Hazelwood Mine Fire Board of Inquiryhazelwoodinquiry.vic.gov.au/wp-content/uploads/2015/12/Report-of... · • Unplanned events insurance – using insurance to mitigate the risk

HazelwoodMineFireBoardofInquiry

High-levelAssessmentof

AlternativeRehabilitation

FinancialMechanisms

NOVEMBER2015

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HazelwoodMineFireBoardofInquiry

HazelwoodMineFireInquiry

High-levelAssessmentofAlternativeRehabilitationFinancialMechanisms

AE1037.0_D1November2015

Version1–6November2015

Issuedto

AnitaMicheleRoperMemberoftheBoardofInquiry

Preparedby Reviewedby

NeilWines(AssociateEnvironmentalScientist)

MichaelCramer(Director)

©AccentEnvironmentalPtyLtdThisdocumenthasbeenpreparedforthesoleuseoftheClientforthepurposestatedinthedocument.NootherpartyshouldrelyonthisdocumentwithoutthepriorwrittenconsentofAccent.Accentundertakesnoduty,noracceptsanyresponsibility,toanythirdpartywhomayrelyuponorusethisdocument.ThisdocumenthasbeenpreparedbasedontheClient’sdescriptionofitsrequirementsandAccent’sexperience,havingregardtoassumptionsthatAccentcanreasonablybeexpectedtomakeinaccordancewithsoundprofessionalprinciples.AccentmayalsohaverelieduponinformationprovidedbytheClientandotherthirdpartiestopreparethisdocument,someofwhichmaynothavebeenverified.Subjecttotheaboveconditions,thisdocumentmaybetransmitted,reproducedordisseminatedonlyinitsentirety.

www.accentenvironmental.com.au [email protected]

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RehabilitationFinancialMechanisms

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ContentsExecutivesummary..................................................................................................................................iiiAbbreviations............................................................................................................................................vDefinitions...............................................................................................................................................vi1 Introduction........................................................................................................................................1

1.1 Background........................................................................................................................................11.2 Qualifications.....................................................................................................................................1

1.2.1 Firmundertakingtheassignment.........................................................................................11.2.2 Personactingaswitness.......................................................................................................2

1.3 Informationsources..........................................................................................................................21.4 Needforfinancialassurance.............................................................................................................2

1.4.1 Historiclegacy.......................................................................................................................21.4.2 Overviewoffinancialassurance...........................................................................................3

2 Financialmechanismsforrehabilitation..............................................................................................42.1 Guidingprinciples..............................................................................................................................42.2 Financialinstruments........................................................................................................................4

2.2.1 Suretyheldbyoperator........................................................................................................62.2.2 Suretyguaranteedbythirdparty..........................................................................................72.2.3 Suretytransferredtogovernmentortrust...........................................................................8

2.3 Financialassurancesystems..............................................................................................................92.3.1 Fullfinancialassurancesystems...........................................................................................92.3.2 Discountfinancialassurancesystems.................................................................................102.3.3 Pre-definedliabilityproportionsystems.............................................................................102.3.4 Pooledfundsystems...........................................................................................................102.3.5 Insurancebasedsystems....................................................................................................11

3 Cross-jurisdictionalreview................................................................................................................123.1 Victoria............................................................................................................................................12

3.1.1 Rehabilitationbondsystemforminingandextractiveindustries......................................123.1.2 VictorianEnvironmentProtectionAuthority......................................................................14

3.2 NorthernTerritory...........................................................................................................................153.3 NewSouthWales............................................................................................................................15

3.3.1 Financialassurancesystemandlegacymines....................................................................153.3.2 Minesubsidencetrustfund................................................................................................163.3.3 CoalSeamGasindustryriskreview....................................................................................16

3.4 Queensland.....................................................................................................................................17

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3.4.1 Financialassurancesystem.................................................................................................173.4.2 Auditoffinancialassurance................................................................................................18

3.5 SouthAustralia................................................................................................................................193.6 Tasmania.........................................................................................................................................193.7 WesternAustralia............................................................................................................................203.8 EuropeanUnion..............................................................................................................................213.9 Manitoba.........................................................................................................................................213.10 Saskatchewan.................................................................................................................................223.11 Nevada............................................................................................................................................233.12 NewZealand...................................................................................................................................243.13 Extractiveindustries.......................................................................................................................25

4 Assessmentoffinancialmechanisms.................................................................................................264.1 Adequacyofcurrentrehabilitationbonds......................................................................................264.2 Futureuncertaintiesandrisks.........................................................................................................274.3 Assessmentoffinancialmechanisms..............................................................................................27

4.3.1 Optionsassessed.................................................................................................................274.3.2 Expectedclosurecosts........................................................................................................284.3.3 Unplannedpost-closurecosts.............................................................................................334.3.4 Post-closuretrustfundoption............................................................................................354.3.5 Estimationofrehabilitationliability....................................................................................36

5 Conclusions.......................................................................................................................................386 Referencesandpersonalcommunications........................................................................................38

TablesTable1 Currentbondand2015estimatedliabilities...................................................................................26Table2 Potentialrehabilitationbondincrease............................................................................................28Table3 Exampleofmulti-stepincreaseoption...........................................................................................30

FiguresFigure1 Australianlegacymines,July2011(Ungeretal2012)......................................................................3

Figure2 Categoriesoffinancialguaranteeinstruments(sourcedfromMonTec2007,p.22.)......................5

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ExecutivesummaryThisreporthasbeenpreparedfortheBoardoftheHazelwoodCoalMineFireInquiry(theInquiry)byAccentEnvironmentaltoaddressTermsofReference10(c):

“Havingregardtotherehabilitationliabilityassessmentsthathavebeenorwillbereportedin2015bytheoperatorsofeachoftheHazelwoodMine,theYallournMine,andtheLoyYangMine,asrequiredbytheMineralResources(SustainableDevelopment)Act1990,andtotheoutcomeoftheRehabilitationBondReviewProject:

(c)anypractical,sustainable,efficientandeffectivealternativemechanismstoensurerehabilitationoftheminesasrequiredbytheMineralResources(SustainableDevelopment)Act1990.”

Theprimarypurposeoffinancialassuranceforminingprojectsistoprovideahighdegreeofcertaintythatadequatefundingwillbeavailabletoundertakefinalrehabilitationintheeventofdefaultbytheoperator.Asecondarypurposeistopromoteprogressiverehabilitation.

Across-jurisdictionalreviewhasidentifiedrangeofdifferentfinancialmechanismsusedtoensurethattherehabilitationofminingoperationsisproperlyfundedandimplemented.Anumberoftrendshavebeenemergingoverrecentyearsincluding:

• theincreaseduseoftrustfundstoenablepost-closuremanagement,includinginperpetuity• agreaterfocusoncostrisksassociatedwithunplannedevents,particularlypostclosure• theadoptionofdiscountbondsystemstorewardgoodperformanceandencourageprogressive

rehabilitation• theuseofmoresophisticatedliabilitycalculationtoolsandadoptionofprobabilisticcostestimation

methodstomoreaccuratelydeterminerehabilitationliability.

Theemergenceofthesetrendsisrecognitionofissueswithtraditionalfinancialassurancemechanisms,suchastheunderestimationofrehabilitationliability,difficultiesinmeetingrequirementsforsiterelinquishmentandproblemsfacedbyregulatorsinencouragingprogressiverehabilitation.

CurrentrehabilitationbondsfortheLatrobeValleycoalminesaresubstantiallylowerthantherehabilitationliabilityofthesites.ThispresentsarisktotheStateandsitswithinthecontextofbroaderissuesincluding:

• geotechnical,hydrogeologicalandfirepreventionrisksatthethreemineswhichresultinadegreeoftechnicaluncertaintyregardingappropriatemethodsofrehabilitation

• marketuncertaintyduetofallingelectricitydemand(whichhasledtooversupply),increasingcompetitionfromtherenewablessectorandthepotentialforfuturecarbonpricing.Suchuncertaintycouldresultintheearlyclosureofoneofmoresites.

Victoriacurrentlyhasafullfinancialassurancesystemforminingprojectsthatrequireoperatorstoproviderehabilitationbondsequalto100%ofestimatedliability.TheStateiscurrentlyimplementingaperformance-baseddiscountbondsystem,butthecoalminesaredeemedineligibleduetotheirhighrehabilitationrisk.

ArangeofoptionsforalternativefinancialmechanismswereassessedfortheirpotentialtoensurethatrehabilitationoftheminesisundertakenasrequiredundertheMineralResources(SustainableDevelopment)Act1990.Theoptionswere:

• Single-stepincrease–asingle-stepincreaseofexistingrehabilitationbondstoachievefullfinancialassurancecoverage.

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• Multi-stepincrease–apre-definedscheduleofbondincreasestoprogressivelyachievefullfinancialassurancecoverage.

• Bonddiscount–thesingle-stepormultistepincreaseoptionswithadditionalbonddiscount.

• Trustfundforrehabilitation–usingatrustfundtoprovidesupplementaryfinancialassurancecoverage.

• Insurance-basedcoverage–usinginsurancetoprovidesupplementaryfinancialassurancecoverage.• Pooledfundcoverage–usingapooledfundtoprovidesupplementaryfinancialassurancecoverage.• Unplannedeventsinsurance–usinginsurancetomitigatetheriskofpost-closureunplannedcosts.• Unplannedeventsfund–usingatrustfundtoprovidefundsforunplannedpost-closurecosts.

• Post-closuretrustfund–usingatrustfundtocoverthecostsofpost-closuremanagement,maintenanceandmonitoringofthesites.

Apost-closuretrustfundcouldalsobeusedtohelpreducethesocialandeconomicimpactsofmineclosureoftheLatrobeValleycommunity

Thegreaterthegapbetweentherehabilitationbondandtherehabilitationliability,thegreatertherisktakenonbytheState.InconsideringtheoptionsforfinancialmechanismstheStatehastoassessthelikelihoodandconsequencesofrehabilitationdefault,itswillingnesstotakeonrisk,andbalancethisagainstthecommercialneedsoftheoperators.Itisuptotheoperatorstopresentacaseforanyfinancialhardshipthatmayoccurfromincreasingthebondamounts.

Itisnotclearthatanyoftheoptionsassessedprovidestrongfinancialorotherincentivesforthemineoperatorstoundertakesignificantprogressiverehabilitation.ThereareinherentrisksinleavinguntestedaspectsofrehabilitationuntiltheendofoperationsanditisimportantthatsuchasituationisavoidedintheLatrobeValley.

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AbbreviationsCPI ConsumerPriceIndex

DEDJTR DepartmentofEconomicDevelopment,Jobs,TransportandResources,Victoria

DPI FormerDepartmentofPrimaryIndustries,Victoria

DSDBI FormerDepartmentofStateDevelopment,BusinessandInnovation,Victoria

DEHP DepartmentofEnvironmentandHeritageProtection,Queensland

EES EnvironmentEffectsStatement

ERR EarthResourcesRegulationBranch(withinDEDJTR)

EPA EnvironmentProtectionAuthorityVictoria

LYP LoyYangPower

LYCA LoyYangComplexAgreement

MCA MineralsCouncilofAustralia

MRSDAct MineralResources(SustainableDevelopment)Act1990

SECV FormerStateElectricityCommissionofVictoria,

TOR TermsofReferencefortheBoardofInquiryintotheHazelwoodCoalMineFire,madebyOrderinCouncilon26May2015

C$ Canadiandollars

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DefinitionsBoardofInquiry TheBoardofInquiryintotheHazelwoodCoalMineFire,comprisingTheHonourable

BernardTeagueAO(Chair),ProfessorJohnCatfordandMrs.AnitaRoper.

Creditrating Anopinionofthegeneralcreditworthinessofaborrowerwithrespecttoaparticulardebtsecurityorotherfinancialobligation.UsuallyexpressedasalphacharacterswithAAAbeingthehighestrating.

Costofcapital Referstotheopportunitycostofmakingaspecificinvestment.

Declaredmine TheMineralResources(SustainableDevelopment)Act1990Section7CprovidestheMinisterforEarthResourceswithpowerstodeclareaspecificmineorquarrywheretherearegeotechnicalorhydrogeologicalfactorswithinthemineorquarrythatposeasignificantrisktopublicsafety,theenvironment,orinfrastructure.

Financialassurance

Atermforthefinancialsecurityprovidedbytenementholderstogovernmenttocoverthecostofrehabilitationintheeventofthetenementholder’sdefault.EquivalenttothetermrehabilitationbondundertheVictorianregulatorysystem.

Financialassurancesystem

Thesystembywhichagovernmentmanagesrisksassociatedwithrehabilitationliability,includingdeterminingtherequiredamountsoffinancialassurance,regulatingtheprovisionoffinancialassuranceandencouragingprogressiverehabilitation.

Financialinstrument

Inthisreportreferstothemeansbywhichtheagreedamountoffinancialassuranceisguaranteedtobeavailabletotheregulatorintheeventofoperatorinsolvency.

HazelwoodCoalMineFire

ThefirethattookholdintheHazelwoodMineonorabout9February2014.

Inquiry There-openedInquiryintotheHazelwoodCoalMineFire.

Insolvency Whenliabilitiesexceedassetsandanorganisationisunabletopayitsdebtswhenandastheyfalldue.

LatrobeValleycoalmines

TheHazelwoodMine,theYallournMineandtheLoyYangMine.

LoyYangComplexAgreement

AnagreementmadebetweentheStateElectricityCommissionofVictoria(SECV),LoyYangPower(LYP)andEdisonMissionEnergyAustralia(EME)on29March1997.

Mining Theextractionofminerals,includingcoal,fromthelandwiththepurposeofproducingthemcommercially,includingprocessingandtreatingore.

Operations Theperiodinthelifeaminingoperationfromthegrantingofapprovaltostartoperationsuntiltheendofmining.

Operator Inthisreport,operatorisusedasageneraltermreferringtotheentitywithresponsibilityforsiterehabilitationandclosureduringthenormaloperationofaminingproject.Indifferentjurisdictionsorcircumstances,thismaybetheminingcompany,thelicensee,thetenementholder.

Opportunitycost

Thecostofanalternativethatmustbeforgoneinordertopursueacertainaction.

Rehabilitation Financialassurancewhichmustbeprovidedbyanoperatorpriortoworkcommencingtoensurethatrehabilitationcanbeundertakenbythegovernmentintheeventof

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bond rehabilitationdefault.Arehabilitationbondshouldalsoprovideanincentiveforlicenseestocomplywiththeirrehabilitationobligations.Equivalenttotermssuchasfinancialassurance,financialsecurityandfinancialguaranteethatareusedinotherjurisdictions.

RehabilitationBondReviewProject

Thecurrentreviewintorehabilitationbondsandthemethodologybywhichtheyarecalculated,asreferredtoatpage1612,lines7–8ofthetranscriptoftheHazelwoodMineFireInquirydated10June2014.

Rehabilitationdefault

Afailurebyatenementholdertoundertaketherehabilitationrequiredbytheregulator,typicallyassetoutinanagreedrehabilitationplan.Forexample,rehabilitationdefaultoccurswhentenementholdersenterintoreceivershiporliquidation.

Rehabilitationliability

Theestimatedcostofundertakingtherehabilitationworksrequiredforaprojectsitetomeetthestandardrequiredbygovernmentforittoberelinquishedattheendofitslife.

Rehabilitationplan

Aplanpreparedbyatenementholdersettingouttherehabilitationworksrequiredforaprojectsitetoberelinquishedtogovernmentattheendofitslife.

Residualrisks Inthisreport,referstotherehabilitationrisks(suchasbatterfailure)thatremainoncesiterehabilitationiscompleteandcouldresultinunplannedpost-closurecosts.

Siterelinquishment

Thepost-closuretransferofarehabilitatedsiteanditsassociatedliabilityfromtheoperatortothegovernmentorathirdparty.

Workplan AplanapprovedundertheMineralResources(SustainableDevelopment)Act1990orendorsedpursuanttoclause21AoftheAgreementsetoutinSchedule1totheMines(AluminiumAgreement)Act1961,asamendedbytheAmendmentAgreementsetoutinSchedule2tothatAct,asthecasemaybe.Aworkplancontainsprescribedinformation,arehabilitationplanand,ifnecessary,aplanforcommunityconsultation.

