Mine voids: big party, now for the hangover

Mining companies and regulators have gravely underestimated the costs of mine rehabilitation, leaving taxpayers in the gun for billions of dollars in clean-up costs, says Rick Humphries.

He should know. Humphries was Rio Tinto’s top adviser on land use before heading up mine rehabilitation for base metals group MMG. The environmental scientist has since “switched sides” to consult for conservation groups on mine closure.

“The problem is there is a very large and growing environmental liability and if it’s not put in check it will cost taxpayers dearly, and result in large scale degradation of national resources,” Humphries told us in an interview last week.

There are some 50,000 abandoned mine sites in Australia. Many are small and old. Others though, such as Century Zinc Mine, Ranger Uranium, and the first of the mega coal mines to close – Anglo American’s Drayton and Rio Tinto’s Blair Athol – are large, toxic and present a formidable challenge to close properly.

The humongous Ranger and Century open cut voids alone will cost around $750 million to $1 billion to rehabilitate and the residual risks and liabilities for their parent companies (Rio Tinto and MMG) are as yet unknown.
What has been missing in the clean-up debate so far however is specifics, detailed research that is of particular company exposures. It is only when investors come to grips with the costs of closure that company directors and regulators will properly address the challenge, says Humphries.

So he has been doing the rounds of stockbrokers and institutional investors in recent days with analysis of Oz Minerals, MMG, ERA’s Ranger Mine, Rio Tinto’s Blair Athol Mine and Australia’s dirtiest power generation assets, the Yallourn, Hazelwood and Loy Yang brown coal mines in Victoria.

It’s “heads we win, tails you lose”

The report, “Mine Rehabilitation and Closure Cost – a Hidden Business Risk”, sheds light on the caprice and inaccuracy of closure provisions and how mining companies account for their liabilities.

Until now, there has been a “head-in-the-sand” approach to closure, which includes offloading assets to small companies, and delay-tactics such as putting mines on “care and maintenance”.

Half a dozen ways out of rehab for coal companies

“Mines aren’t typically designed with closure in mind,” says Humphries, “Mining is all about cash-flow. Closure is not in the corporate DNA”.

His report, conducted for conservation group Lock The Gate, finds a systemic “low-balling” of closure costs which is “exposing the sector to increased public and political scrutiny and will eventually undermine the industry’s social licence, increase costs and inhibit their ability to grow”.

From a share market perspective, the most sensitive finding is likely the case of Oz Minerals. Oz Minerals operates the Prominent Hill mine, a large copper/gold deposit in outback South Australia.

The report found “significant under-estimation of the cost of rehabilitating the waste-rock dumps and tailings storage facilities by $100 million to $200 million”.

“OZ Minerals’ closure provision of $30.9 million completely and massively under-estimates the closure liability by orders of magnitude.”

The case study on the Chinese-controlled base metals miner MMG reflects a problem seen across the board with mining companies: the constant escalation of closure provisions.

MMG inherited a closure provision of $169 million in 2008 when it acquired the majority of Oz Minerals’ assets. That has shot up to $US805 million in 2015.

“The MMG case study illustrates two points. Firstly, mine rehabilitation provisions can be extremely unreliable and secondly closing mines is an expensive business. The publicly quoted closure cost figure of $US378 million for Century dwarfs the total Oz Minerals provision at the time of MMG’s acquisition ($A169.1 million), suggesting OZ Minerals completely underestimated the scope of the closure task,” the report notes.

Risks and costs of mine closure are poorly understood

The case of Century raises serious questions over the accuracy of the provisions for MMG’s other assets, says Humphries, and it illustrates (along with the ERA case study below), “that mining companies have a habit of systemically underestimating the real cost of closure because the complexity, risks and costs of mine closure are poorly understood”.

ERA’s Ranger Uranium mine is the classic case of escalating cost estimates. Humphries details the continual revision of estimates over the years from $149 million in 2008 to more than $600 million this year.
Rio Tinto’s Blair Athol mine enshrines a different challenge entirely, that of a major mining group flogging a depleted asset to a small player with little ability to fund a clean-up.

The deal is not done yet but an agreement was struck a few weeks ago for Rio to sell its Blair Athol coal mine to a small ASX-listed company TerraCom. The mine was sold for $1, including Rio’s slated $79 million clean-up liability.

But as the Humphries report notes, the financial assurance calculated by the government’s methodology comes up with a rehab cost of twice that, $160 million.

IEEFA director Tim Buckley describes this as a “heads we win, tails you lose” scenario for TerraCom’s promoters. The company has $150 million in debt and no equity, and its success rides on a bounce in the price of thermal coal. It has risen lately but, as Buckley says, thermal coal appears to be in structural decline.

So leveraged is TerraCom that its shareholders are destined to clean up if the coal price keeps rising but if their gamble doesn’t work, the clean up costs will be lumped with taxpayers.

After all, Rio wasn’t making money when it shut Blair Athol at the apogee of the coal boom in August 2012. Humphries reckons opinions on the final cost vary between $160 million to $300 million. Other sources expressed hope that the presence of former Labor politicians on the TerraCom share register would not influence the final decision of the Queensland government to wave the deal through, or not.

If their gamble doesn’t work, the clean up costs will be lumped with taxpayers


Finally, there are the Latrobe Valley coal mines. Following the Hazelwood Inquiry into the Morwell coal mine fire, the Victorian Government raised the financial assurance for the Yallourn, Hazelwood and Loy Yang brown coal mines from a collective $41 million to $254 million.

It took however the longest mine fire in the region’s history, in February 2014, and a subsequent state government inquiry to put focus on mine rehabilitation and deliver the five-fold revision in clean-up costs.

The Humphries Report illuminates the challenge for the mining sector and state governments and it contains just five case studies.

Mining has brought significant national wealth to this country and now, with mines to close and commodity prices waning, the quid pro quo looms large.

Should regulators and miners fail to meet the challenge, there will be significant reputation damage, says Rick Humphries.

It is inevitable that there will be a slew of disputes between governments, mining companies and environment groups, especially if mining companies hit the wall with insufficient financial assurance in place. The parlous financial position of US group Peabody is not promising in this regard.

Broadly, taxpayers will be burnt, as well as shareholders, unless the issues are addressed early.

The capacity for mining companies to relinquish their liabilities as they have in the past will be increasingly constrained by the diminishing appetite for state governments to shoulder their residual risks.

“This means Australian mining companies are likely to accrue a large portfolio of multi-decade liabilities over time as the current generation of very large coal, base metal and iron ore mines start to close,” says the report.

Transparency is tonic for responsible regulation. Our largest miner BHP, for instance, does not make public the environmental liabilities for its Nickel West operations in Western Australia, even though it is trying to sell them. UBS estimates these alone at up to $2 billion.

Equally worrying is the hotch-potch of public information available through various state agencies. There is no national reckoning either.

For the environment, the risks are clear, The Mary Kathleen uranium mine, once controlled by Rio, was rehabilitated and relinquished in 1986, winning an award for technical excellence at the time. The waste dump has since failed and the liability and attendant costs now reside with Queensland taxpayers.

Mary Kathleen, whose AFL side once won three regional premierships, is now a ghost town. Radioactive waste has seeped into the water systems.

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