SA Mines urged to put clear strategy in place in preparation for mine rehabilitation liabilities

While South African mining houses are becoming more aware of their obligations in terms of mine rehabilitation, many have not implemented an appropriate strategy to ensure they will be able to make provisions for the liability of mitigating future polluti

This is according to Taruvona Mashamhanda, Actuary at Old Mutual Corporate, who says mine rehabilitation obligations, if not properly accounted for from the start of a mine’s operations, can become a ticking time bomb – with costs of rehabilitation often running into billions of rands.

“One of the biggest challenges facing South African mines is preparing for the day when it eventually closes. When the regulators suddenly tighten the screws on mine rehabilitation regulation, as they have done recently in terms of enforcing this obligation, many mines realise they are in financial trouble.”

Mashamhamda says currently many mines in an effort to avoid market volatility, are allocating provisions for the rehabilitation liability to cash investments. He warns though that while cash is a comfortable and safe investment vehicle, it is unlikely to generate the required returns over the long-term.

“Mines, especially those that still anticipate long-term production, need to consider more strategic investments to save for the rehabilitation obligation,” he says.

According to Mashamhanda, mines using a strictly cash strategy often do not take into account any growth that will occur on the liabilities side. “Mining rehabilitation liabilities tend to grow in excess of CPI, making cash an inappropriate investment for these provisions. There are ways of managing the volatility without being in cash,” he says.

Even those mines that are aware of their rehabilitation liability and are making financial provisions for this, may still find themselves in financial straits if they have not considered their financial position from a holistic point of view.

“The final closure liability is determined by the extent and type of mining and is sometimes impacted by unexpected geological incidences. It is also affected by inflation. As a result, there is a level of uncertainty impacting the unfolding of the closure and rehabilitation liability.

“It’s crucial to look at the position of an operating mine in terms of its liabilities as well as its assets. Furthermore, the lifespan of the mine is not necessarily guaranteed and the premature closure of the mine can lead to major financial consequences – even for mines who have some form of premature closure guarantee,” he says.

Mashamhanda says that by taking the assets and liabilities of the specific mine into account, and having a holistic view of the financial position of the mine, Old Mutual can run through a variety of financial models that will maximise the return on the mine’s investments, while at the same time minimising the volatility,” he says.

“In this way, by building up assets and following a long-term investment plan designed to account for the gap between assets and liabilities, a mine will be able to accurately plan for the costs of the ultimate closure of the mine and avoid an unmanageable financial burden,” he says.