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1 Introduction

1.1 BackgroundInFebruary2014afiretookholdintheHazelwoodCoalMine,adverselyimpactingLatrobeValleycommunities.InMarch2014,aBoardofInquirywasestablishedtoinquireintoandreportonanumberofspecifiedmattersrelatingtothefireintheHazelwoodCoalMine. ThatInquiry’sreportwastabledintheVictorianParliamenton2September2014.

Sincethatreportwastabled,furtherconcernswereraisedaboutthepotentialhealthimpactsofthefireontheLatrobeValleycommunitiesandfutureoptionsforrehabilitatingVictorianminesintheLatrobeValley.

OntherecommendationofthePremierundersection53(1)oftheInquiriesAct2014,theGovernorinCouncilissuedanOrderinCouncil(dated26May2015),appointingaBoardofInquirytoinquireintoandreportonthetermsofreferencespecifiedinparagraphs6to11oftheOrder(GG2015).

TermsofReference10statesthefollowing:

“Havingregardtotherehabilitationliabilityassessmentsthathavebeenorwillbereportedin2015bytheoperatorsofeachoftheHazelwoodMine,theYallournMine,andtheLoyYangMine,asrequiredbytheMineralResources(SustainableDevelopment)Act1990,andtotheoutcomeoftheRehabilitationBondReviewProject:

(a)whethertherehabilitationliabilityassessmentsreferredtoaboveareadequate;

(b)whetherthecurrentrehabilitationbondsystem,beingoneofthemeasurestoprovideforprogressiverehabilitationbyendofminelifeasrequiredundertheMineralResources(SustainableDevelopment)Act1990,is,orislikelytobe,effectivefortheHazelwoodMine,theYallournMine,andtheLoyYangMine;and

(c)anypractical,sustainable,efficientandeffectivealternativemechanismstoensurerehabilitationoftheminesasrequiredbytheMineralResources(SustainableDevelopment)Act1990.”

ThisreporthasbeenpreparedfortheBoardoftheHazelwoodCoalMineFireInquiry(theInquiry)byAccentEnvironmentaltoaddressTermsofReference10(c)(showninbold).

1.2 Qualifications

1.2.1 FirmundertakingtheassignmentAccentEnvironmentalPtyLtd(Accent)isaMelbourne-basedcompanyformedin2012toprovideenvironmentalandsocialimpactassessment,managementservices,andstrategicadvicetothemining,oilandgas,industrial,waterandwastesectors.Accenthasparticularcapabilitiesandexperienceintheareaofminesiterehabilitationandmineclosure,whichisakeyareaoffocusforthecompany.

AccentissupportedinthisassignmentbyMarsdenJacob,aconsultancyfirmthatoffersin-depthandindependentresearchandanalysisoneconomic,financialandpublicpolicyissues.MarsdenJacobwasfoundedin1996inMelbourneandhassincegrowntobecomeanationalfirmwithofficesinMelbourne,Perth,BrisbaneandSydney.

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1.2.2 Personactingaswitness

Mr.MichaelCramer,DirectorofAccentEnvironmental

MichaelCrameristhefounderandDirectorofAccentEnvironmental.HehasaBachelorofScience(EarthSciences)withHonoursfromtheUniversityofMelbourne(1989)andaMasterofEnvironmentalSciencefromMonashUniversity(1998).

Michaelhasover20yearsofexperienceconsultingtoindustryandgovernment,includingprojectmanagingenvironmentalimpactassessmentsandpreparingmanagementplansformajorprojectsinthemining,petroleum,water,wasteandindustrialsectors.Hehasundertakenworkinbothtemperateandhigh-rainfallenvironmentsinAustralia,Asia,AfricaandPapuaNewGuinea.MichaelisaqualifiedEnvironmentalSocialandHealthImpactAssessment(ESHIA)facilitatorforChevronCorporationandisamemberoftheAustralasianInstituteofMiningandMetallurgy(AusIMM),theEnvironmentInstituteofAustraliaandNewZealand(EIANZ)andtheAustraliaAfricaChamberofCommerce(AACC).

MichaelhasspecialistexperienceinminerehabilitationandclosureplanningworkingforboththeprivatesectorandgovernmentinAustraliaandinternationally.Hisclosureexperienceincludesprovidinghighleveladviceregardingfinancialassurance,assessingandmanagingclosureliability,andpreparingandcostingrehabilitationandclosureplans.In2014,hewastheprojectdirectorforAccent’sdevelopmentofareducedbondschemeforminingandextractiveindustryoperationsinVictoriawiththeassistanceofKPMG.In2003hepreparedaStrategicFrameworkforRehabilitationandClosurePlanningfortheLoyYangMine.

1.3 InformationsourcesThefollowinginformationsourceswereprovidedtoAccentbytheInquiry:• MineralResources(SustainableDevelopment)ActReview-Stage2,DraftdiscussionpaperNo5-

RehabilitationBonds(DEDJTR.1008.001.0232).

• LoyYangComplexAgreementbetweenEdisonMissionEnergyAustraliaLimited,LoyYangPowerLimitedandSECV29March1997(redacted).

• Annualactivityandexpenditurereturn2014-15forMIN5004(DEDJTR.1007.001.0201).• Annualactivityandexpenditurereturn2014-15forMIN5189(DEDJTR.1007.001.0223).• Annualactivityandexpenditurereturn2014-15forMIN5003(DEDJTR.1007.001.0182).• KPMG(June2011)Optionsforfinancialassuranceforrehabilitationofmineandquarrysites,

(DEDJTR.1007.001.0228).

Theabovesourceswerereliedupon,inpart,topreparethisreport.Othersourcesrelieduponinpreparingthisreportarelistedinthereferencesandpersonalcommunicationssection(seeSection0).

Inparticular,referencestotheoutcomesoftheVictorianGovernment’srehabilitationbondreviewprojecthavebeensourcedfromHazelwoodCoalMineFireInquirysubmissionfromtheVictorianGovernmentLatrobeValleyCoalMinesRehabilitation(VictorianGovernment2015).

1.4 Needforfinancialassurance

1.4.1 HistoriclegacyTheneedforfinancialassuranceisillustratedbythelegacyofenvironmentalissuesleftbyabandonedminesinAustralia(seeFigure3)(Ungeretal.2012).Muchofthislegacyistheresultofhistoricoperationsthatweresubjecttolessstringentregulatorycontrolsandmuchlowergovernmentandcommunity

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expectationsthanprojectsoperatingtoday.However,eventoday,therearemanyrecentorcontemporaryoperationswithsubstantiallegacyissues.

Oneofthemajorissuesrequiringmanagementbyindustryandregulatorsistheissueofprematureclosure.AnAustralia-widestudyofapproximately1000sitesthatclosedbetween1981and2005foundthatataround75%ofsiteclosureswereprematureorunplanned(Pepperetal.2014).ThepotentialconsequenceofthisscenarioisthattheliabilitymayfallontheStateifthesitesarenotrehabilitatedeffectively.

Figure3 Australianlegacymines,July2011(Ungeretal2012)

1.4.2 OverviewoffinancialassuranceFinancialassurance(providedbyrehabilitationbondsinVictoria)helpsensuretheoperatorresponsibleforminingactivitiesisresponsibleforpayingfortherehabilitation,evenintheeventofrehabilitationdefaultduetoinsolvency.Thisavoidscosttothetaxpayerandimprovescommunityconfidenceintheindustry.However,maintaininga100%financialassurancesystemtorepresentthetruecostofrehabilitationhasthenegativeimpactoftyingupmoneythattheindustrycouldbeinvestinginotheractivitiesincludingprogressiverehabilitation(Pepperetal2014).

Financialassurancesystemshavecommonlybeencriticisedforunderstatingactualmineclosurecosts.Theonlywaytoensureabonddoesnotfallshortistodevelopasystemthatcanaccuratelycalculatethecostofmineclosureandforthistobeannuallyreviewedandadjustedreflectingperformancemilestonesornon-compliancewithanyincrementalmineclosurerequirements(Pepperetal.2014).

Thereisamoralhazardassociatedwithanysystemwherethefinancialassuranceislessthantherehabilitationliability.Suchmoralhazardcanbeduetoabondreduction(suchasunderabonddiscountsystem),theunder-valuingofliability,orwheresiteconditionshavechangedsincethebondwasset(e.g.projectexpansion,ortheemergenceofnewenvironmentalorotherliabilities).Moralhazardisalsopresentwherethefinancialassurancesystemallowsfromcross-subsidiesbetweenprojects(DPIundated).

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2 Financialmechanismsforrehabilitation

2.1 GuidingprinciplesTheVictoriangovernmentsubmissiontotheInquiry(VictorianGovernment2015)liststenprinciplesforagoodsecuritybondmodelthatwereidentifiedbyKPMG.Theprincipleswereanoutputofagovernmentandindustryworkinggroupconvenedin2011bythethenDepartmentofPrimaryIndustries(DPI)toexploreoptionsforbondreform.ThetenKPMGprinciplesare:

• thesystemshouldreflectthefactthatarehabilitationfailurerateof100%isunlikely• thesystemcannotbea‘noassurance’system–thiscreatesmoralhazard• thesystemshouldrewardpastgoodbehaviour• thesystemshouldalsoencouragefuturegoodbehaviouranddiscouragefuturebadbehaviour• thesystemshouldbebasedonriskmanagementprinciples• thesystemshouldavoidcross-subsidies• thesystemshouldattempttoavoidlargeanduncertainincreasesintheamountoffinancialassurance• theGovernmentwillseektomanageitsfinancialriskstominimiseanybudgetaryimpact• anynewmodelshould,wherepossible,notmateriallyincreasetheadministrativeburden• financialassuranceshouldbereadilyconvertedintocash.

Theaboveguidingprincipleswereincluded,almostverbatim1,inasubsequentDPIdiscussionpaperDRAFTDiscussionPaperNo5–RehabilitationBonds(DPIundated).

2.2 FinancialinstrumentsInthisreport,financialinstrumentsaredefinedasthemeansbywhichtheagreedamountoffinancialassuranceisguaranteedtobeavailabletotheregulatorintheeventofoperatorinsolvency.Financialinstrumentsareakeycomponentoffinancialassurancesystems(seeSection2.3).

TheultimatepurposeoffinancialassuranceforsiterehabilitationistoprovideahighdegreeofcertaintythatadequatefundingwillbeaccessibletotheStatetoundertakerehabilitationworksintheeventofrehabilitationdefaultbytheoperator.

Althougharangeoffactorsmaycontributetotheinabilityofanoperatortocarryoutrehabilitationworks,financialassurancemechanismshavetheintentofmitigatingfinancialfactors.Theseinclude:

• theoperatorbeingplacedinadministration• theoperatorbeingunabletofundrehabilitationworksduetopoorcashflow,eventhoughthefirmmay

haveconsiderableassets• theoperatorchangingownershipstructureinawaythatreducesorextinguishesrehabilitation

liabilities• theoperatorlackingcapabilityand/orcapacitytoundertakerequiredrehabilitationworksatthetime

requiredduetoachangeinstaffingmix.

1InDPI(undated),thewordingofthesecondguidingprincipleregardingmoralhazardwaschangedto‘Thesystemshouldavoidcreatingmoralhazard’.

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Overtime,regulatorsofminingactivitiesaroundtheglobehavepermittedarangeofalternativefinancialinstrumentstobeusedasthebasisforprovidingfinancialassurance.ThesearesummarisedinFigure4(MonTec2007).

Figure4 Categoriesoffinancialguaranteeinstruments(SourcedfromMonTec2007,p.22.)

AsillustratedinFigure2,thefinancialinstrumentscanbeclassifiedaccordingtotheextenttowhichtheprobabilityofthegovernmentnothavingclearaccesstoadequatefundsisreduced.

Thehighestguaranteeisprovidedbyfinancialinstrumentsthatareheldbygovernment,orheldintrustbygovernment.Thismeansthatthegovernmenthasdirectcontroloverthefundsandisabletomonitordirectlytheliquidityandadequacyoftheinstrument.

HazelwoodReport–FinancialGuaranteeGuidelines

Financialsuretyinstrumentsformineclosureandrehabilitation

Suretyremainswithinoperatorcompany

Insurancepolicy

Depositofcashorcashequivalents

Pledgeofassets

Self-bondingbyaccountingaccruals Trustfund

Parentcompanyguarantee

Bondpool

Suretybond

Letterofcredit,bankguarantee

Mortgage(titletransferredtogovernment)

Suretytransferredtogovernmentortrust

Defaultriskbornbygovernmentandtaxpayersdecreases

*Dependsondecouplingofassetsfrommineoperator

Captiveinsurancecompany*

Transferofliabilityintoseparatecompany*

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Attheotherendofthespectrum,thelowestguaranteeisprovidedbyinstrumentsthatareheldbythemineoperator,eitherintheformofcashorprovisionsheldonabalancesheet.Althoughsuchinstrumentsrelativelylowcostforoperators,therisktogovernmentissubstantialbecauseaccesstotheinstrumentisindirect.Ofparticularconcernisascenariowheretheoperatorisplacedinadministration.Inthatcircumstancethegovernmentwouldbecomeanunsecuredcreditor,facingtherealprospectoffundingunderthefinancialinstrumentnotbeingavailableonceobligationstomoreseniorcreditorsaredischarged.Evenwherethefinancialinstrumentisheldbyafinanciallysoundoperator,theabilityofthegovernmenttomonitortheadequacyoffundingisconstrained.

Financialinstrumentsissuedbyathirdpartyinstitution,fallbetweenthetwoalternateendsofthespectrum.Thisclassofinstrumentistypicallyanassetheldagainstafinancialinstitutionsuchasabankorinsurancecompany,andprovidesa‘guarantee’ofpayment,contingentupontheinabilityoftheoperatortomeetitsfundingobligation.Thedegreeofrisktothegovernmentundereachinstrumentvaries.

InthefollowingsectiongreaterdetailisprovidedoneachofthefinancialinstrumentsoutlinedinFigure4.

2.2.1 Suretyheldbyoperator

Pledgeofassets

Apledgeofassetsisessentiallyapromisetotransfertheownershipofallassetsthatremainonthesitefollowingsiteclosuretothegovernmentorregulator.Determiningthetruefinancialvalueofthisinstrumentisdifficultbecauseitreliesonascertainingthattheassetshavenoexistingchargeoverthem,thatthereisamarketfortheassets,thevalueofthoseassetsinthatmarketandthetransactionscoststhatwouldbeincurredtoeffectthesale.

Asaresult,apledgeofassetsisveryrarelyacceptedasfinancialinstrument.

Self-bondingbyaccountingaccruals

Underthisapproach,theoperatorprovidesanassurancethatsufficientfundshavebeensetasidetomeetclosureandrehabilitationcosts.Typically,provisionismadeasaliabilityonthebalancesheet.Insomeexamples,theopinionofanindependentauditorisrequiredtodeterminetheadequacyoftheprovisionandthecorrespondingassets.

Thekeyriskunderthisinstrumentisfromtheoperator,orthecontrollingentityoftheoperator,enteringintoadministrationorinsolvency.Underthisscenario,thegovernmentorregulatorwouldlikelytobelistedasanunsecuredcreditor.Whilstitmaybepossiblethatfollowingcompletionoftheprocessthegovernmentwouldreceivetheprovisionedfunds,thedegreeofriskthatthiswouldnotoccurisrelativelyhigh.

Controlledbankaccount

Acontrolledbankaccountisanaccountheldatafinancialinstitutioninthenameoftheoperator.However,restrictionsareplacedonthedraw-downoffundsfromtheaccount.Theregulatororgovernmentistypicallynamedasapartytotheaccount,andusuallyistheauthorisingpartyforreleaseoffunds.

Adefiningfeatureofacontrolledbankaccountisthatfundsarereleasedasreimbursementtotheoperatorforworksdonetorehabilitatethemineinaccordancewiththerequirementsofthelicence.

Transactioncostsareminimalunderthisoption,howthereisanopportunitycostincurredbytheoperatorfromholdingfundsinthecontrolledaccount,wheretheinterestearnedisrelativelylowerthanalternativeinvestment.

