NEMA: Environmental rehabilitation law

The Department of Mineral Resources (DMR) recently completed an extensive legislative review that resulted in the ‘carving out’ of environmental authorisation legislation from the Mineral and Petroleum Resources Development Act (MPRDA) into the National Environmental Management Act (NEMA). The amended NEMA is effective from 20 November 2015 and will be administered by the DMR.

Amendments to NEMA will radically change how mining companies provide for, calculate and report on their mining rehabilitation liabilities. According to Kate Swart, an associate at Clyde & Co and a specialist in insurance and environmental law, the key changes centre on how and when mine rehabilitation is carried out as well as on the calculation of and provision for rehabilitation costs.

The hunger for information on NEMA is tangible, with some 250 mining industry stakeholders congregating at the Ernst & Young Mining and Metals Quarterly Update, held 15 April 2016 in Johannesburg. For these stakeholders the challenge is to ensure that their mines are fully compliant with the new legislation by the February 2017 deadline, as determined by a 15-month window from the effective date.

Three closure plans
Under the old regulation mines had to submit an interim closure and final closure plan. NEMA requires three closure plans, the minimum content of each being prescribed by the Act. The first is the ‘ongoing rehabilitation plan’, which lists the regular activities required during the operational life of mine.

The second is the ‘final rehabilitation plan’ which includes details of the final rehabilitation and ‘use of land’ following the mine’s closure. “This plan focuses on bringing the mine to a point where it can close and must consider how the land will be used post-closure,” said Kate Swart. This stage typically accounts for the bulk of rehabilitation costs and activities.

Stage 3 occurs post-closure and requires that the mine conduct indefinite post-closure environment impact assessments. Under the new law the liability of the mine continues post-closure, indefinitely, especially where the treatment of water is concerned. “An environmental risk assessment which includes the treatment of extraneous and polluted water must be done for the post-closure period of the mine – for an indefinite period,” she said.

How do mines finance their rehabilitation costs?
Traditional methods include bank guarantees, guarantees issued by an insurer, depositing funds with the DMR or a setting up a trust fund. “The complexities introduced by NEMA will force a change in the way in which mines approach the funding of their rehabilitation liabilities,” observed Andrew Rumbelow, Institutional Segment Head at Sanlam Investments.

He suggests that mining houses will have to partner with specialists in mining rehabilitation, structured finance solutions and investments in order to meet the open-ended financial liabilities proposed by NEMA. It is for this reason that Sanlam Wealthsmiths™ have teamed up with Cenviro Solutions to offer customised mining rehabilitation solutions.

Sanlam and Cenviro, co-sponsors of the Ernst & Young event, are specialists in the mining rehabilitation guarantee market. Cenviro is part of Centriq, which is a wholly-owned subsidiary of short term insurer, Santam. Santam is in turn 62.5% ‘held’ by insurance giant Sanlam.

New challenges
NEMA has introduced several new challenges, compounded by ambiguous wording around the post-closure (latent) liability guarantee, which will present some challenges for the issuer of the guarantee:

1. Limited funding opportunities: New wording suggests that the investable universe for trusts is now more restrictive than in the past, and the use of trusts as a funding mechanism is limited to the post-closure (latent) liability portion only.
2. Intricate, more detailed calculations: Because the description of the liability is now much broader and includes 10 years post-closure (future) costs, attempting to calculate the quantum of the ‘guarantee’ at the onset will be extremely challenging. Not only will experts need to be brought in for this calculation, but auditors will also need to check the process for accuracy. This suggests that the overall costs of the liability that they have to explicitly provide for is likely to be materially higher. This in itself carries a whole set of unique challenges.

Of greatest concern is that the trust fund can only be used for post-closure funding. Funds in the trust can therefore only be utilised once the final rehabilitation and closure plan have been carried out. “The trust fund is there to sort out latent defects, or latent environmental liability and treatment of water only – and that is a major change,” said Ms. Swart.

Tax implications for existing structures
 Mines that set up trusts under the previous regulation are in limbo because it is not clear whether they can continue using these structures or if funds need to be pulled out of the trust and redistributed elsewhere. If the latter applies, the question remains whether the surplus capital in those trusts can be withdrawn without incurring tax penalties. It is also not clear whether the new trust structures qualify for relaxations in term of section 37A of the Income Tax Act.

“There is also some ambiguity on the tax benefits for contributions to guarantee funds too – we are not sure how these will be addressed nor whether any amendments to the taxation legislation is proposed,” said EY tax expert, Tricha Icharam.

Closer scrutiny of financial adequacy
Compliance with NEMA will result in significant finance and consulting charges to mines. It requires that mines contract with independent outside parties to assess and review the adequacy of their financial provisions for rehabilitation on an annual basis for life of mine. Following the review, the adequacy of the financial provision is assessed to indicate whether any adjustment is required. This assessment must be audited by an independent auditor and submitted to the DMR.  Wickus Botha, Africa mining & metals leader at EY, said that all existing rehabilitation plans would have to be assessed and audited.

Mining stakeholders have taken issue with the DMR’s approach to surplus or shortfall determinations. Surpluses are simply deferred against subsequent assessments, with the result that significant amounts of capital could be tied up in the event mining activities or ‘life of mine’ change. Shortfalls will have to be remedied within 90 days of the audit report.

The three plans, along with the audit report and the quantum of the financial provision for rehabilitation, must be included in an environmental management programme, which must be published on a public website. Provision will have to be made internally at each mine to tailor this information for public consumption.

Penalties for lack of compliance
The DMR warned that mine management faced severe sanctions for contravening NEMA: Fines of up to R10 million, 10-year prison sentences or both can be imposed on a company and its directors for non-compliance – it is therefore an imperative for mine owners and their executive teams to consult with experts in the field of mining rehabilitation solutions to make sure that all requirements of the new regulation are addressed.

Where to turn
There are a lot of uncertainties facing the industry with regard to the interpretation and implementation of the new regulation and NEMA’s revised provisions will have significant implications for mining houses going forward.

Under trusts, investments now have to be guaranteed and this falls precisely within the ambit of Sanlam Investments.  Mining companies benefit from the fact that Sanlam have both the insurance licence (for bespoke insurance solutions) and the investment expertise to structure guarantees. They are therefore able to tailor investment strategies that provide a significant amount of customisation and flexibility, taking into account a mine’s unique financial circumstances as well as their appetite for risk.

Says Rumbelow, “While we have the flexibility to meet the specific tailor-made investment solution you require, we believe serious consideration should be given to adopting an asset liability investment strategy. Given that your overall liability will increase materially, as mining houses you will have to think more skilfully about how you will fund these liabilities going forward”.