It has been over five years since Western Australia introduced the Mining Rehabilitation Fund (“MRF”).  On introduction, the MRF was hailed as a significant innovation in dealing with the issues of historical abandoned mine sites. 

The objective of the MRF was to ensure that financial responsibility for rehabilitation of both existing and historical mine sites fell on the mining industry rather than the West Australian taxpayer.  It was also intended to reduce the financial assurance required for mine rehabilitation, and thereby lower the capital requirements on the industry, strengthening WA’s attractiveness as an investment location. The MRF was meant to secure adequate funding to deal appropriately with the environmental and safety risks caused by insolvencies or other unplanned mine closures, and the State’s legacy of historical abandoned mines.

Recent government initiatives and events both in WA and in other states, have brought mine rehabilitation issues back into the public focus.  A review of the effectiveness of the MRF is currently in train and is expected to be published shortly.

While the review might conclude that everything is ‘on track’, we consider that it is worth thinking about changes that might be expected in the (near) future.

The Mining Rehabilitation Fund – a recap

The MRF became compulsory from 1 July 2014, with an optional period from 1 July 2013.  The Mining Rehabilitation Fund Act 2012 (WA) (the “MRF Act”) requires all holders of mining tenements granted under the Mining Act 1978 (WA) to pay a non-refundable levy into the MRF.  Contributions are based on the level of ground disturbance, with an annual levy calculated at the estimated rehabilitation cost at standardised per-hectare dollar rates for various activities.  The annual fund contribution rate is currently set at 1%. State Agreement operations are currently excluded from the MRF.

The funds raised from the levy are paid into a pooled fund held by the State, which could be used for rehabilitation in the event of the inability of a mine operator to meet its rehabilitation commitments, usually as a result of insolvency or administration.  Interest on the MRF is intended to be used to fund the Abandoned Mines Program, to address the legacy of abandoned sites resulting from WA’s long history of mining.

The Minister retains the discretion to require that a tenement holder lodges an Unconditional Performance Bond (“UPB”) under the Mining Act, in addition to the MRF contribution. Requirements for UPBs will be imposed on tenements that are considered to have an increased risk of the rehabilitation liability falling upon the State.

Where are we at?

The annual contribution of the MRF levy was designed to create a global fund that would replace tenement specific UPBs, which were released back to the tenement holders. It is anticipated that the size of the MRF will have risen to over $100 million by June 2018, whereas over $1 billion in UPBs were returned to the industry, with only $32 million remaining with the State.  This compares to a total estimated rehabilitation liability under the MRF of approximately $3 billion.

The first major application of the MRF was in July 2015, when the operator of Ellendale Diamond Mine, Kimberley Diamond Company Pty Ltd (“KDC”), was placed into administration.  The abandonment of Ellendale attracted significant publicity and debate, as the State had only recently returned $12.1 million of UPBs to KDC.  In the previous year, KDC had contributed $0.8 million to the MRF. 

Ellendale was deemed an abandoned site under the MRF Act, meaning that MRF funds could be used to ensure the site was safe, stable and non-polluting. The MRF spent $463,280 on rehabilitation and other operational expenditure at Ellendale, in order to meet immediate safety requirements, and costs were not borne by the taxpayer. However, Ellendale raised the question of whether the MRF was sufficient to fund the rehabilitation of abandoned mines, particularly if there were multiple abandonments within a short period, which fortunately has not occurred.

How well has it worked?

The size of the industry's total rehabilitation liability relative to the MRF suggests a significant level of exposure to the State.  While the MRF was certainly not designed with the intention to cover all the rehabilitation costs, the disparity of the two figures highlights the level of risk.  It should be remembered that the MRF is intended to accumulate over several decades.

However, the rehabilitation liability has not significantly altered, which suggests that, as yet, the MRF has not been effective in encouraging progressive rehabilitation, as it was originally intended to do.  It remains uncertain how far the State will allow the industry's total rehabilitation obligations to accrue before it considers further action necessary.

The MRF is only a partial solution to environmental compliance issues. The levy rate of 1% offers minimal incentive for progressive rehabilitation, and is weaker than full UPBs in this regard. This is perhaps an unavoidable shortcoming of the MRF as a mining securities system, as the reality of mining is that progressive rehabilitation often does not make commercial sense.