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2.2.2 Suretyguaranteedbythirdparty

Insurancepolicy

Thereisanemergingmarketininsuranceproductsthatareofferedtoprovidecoveragainsttheconsequentialrisksofnotundertakingadequateminerehabilitationworks,andinsomeinternationalmarkets,insuranceproductsareofferedthatguaranteethatminerehabilitationobligationsaremetintheeventofdefaultbyanoperator.However,acommercialinsuranceproductofthistypeappearsnottobewidelyavailableintheAustralianmarket.

Insuranceismoretypicallyheldtoguardagainstsuddenandaccidentalevents,andgradual,slowtodeveloppollutionevents.

Bankguarantee

Abankguaranteeisanagreementbetweentheoperatorandthebankthatfundswillbeprovidedtothegovernment(oraddressee)forrehabilitationpurposesifneeded.Thegovernmentmustdecidefromwhichbankstheywillacceptaguarantee.Theguaranteeisadministrativelysimpleforthegovernment.Fortheoperatorhoweveritcanlimittheiraccesstocapital,asitisconsideredtobetheprovisionofcreditbythefinancialinstitution.

Abankguaranteehasthefollowingcharacteristics:

• itisanunconditional,writtenundertakingissuedbyafinancialinstitution(usuallyabank)infavourofathirdparty(inthiscaseitwouldbethegovernmentorregulator)

• the‘guarantee’isforthefinancialinstitutiontopayadefinedamountofthebankcustomer’smoneyupondemandbythenamedthirdparty.

Thehighdegreeofsecurityofferedbythebankguarantee,asaresultoftheunconditionalnatureoftheinstrument,makesbankguaranteesthemostcommonformoffinancialassuranceinstrumentforminerehabilitationliability.

Bankguaranteescanberelativelycostlyforoperators.Theissuinginstitutiontypicallychangesafeeorpremiumeachyear,andwillrequiretheoperatortoprovidesecurityasbackingforsomeportionoftheguarantee.Itshouldbenotedthoughthatsomelargeoperatorswithstrongbalancesheetshaveobtainedbankguaranteeswithoutarequirementtopayapremiumorfee.

Fromtheperspectiveoffinancialinstitutions,abankguaranteecanbeviewedastheequivalentofaloan.Operatorsfrequentlycommentthatthismeanstheborrowingcapacityoftheoperatorisrestrictedbytheusebankguarantees.

Letterofcredit

Aletterofcreditissimilartoabankguarantee,howeverittypicallyhasanumberofconditionsattachedtopaymentofcredittothenominatedparty.Ofparticularrelevancetorehabilitationsassurance,theregulatorwouldtypicallyberequiredtoprovethattheoperatorhadfailedtomeetitsobligationspriortoreleaseoffundsundertheletterofcredit.

TheEPAnotesthataletterofcreditisestablishedinasimilarmannertoabankguarantee(EPA2015b).However,inordertoclaimagainsttheletterofcredit,theregulatororgovernmentmustpresentthebankwithdocumentationshowingadefaultonbehalfoftheoperator.

Thekeydisadvantageofaletterofcreditisintheneedfortheregulatortodemonstratetheoperators’defaulttothebank.

Suretybond

Asuretybondisafinancialinstrumenttypicallyissuedbyaninsurancecompany.Theoperatorwouldtakeoutaninsurancebondwithaninsurancecompany.Thegovernmentorregulatorisnamedinthetermsof

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thebondasthebeneficiaryofthefundstobeprovidedbythebond,followingadefinedeventorevents.Inthiscasethedefinedeventwouldbedefaultbytheoperatorinundertakingrehabilitationworksagreedunderthelicenseconditions.

Suretybondsaretypicallytakenoutforaspecificperiodoftime(e.g.oneyear).Theyrequirethepaymentofapremiumbytheoperator,andwouldberenewedattheendofthecontractperiod.Thisprovidesanopportunityforthecoverageunderthebondtobeamended.Italsopermitstheinsurertoreassesstherisksunderthecontractandadjustthepremiumaccordingly.

Bondpool

Abondpoolistypicallymadeupofcontributionsmadebyarangeofoperatorsinaparticularlocationandismanagedbytheindustry.Thebondpoolisdesignedtoprovideafundthatcanbedrawnagainsttomeettheminerehabilitationobligationsofoperatorsinthecaseofbankruptcyorotherunforeseenevents.

Bondpoolshaveanumberofundesirableattributes.First,itisdifficultforthegovernmentorregulatortoobservetheadequacyoffundsandtheformoffundsheldinthebondpool.Thepoolofriskalsocreatesanincentiveforindividualoperatorstonotincurprogressiveminerehabilitationexpensesbecausethecontributionsmadebytheremainingpoolcontributorscanbereliedupontodischargerehabilitationobligations.

Parentcompanyguarantee

Aparentcompanyguaranteewouldberelevantwherethelocaloperatorisasubsidiaryofalargerfirm.Theparentcompanywouldtypicallyconsolidatetheassetsandliabilitiesofthelocalsubsidiaryonitsbalancesheet.Wheretheparentcompanyisalarge,financiallystablemulti-nationalcompany,thisformofguaranteecouldberelativelylowriskforthegovernmentorregulator.However,theinabilitytomonitortheactivitiesandtruefinancialpositionofamulti-nationalfirmwouldweighagainstthisoption.

2.2.3 Suretytransferredtogovernmentortrust

Depositofcashorcashequivalents

Depositsofcashorcashequivalentsarethemostdesirableandleastriskformoffinancialassuranceinstrumentfromtheperspectiveoftheregulator.Inthiscaseacashpaymentismadeintoagovernment-ownedbankaccountthatwouldbesufficienttocoverexpectedrehabilitationcosts.Thekeyadvantagesarethatthefundsarehighlyliquid,directlyaccessiblebythegovernmentandfreeofcreditrisk.

Fromtheperspectiveofoperators,cashorcashequivalentdepositsarehighlyinefficient,duetotheopportunitycostofthefundsheldindepositwiththegovernment.

Trustfund

Anoperatorcanestablishatrustfundwithanagreementthatthemoneyistobeusedforrehabilitationonly.Contributionstothefundcanbemadeaccordingtoapaymentscheduleorasalumpsum.

TheEPA(2015b)notesthefollowingregardingtrustfunds:

• theyaretypicallycreatedbyasingledutyholder(althoughcanhavejointsignatories)• thetrusteeispermittedtoaccumulateincomefromfundsinvestedinthetrust• theaccumulatedincomemaybeaddedtothecapital.

Anaccumulatingtrustfundisestablishedtoholdcashorotherassetsonbehalfoftheoperator.

Thepowersofthetrusteeandtherightsofbeneficiariesaresetoutinthetrustagreement.Theregulatororgovernmentwouldbeabeneficiaryofthetrust.Thetrustcanbedesignedtoaccumulateabalanceovertime,ortomaintainaconstantbalance.

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Fromtheperspectiveoftheoperator,atrustfundwouldresultinanopportunitycostbeingincurredbecausethefundsorfinancialinstrumentsheldintrustcannotbeputtoalternativeuse.

Dependinghowthemoneyinatrustfundisinvesteditcanlosevalue.Thefundmustthereforebemonitoredtoensurethatitholdstherequiredleveloffunds.Trustfundsmustbesetupsothatifthecompanybecomesinsolvent,themoneyisavailabletotheregulatorandisnotseizedbyothercreditors(DPIundated).

Mortgage(titletransferredtogovernment)

Underthisoptiontheoperatorwouldprovideamortgageoverpropertyownedbytheoperatorforthebenefitofthegovernmentorregulator.Oncerehabilitationworkshavebeenundertakentothesatisfactionofarelevantauthority,themortgagewouldbedischarged.Thetruevalueofthisinstrumentwouldlargelydependupontheexistenceofamarketforthepropertyoverwhichthemortgageisheld.Forthisreason,itwouldbedesirableforthepropertytonotbeofaspecialisednature.Thepotentialforsignificantfluctuationinthevalueoftheassetsandtheliquidityoftheassetovertimemeansthatthisformoffinancialassuranceinstrumentisrarelyusedforminerehabilitationassurance.

2.3 FinancialassurancesystemsInthisreport,financialassurancesystemsaredefinedasthesystemsbywhichgovernmentsmanagerisksassociatedwithrehabilitationliability,includingdeterminingtherequiredamountsoffinancialassurance,regulatingtheprovisionoffinancialassuranceandencouragingprogressiverehabilitation.

TherearearangeoffinancialassurancesystemsinoperationinAustraliaandinternationally.However,mostsharethefollowingcharacteristics:

• Theyassumethatrehabilitationwillbeundertakenbyathirdparty,notthemineoperator,andcalculatethefinancialassuranceamountaccordingly.

• Thefinancialassuranceamountissubjecttoperiodicreviewandcanbeadjustedaccordingtoincreasesordecreasesinestimatedrehabilitationliability.

• Thepotentialforoperatorstoreducetheirfinancialassuranceamountbyreducingrehabilitationliabilityprovidesincentiveforprogressiverehabilitation.

• Withtheexceptionofpooledorsinkingfunds,eachfinancialassuranceamountistiedtoaspecificmininglicenceoroperation.

Themostcommonfinancialassurancesystemsforminingoperationsarebrieflydescribedbelow.

2.3.1 FullfinancialassurancesystemsFullfinancialassurancesystemsrequirethat100%oftherehabilitationliabilityofaminingoperationiscoveredbyfinancialassuranceacrossthelifeoftheproject.Thefinancialinstrumentusedtounderpinthesystemistypicallyanunconditionalbankguarantee.Suchsystemsareacommonmeansofmanagingfinancialassuranceforminingoperations,bothinAustraliaandinternationally.TheVictorianrehabilitationbondsystemisonesuchexample.

Fullfinancialassurancesystemsprovidethegovernmentwithahighdegreeofprotectionagainstrehabilitationdefaultbytheoperator,providedtherehabilitationliabilityhasbeenaccuratelyestimatedandthefinancialinstrumentusedislowrisk(suchasanunconditionalbankguarantee).

Suchsystemsseektoprovideincentiveforprogressiverehabilitationbyofferingthepotentialtoreducethefinancialassuranceamount.Theincentiveforprogressiverehabilitationisstrongestforoperatorsthatplaceahighvalueontheopportunitycost(orcostofcapital)ofthesecurityforabankguarantee.

Thedisadvantagesoffinancialassurancesystemsincludelimitinganoperator’saccesstocapitalsincetheprovisionofabankguaranteeisconsideredtobeaprovisionofcreditbythefinancialinstitution(DPI

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undated).Also,inrequiring100%rehabilitationliabilitycoverageforeachsite,thesystemdoesnotreflectthehistoricallylowrehabilitationdefaultrateofminingoperationsinmostjurisdictions.

2.3.2 DiscountfinancialassurancesystemsDiscountfinancialassurancesystemsoffereligibleoperatorsaperformance-baseddiscountintheamountoffinancialassurancethattheyarerequiredtoprovide.Thecriteriaforenteringadiscountsystemtypicallyincludesfinancialviability,goodregulatorybehavior(suchastimelypaymentoffees,lackofinfringementnotices)andademonstratedcommitmenttoprogressiverehabilitation.Aswithafullfinancialassurancesystem,thefinancialinstrumentusedtoprovidetheassuranceistypicallyanunconditionalbankguarantee.

Discountsystemsseektorewardthosemembersoftheindustrywhohavedemonstratedpastgoodbehavior,therebyprovidinganincentivetoothers.Theinclusionofrehabilitationperformanceintheentrycriteriaisawayofencouragingprogressiverehabilitation.

Suchsystemsmayhavearangeofdiscountsavailabledependingonthecategoriesandlevelsofoperatorperformance,ortohaveasetdiscountthatappliestoalleligibleoperations.Discountsystemsmayrequirealloperatorstostepuptofullfinancialcoveragepriortositeclosure.

Discountsystemscanworkinparallelwithfullfinancialassurancesystems.Sitesthatarenoteligibleforthediscount,orhavebeenrequiredtoexitthediscountsystemduetopoorperformance,operateunderthefullfinancialcoveragesystem.

Adegreeofmoralhazardexistswithdiscountsystemsastheamountoffinancialassuranceislessthantherehabilitationliability.Thegreaterthediscount,thegreaterthemoralhazard.

2.3.3 Pre-definedliabilityproportionsystemsInpre-definedliabilityproportionsystems,theproportionofrehabilitationliabilitycoveredbyfinancialassuranceincreasesinanumberofpre-definedincrementsacrossthelifeofaminingoperation,reaching100%coveragepriortoclosure.

Aswithadiscountbondsystem,performancecriteriacanbespecifiedthatoperatorshavetomeettoenterandremainonthesystem.Insuchacase,thepre-definedliabilityproportionsystemwouldoperateinparallelwithafullfinancialassurancesystem.

Alternatively,thepre-definedliabilityproportionsystemcanbeappliedtoalloperatorsregardlessofperformance.Thesystemissimplerinthiscaseasoperatorsdonotswitchbackandforthbetweentheproportionsystemandafullfinancialassurancesystem.Thissimplersystemisattractivetooperatorsas,inadditiontothediscounttheyreceive,theyhavecertaintyregardingthetimingandpercentageoftheincrementalincreasesintheirfinancialassurance.

Thepre-definedliabilityproportionsystemprovidedallowsgreateraccesstocapital,particularlyduringtheearlierstagesofoperationallife.Aswithallsystemsinvolvingadiscountinfinancialassurance,adegreeofmoralhazardexists.

2.3.4 PooledfundsystemsInpooledfund(orsinkingfund)systems,someorallofthefinancialassurancewithinajurisdictionisheldviaamanagedfundthatenablestherisksofrehabilitationdefaulttobepartiallysharedacrosstheminingsector.Therearetwopotentialtypesofpooledfundsystems–government-ownedandindustry-owned(DPIundated).Bothpooledfundsystemssharethefollowingcharacteristics:

• Eachoperationpaysintothefundanannualamountthatisproportionaltoitsestimatedrehabilitationliability.

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• Thetotalamountoffinancialassuranceheldacrossthesectorislessthanthesumofallrehabilitationliabilities.Individualparticipatingoperationsprovidealowerfinancialassuranceamountthantherehabilitationliabilityoftheirsite.

• Fundsarenottiedtoaspecificmininglicenceoroperation.Thegovernmentcanthereforeallocatefundstootherrehabilitationneeds,suchassupplementingrehabilitationfundsforasitethathasdefaultedandbeenfoundtohavehadinadequatefinancialassurance,ortherehabilitationoflegacyabandonedmines.

• Thereisaninherentissueofcross-subsidy,wherebymoneyfromwell-performingoperationsisusedtofundtherehabilitationofdefaultingoperators.

• Moralhazardexistsifcontributionstothefundaresmallcomparedtothesizeofanoperator’sliability,whichistypicallythecaseinpooledfunds.

• Clearpoliciesandgovernancemustbeestablishedregardingtheprudentialoversightofthefund’sinvestment,thenecessarybaselinebalance,therateofcontributions,andforwhatpurposesthefundsmaybeused(DPI,undated).

2.3.5 InsurancebasedsystemsUnderaninsurancebasedsystem,operatorscouldberequiredtoholdaninsurancepolicytocovertheriskofrehabilitationdefault(DPIundated).Thesystemwouldbesimilartothefullliabilitycoveragesystemexceptthatinsurancewouldbethefinancialinstrumentinsteadofanunconditionalbankguarantee.Rehabilitationliabilitywouldbeestimatedwhentheinsuranceistakenoutandreviewedperiodically.Theinsurancewouldbesufficienttocoverthefullcostofthirdpartysiterehabilitation.Significantpenaltieswouldapplyinthecasethatanoperatorwasfoundtobeunder-insuredorhadnotpaidapremium.

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3 Cross-jurisdictionalreviewAdesktop-basedcross-jurisdictionalreviewwasundertakenofexistingfinancialmechanismsforrehabilitationinAustraliaandinternationally.

3.1 Victoria

3.1.1 Rehabilitationbondsystemforminingandextractiveindustries

Existingrehabilitationbondsystem

InVictoria,theMineralResources(SustainableDevelopment)Act1990(MRSDAct)requirestheholderofanexploration/mininglicenceorextractiveindustryworkauthoritytorehabilitatethelandinaccordancewiththerehabilitationrequirementsoftheapprovedworkplan,licenceconditionsorspecificcodeofpractice(DEDJTR2015).InsuchcasesarehabilitationbondisrequiredforanamountdeterminedbytheMinister.InVictoria,‘rehabilitationbond’isthetermusedforfinancialassurance.

