December 2017

Emerging risk: mine closure and rehabilitation

  • By Terence Jeyaretnam, Partner, Climate Change and Sustainability, EY

An outline of the risks and opportunities for companies, investors and regulators in relation to rehabilitation and provisioning

Recently, there has been significant increase in concern by investors and regulators over the levels and adequacy of bonds held for mine rehabilitation. But are these concerns just alarmist and associated with recent bad publicity and market volatility? If poorly managed, mine closure and rehabilitation represent a significant and material risk to companies, investors and regulators (flowing on to the state and community). Appropriate levels of mine closure bonds and the bonding mechanism, therefore, become key risk mitigators.

On an annual basis, Ernst and Young (EY) conducts a global survey of over 200 institutional investors on a wide range of topics. In 2015, the focus of the survey was to examine investors’ changing attitudes, namely in relation to stranded assets (assets that lose their value prematurely due to environmental, social or other external factors). The results of the survey indicated that:

  • 62 per cent of investors were concerned about the risk of stranded assets
  • more than 33 per cent of investors reported cutting their holdings of a company in 2014 due to risk of stranded assets
  • 37 per cent of investors used a structured, methodical approach to analysing non-financial information related to these risks as part of their investment decisions.

EY also undertakes an annual survey of global mining companies to determine the top ten business risks facing both mining and metals. In 2016-17, the top ten risks included cash optimisation, social licence to operate and capital access, among others.

Over this time, the natural resources industry has remained a dominant player in Australia’s economy; however, we have seen major mining firms, in part due to risk management, continue to divest their holdings in potentially higher risk assets, principally coal, to lower capitalised companies. Mine sites are under more scrutiny than ever before due to state governments being concerned that they are under-bonded, in addition to continuing social pressure from some community sectors to see mines closed.

Risks to regulators and consequences

There is a widening gap between the amount of land disturbed by mining and the amount of land that is progressively rehabilitated. In Queensland, the state government estimates that only nine per cent of disturbed land was rehabilitated and that, from 2006-21, the ratio of disturbed land to rehabilitated land will increase from 3:1 to 12:1. While the area of land being disturbed has increased, many mining companies have seen credit downgrades, with a global mining company default rate of 6.5 per cent in 2015 (Moody’s Investors Services Inc, 2016).

There has also been a recent general uptick in mining company mergers and acquisition activity. Deals have reportedly increased by 71 per cent year-on-year to US$14.8 billion in 2017, a 13 per cent increase from the previous quarter, with coal assets continuing to represent the greatest proportion of transactions. Although the continued operation of mines result in GDP to the state economy, a key concern of state governments is the potential for mines to become a financial liability in the event of default,
especially with increased mine ownership by lower capitalised companies.

Accordingly, regulators have recognised that the value of bonds held is often insufficient for a range of reasons, including:

  • A change in public expectation and in regulations. What was previously acceptable is likely to be unacceptable as mines close going forward (ie uncertainty associated with handback criteria).
  • Rates and allowances used to calculate bonds not reflecting actual industry costs. Given the significant quantities typically required, estimates are highly sensitive even to small variances within rates.
  • Bond calculators previously developed and used found to be flawed.
  • Poor/inadequate closure planning, potentially resulting in some aspects not being recognised
    or appropriately costed.

Event risks either not included or incorrectly calculated. Event risks should be considered, but accounting for event risks is not well understood within the industry. Contingencies should also be aligned with the accuracy of the cost estimates.

Post-closure costs continuing to increase.

Acting to manage the financial liability and increased public scrutiny, the majority of jurisdictions within
Australia have moved to tighten associated regulations. Bond calculations have recently been reviewed in most Australian states including New South Wales, Queensland and Victoria, resulting in significant bonds increases. For example, in New South Wales the bonds held have increased from $0.5 billion to $2.2 billion from 2005-16, while Victoria recently announced increases by almost 20-fold since early 2016 levels for some brown coal assets.

Within New South Wales, the 2017 Auditor General’s report on mining rehabilitation security deposits also identified that there is no mechanism to prevent a mine being in ‘care and maintenance’ indefinitely, during which rehabilitation is postponed. Thus, in further attempts to protect themselves, we have seen jurisdictions introducing a range of reforms and policies. Examples include the potential for the state to access bonds to mitigate risk, the introduction of audit processes and the Queensland government passing the Environmental Protection ‘Chain of Responsibility’ Amendment Bill (whereby any organisation that has materially benefited from activities (including mining) would be liable for rehabilitation costs, should companies default).

Probable and reliable provisioning

Alongside these recent changes in the regulatory landscape, one of the top ten mining and metals sector risks is capital raising. As the risk of default has increased, banks are only extending trade and long-term financing at an increased cost to those companies with sufficient security to back
the debt.

Restoration and rehabilitation provisions are covered under Australian Accounting Standards Board (AASB) 137 – Provisions, Contingent Liabilities and Contingent Assets. AASB 137 states that a provision arises when a present obligation (legal or constructive) exists as a result of a past event, and a probable and reliable estimate can be made. A significant part of a mining company’s obligation relates to planning for environmental rehabilitation during the construction phase, with the provision growing as operations expand.

Given the expansive nature of mines, the development of ‘probable and reliable’ estimates requires specialist and in-depth knowledge. However, estimates are frequently based on flawed closure plans and/or cost estimates (sometimes arising from the use of state bond calculators). The uncertainty associated with estimates may in some instances be used to plausibly withhold or disclose to a minimum any ‘bad news’. However, as the understanding of the market has improved, the non-disclosure of unpopular information has resulted in the market self-assessing mining companies and estimating that their exposure to risk is greater than it actually is.

A way forward

Although the sector appears to be in a cycle of volatility, there are opportunities for companies, investors and regulators in relation to rehabilitation and provisioning. These include:

  • improving closure cost/provision calculation and reporting
  • improving closure planning
  • incorporating innovative and revenue-producing activities to post-closure
  • engaging with regulators (particularly with regards to handback criteria)
  • developing regulations that are practicable.

Such constructive measures highlight a company’s ability to temper exposure to risk, while removing potential overcompensation by the market. In this way, regulators can be provided the reassurance that the industry considers the magnitude of potential issues and is taking steps to proactively tackle them.

The views expressed in this article are the views of the author, not Ernst & Young. This article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.


Moody’s Investors Services Inc, 2016. Moody’s Investors Service: Corporate Default and Recovery Rates 1920-2015.

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