While the MRF theoretically encourages progressive rehabilitation by incentivising miners to change the category or reduce the number of hectares under a disturbance category, the extent to which a mining operation can change its category meaningfully is limited by the commercial reality of mining and operational needs. 

Government initiatives

The West Australian government has commenced a post-implementation review (“PIR”) of the Mining Rehabilitation Fund Regulations 2013 (WA), in order to evaluate the effectiveness and administration of the MRF Act. This PIR will consider the Regulations and funding of the Abandoned Mines Program in order to assess how successful the MRF has been in meeting its objectives, and whether there have been any unintended consequences.  It will also assess whether the MRF aligns with the State's broader regulation of the mining industry, and whether there is any potential for improvement.

The PIR's scope will include consideration of whether the MRF's current fee levels and thresholds are appropriate.  It is likely that the result will be to recommend some level of increase to current contribution levels. The PIR is currently underway and is due to report in the next few months.  This will be followed by a comprehensive review of the MRF Act after ten years of implementation.

Meanwhile, the Federal Senate has launched its own inquiry into the rehabilitation of mining and resources projects as they relate to Commonwealth responsibilities, and is undertaking public hearings around the country, and is currently due to report later this year.  The focus will be on whether any legislative change is necessary to ensure that rehabilitation occurs without any burden on public finances, and that mining companies, and their directors, are not able to avoid their rehabilitation obligations.

Developments in other States

The MRF attracted the attention of other States and Territories as a mechanism to address legacy rehabilitation obligations.  Both Queensland and the Northern Territory have introduced a similar levy aimed at ensuring that the industry carries the cost for historic liabilities. 

However, neither jurisdiction has followed Western Australia’s approach in respect of the rapid release of almost all performance bonds.  Northern Territory has retained bonds equal to 90% of estimated rehabilitation liabilities. Likewise, Queensland’s new framework, which will come into effect over a three-year period from 2019, will only release bonds based upon an individual assessment of risk to be made over each mine site.  Queensland has also adopted a tiered approach to its levy, whereby mines considered at greater risk of defaulting on the rehabilitation obligations will pay the levy at a higher rate of up to 2.75%.

The future: where to from here?

The MRF can be seen as a significant improvement on the former mine securities system in Western Australia.  The previous universal imposition of UPBs was a blunt instrument that had the side-effect of locking up capital that could otherwise be invested into new resources projects.  It was administratively cumbersome, and it offered no meaningful solution to the legacy issue of historical abandoned sites, which exists throughout Australia.

Improving mine rehabilitation outcomes will require action both at the State and Commonwealth level. Potential reforms include revisiting the Corporations Act 2001 (Cth), or considering legislation that goes further in holding directors, shareholders or associated companies liable for rehabilitation. The treatment of rehabilitation liabilities in company liquidation, and the role and responsibilities of company directors, may require amendment to meaningfully address environmental responsibilities.

However, the issues at Ellendale, and the response from other states may suggest that WA has gone too fast and too far in its release of performance bonds.  The current size of the MRF, at a little over $100 million, would only cover the full rehabilitation of one or two significant projects.  Arguably, immediate full rehabilitation of a major site such as Ellendale was not the intent of the MRF, but the question remains open as to whether the risk to the State, and its taxpayers, has been fully mitigated, or whether the State should act to reduce its risk and increase industry compliance.

What do you need to think about?

• There is a potential for bonds or other financial assurance mechanisms to be imposed in the future, either under the Mining Act 1978 (WA) or the Environmental Protection Act 1986 (WA).
• Increases to the MRF levy rate, or greater use of UPBs, remain potential outcomes. 
• The exclusion of State Agreement operations from the MRF is perhaps the most likely area for significant reform.
• There is also scope for the Department of Mines, Industry Regulation and Safety to further expand and refine its monitoring and compliance operations. 

Therefore, Boards should consider their environmental rehabilitation liabilities generally, and specifically their current and potential future MRF liability in their strategic planning, and treat it as something more than an unavoidable levy.