TheDEDJTRguidelineEstablishmentandManagementofRehabilitationBondsfortheMiningandExtractiveIndustries(DEDJTR2015)setsoutthedepartment’spoliciesfortheestablishmentandmanagementofrehabilitationbonds andoutlinesthemethodstobeusedinassessingrehabilitationliability.KeyfeaturesassetoutintheguidelinesandapplicabletotheLatrobeValleycoalminesaresummarisedbelow:

• TheEarthResourcesRegulationBranch(ERR)ofDEDJTRisresponsibleforsettingandreviewingrehabilitationbondsasrequiredbytheMRSDAct.

• Rehabilitationplansmusttakeintoaccountanumberoffactorslistedinsection79oftheMRSDAct,includingtheneedtostabilisetheland,andanypotentiallongtermdegradationofthe environment.

• TheMRSDActrequiresrehabilitationtobecarriedoutprogressivelyduringthelifeoftheoperation.Mininglicencesarealsograntedsubjecttoanumberofconditionsthatmaycontainfurtherrehabilitationrequirements.

• Section80oftheMRSDActrequiresalicenseetoenterintoarehabilitationbondforanamountdeterminedbytheMinister.Theconditionofarehabilitationbondisthattheauthorityholderrehabilitatesthelandasrequiredbysection78or78AoftheMRSDAct.

• RehabilitationbondsareperiodicallyreviewedbyDEDJTRtoensurethattheyremainatappropriatelevelsduringthelifeoftheoperation.Thebondisalsoreviewedwhenaworkplanvariationissubmitted,atenementistransferredorwhenrequestedbythetenementholder.

• Theamountofbondiscalculatedtoaddressinfulltherehabilitationliabilitybasedontheworksspecifiedintheapprovedworkplan.

• Forperiodicbondreviews,thebondiscalculatedontheexistingrehabilitationliabilityatthetimeofthereview.Rehabilitationliabilityiscalculatedonachievingthefinalrehabilitatedlandformasspecifiedintherehabilitationplan.

• Currently,DEDJTRonlyacceptsrehabilitationbondsintheformofanunconditionalbankguarantee.• Arehabilitationbondcalculatorhasbeendevelopedbythedepartment.Operatorsareableto

undertakeself-assessmentoftheirrehabilitationliabilitybytheuseoftherehabilitationbondcalculator.Alicenseecanchoosetouseanalternativecalculationmethodologybutwillneedtoprovidesufficientdocumentationtosubstantiatehowtheliabilityestimatewasderived.

• Inestablishingtherehabilitationliabilityitmustbeassumedthattheoperatorisunabletocompletethereclamationworksandthereforerehabilitationmustbemanagedbythedepartmentusinga'third

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party.'Accordingly,theleveloftherehabilitationbondwilltypicallybesignificantlyhigherthanthecostfortheoperatortoundertakethework.

• AnestimateoftherehabilitationliabilityisalsorequiredinannualreportsbymininglicenseesundertheMineralResourcesDevelopmentRegulations2002.

Rehabilitationbondpolicyreformpackage

ArehabilitationbondpolicyreformpackagewaspreparedbyDEDJTRin2014(VictorianGovernment2015).Thereformpackagerecommendstheintroductionof:

• atwo-trackbondmodel,involving:- 25percentbonddiscountforoperationsthatmeettheeligibilitycriteriathroughoutproduction- onceoperationceasesproduction,fullbond(100percent)mustbeprovided- ifoperationsontheschemefailtomeetanyeligibilitycriteriaatanytime,theywillberequiredto

providefullbond(100percent)- start-upbondscheme(fornewoperations)–50percentbonddiscountfornewoperationsover

firstfiveyearsthatmeettheeligibilitycriteria.Afteryearfiveofoperation,fullbondmustbeprovided

• cashbonds-allowingcashpayment(insteadofbankguarantee)forbondsupto$20,000.

ImplementationoftherehabilitationbondreformpackageisunderwaybyDEDJTR.Therehabilitationbondpolicyreformpackageexpresslyexcludeshigh-risksites,includingcoalmines(VictorianGovernment2015).

Post-closuretrustfund

TheMinisterforPlanning’sAssessmentundertheEnvironmentEffectsAct1978oftheproposedStockmanProjectinEastGippslandwillrequirethecompanyandthegovernmenttoco-contributetoaPost-closureTrustFund(PCTF)(VictorianGovernment2014).TherequirementforaPCTFrecognisesthefutureneedforongoingmonitoringandmaintenanceofpost-closurerisksassociatedwiththemine,inparticularthetailingstoragefacility.Anindependentassessmentofthenetpresentvaluefortheserequirementswasundertakenandestimatedtototalapproximately$5.5million.

AlegallybindingagreementbetweentheproponentandtheStatewouldrequiretheproponenttocontributetothePCTF.TheAssessmentrecommendsthataninitialamountbecontributedtothePCTFpriortocommencingworks,withallowanceintheagreementforreviewoftheadequacyofthisamountpriortohandback.Theabilitytoreviewthefundamountandrequireadditionalcontributionsisconsistentwithsimilarmechanismavailableforrehabilitationbonds(sees.80(4)MRSDAct).

Keypoints

• Therehabilitationbondsystemappliestobothminingandextractiveindustrysites.• 100%financialassuranceheldbygovernment.• Arehabilitationbondcalculatorisavailabletoestimaterehabilitationliability.• Currently,rehabilitationbondsareonlyacceptedintheformofanunconditionalbankguarantee.

• Bondreformswillintroducediscountbondsandsmallcashbonds(butcoalminesexcludedfromreformpackage).

• PrecedenthasbeensetinVictoriafortheestablishmentofpost-closuretrustfunds.

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3.1.2 VictorianEnvironmentProtectionAuthoritySection67BoftheVictorianEnvironmentProtectionAct1970(EPAAct)andassociatedregulationsprovidefortheEnvironmentProtectionAuthority(EPA)torequiredutyholderstoprovidefinancialassuranceasaconditionofalicencesorworksapprovalsforcertainscheduledactivities(EPA2014).

EPAiscurrentlyreformingthefinancialassurancesystemandhasissuedadraftguidanceonhowtodeterminetheamountoffinancialassuranceforlandfills,prescribedindustrialwaste(PIW)management,containerwashingandPIWcomposting(EPA2015a).

Operationallandfillsarerequiredtomaintainboththeoperational,andtheclosureandaftercarecomponentsoffinancialassurance.Closedlandfillsarerequiredtomaintaintheclosureandaftercarecomponent.

Landfilloperationalfinancialassurance

Inthedraftguidelines,EPAproposesasimpleformulatocalculatetherequiredoperationalfinancialassuranceforlandfills(EPA2015a).Theformulais:

OperationalFA=$(0.20xfilledvolumeincubicmetres)+$370,000

Theformulawasderivedusingestimatedremediationcostsforthefollowingtypesofunplannedeventsatvariablysizedlandfills:

• excessiveseepageorlossofleachatecontainment• illegaldumping• slumpingofbatters• failureorerosionoftemporarycappingorvegetation.

LandfillsdeemedbyEPAtobeoutsidetheassumptionsinherentintheformulashouldinsteadcalculatetherequiredlandfilloperationalfinancialassuranceinconsultationwithEPA.

Theformulaisbasedon2015costsandshallbeindexedusingtheConsumerPriceIndexadjustmentcalculationbelowforfinancialassurancecalculationsperformedinsubsequentyears.

Landfillclosureandaftercarefinancialassurance

Thedraftguidelines(EPA2015a)requirethatthecalculationofclosureandaftercarefinancialassuranceaddressesthecostsofcomplyingwiththeLandfillBestPracticeEnvironmentalManagementDocument(EPA2015c)andtheClosedLandfillGuidelines(EPA2012).Thefinancialassuranceisrequiredtoincludecostsassociatedwithfinalcappingworks,revegetation,infrastructurecosts,technicalassessments,environmentalmonitoring,preparationofrehabilitationplanandaftercaremanagementplan,ongoingmanagementandmaintenance,inspectionauditingandreporting.

Thefinancialassuranceforclosureandaftercarecanbereduceduponauditorverificationthattheclosureactivitiesarecompleted.

Financialinstruments

Aspartoftheirreformofthefinancialassurancesystem,EPAhasissueddraftguidanceontypesoffinancialassurancethatmaybeconsidered(EPA2015b).Theseare:

• bankguarantees• guarantees(bydeedpoll)• mutualfunds• accumulatingtrustfunds• controlledbankaccounts• lettersofcredit

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• certificatesoftitle• bonds• insurance.

Keypoints

• Guidanceisindraftstage.• Simplecalculation(flatrate)oflandfilloperationalfinancialassurance.• Twocomponentsoffinancialassurance:

- Operational- Closureandaftercare.

• ConsumerPriceIndexadjustmentforthefinancialassurance.• WiderangeoffinancialassurancetypesmaybeconsideredbyEPA.

3.2 NorthernTerritoryIntheNorthernTerritory,upuntil2013,thedefaultfinancialassurancesysteminvolvedthecalculationtherehabilitationliabilityforagivenperiodwith100%financialassuranceheldintheformofanunconditionalbankguarantee.In2013theMiningManagementAct(MMA)wasamendedtorequireoperatorstopayanannualnon-refundablelevyinadditiontolodgingasecuritybond(NTMinesandEnergy2015).

Underthe2013financialassurancesystem,miningprojectsnowlodge90%financialassuranceheldintheformofanunconditionalbankguaranteeorcashandpayanannuallevysetat1%ofthefinancialassuranceamount.

Thelevyprovidesfundsforaddressingtheterritory’slegacyminingliabilities,estimatedtobe$1billion.Thediscountof10%inthetotalsecurityamountpayablebyoperatorsistooffsetthecostofthelevytoindustry(NTMinesandEnergy2015).

Keypoints

• 90%financialassurancerequiredfromoperators.• Financialassurancerequiredintheformofanunconditionalbankguaranteeorcash.• Annuallevy1%offinancialassuranceamounttofundrehabilitationoflegacysites.

3.3 NewSouthWales

3.3.1 FinancialassurancesystemandlegacyminesTheNewSouthWales(NSW)financialassurancesystemprovidesfinancialassuranceforexistingminesaswellasgeneratingfundsforaddressingtheissueoflegacyminingprojects.Thesysteminvolvesthecalculationoftherehabilitationliabilityforagivenperiodwith100%financialassuranceheldintheformofanunconditionalbankguaranteeorcash(NSWIndustryandInvestment2010).Currentlyaround$1.8billionisheldinsecuritydeposits(NSWResources&Energy2015a).

Arehabilitationcostcalculationtoolisavailabletoassistincalculatingthesecuritydepositforasite.Partialreleaseofthesecuritydepositsmayoccurwhensuccessfulrehabilitationhasbeendemonstratedforpartofthesite(NSWResources&Energy2015a).

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Legacymines

NSWhasaDerelictMinesProgramtorehabilitatelegacyminingprojects.Therearecurrentlyanestimated573derelictminesitesinNSW.Itisunclearhowmuchfurtherrehabilitationworkneedstobedoneonthesesites(Pepperetal2014).

Levy

In2012,theNSWgovernmentintroducedanadministrativelevyontheminingandpetroleumindustriestomeetthecostsofcomplianceandenforcement,andtoimproveassessment,approvalsandcommunicationscapabilities(NSWResources&Energy2015b).

Theadministrationisanannualchargeequivalentto1%oftherehabilitationsecuritydepositandcanonlybeusedforthepurposeoffundingmineralsandpetroleumadministrativecostsandtheDerelictMineSitesFund(NSWResources&Energy2015a).

Keypoints

• 100%financialassuranceisheldbygovernment.• Financialassuranceisrequiredintheformofanunconditionalbankguaranteeorcash.• Arehabilitationbondcalculatorisavailabletoestimaterehabilitationliability.

• Thereisanannuallevyof1%ofthefinancialassuranceamounttofundadministrativecostsandtheDerelictMinesProgram.

3.3.2 MinesubsidencetrustfundTheMineSubsidenceAct1961providesfortheMineSubsidenceBoardtoprovidecompensationorrepairserviceswhereproperties,suchashouses,aredamagedbycoalminesubsidence.TheMineSubsidenceBoardisalsoresponsibleforreducingtheriskofminesubsidencedamagetopropertiesbyassessingandcontrollingthetypesofbuildingsandimprovementswhichcanbeerectedinMineSubsidenceDistricts(NSWMSB2015).

OtherimportantrolesoftheMineSubsidenceBoardincludetheeliminationofpublicandprivatedangercausedbyminesubsidence,fundingresearchprogramsthatmeettheexistingandfutureneedsofthecommunityandindustry,andtheprovisionofacomprehensiveandaccessibleadvisoryandtechnicalservice(NSWMSB2015).

Levy

ContributionsarepayabletotheMineSubsidenceCompensationFund(theFund)byproprietorsofcollieryholdings.Thecontributionis,foreachdollarofthelandvalueofthatcollieryholding,tobecalculatedattheratedeterminedforthatcollieryholding(NSWGovernment2012).

Keypoints

• Annuallevyofcollieryholding,primarilytofundcompensationofanydamagecausedbysubsidence.

• Fundscanbeusedtoidentify,completeandpromoteresearchprogramsthatmeettheexistingandfutureneedsofthecommunityandindustry.

3.3.3 CoalSeamGasindustryriskreviewTheNSWGovernmentChiefScientist&Engineerinvestigatedtheenvironmentalrisk,responsibilityandinsurancearrangementsfortheNSWcoalseamgas(CSG)industry(NSWCS&E2014).

Theinvestigationfoundthatthereisagapinpolicywhichdoesnotaddresslongtermorunforeseenenvironmentalimpactsandthatcompanyliabilitycoverandinsuranceisadifficultspacetoregulate.In

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addition,thereisnomechanismtoaddressunforeseenand/orlongtermenvironmentalimpactspotentiallyattributedtothesegasextractionactivities

Theinvestigationnotesthattherearethreeprimarylevelsofriskwhichneedtobeaddressedinthisregard:

• Expectedcosts–coveredbyasecuritydeposit(providedbyindustrytoGovernment)suchasupfrontcashorabankguarantee

• Suddenaccidentalpollution–coveredbyinsurance(providedbyindustry)

• Unforeseenandlongtermcosts–coveredbyenvironmentalfund(providedbyindustrytoGovernment)toaddressgovernmentcostsassociatedwithunforeseenandlongtermimpactsincludingintheeventofwellabandonmentorcompanyinsolvency.

Keypoints

• Separatefinancialinstrumentsforseparateriskscomponents:- expectedcostscoveredbysecuritydeposit- suddenaccidentalpollutioncoveredbyinsurance- unforeseenandlongtermcostscoveredbyanenvironmentalfund.

3.4 Queensland

3.4.1 FinancialassurancesystemThefinancialassurancesysteminQueenslandinvolvesthecalculationofrehabilitationliabilityforagivenperiodwith100%financialassuranceheldintheformofanunconditionalbankguaranteeorcashinlimitedcircumstances(DEHP2014a).InMarch2014,theDepartmentofEnvironmentandHeritageProtection(DEHP)introducedanewdiscountsystem.

Thegovernmentprovidesacalculator,similartotheNSWandVictoriancalculationtools,tohelpwithestimatingfinancialassurance(K.Brown,perscomm).

Discountsystem

Thediscountsystem,wherebyoperatorsreducetheamountoffinancialassurancepayable,isappliedtorewardlicenseeswhohavealowriskofdefault,lowincidenceofnon-compliance,andlowriskofenvironmentalharm(DEHP2014a).

Thekeyaspectofthisschemeisthatadiscountofupto30%isofferedbasedonmeetingfinancial,complianceandrehabilitationcriteria.Sinceitsinception,45outofthe229siteswithfinancialassurance(20%)haveappliedandbeenacceptedintothediscountscheme(K.Brown,perscomm).

Sitesthatdonotqualify,orhavenotapplied,forthediscountsystemremainonthe100%financialassurancesystem.

