committed for industry, the community, private land holders
by the body corporate under the Act or and government agencies in order to educate
Regulations. stakeholders on the new system and provide
e. Change compliance provisions so that: certainty in relation to the new processes that
i. directions (i.e. a stop work order) can be will be introduced and their timing.
issued for failing to rehabilitate.
43. An enhanced compliance system will be established
by the department. This will be developed through
amendments to the Mining Act 1978 and the
establishment of regulations as outlined above. It
will be supported through the department’s current
Enforcement and Prosecution Policy.
44. The department will manage these new compliance
provisions in the following manner:
a. Fund contributions by all operators will be
collectively reviewed on an annual basis by the
department. Analysis will ensure that estimated
rehabilitation costs for operations which
significantly deviate from average costs are
identified and addressed.
b. There will be penalties for providing false and
24 Department of Mines and Petroleum Western Australia’s Mining Security System
FRAMEWORK FOR GOVERNANCE
OF A MINING REHABILITATION FUND
The obligation on the part of tenement holders as a class to contribute to a Mining
Rehabilitation Fund needs to be established by statute. The legislation then imposes an
obligation on tenement holders to contribute to the fund and unambiguously sets out what
the fund can be used for. The operation of the fund will benefit from an advisory panel which
is independent of government and comprises people with relevant industry and financial
skills. It will provide advice to the department on a range of issues including the balance of
the fund, the fee structure and priority mine sites for rehabilitation.
Introducing new legislation is a time consuming process and the suggestion is to amend the
Mining Act 1978 so that the fund provisions can be bolted into an existing framework which
uses some similar concepts and definitions. The framework below is only intended to show
examples of key provisions dealing with governance. The specific wording of the necessary
legislative amendments will be prepared through the appropriate legislative drafting process
of government and subject to a separate consultation process. This appendix is however
provided as an indication of the potential form of any changes.
A summary of examples of governance provisions which may be covered in legislation are set
out below. Explanations of some of the key concepts which would need to be defined in detail
in any legislation follow at the end of the provisions. Those key concepts are in italics.
New parts to the Mining Act 1978
The purpose would be included in the legislation and would look something like this:
The purpose of this amendment is to allow the Minister to establish and maintain, by a set of
operating rules, a fund to provide financial recourse to the government in circumstances where
a tenement holder has caused (directly or indirectly) the occurrence of a claim event.
The legislation would prescribe what the funds held could be used for. An example follows.
A claim event:
1. is deemed to have occurred if it is an existing claim event; and
2. otherwise arises when a tenement holder has failed to meet its environmental rehabilitation
obligations under the provisions of the Mining Act 1978 requiring the rehabilitation of relevant
tenements disturbed by mining operations to the satisfaction of the Minister.
If the legislation was embodied in the Mining Act itself, the existing concept of 'tenement
holder' could be used. For example:
The mining security requirement applies to every tenement holder that is (or as the case may be
was) at the relevant time the owner of a mining tenement other than an excluded tenement. For
the avoidance of doubt this does not include any tenement holder in its capacity as holder (past or
present) of a tenement held under a State Agreement.
Any legislation would need to provide for the establishment of the trust fund and a mandate to
make rules for the operation of the fund. An example would be:
1. The fund is to be the property of the government and is to be held on trust for the purposes
2. The government must ensure that operating rules are made for the establishment, maintenance
and management of the fund.
Department of Mines and Petroleum Western Australia’s Mining Security System 25
Provisions will need to be included in order to impose a legal obligation on tenement holders to
pay levies. For example:
1. Every tenement holder to which this requirement applies must pay to the fund the appropriate
annual contribution as is from time to time prescribed.
2. Every tenement holder to which this requirement applies must pay to the fund any amount
levied against that tenement holder as an extraordinary levy in accordance with the Act.
3. A resolution under subsection (1) and (2) above may provide for the amounts of the
contributions to differ as between different classes of tenement holders.
4. The amount of every contribution payable under subsection (1) or (2)–
(a) is payable on such date or dates and in such manner as approved by the Minister;
(b) is recoverable on behalf of the trust fund as a debt due to the fund.
The funds held can only be applied for the purposes stipulated. In addition, it is proposed that
the legislation will require that a minimum fund balance (inflation adjusted) will always be
maintained except in extraordinary circumstances. Therefore, interest earned plus contributions
made in each year (less expenses and an inflation proof adjustment) will be the maximum
amount that could be spent on rehabilitation in that year. The operating rules will establish an
order of priority for application of available funds and a timeline for any spend. A suggested
legislative framework for this would be:
1. The fund must be held and applied for the purpose of providing funds to the Department to:
(a) rectify a claim event in accordance with the operating rules; or
(b) if sufficient cash surpluses are held, to make credits against future payments to entities
which have carried out their rehabilitation activities in a timely manner and in accordance
with best industry practice and in accordance with the Act.
2. The department will be entitled (but not obliged) to apply the maximum annual claim amount
for any claim year in accordance with the operating rules.
3. If any claim event occurs in any claim year and the maximum annual claim amount for that
claim year has already been applied in full then the department may make application to apply
sufficient funds from the fund to rectify that claim event to the extent.
