04-12-2018 · Insight

Miners face rising environmental liabilities

Environmental costs are becoming an ever-increasing burden for mining companies, a study shows.

The provisions that miners need to set aside for future clean-up and other restoration costs after their mining operations have ended are already extensive. If not properly managed, they could become a credit risk for their bonds, says Jaap Smit, Credit Analyst for Metals and Mining at Robeco.

“Mining companies are already obliged to make provisions for so-called restoration and decommissioning of their assets,” he says. “These provisions are liabilities to restore the environmental disturbance that was caused by the operations of the mining sites and to rehabilitate the environment when the asset is depleted and closed.”

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Before and after: how a former mine is restored.
Source: Goldcorp Marlin

“Every large mining company remains responsible for a sizeable number of closed mining sites, including the tailings dams used to store byproducts of mining operations, along with old processing facilities and so forth. For example, Rio Tinto has 13 old mine sites in closure, some of them decades old, plus 200 other industrial legacy sites, compared to 57 active mine sites. Remediation sometimes costs hundreds of millions of dollars per site, and often requires costly annual monitoring and maintenance.”

“By way of comparison, about 20% of BHP’s total provisions are reserved for closed sites. One of Rio Tinto’s most expensive projects – the former Holden copper mine in Washington state – cost the company USD 500 million and took five years to rehabilitate. Environmental regulation across the world is becoming more demanding and can be an inflationary cost factor.”

External influences

The real problem is correctly estimating these provisions while simultaneously dealing with external influences such as currency fluctuations, changing interest rates, and more critically, the risk of falling commodity prices which lowers future revenues, he says. The latter problem can squeeze a company’s finances just at the time it needs extra money for restoration.

“In absolute terms, the provisions are sizeable, a significant item on the balance sheet, and a burden on total enterprise value,” Smit says. “We see a risk that cash costs for environmental rehabilitation might rise over time and become an accounting expense in the income statement. In terms of the credit impact, we see that the costs are about 0.5% of sales annually, which means they are a manageable but not negligible item for investment grade companies.”

“For high yield companies, environmental provisions result in higher adjustments to their leverage. A more detailed disclosure is needed. Liabilities such as pensions and leases get a lot more attention, while this type of environmental liability is also a real financial one.”

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