Pooledfundinvestigation

During2014,theQueenslandGovernmentinvestigatedthedevelopmentofapooledfundmodelsimilartotheWesternAustralianMRFanddevelopedadiscussionpaper.However,thepooledfundmodelreceivedinsufficientsupportandfurtherdevelopmentworkhasbeendiscontinued(K.Brown,perscomm).

Postclosurefund

Operatorsmayberequiredtomakearesidualriskpaymentafterlodginganapplicationtorequestcertificationofprogressiverehabilitationorapplicationtosurrenderanauthorityfortheresource,this

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paymentcoverstheQueenslandGovernment'spotentialrehabilitationcostsincurredbytheoperatorsresourceactivityafterfinancialassurancehasbeenreturned.Theadministeringauthoritywilldecideonthesizeoftheresidualriskpaymentbycalculatingallpotentialcostsofrehabilitating,restoringandprotectingtheenvironmentafteryourresourceactivityiscomplete(DEHP2015).

Keypoints

• Basecase100%financialassuranceheldbygovernment.• Performance-baseddiscountofupto30%ofthefinancialassuranceisavailablebasedonmeeting

financial,complianceandrehabilitationcriteria.• Financialassuranceisrequiredintheformofanunconditionalbankguarantee.• Afinancialassurancecostcalculationtoolisavailable.• Aresidualriskpaymentmayberequired.

3.4.2 AuditoffinancialassuranceIn2013,theQueenslandAuditOfficepreparedareportontheenvironmentalregulationoftheresourcesandwasteindustries(QAO2013).

Financialassurancerisk

TheAuditOfficefoundthat,inJune2013,thestateheldminingenvironmentalauthoritieswithfinancialassurancetotaling$4.45billion,upfrom$1.6billionin2008.AlthoughrecentinitiativesbytheDepartmentofEnvironmentandHeritageProtection(DEHP)hadincreasedthefinancialassuranceheldbythestate,theinvestigationfoundthat:

• Thefinancialassuranceheldisofteninsufficienttocovertheestimatedcostsofrehabilitation.

• Wherefinancialassuranceisinsufficienttocoverthecostsofrehabilitationtheresponsibledepartmentsarereluctanttotakeaction.

• ThereislittleevidenceofprogressiverehabilitationoccurringinQueensland.

• Asaresult,successfulenvironmentalrehabilitationisnotoccurringandthestateremainsexposedtounnecessaryandunacceptablefinancialrisks.

AuditOfficeFindings

TheAuditOfficefoundthat,tobeeffective,financialassuranceshouldbematerialenoughtopromotecompliancewithenvironmentalcomplianceconditionsandsufficienttocoverthecostsofrehabilitation,thuslimitingtheexposureofthestate.

Theinabilityofenvironmentalauthorityholderstomeetenvironmentalrequirementsmeanssomesitesbecomenon-operationalandgointo‘careandmaintenance’asameansofavoidingrehabilitation.

Wherethefinancialassuranceofafailedoperationisinsufficient,thegovernmentisleftwiththreeoptions:

• notrehabilitatingthesiteatall• rehabilitatingthesiteonlytotheextentcoveredbytheamountoffinancialassuranceheld• completelyrehabilitatingthesiteattaxpayer’sexpense.

Keypoints

• Tobeeffective,afinancialassuranceshouldbematerialenoughtopromotecompliancewithenvironmentalcomplianceconditionsandsufficienttocoverthecostsofrehabilitation.

• Departmentsarereluctanttotakeactionwherefinancialassuranceheldisinsufficient.

EXP.0010.001.0027



• ThereislittleevidenceofprogressiverehabilitationoccurringinQueensland.• Careandmaintenancemaybeusedasameansofavoidingrehabilitation.

3.5 SouthAustraliaThefinancialassurancesysteminSouthAustraliainvolvesthecalculationtherehabilitationliabilityforagivenperiodwith100%financialassuranceheldintheformofanunconditionalbankguarantee(DSD2015).

Postclosuretrustfund

InSouthAustralia,theregulatorshaverecognisedthatpotentialpostclosureliabilitiesneedtobeaddressedandthatareviewofthecurrentarrangementswillneedtobecarriedout.TheSaskatchewanInstitutionalControlProgram(seeSection3.10)isamodelthatwouldbeincludedinanybenchmarkingstudy(G.Marshallperscomm).

Costcalculation

MiningoperatorshavebeenreferredbygovernmenttoeithertheNSWorVictorianrehabilitationcostcalculatorstoestimaterehabilitationliability(T.Ward,perscomm).However,SouthAustraliaistrialingitsownrehabilitationliabilityestimationtooltomoreaccuratelydeterminetherehabilitationliabilities.TheSouthAustraliancalculationtoolincludesadditionalfeaturessuchasacostloadingbasedontheremotenessofoperations.

Keypoints

• 100%financialassuranceisheldbygovernment.• Financialassuranceisrequiredintheformofanunconditionalbankguarantee.• Afinancialassurancecostcalculationtoolisavailable.

3.6 TasmaniaThefinancialassurancesysteminTasmaniainvolvesthecalculationtherehabilitationliabilityforagivenperiodwith100%financialassuranceheldintheformofanunconditionalbankguaranteeorcash(MRT2013).

Legacies

ManyofthelargerminesitesinTasmaniaincludeareasofhistoricaldisturbance.Acidminedrainageisalegacyfromsomehistoricalworkings.Thesecuritydepositsonmostofthelargeroperationsareinsufficienttocoverthecostofthecurrenton-siteliabilities,intheformofbothcurrentdisturbanceandhistoricallegacies(MRT2013).

Transitionalfinancialassurance

MineralResourcesTasmania(MRT)considersthattherehabilitationliabilitiesatsomesitesmayamountto$20-30million,whilethesecuritydepositsheldareonlyfor$2-3million.MRTdoesnotconsideritpossibleforacompanytoincreasethefinancialassuranceten-foldoverashortperiodoftime.

TransitionalProvisionsprovideguidanceontheprocessandtimetableformatchingthesecuritydeposittotherehabilitationanddecommissioningliability(MRT2013).

EXP.0010.001.0028



Postclosurefund

Onesecuritydepositspecificallyexistsforthelong-termmaintenanceofadam.Miningcompanieshavebeenadvisedthatwhereatailingsdamistobeabandonedaportionofthesecuritydepositwillberetainedtoprovidefundsfordamsurveillanceandroutinemaintenance(e.g.whereacidgenerationwillbemanagedbyapermanentwatercover)(MRT2013).

Keypoints

• Aportionofasecuritydepositwillberetainedforthemaintenanceoftailingsdams.• Thereistransitionalfinancialassuranceforsiteswithhistoricallegacies.

3.7 WesternAustraliaUpuntil2013,thefinancialassurancesysteminWesternAustraliainvolvedthecalculationtherehabilitationliabilityforagivenperiodwith100%financialassuranceheldintheformofanunconditionalbankguarantee.TheDepartmentofMinesandPetroleum(DMP)inWesternAustraliaintroducedanewbondschemein2013,theMiningRehabilitationFund(MRF).

MiningRehabilitationFund

By1999,theincreasingcostsandstandardsofrehabilitationreducedthevalueoffinancialassuranceheldbygovernmenttoapproximately80percentofthetotalcostofrehabilitationindustry-wide.By2005thevalueheldhaddroppedtoapproximately25percent.Thegovernmentdecidedtomovetowardsfullliabilitysecurities;howevertheglobalfinancialcrisishitandalternativeoptionstoenhanceminingsecuritieswereinvestigatedresultingintheintroductionoftheMRF(Leybourne2014).

ThekeyaspectoftheMRFisanannuallevytobepaidbytenementholdersintoapooledminingrehabilitationfund,providingtheGovernmentwiththefundstocoverrehabilitationcostswhentenementholdersareunabletodoso(DMP2014).

TheMRFcalculatesthelevybasedonexistingenvironmentaldisturbancesatthetenementattheannualreportingdate.Thetotalrehabilitationliabilityestimateismultipliedby1%todeterminetheamountowedforeachtenement.

Theincentivefortenementholderswastheopportunitytohavethebankguaranteesheldagainsttheirtenementsretired;althoughforhighriskminesthe100%securitywillcontinuetoberetained.Thelevydoesnotabsolvetenementholdersoftherequirementtoproperlyrehabilitatetheirsites;however,itwillprovidegovernmentwithfundstocovercostswhenrequired(DMP2014).

Inaddition,interestgeneratedfromtheMRFwillbeusedtorehabilitateWesternAustralia’slegacyabandonedminesites.TheWesternAustralianabandonedminedatabaselistssome10,000abandonedminefeatures,andanabandonedminepolicycurrentlybeingdraftedwillprovideaframeworkforthesefeaturestobeconsideredandprioritisedforrehabilitation.

EllendaleDiamondMine

TheEllendalediamondmineinWesternAustralia,wentintoadministrationin2015,after$12.1millionworthofsecuritywasretiredinmid-2013aftersigninguptotheMRF(TheWestAustralian2015a).Anunexpectedwallslipinthemainpitinmid-2013forcedasuspensionofmining(TheWestAustralian2015b).TheliquidatorshavebeenunabletofindabuyerforEllendalewiththemajorbarrierbeingtheestimated“$28millionenvironmentalrehabilitationcost”attheKimberleymine.Theproblemwasexacerbatedbythecompany’s"failuretosetasiderehabilitationmoney”(TheWestAustralian2015a).

EXP.0010.001.0029



TheliquidatorsareseekingtoreturntheleasestotheDMP.TheresponsibilityformaintainingEllendale’senvironmentalobligations,aswellasrehabilitationliabilitiesestimatedat$28millionbythecompanyandupto$40millionbyDMP,ontotheMRF(TheWestAustralian2015c).

Keypoints

• Anannuallevyof1%offinancialassurancecontributedtoapooledgovernmentownedfund.• Thefundcanbeusedbygovernmentforrehabilitationonanytenementacrossthestate,including

abandonedsites.• Highrisksitesstillprovide100%financialassuranceasabankguarantee.

3.8 EuropeanUnionMiningWasteDirective

EuropeanCommissionDirective2006/21/EC,onthemanagementofwastefromextractiveindustries(theMiningWasteDirective),wasadoptedbytheEuropeanCommunityinMarch2006(EC2006).WastescoveredbytheDirectiveincludetailings,wasterock,overburdenandtopsoil.

Operatorsofwastefacilitiesarerequiredtolodgeafinancialguaranteeorequivalentsufficienttocoverthecostofrehabilitationofthelandinaccordancewithmemberstateprocedures.Theguaranteeshouldbeintheformofafinancialdeposit,includingindustry-sponsoredmutualguaranteefunds.Thesizeoftheguaranteeshallbeperiodicallyadjustedinaccordancewithanyrehabilitationworkneededtobecarriedout.

In2009,theECadoptedtechnicalguidelinesfortheestablishmentoffinancialguaranteesinaccordancewithArticle22oftheMiningWasteDirective(EC2009).Financialguaranteesarerequiredtoconsiderimpactsontheenvironmentandhumanhealth.Coststobeassessedincludethosenecessarytoensurelandrehabilitation,closureandafterclosure,includingpossibleafterclosuremonitoringortreatmentofcontaminants.

Keypoints

• Financialguaranteesarerequiredforfacilitiescontainingminewaste.• 100%financialassuranceisheldbymemberstategovernments.• Financialguaranteescanbeintheformofindustry-sponsoredmutualguaranteefunds.• Financialguaranteeswillneedtoconsiderfactorsincluding:

- humanhealthimpacts- postclosuremonitoringortreatmentofcontaminants.

3.9 ManitobaFinancialassurancesystem

ThefinancialassurancesystemintheProvinceofManitoba,Canada,enablesproponentswithcorporatecreditratingsthatmeetorexceedcertainstandardstoavoidthepaymentoffinancialassuranceentirelyortoavoiditforthefirsthalfoftheprojectlife(ManitobaIndustryTradeandMines2001).

Forproponentsthatdonotmeetthecreditratingcriteria,theManitobansystemisbasedona‘pre-definedliabilityproportionsystem’whereprojectsmakeannualcontributionstowardstheirfinancialassuranceuntilthefullamountisreached.

EXP.0010.001.0030



Thefullfinancialassuranceamountisbasedontheestimatedfullcostofrehabilitation,includinganyrequirementsforperpetualcare.

Theannualcontributionsarepre-definedproportionsofthefinancialassuranceamount.Theproportionsarerelatedtothelifeoftheprojectandcontributionsincreaseastheprojectproceeds(C.Liskeperscomm).

Forexample,aprojectwithafiveyearminelifepaysitsfirstinstallmentoffinancialassurance(6.3%)inyear1andreachesthefullamountoffinancialassuranceinyear4.Incontrast,aprojectwithaminelifeof15+yearspaysitsfirstinstallmentoffinancialassurance(1%)inyear1andreachesthefullamountoffinancialassuranceinyear14.

Themaximumperiodofdiscountis14yearsandalloperationsmusthavethefull100%liabilityheldatleastoneyearfromprojectend.

Keypoints

• Nofinancialassurancerequiredforproponentswithstrongcorporatecreditratings.• Largediscountinfinancialassuranceinearlyyearsofoperation.• Progressiveincreaseinfinancialassurancepaymentsbasedonapre-definedliabilityproportionsystem.• 100%financialassuranceheldpriortoclosure.

Financialassuranceincludesrequirementsforperpetualcare.

3.10 SaskatchewanTheProvinceofSaskatchewan,Canada,ismoreadvancedthanmostjurisdictionswhenitcomestoconsiderationofpost-closureliabilitiesandprovidingguidanceforpost-closurecostestimation.Thisincludes:

• EstablishingaprocessunderitsReclaimedIndustrialSitesAct2006,andrelatedregulationsandpoliciesforlong-termcareandmonitoringofdecommissionedminesites(NOAMI2010).

• Providingamethodfordeterminingadiscountinterestrateforuseinnetpresentvaluecalculationsaimedatestimatingliabilityforlong-term/perpetualpost-closuremanagement(SaskatchewanMinistryofEnergyandResources2009).

• Requiringscaledcontingencyfundingforunforeseenpost-closureevents(suchasastormsurgeonatailingsstoragefacility)tocovermaintenanceandmonitoring.Arateof10%isappliedtoprojectswithnotailingsorengineeredstructuresand20%forprojectswithtailingsorengineeredstructures(NOAMI2010).

InstitutionalControlProgram

In2007,theprovincelegislatedtoestablishandenforceanInstitutionalControlProgram.Theprogramimplementstheprocessforthelong-termmonitoringandmaintenanceofminesiteswhenmining/millingactivitieshaveended,remediationhasbeencompletedandapproved,andthesitesarereadytobetransferredtoprovincialresponsibility(SaskatchewanMinistryofEnergyandResources2012).

TheobjectivesoftheInstitutionalControlProgramareto:

• setouttheconditionsbywhichtheGovernmentofSaskatchewanwillacceptresponsibilityforlandthat,inconsequenceofdevelopmentanduse,requireslongtermmonitoringand,incertaincircumstances,maintenance

• ensurethattherequiredmonitoringandmaintenancearecarriedoutonthatland

• provideafundingmechanismtocovercostsassociatedwiththemonitoringandmaintenanceonthatland

EXP.0010.001.0031



• ensurethatcertainrecordsandinformationarepreservedwithrespecttothatland.

Post-closurefund

Toaddresstheprovince’sriskofacceptingsitesintocustodialresponsibilityandthecostsoffuturemonitoring,maintenanceandunforeseenfutureevents,theholderresponsibleforanindividualsiteestablishesdedicatedsite-specificfunding.Thefundsaremanagedbytheprovincebutarelegislatedandindependentfromprovincialrevenue(MinistryofEnergyandResources2012).

MonitoringandMaintenanceFund

AnownerapplyingforentryofaclosedsiteintotheInstitutionalControlProgramisrequiredtopaythefundanamountrepresentingthepresentvalueofthefuturecostsassociatedwiththemonitoringandmaintenanceofthesite.

UnforeseenEventsFund

AnownerapplyingforentryofaclosedsiteintotheInstitutionalControlProgramisrequiredtopaythefundanamountrepresenting10%ofthepresentvalueofthefuturecostsassociatedwiththemonitoringandmaintenanceofthesite(20%foraclosedsitewithtailingsorengineeredstructures).