The fund will grow rapidly until it reaches the target balance of $300,000,000 in approximately
6 years. If an extraordinary event occurred before that balance was achieved, the department
might seek to borrow funds, through the Minister, from treasury on a temporary basis. The
interest expense for any funds borrowed would be an expense of the fund. The legislation would
need to contain provisions empowering the fund manager to borrow from Treasury for this
purpose. For example:
1. The department may borrow monies at any time prior to the time when the fund reaches the
minimum principal balance. Any funds borrowed for this purpose must be applied to the
existing fund balance.
2. Funds may be borrowed on an interest bearing basis but the department may not provide any
security over the assets of the fund to the lender of those funds.
It is proposed that there is an advisory panel established to provide advice to the Director
General on matters relating to the management of the fund. The advisory panel could be
established by legislation, for example:
1. The Director General may appoint up to four members to an advisory panel.
2. The four members of the advisory panel must not be employees of the department.
3. The Director General may also appoint an ex officio member to the advisory panel.
4. The Minister may set in regulation the roles and functions of the advisory panel.
26 Department of Mines and Petroleum Western Australia’s Mining Security System
5. The Director General will ensure that the members of the panel have expertise in:-
(a) mine rehabilitation;
(b) mining industry management;
(c) the environment; and
(d) financial and legal matters.
Although the legislation will make it clear that funds can only be applied for the purposes
described in the legislation (see above), the detail of the way the fund operates within the
confines of those purposes will need to be confirmed in detail (‘operating rules’). The
legislation would put parameters around those rules. For example:
1. Operating rules will be made for the establishment, maintenance, management and application
of the fund for all or any of the following purposes:
(a) establishing, maintaining and managing the fund;
(b) providing for the payment out of the fund of the costs of establishing, maintaining,
managing and administering the fund;
(c) providing for the minimum size at which the fund is to be maintained;
(d) providing for the annual contribution amount for tenement holders (which may vary
between prescribed classes of tenement holders);
(e) providing for the investment of the money held in the fund;
(f) determining the parameters for determining whether or not a tenement holder is carrying
out acceptable low risk exploration or prospecting activities in relation to certain
tenements and (where relevant) excluding those tenement holders from contributing in
relation to those excluded tenements for any claim year;
(g) monitoring on an annual basis whether or not any excluded tenements should lose their
(h) providing for the exemption of a tenement holder from being a fund contributor (totally
or in relation to some tenements only) for such time as that tenement holder is required to
provide performance bonds in relation to one or more individual tenements;
(i) prescribing rules for the consequences of the failure by any tenement holder to comply
with its obligations to pay to the fund;
(j) prescribing rules for determining the priority of application of fund monies as between
eligible existing claim events and the allocation of funds available across more than one
(k) prescribing rules for the awarding contracts to carry out rehabilitation work in relation to
a claim event;
(l) determining requirement for rehabilitation work plans and reporting requirements;
(m) determining the amount of any extraordinary levy that may be imposed and making any
determination of as to whether or not an extraordinary claim event has occurred for that
(n) prescribing the terms and conditions on which application of the funds may be made to
rectify claim events in the event that the maximum claim amount for any claim year has
An extraordinary levy can be imposed in response to a significant mine site failure which
requires immediate rehabilitation works in order to protect the environment, public and/or
public infrastructure. Examples of how this could be structured are:
1. The department may, with the consent of the Minister, impose on tenement holders an
extraordinary levy, for payment into the fund if, at any time:
Department of Mines and Petroleum Western Australia’s Mining Security System 27
(a) it has reason to believe that the balance in the fidelity fund may be insufficient in any
claim year to rectify any actual and prospective claim events for that claim year, after the
application of the maximum annual claim amount for that claim year; or
(b) an emergency claim event occurs and the balance of the fidelity fund is not sufficient to
meet the requirements for rehabilitation required on the mining tenement; and
(c) the management committee may approve both the imposition of an extraordinary levy
and the amount of such a levy.
Relevant definitions to include in any amendment may include:
An existing claim event will include tenements which have been/will be abandoned (but not
tenements under State Agreements). These will need to be identified on at least an annual basis.
If there is any surplus left in any claim year after preserving the minimum principal balance of the
fund (indexed in accordance with inflation) then the department may apply those excess funds to
rectify one or more of those existing claim events.
An excluded tenement would cover a tenement that either:
(a) qualifies as being exempt by reason of the tenement holder carrying out prospecting or
exploration activities (exclusively) provided that:
(i) the tenement holder is not in breach of existing environmental obligations in relation
to mining operations; and
(ii) the activities carried out in relation to that tenement are not determined to be
'environmentally high risk'; or
(b) is determined to be exempt because it is determined that the relevant tenement holder will
be obliged to provide performance bonds as security for its reclamation obligations in
relation to that tenement.
Any tenement deemed to be an exempt tenement may subsequently lose that status.
The minimum principal balance is set each year in regulation.
The maximum annual claim amount for any claim year will be the amount arrived at by taking
the balance held in the fund (net of running costs but including contributions made in that claim
year) and deducting the applicable minimum principal balance for that year.
28 Department of Mines and Petroleum Western Australia’s Mining Security System
Department of Mines and Petroleum Western Australia’s Mining Security System 29
Government of Western Australia
Department of Mines and Petroleum
Mineral House, 100 Plain Street
East Perth, WA 6000
Tel: +61 8 9222 3333
Fax: +61 8 9222 3862
Published March 2011