Keypoints

• Governmentacceptsresponsibilityforlandthatrequireslong-termmonitoringandmaintenance.• Ownersuppliesfundingtoentertheprogramtocoverthefuturecostsassociatedwiththe:

- monitoringandmaintenanceofthesite- unforeseenevents.

3.11 NevadaTheStateofNevada,USA,isamajorcenterofgoldmining.ThemajorityofminingprojectsinNevadaaregovernedbyacombinationofFederalandStateLaw,as85%oflandinNevadaisfederallycontrolled(Sassoon,2008).NevadahassignedamemorandumofunderstandingwithFederalagenciestocoordinatetheadministrativeandenforcementobligationspertainingtotherehabilitationofminingland.

Theamountoffinancialassurancerequiredmustbebasedonanestimateofthecostofexecutingtheplanforreclamationwhichwouldbeincurredbythestateorfederalagencyhavingjurisdictionovertheland,andmustbesufficienttocoverthecostofallaspectsofphysicalclosureandincludeadministrativeandcontingencycosts(StateofNevada2015).

ThetypeoffinancialassuranceacceptedbyNevadaStateLawisspecifiedinRegulationNAC519A(StateofNevada2015).Theyincludethefollowing:

(a) Atrustfund

(b) Abond

(c) Anirrevocableletterofcredit

(d) Insurance

(e) Acorporateguarantee

(f) Anycombinationthereof.

Notmorethan75%oftherequiredfinancialassurancemaybesatisfiedbythecorporateguarantee,whichissubjecttoperiodicreviewandapprovalbytheAdministratoroftheDivision.Theremainingportionofthefinancialassurancemustbesatisfiedbyasuretyidentifiedinthissection(StateofNevada2015).

EXP.0010.001.0032



Followingsuccessfulclosurethefundsarereturnedtotheproponentunlessthereisalongtermoutstandingobligationsuchasperpetualwatertreatment.Inthiscaseaspecialarrangementmaybemadesuchasaself-perpetuatingfund(Sassoon2008).

Inaddition,theNevadaBureauadministersaBondPoolthatguaranteescompanieswithreclamationcostsuptoUS$3million(StateofNevada2015).

Incrementalpaymentsforthefinancialassuranceareacceptedaslongastheamountofthefundatanygiventimecoverstheoutstandingreclamationobligation.Thesepaymentsareusuallyonlyapplicabletolargerprojectsandpaymentwouldbemadeateachsubsequentphaseofoperations(Sassoon2008).

Keypoints

• Arangeoftypesoffinancialassuranceareaccepted.• Upto75percentoftherequiredfinancialassurancemaybesatisfiedbythecorporateguarantee.• Financialassurancecanincludefundingrequirementsforperpetualcare.• Incrementalpaymentsforthefinancialassuranceareaccepted.

3.12 NewZealandFinancialassurancesystem

ThefinancialassurancesystemforminingprojectsinNewZealandisregulatedattheprovincialgovernmentlevel.Typically,100%financialassuranceisrequiredandheldintheformofanunconditionalbankguarantee.

Section108oftheResourceManagementAct1991allowsforabondtoberequiredasaresourceconsentcondition,butprovideslittleadditionalinstruction.Accordingly,thedevelopmentofthebondsystemforminingprojectsinNewZealandhasbeendrivenprimarilybytheindustryinconsultationwithprovincialanddistrictcouncils(A.Paulperscomm).

Rehabilitationliabilityisestimatedbyanindependentexpertorbytheminingcompany’sexperts(andgenerallythenpeer-reviewedbyexpertsemployedorengagedbythecouncils)onasite-specificbasis.Nostandardcostcalculatorisused.QuantitativeriskassessmentshavebeenbroadlyadoptedinNewZealandasanimportantcomponentofrehabilitationliabilityassessments.Thequantitativeriskassessmentistypicallyundertakenjointlybetweenthemineoperatorsandtheprovincialcouncil.Residualrisksidentifiedintheriskassessment(suchaspitwallfailure)arecoveredbyinsurance(ibid).

Progressiverehabilitationisdrivenbycouncilenforcementandgoodindustrypracticeratherthaninresponsetofinancialassurance(ibid).

Probabilisticcostassessment

TheNewZealandbondsystemincorporatesprobabilisticcostassessmentinsettingfinancialassuranceamounts.Probabilisticassessmentsconsiderthecostuncertaintiesassociatedwithdifferentcomponentsofrehabilitation(i.e.theriskofcostsbeingeitherunderestimatedoroverestimatedforeachcomponent).AstandardstatisticaltechniquecalledMonteCarlosimulationisusedtoassesstheoveralleffectsuchuncertaintiescouldhaveonthetotalestimateofrehabilitationliability.

InNewZealand,thefinancialassuranceamountsarethensetbycouncilbasedonthe80percentile(andinsomecases,whereotherbeneficiariesareincluded,the95percentile,althoughthisisunderstoodtobechanging)costamount(A.Paulperscomm).

Financialassuranceamountssetinthismannerfactorintheriskofcostincreasesduringrehabilitationandtypicallyresultinmuchhigheramountsthanthedeterministicestimationsusedinmostjurisdictions(includingVictoria).

EXP.0010.001.0033



Post-closuretrustfunds

Post-closuretrustfundsareusedinNewZealandtopayfortheongoingmanagement,maintenanceandmonitoringoflandthathasbeenrehabilitatedandrelinquishedbacktogovernment.AnexampleistheMarthaTrustthathasbeenestablishedattheWaihiGoldminingoperations(OceanaGold2015):• TheMarthaTrustwilloverseeapost-closuretrustfundthatgeneratesannualinterest.Thisinterestwill

allowthetrusttomanage,monitorandmaintainthesiteinperpetuity.Inaddition,thetrustwillprovidemoneytotakeoutinsurancecoverforresidualrisksatthesite.

• WaihiGoldmaintainsacapitalisationbondduringoperationsinadditiontothecompany’srehabilitationbond.Thecapitalisationbondensuresthatasumofmoneywillalwaysbeavailabletoallowthetrusttocarryoutitsactivities,evenintheunlikelyeventthatminingfinishesearly,andthecompanywalksawayfromthesite.

• Onceclosureiscomplete,asumofmoneywillbehandedoverbythecompanytoallowthetrusttocarryoutitsfunctions,andthecapitalisationbondwillnolongerberequired.

ThetrusteesfortheMarthaTrustwillbenominatedatmineclosurewhenthetrustbecomeoperative.ThetrusteeswillincluderepresentativesnominatedbythedistrictandregionalcouncilsandthelocalMaoripeople(HaurakiCouncil2012).

Keypoints

• Financialassurancepracticehasbeenlargelyindustry-driveninconsultationwithProvincialCouncilsandotherparties.

• 100%financialassuranceheldbygovernment.• Financialassurancerequiredintheformofanunconditionalbankguarantee.• Probabilisticcostestimationusedinsettingfinancialassuranceamount.• Quantitativeriskassessmentsusedtoinformfinancialassuranceamountandresidualrisk.

• Post-closuretrustfundsestablishedtopayfortheongoingmanagement,maintenanceandmonitoringofrehabilitatedsites.

• AcapitalisationbondattheWaihiMineguaranteesthatmoneywillbeavailableforthetrustfundevenintheeventofoperatorinsolvency.

3.13 ExtractiveindustriesLevy

Insomejurisdictionsthereisnofinancialassuranceforaggregatequarryingsites(i.e.sandandgravelquarries).IntheProvinceofManitoba,Canada,thegovernmentscollectalevytopayforrehabilitation,calculatedbasedonpertonneofmaterialremoved,andthegovernmentusesthisfundingtoco-ordinateandpayforrehabilitation(C.Liske,perscomm).

Keypoints

• Productionlevycontributestogovernmentownedpooledfund.• Pooledfundcanbeusedbygovernmentforrehabilitationonanytenement.• Governmentco-ordinatesrehabilitation.

EXP.0010.001.0034



4 Assessmentoffinancialmechanisms

4.1 AdequacyofcurrentrehabilitationbondsTable1showstherehabilitationbondscurrentlyheldfortheHazelwoodMine,theYallournMineandtheLoyYangMine($15million,$11.46millionand$15million,respectively).Table1alsoshowstheoperators’self-reportedestimatesofcurrentrehabilitationliability,asreportedintheir2015Schedule19AnnualActivityandExpenditurereturns($73.4million,$46millionand$53.7million,respectively).

Table1 Currentbondand2015estimatedliabilities

Mine Totalareadisturbed

ha

Rehabilitationbondheld

$

Estimateofrehabilitationliabilityfrom2015returns

$

Hazelwood 2543 $15,000,000 $73,400,000

Yallourn 1768 $11,460,000 $46,000,000

LoyYang 1160 $15,000,000 $53,700,000

Itisclearfromthisinformationthattherehabilitationbondsaresubstantiallybelowcurrentestimatesofrehabilitationliabilityateachofthethreesites.

Inadditiontheself-assessedamountsmaybemuchlowerthantheactualcostofrehabilitation.Incidentsattwooftheminesoverthepasteightyears,includingthe2014HazelwoodCoalMineFire,the2012MorwellRiverdiversionfailureattheYallournMine(EER2014)andthe2007YallournMineBatterfailure(VictorianGovernment2008)haveraisedconcernsaboutgeotechnical,hydrogeologicalandfirepreventionissues.

TheYallournMineBatterfailureledtotheamendmentofSection7CoftheMRSDActtoprovidefortheMinisterforEarthResourcestodeclareaspecificmineorquarrywheretherearegeotechnicalorhydrogeologicalfactorswithinthemineorquarrythatposeasignificantriskto:

a) publicsafetyb) theenvironmentc) infrastructure.

TheLatrobeValleycoalminesweredeclaredunderSection7CandaTechnicalReviewBoardcomprisedofeminentAustralianandinternationaltechnicalexpertsappointedtoactinareviewcapacity.

Whilethe2015self-reportedestimatesofrehabilitationliabilitybytheminesdofactorin,tosomeextent,theemergenceofthegeotechnical,hydrogeologicalandfirepreventionriskfactors,thereisstilluncertaintyregardingthebestwayofmanagingclosuretominimisetheseissues.Itislikelythatfurtherincreasesinestimatedrehabilitationliabilitywilloccurastheseriskfactorsarefurtherinvestigatedandresolved.

Forexample,Hazelwood’s2014AnnualActivityandExpenditureReturnestimatedarehabilitationliabilityofbetween$46millionand$91millionbaseduponwhetherparticularbatterstabilisationworkswouldberequired(VictorianGovernment2015).Thisillustratesthesensitivityofrehabilitationliabilityestimatestothetechnicaluncertaintyassociatedwiththeseriskfactors.

EXP.0010.001.0035



ARehabilitationBondReviewProjectcommissionedbyDEDJTRhasrecentlybeencompleted(VictorianGovernment2015).TheobjectiveoftheprojectwastounderstandandtoestimatetherehabilitationliabilitiesforthethreeLatrobeValleycoalmines.Thisworkwillprovideindependentestimatesofrehabilitationliabilitythatcanfurtherinformdiscussionoffinancialmechanismforrehabilitation.

4.2 FutureuncertaintiesandrisksAnassessmentoffinancialmechanismsforrehabilitationneedstoconsiderthecurrentminelifeexpectanciesoftheLatrobeValleycoalminesaswellasthepotentialforprematureclosure(plannedorunplanned)tooccur.Thecurrentestimatedlivesofthethreeminesbasedoncurrentreservesofcoalare:• Hazelwood–2031• Yallourn–2032• LoyYang–2048

Basedontheseestimates,thereisbetween15and32yearsremainingtoresolvethecurrenttechnicalissueswithrehabilitation,undertakefurtherprogressiverehabilitationandplanforfinalclosure.

Inaddition,theminesandpowerstationsoftheLatrobeValleyareclassifiedasessentialservicesfortheStateofVictoria.TheyhavethereforebeenpreviouslyconsideredtooimportanttotheState’spowersupplyforthegovernmenttoallowthemtoclose.

However,thefutureofbrowncoalasasourceofenergyiscurrentlysubjecttoagreaterthanusualdegreeofmarketuncertaintyduetofactorssuchas:

• fallingdemandforelectricityinsouth-easternAustralia,whichhasledtooversupplyinthenationalelectricitymarket(AEMO2015)

• competitionfromtherenewableenergysectorwhichisgoingthroughaperiodofrapidtechnologicaladvancement(Parkinson2014)

• thepotentialforAustraliatore-introducecarbonpricingasafutureresponsetoclimatechange.

Giventhesemarketuncertainties,inparticularthefallingdemandforelectricityandcurrentovercapacity,theriskofoneormoreofthethreeminesendingoperationspriortotheexhaustionofcurrentreserveshastobetakenintoconsiderationwhenassessingfinancialmechanismsforrehabilitation.Ifthecurrentoversupplyofelectricityinthenationalelectricitymarketcontinues,itmaybepossibleforoneofthepowerstationstostopoperatingwithoutcausingashortageofsupply.

4.3 Assessmentoffinancialmechanisms

4.3.1 OptionsassessedArangeofoptionsforalternativemechanismstoensuretherehabilitationoftheLatrobeValleyCoalMineshavebeenassessed.Theoptionswereassessedintermsoftheirpracticality,sustainability,efficiencyandeffectiveness,asrequestedunderTermsofReference10(c),and,whereapplicable,againstthetenguidingprinciplesforagoodsecuritybondmodel(seeSection2.1).

Theoptionswereassessedunderthreecategoriesofactualorpotentialclosurecosts:

• Expectedclosurecosts–basedoncurrentandfuturerehabilitationplansandrehabilitationbondestimationsapprovedbyDEDJTR.Theassessmentofoptionsunderthiscategoryincludeconsiderationoftheirpotentialtopromoteprogressiverehabilitation.

• Longterm,post-closurecosts–associatedwithactivitiessuchasongoingwatertreatment,aquiferdewatering,maintenance,monitoringandinspection.

• Unplannedpost-closurecosts–arisingfromunpredictableissues,suchasthediscoveryofadditionalliability,thefailureoftechnicalsolutionstoresolveclosureissues,orthestructuralfailureoflandforms.

EXP.0010.001.0036



Theconsiderationofthreecategoriesofcostsisconsistentwithcurrenttrendsinfinancialassurancemanagementandallowsgreaterflexibilityinaddressingthevariouscostrisksassociatedwithmineclosure.

Thealternativeoptionsassessedrelatingtoexpectedclosurecostsare:





• Insurance-based–usinginsurancetoprovidesupplementaryfinancialassurancecoverage.• Pooledfund–usingapooledfundtoprovidesupplementaryfinancialassurancecoverage.

Theoptionsassessedrelatingtounplannedpost-closurecostsare:• Unplannedeventsinsurance–usinginsurancetomitigatetheriskofpost-closureunplannedcosts.• Unplannedeventsfund–usingatrustfundtoprovidefundsforunplannedpost-closurecosts.

Theoptionassessedrelatingtolongterm,post-closurecostsis:


Inaddition,theissueofrehabilitationliabilitycalculationisbrieflydiscussed,asallfinancialassurancesystemsarereliantontheaccurateestimationofliability.

4.3.2 Expectedclosurecosts

Single-stepincrease

Underthisoption,eachoftheLatrobeValleycoalmineswouldberequiredtoincreasetheircurrentrehabilitationbondinasingle-steptoequalthecurrentrehabilitationliability.Increasingordecreasingrehabilitationbondsfollowingare-calculationofrehabilitationliabilityisstandardpracticeunderthecurrentrehabilitationbondsystem.

Forexample,iftheregulatoracceptedtheoperators’estimatesofrehabilitationliabilityassubmittedinthe2015rehabilitationliabilityassessments,theincreasewouldbeasshowninTable2.Insuchacase,thebondswouldincreasebyfactorsofbetween3.6and4.9.

Table2 Potentialrehabilitationbondincrease

Coalmine Currentrehabilitation

bond($million)

Rehabilitationliabilityestimatedin2015return($million)

Potentialbondincrease($million)

Potentialbondincreasefactor

Yallourn $11.46 $46.00 $34.54 4.0

Hazelwood $15.00 $73.40 $58.40 4.9

LoyYang $15.00 $53.70 $38.70 3.6

TheregulatormayrequesthigherbondsthantheincreasedamountsshowninTable2.Forexample,higherbondscouldberequestedifthecurrentrehabilitationplanswereupdatedtoincorporatemoreonerousrehabilitationrequirements.Insuchacase,thebondincreasefactorswouldbeevenhigher.

EXP.0010.001.0037



Theincreasedrehabilitationbondcouldcontinuetobeprovidedbyanunconditionalbankguarantee.Alternatively,acashguaranteecouldbeprovided.However,provisionofacashbondwouldbeachangeinpractice,ascashpaymentsareproposedtoonlybeacceptedforbondsupto$20,000intherehabilitationbondpolicyreformpackage(VictorianGovernment2015)(seeSection3.1.1).

TheincreaseofbondstoachievefullfinancialassurancecoveragewouldcovertheStatefor100%oftheestimatedrehabilitationliability.However,evenwiththeaddedincentiveofreducingabondthatwasnowmuchhigher,operatorsmaybereluctanttoundertakesubstantialprogressiverehabilitationforthefollowingreasons:

• Thecostofrehabilitationtoreducethebondislikelytobegreaterthanthefinancialbenefits(e.g.reducedcostofcapitalandlowerbankguaranteemaintenancefees)thatcomefromhavingareducedbond.

• Intheabsenceofagreedendlandformsandendlandusesforthesites,andwithcurrenttechnicaluncertaintiesconcerningrehabilitationmethods,thereisariskthatreworkcouldberequiredifsomeaspectsofrehabilitationareundertakenprematurely.

Thecosttooperatorsofacashbondwouldbesubstantiallymorethanthecostofmaintainingabankguaranteeofequivalentvalue,butwouldcreateastrongerfinancialincentiveforoperatorstoundertakeprogressiverehabilitation.

Theadvantagesofthesingle-stepincreaseoptioninclude:• TheStatewouldbecoveredfor100%ofagreedrehabilitationliability.

• TheoptionwouldbeconsistentwiththecurrentadministrationoftheVictorianrehabilitationbondsystem.

• Abondsetat100%oftheestimatedrehabilitationliabilitymayprovidefinancialincentiveforoperatorstoundertakeprogressiverehabilitation.

Thedisadvantagesofthesingle-stepincreaseoptionincludethefollowing:

• Operatorswouldbesubjecttoalargeone-offbondincreasethatcouldpotentiallycreatefinancialhardship.Thegreaterthegapbetweenthecurrentrehabilitationbondandtheagreedrehabilitationliability,thegreaterthepotentialforfinancialhardship.

• Thecostofrehabilitationtoreducethebondislikelytobegreaterthanthefinancialbenefitsthatcomefromhavingareducedbond.

Multi-stepincrease

Underthisoption,eachoftheLatrobeValleycoalmineswouldberequiredtoincreasetheircurrentrehabilitationbondovertimebyanagreednumberofincrementsuntilitequaledtherehabilitationliability.Thepaymentscheduleandpercentageswouldbeagreedbetweentheregulatorsandoperators.Thegreaterthegapbetweenthecurrentrehabilitationbondandtheestimatedrehabilitationliability,themoreattractivethisoptionislikelytobetooperators.

TheuseofabondimplementationplantoprogressivelyincreasefinancialassurancecoverageisallowedunderfinancialhardshipprovisionsinSection8oftheDEDJTRrehabilitationbondguidelines(DEDJTR2015).

Forexample,theoperatorscouldberequiredtoincreasetheamountoftheirrehabilitationbondoverfiveevenlyspacedincrementalpayments.OnesuchpaymentscheduleisshowninTable3withpaymentsoccurringeverysecondyearovereightyears.IftherehabilitationliabilitywasrecalculatedorCPI-adjustedduringtheperiodofthepaymentscheduleandthebondamountincreasedordecreased,thentheindividualpaymentamountswouldalsovary.

EXP.0010.001.0038



Table3 Exampleofmulti-stepincreaseoption

Coalmine Currentrehabilitation

bond

Bondincrease*($million)

Finalrehabilitation

bond ($million) Initial

(1/5ofremaining

gap)

Year2(1/4of

remaininggap)

Year4(1/3of

remaininggap)

Year6(1/2of

remaininggap)

Year8(allof

remaininggap)

(100%ofliability)($million)

Yallourn $11.46 $6.91 $6.91 $6.91 $6.91 $6.91 $46.00

Hazelwood $15.00 $11.68 $11.68 $11.68 $11.68 $11.68 $73.40

LoyYang $15.00 $7.74 $7.74 $7.74 $7.74 $7.74 $53.70

*bondincreasewouldbecalculatedbasedonremaininggapattimeofeachpayment

Theincreasesinrehabilitationbondscouldcontinuetobeprovidedbyunconditionalbankguarantees.Alternatively,cashguaranteescouldbeprovidedbutthiswouldrequireachangeingovernmentpracticeandrepresentasubstantialcostincreaseforoperators.

Theadvantagesofthemulti-stepincreaseoptioninclude:

• TheStatewouldbecoveredfor100%ofagreedrehabilitationliabilitybytheendofthescheduledperiodforbondincreases.

• ConsistentwiththecurrentadministrationoftheVictorianrehabilitationbondsystem.• Reducethefinancialhardshipforoperatorsthatmaybeassociatedwiththesingle-stepincreaseoption.

• Providesopportunityforoperatorstoundertakeprogressiverehabilitationtoreducetheirrehabilitationliabilitybeforefullfinancialassurancecoverageisreached.

• Providesgreaterfinancialcertaintytooperatorswhowouldbebetterabletoplanfortheregularincreasesinbondamount.

Thedisadvantagesofthemulti-stepincreaseoptioninclude:

• TheStatewouldbeexposedtorehabilitationdefaultriskforlongerperiodthanunderthesingle-stepincreaseoption.

• Therewouldbeariskofmineclosure(plannedorunplanned)occurringbeforefullfinancialassurancecoverageisachieved.Inthecaseofearlyclosure(asdistinctfromrehabilitationdefault)itwouldstillbeexpectedthattheoperatorwouldundertakerehabilitationtothevalueofthefullamountoftherehabilitationliability.However,anyclosureofaminewherefinancialassuranceislessthantherehabilitationliabilityrepresentsarisktotheState.

• Thecostofrehabilitationtoreducethebondislikelytobegreaterthanthefinancialbenefitsthatcomefromhavingareducedbond.

Bonddiscount

Underthisscenario,eitherthesingle-stepoptionorthemulti-stepoptioncouldbecoupledwithaperformance-basedbonddiscount,suchasthetwo-trackbondmodelthatDEDTRisimplementingaspartofitsrehabilitationbondpolicyreformpackage(VictorianGovernment2015)(seeSection3.1.1).

The25%bonddiscount,availableunderthetwo-trackbondmodel,wouldbemadeavailabletotheLatrobeValleycoalmineoperatorsprovidedtheymeettheeligibilitycriteria.Ratherthansteppinguptofullfinancialassurancecoverage,theoperatorswouldinitiallyonlyberequiredtostepupto75%financialassurancecoverage.Fullfinancialassurancecoveragewouldonlyberequiredoncetheoperationsceasedproduction,providedtheycontinuedtomeettheeligibilitycriteria.Iftheoperationsfailedtomeettheeligibilitycriteriaatanytime,theywouldforfeitthe25%bonddiscount.

EXP.0010.001.0039



Notehoweverthathigh-risksitesincludingcoalminesareexpresslyexcludedfromtheproposedtwo-trackbondmodel(VictorianGovernment2015).

Theadvantagesofthebonddiscountoptioninclude:

• ConsistentwithproposedreformstotheadministrationoftheVictorianrehabilitationbondsystem(exceptfortheexclusionofhighrisksites).

• Reducesfinancialhardshipforoperatorsthatmaybeassociatedwithasingle-stepincreasetofullfinancialassurancecoverage.

Thedisadvantagesofthebonddiscountoptioninclude:• TheStatewouldbeexposedtorehabilitationdefaultriskduringtheperiodthediscountapplies.

• Ariskofmineclosure(plannedorunplanned)occurringbeforefullfinancialassurancecoverageisreached(asdescribedundermulti-stepincreaseoptionabove).

• Thecostofrehabilitationtoreducethebondandachieveeligibilityforthe25%discountislikelytobegreaterthanthefinancialbenefitsthatcomefromhavingareducedbond.

Trustfundforrehabilitation

Atrustfundforrehabilitationcouldbeestablishedbytheoperatorstosupplementtheuseofrehabilitationbonds.

TheLoyYangComplexAgreement(LYCA)isanexampleofsuchatrustfund(EME,LYP&SECV1997).UnderthetripartiteAgreementbetweentheLoyYangApowerstation,LoyYangBpowerstationandtheStateofVictoria,rehabilitationcostsfortheLoyYangMinearetobeproportionatelyassignedtotheusersofcoalfromthemine.Thethreepartiesaretoopenajointbankaccountwithatradingbank.Contributionswillbepaidintothataccountoranirrevocablestandbyletterofcreditwillbeprovided.Contributionstothetrustfundaretocommencein2023withatenthoftherequiredcontributionpaidineachyearuntil2032.Thefundwouldthereforematchthefinalrehabilitationliabilitymorethan10yearspriortotheplannedclosurein2048(AGL2015).

AtrustfundsuchastheLYCA,withthegovernmentasasignatory,providesadditionalassurancetotheStatethatfundswillbeavailabletoundertakesiterehabilitation.

Atrustfunddoesnotprovidethesamelevelofguaranteeasarehabilitationbondsupportedbyanunconditionalbankguarantee.However,ifestablishedappropriately,itsitstowardsthesecureendofthespectrumofrisk.Therisksassociatedwithatrustfundcanbeminimisedbystepsincluding:• usingthegovernmentasasignatory• investingthemoneyinabank• guaranteeinglatercontributionsbyanunconditionalbankguarantee• monitoringandreportingonfundlevels

• settingupthefundsothatifanyofthesignatoriesbecomesinsolvent,themoneyisavailabletotheregulatorandisnotseizedbyothercreditors.

Theadvantagesofthetrustfundforrehabilitationoptioninclude:

• Ifestablishedcorrectly,thefundswouldbeprotectedevenintheeventofoneofthesignatoriesbecominginsolvent.

• Demonstratesoperatorcommitment.• Increasesthelevelofassurancethatfundswillbeavailabletoundertakesiterehabilitation.• Canbeusedtosupplementotherfinancialassuranceinstruments,suchasrehabilitationbonds.

• Asfundscanonlybeusedforrehabilitation,thisoptionprovidesincentiveforprogressiverehabilitationtobeundertaken.

Thedisadvantagesofthetrustfundforrehabilitationoptioninclude:

EXP.0010.001.0040



• Ifthefundwasnotestablishedcorrectly,thereisariskitcouldbeseizedbycreditorsintheeventofoneofthesignatoriesbecominginsolvent.

• Ariskofmineclosure(plannedorunplanned)occurringbeforethefundequalstherehabilitationliability.

• Anopportunitycostisincurredbyoperatorsbecausethefundsorfinancialinstrumentsheldintrustcannotbeputtoalternativeuse.

• Additionalfinancialimpositionontheoperator.• Additionaladministrativeburdenforregulatorandoperator.

Insurance-based

Theinsurance-basedoptionwouldallowinsurancetoreplaceorsupplementtheuseofrehabilitationbonds.

Forexample:

• Insurancecouldbetakenoutbyoperatorstoinsureagainsttheriskthatrehabilitationcostsexceedtherehabilitationbond.

• Insurancecouldbetakenoutbygovernmenttocoverknowngapsbetweenrehabilitationliabilityandtherehabilitationbond(suchasunderadiscountbondsystem)intheeventofrehabilitationdefaultbytheoperator.

• Insurancecouldbetakenoutbygovernmenttoguaranteethatminerehabilitationobligationsaremetintheeventofdefaultbyanoperator.However,acommercialinsuranceproductofthistypedoesnotappeartobewidelyavailableintheAustralianmarket.

Insuranceistypicallyheldtoguardagainstsuddenandaccidentalevents,andgradual,slowtodeveloppollutionevents.

Amoralhazardmayarisewiththeuseofinsurancebyoperatorswherethecostofdefaultingonrehabilitationislowerthanthecostofundertakingrehabilitation.However,theinsurerwillmitigatethisriskbythewordingandconditionsoftheinsuranceagreement.

Inadditiontoinsurance,asuretybondissuedbyaninsurancecompanycouldbetakenoutbytheoperatortoprovidefundsintheeventofrehabilitationdefault.Thegovernmentcouldbenamedasabeneficiaryofthesuretybond.

Assuretybondsaretypicallytakenoutforaspecificperiodoftime,theamountofcoveragecanbeamendedattheendofeachcontractperiod.However,theinsurerisalsogivenanopportunitytoreassesstherisksunderthecontractwhichmayresultinpremiumincreases.

Theadvantagesoftheinsurancebasedoptioninclude:

• Theoptioncouldsupplementotherfinancialassuranceinstruments,suchasrehabilitationbonds,toreduceoverallrisk.

• Thegovernmentcouldbeprovidedwithrehabilitationfundsintheeventofrehabilitationdefaultbytheoperator.

Thedisadvantagesoftheinsurancebasedoptionincludethefollowing:• Theoptiondoesnotprovideincentiveforprogressiverehabilitation.• Insuranceproductsmaybeunavailable.• Insurancepremiumsmaybeexpensiveandaresubjecttofluctuation.• Thereisariskthattheinsurerwillnotpayout.• Potentiallegalcostsinvolvedinmakinganinsuranceclaim.• Potentialformoralhazard.

EXP.0010.001.0041



• Additionalfinancialimpositionontheoperator.• Additionaladministrativeburdenfortheregulatorandoperator.

Pooledfund

Underthisoption,thethreeoperatorswouldpayanannuallevyintoagovernment-ownedrehabilitationfund.Thefundcouldbeusedbygovernmenttohelppayforrehabilitationatanyofthethreecoalminesintheeventoftheirdefault.Inreturn,theoperatorswouldbeallowedtomaintainareductionintheirrehabilitationbond.

UsingtheNorthernTerritoryasanexample(seeSection3.2),theoperatorswouldberequiredtopayanannuallevyequalto1%oftheirrehabilitationbond,butwouldreceivea10%reductionintheirfinancialassuranceascompensation.Othercombinationsofbondreductionandlevyamountcouldbeconsidered.

Pooledfundsareonlyviablewhen:• Therearemanyparticipants,enablingasmalllevytogenerateasizeablefund.• Theparticipantsrepresentadiversityofriskprofilesminimisingtheriskofmultiplepayouts.

Withonlythreeparticipants,ahighlevywouldberequiredtogenerateasizeablefund.Evenasmalllevywouldincreasethefinancialburdentotheoperators,unlessaccompaniedbyasubstantialreductioninthepercentageoffinancialassurancecoveragerequired-whichinturnwouldthenleavetheStateexposedtorehabilitationdefaultrisk.Inaddition,thethreeparticipantsdonotrepresentalargediversityofriskprofiles.

4.3.3 Unplannedpost-closurecostsThetwooptionsoutlinedbelowwouldbedesignedtomitigatetherisktogovernmentofunplannedcostsfollowingsiterelinquishment.

ThegeotechnicalandhydrogeologicalriskfactorsthatledtotheminesbeingdeclaredunderSection7CoftheMRSDActwillremainpost-closure.Theseriskfactorsalongwithotherresidualriskssuchasfirecouldresultinunplannedpost-closurecosts.

TheperiodremainingbeforetheclosureoftheLatrobeValleycoalminesprovidesanopportunityforresearchandrehabilitationtrialstobeundertakentobetterunderstandandmitigatekeyclosureriskfactors,suchasthelongtermstabilityofpost-closurelandforms.Suchresearchcouldreducetheriskofsignificant,unplannedpost-closurecoststotheextentthatfinancialassuranceforunplannedeventsisnotrequired.

Unplannedeventsinsurance

Theunplannedeventsinsuranceoptionwouldinvolvetheuseofinsurancetomitigatetherisktogovernmentofunplannedpost-closurecosts.

UsingNewZealandasanexample(seeSection3.12),insurancecouldbeobtainedtocoverresidualclosurerisks.Theinsurancecouldbetakenoutbygovernment,orbyapost-closuretrustfundestablishedtomanagethesite.

Theoperatorcouldberequiredtomaintainaseparatebondduringoperations(suchastheNewZealandcapitalisationbond)thatwouldguaranteetheavailabilityofmoneyforpost-closureinsuranceintheeventofoperatorinsolvency.Uponsiterelinquishment,theoperatorwouldprovidefundstopayforthepost-closureinsuranceandthe‘capitalisation’bondwouldbereturned.

Theregulatorandoperator,withadvicefromindependenttechnicalspecialists,couldidentifytheresidualrisksforwhichinsuranceisrequiredanddeterminetheappropriateamountofcover.TheexistingTechnicalReviewBoardestablishedtooverseetechnicalissuesattheLatrobeValleycoalminesmaybesuitablefor

EXP.0010.001.0042



overseeingthisprocess.Aquantiativeriskassessmentprocesscouldbeusedtoidentifyandquantifytheresidualrisks.

Theadvantagesoftheunplannedeventsinsuranceoptioninclude:• Statewouldbeaffordedcoverforresidualpost-closurerisksthatcouldresultinunplannedcosts.• Insuranceisanappropriatefinancialinstrumentformanagingunplannedcosts.• Provisioningforpost-closurecostshelpstheoperatorrelinquishthesite.

• TheoptionisconsistentwiththerationalebehinddeclaringtheLatrobeValleycoalminesunderSection7CoftheMRSDAct.

• CoulddrawuponexpertiseofexistingTechnicalReviewPanel.• Aseparatebondduringoperationscouldguaranteetheavailabilityofmoneyforpost-closureinsurance

intheeventofoperatorinsolvency.

Thedisadvantagesoftheunplannedeventsinsuranceoptioninclude:• Additionalfinancialimpositionontheoperator.• Additionaladministrativeburdenforregulatorandoperator.

• Potentialdifficultyinidentifyingandquantifyingriskstobeinsuredagainstandappropriatelevelofcover.

• Uncertainregulatorymeansforimplementingoption.

Unplannedeventsfund

Theunplannedeventsfundoptionwouldinvolvetheestablishmentofafundtomitigatetherisktogovernmentofunplannedpost-closurecosts.

UsingtheSaskatchewanInstitutionalControlProgramasanexample(seeSection3.10),anoperatorseekingtorelinquishasitewouldpayanamountintoatrustfundtocoverthepresentvalueofthefutureestimatedcostsassociatedwithunplannedpost-closureevents.InthecaseofSaskatchewan,therequiredcontributionamount(forsiteswithtailingsorengineeredstructures)isequalto20%ofthevalueofthefutureestimatedcostsassociatedwiththemonitoringandmaintenanceofthesite.

Alternatively,theregulatorandoperator,withadvicefromindependenttechnicalspecialists,couldidentifytheresidualrisksthattheunplannedeventsfundisrequiredtocover.Anestimateoftherequiredsizeofthefundcouldbedevelopedonthisbasis.TheexistingTechnicalReviewBoardmaybesuitableforoverseeingthisprocess.Aquantitativeriskassessmentprocesscouldbeusedtoidentifyandquantifytheresidualrisks.

Thetrusteesoverseeingthetrustfundcouldcompriserepresentativesfromstateandlocalgovernmentsandthelocalcommunity,alongwithtechnicalexperts.

Theoperatorcouldberequiredtomaintainaseparatebondduringoperationstoguaranteetheavailabilityofmoneyfortheunplannedeventsfundintheeventofoperatorinsolvency.Uponsiterelinquishment,theoperatorwouldprovidefundstopaytothepost-closurefundandthebondwouldbereturned.

Thetrustfundcouldpotentiallybeacommonfundproportionatelycontributedtobyeachofthethreecoalmines.However,ifacommonfundwasestablishedtherewouldbeariskthatunplannedeventsatasinglesitecoulddraintheentirefund.

Theadvantagesoftheunplannedeventsfundoptioninclude:• TheStatewouldbeaffordedcoverforresidualpost-closurerisksthatcouldresultinunplannedcosts.• Provisioningforpost-closurecostshelpstheoperatorrelinquishthesite.• TheoptionisconsistentwiththerationalebehinddeclaringtheLatrobeValleycoalminesunderSection

7CoftheMRSDAct.• ThereisoptiontodrawuponexpertiseofexistingTechnicalReviewPanel.

EXP.0010.001.0043



• Aseparatebondduringoperationscouldguaranteetheavailabilityofmoneyfortheunplannedeventsfundintheeventofoperatorinsolvency.

Thedisadvantagesoftheunplannedeventsfundoptioninclude:• additionalfinancialimpositionontheoperator• additionaladministrativeburdenforregulatorandoperator• potentialdifficultyinidentifyingandquantifyingrisksanddeterminingsizeoffund.

4.3.4 Post-closuretrustfundoption

Context

MiningprojectsinAustraliaarefindingitincreasinglydifficulttomeetregulatoryrequirementsforsiterelinquishmentandtimeframesforthetraditionalpost-closuremaintenanceandmonitoringperiodhaveincreaseddramatically.InQueensland,forexample,theDEHPadvisesthatmanymajorminingsiteswillrequireupto50yearsofpost-rehabilitationmonitoringbeforerelinquishment(QueenslandAuditOffice2014).

Long-termpost-closuremanagement,maintenanceandmonitoringoftheLatrobeValleycoalmineswillalmostcertainlyberequiredduetothetimerequiredtoachievegeotechnicalandhydrogeologicalstabilityatthesites.

Thefinancialassurancethatappliesduringmineoperationsmaynotthemostappropriateassurancetocoverpost-closurerisksandcanleaveminingcompaniesresponsiblefornon-productiveassetsformanydecades.Atmanyminingsites,post-closurecostsarelikelytobeincurredin-perpetuity.

TheLeadingPracticeSustainableDevelopmentProgramMineClosureandCompletionHandbook(DITR2006)suggeststhatoperatorsshouldconsidertheestablishmentoftrustfundorotherfinancialarrangementthatwouldgenerateincomefortheongoingmanagementofrehabilitatedareas,ifthismechanismprovidesameansforearlyrelinquishment.

Fundcharacteristics

Apost-closuretrustfundcouldbeestablishedtoprovidefundstocoverlong-termpost-closurecosts,includinganyin-perpetuitymanagementcosts.Thepost-closuretrustfundproposedfortheStockmanProject(seeSection3.1.1),althoughnotyetimplemented,providesaprecedentforestablishingsuchatrust.Theinterestgeneratedbythetrustwouldbesufficienttofundongoingpost-closureactivities.

Thesizeofafundforthispurposewouldneedtobebasedonthemanagement,maintenanceandmonitoringprogramnegotiatedbetweentheregulatorandoperator,potentiallyinvolvingtheTechnicalReviewBoardorotherexperts.

Ifthefundwasalsodesignedtomeetseparatecommunityobjectives,thentheseobjectivesandanestimateofassociatedcostsandcontributionscouldbenegotiatedbetweentheoperators,communityrepresentativesandthevariouslevelsofgovernment.

Thetrusteesoverseeingthetrustcouldcompriserepresentativesfromstateandlocalgovernmentsandthelocalcommunity.ThetrusteescouldreceiveadvicefromexpertssuchastheTechnicalReviewBoard.

Operatorscouldberequiredtomaintainabondduringoperationstoguaranteetheavailabilityofmoneyforthepost-closuretrustfundintheeventofoperatorinsolvency.Uponsiterelinquishment,theoperatorwouldprovidefundstopaytothepost-closurefundandtheguaranteewouldbereturned.

Asoutlinedfortheunplannedeventsfundoption,thetrustfundcouldpotentiallybeacommonfundproportionatelycontributedtobyeachofthethreecoalmines.Ifacommonfundwereestablishedthenthetrusteesoverseeingthefundwouldhavethediscretiontoprioritiseexpenditureacrossthethreesitesenablinganintegratedregionalapproachtopost-closuremanagementandcreatingefficienciesofscale.

EXP.0010.001.0044



Theadvantagesofthepost-closuretrustfundoptioninclude:• TheStatewouldbeaffordedcoverinperpetuityforroutinepost-closurecosts.• Regulatoryprecedenceexistsforapost-closuretrustfund.• Provisioningforpost-closurecostshelpstheoperatorrelinquishthesite.

• Acommonfundbetweenthethreecoalmineswouldenableanintegratedregionalapproachtopost-closuremanagement

• Aseparatebondduringoperationscouldguaranteetheavailabilityofmoneyforthepost-closuretrustfundintheeventofrehabilitationdefault.

Thedisadvantagesoftheunplannedeventsfundoptioninclude:• additionalfinancialimpositionontheoperator• additionaladministrativeburdenforregulatorandoperator.

Post-closurecommunityfund

Apost-closuretrustfundcouldalsobeusedtohelpreducethesocialandeconomicimpactsofmineclosureoftheLatrobeValleycommunity.SimilartoanumberofotherexistingtrustarrangementsincludingtheNSWMineSubsidenceBoard(seeSection3.3.2),thefundcouldbeusedforfundingprogramsthatmeettheexistingandfutureneedsofthecommunity.

Thesizeofthefundcouldbeincreasedtoenableittoperformthisadditionalrole.Insuchacase,therecouldbegroundsforstate,local(andperhapsfederal)governmentstomakein-kindcontributionstothefund.

Itwouldbeimportanttokeepsuchatrustseparatefromanyunplannedeventstrustfundorpost-closuretrustfundsothatthefundsineachwereprotectedfromthecostsofactivitiestheywerenotdesignedtofund.

4.3.5 EstimationofrehabilitationliabilityAllfinancialassurancesystemsrelyontheaccurateestimationofrehabilitationliability.However,experiencehasshownthattypicaldeterministicmeansofestimatingliability,suchasthroughtheuseofabondcalculatortool,tendtounderestimatetheactualcostsofrehabilitationduetofactorssuchas:

• Aninherentassumptionthatrehabilitationwillbeabletoproceedasplanned,whereasproblemsinevitablyariseandcommonlyresultinincreasedcosts.Suchcostincreasesoftenexceedthecontingencyfactoredintotheoriginalcalculation.

• Failureofproposedtechnicalmethodstoachievetheirobjectives,whichcanrequiresubstantialadditionalcosttorectify.

• Rehabilitationcoststrendingupovertimeasregulatorandcommunityexpectationschangeandasmanagementoftechnicalissuesbecomesmoreelaborate.

Tohelpovercometheseissues,probabilisticcostestimations,suchasarecommonlyusedforsettingrehabilitationguaranteesinNewZealand(seeSection3.12),canbeundertakentoidentifycostrisksandprovideamorerobustestimateofrehabilitationliability.Probabilisticestimationsarealsousefulforensuringthatrehabilitationstrategiesfocusonkeyrisks.TheMineralsCouncilofAustralia(MCA)submissiontotheInquiryadvocatesbondsthatallowforunforseenphenomenaonaprobabilisticbasis(MCA2015).

ProbabilisticcostestimationscouldbeadoptedaspartoftheprocessofbondsettingfortheLatrobeValleycoalmines.Ideally,asinNewZealand,suchcostestimationswouldbelinkedtoquantitativerehabilitationriskassessments.

Probabilisticcostestimationscanlookattwosourcesofcostrisk:

EXP.0010.001.0045



• Thecostrisksassociatedwiththeproposedrehabilitationactivities(i.e.assumedquantitiesandcostrates).

• Theriskofadditionalactivitiesbeingrequiredasaresultofunplannedeventsorunidentifiedliabilities.

Boththeseareasofriskwouldideallybeconsidered.

EXP.0010.001.0046



5 ConclusionsTheprimarypurposeoffinancialassuranceforminingprojectsistoprovideahighdegreeofcertaintythatadequatefundingwillbeavailabletoundertakefinalrehabilitationintheeventofdefaultbytheoperator.Asecondarypurposeistopromoteprogressiverehabilitation.

Across-jurisdictionalreviewhasidentifiedrangeofdifferentfinancialmechanismsusedtoensurethattherehabilitationofminingoperationsisproperlyfundedandimplemented.Anumberoftrendshavebeenemergingoverrecentyearsincluding:

• theincreaseduseoftrustfundstoenablepost-closuremanagement,includinginperpetuity• agreaterfocusoncostrisksassociatedwithunplannedevents,particularlypostclosure• theadoptionofdiscountbondsystemstorewardgoodperformanceandencourageprogressive

rehabilitation• theuseofmoresophisticatedliabilitycalculationtoolsandadoptionofprobabilisticcostestimation

methodstomoreaccuratelydeterminerehabilitationliability.

Theemergenceofthesetrendsisrecognitionofissueswithtraditionalfinancialassurancemechanisms,suchastheunderestimationofrehabilitationliability,difficultiesinmeetingrequirementsforsiterelinquishmentandproblemsfacedbyregulatorsinencouragingprogressiverehabilitation.

CurrentrehabilitationbondsfortheLatrobeValleycoalminesaresubstantiallylowerthantherehabilitationliabilityofthesites.ThispresentsarisktotheStateandsitswithinthecontextofbroaderissuesincluding:

• geotechnical,hydrogeologicalandfirepreventionrisksatthethreemineswhichresultinadegreeoftechnicaluncertaintyregardingappropriatemethodsofrehabilitation

• marketuncertaintyduetofallingelectricitydemand(whichhasledtooversupply),increasingcompetitionfromtherenewablessectorandthepotentialforfuturecarbonpricing.Suchuncertaintycouldresultintheearlyclosureofoneofmoresites.

Victoriacurrentlyhasafullfinancialassurancesystemforminingprojectsthatrequireoperatorstoproviderehabilitationbondsequalto100%ofestimatedliability.TheStateiscurrentlyimplementingaperformance-baseddiscountbondsystem,butthecoalminesaredeemedineligibleduetotheirhighrehabilitationrisk.

ArangeofoptionsforalternativefinancialmechanismswereassessedfortheirpotentialtoensurethatrehabilitationoftheminesisundertakenasrequiredundertheMineralResources(SustainableDevelopment)Act1990.Theoptionswere:





• Insurance-basedcoverage–usinginsurancetoprovidesupplementaryfinancialassurancecoverage.• Pooledfundcoverage–usingapooledfundtoprovidesupplementaryfinancialassurancecoverage.• Unplannedeventsinsurance–usinginsurancetomitigatetheriskofpost-closureunplannedcosts.• Unplannedeventsfund–usingatrustfundtoprovidefundsforunplannedpost-closurecosts.

EXP.0010.001.0047




Apost-closuretrustfundcouldalsobeusedtohelpreducethesocialandeconomicimpactsofmineclosureoftheLatrobeValleycommunity

Thegreaterthegapbetweentherehabilitationbondandtherehabilitationliability,thegreatertherisktakenonbytheState.InconsideringtheoptionsforfinancialmechanismstheStatehastoassessthelikelihoodandconsequencesofrehabilitationdefault,itswillingnesstotakeonrisk,andbalancethisagainstthecommercialneedsoftheoperators.Itisuptotheoperatorstopresentacaseforanyfinancialhardshipthatmayoccurfromincreasingthebondamounts.

Itisnotclearthatanyoftheoptionsassessedprovidestrongfinancialorotherincentivesforthemineoperatorstoundertakesignificantprogressiverehabilitation.ThereareinherentrisksinleavinguntestedaspectsofrehabilitationuntiltheendofoperationsanditisimportantthatsuchasituationisavoidedintheLatrobeValley.

EXP.0010.001.0048



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Personalcommunications

K.Brown-KatherineBrown,EnvironmentalPolicyandPlanning,DepartmentofEnvironmentandHeritageProtection,Queensland,21October2015.

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C.Liske-ChiefMiningEngineer,GovernmentofManitoba,ManitobaMineralResourcesMinesBranch20October2015.

G.Marshall-GregMarshall,DirectorMiningRegulation,DepartmentofStateDevelopment,27October2015.

A.Paul-AlisonPaul,CorpAffairs&LegalManager,OceanaGold,NewZealand,22October2015.

T.Ward-TonyWard,ManagerEARFandMineCompletion,DepartmentofStateDevelopment,29October2015.

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Documents

Hazelwood Mine Fire Board of Inquiryhazelwoodinquiry.vic.gov.au/wp-content/uploads/2015/12/Report-of... · • Unplanned events insurance – using insurance to mitigate the risk