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There’s a new vogue in mine rehabilitation: sell the mine for nothing, and let someone else sort it out. By Mike Seccombe.

Who foots the bill for open-cut mine rehabilitation?

An open-cut mine in Queensland, one of thousands that will require rehabilitation.
Credit: DENISBIN / FLICKR

The first law of holes is well known. When you find yourself in a hole, stop digging. The second law, the corollary, is that you should then fill in the hole lest it become a hazard.

That is unless you are a big resources company, in which case the second law is that you should quickly hand the shovel to someone else, and disclaim further responsibility for the hole.

Let’s take an example. Last December Mark Cutifani, the chief executive of Anglo American, one of the world’s biggest mining companies, announced a radical restructure of its global operations under which 85,000 jobs would be shed and “negative cash flow assets either be closed, placed on care and maintenance or sold”.

Anglo American found itself in financial trouble as a result of the global crash in commodity prices. So it was going to stop digging at many sites around the world, including at four coalmines in Australia. It was looking for someone else to whom it could hand the shovel.

On January 20, in a very brief media release, the company announced it had found a buyer for one of them.

The company entered into a share sale agreement with Batchfire Resources Pty Ltd, the statement said, to sell its entire interest in the Callide thermal coalmine in Queensland. “The transaction will be effected via a sale of shares in the subsidiary companies holding Anglo American’s interest in Callide,” it said. “The transaction remains subject to several conditions precedent, and its terms are confidential.”

Beyond that it gave no details, other than pointing out that Callide was a very big, open-cut hole that produced 7.6 megatonnes of coal in 2014 and 5.6 megatonnes in the first nine months of 2015.

You might not have heard of Batchfire Resources. Nor had a lot of people who report on the area. But a few details soon emerged. 

At the time of sale, Batchfire had just 24 shareholders who had raised only about $750,000. When ownership of the mine passed to its new owners, says analyst Tim Buckley, of the Institute for Energy Economics and Financial Analysis, so did responsibility for cleaning up the mine at the end of its life via a financial assurance of $121 million held by the Queensland Department of Environment and Heritage Protection, to cover the cost of rehabilitation. 

You can think of a financial assurance as a kind of insurance. Instead of setting aside the cash to cover eventual clean-up costs, a mining company contracts with a big financial institution, to which it pays a premium. In the event that the mine closes and has to be rehabilitated, the financial institution pays out. 

“But what if the rehabilitation liability is $221 million?” says Buckley. “Who pays the extra? Batchfire, if they’ve got the money; but we know they don’t. The taxpayers end up picking up the bill.”

Buckley is of the opinion that the rehabilitation cost will be much, much more than $121 million. And there are good reasons to suspect he is right. First, Callide is a very big hole: various owners have been digging it since 1944. Second, there is a long history of mining companies underestimating rehabilitation costs and governments doing little to enforce them.

Two years ago, the Queensland Audit Office issued a swingeing analysis of that state’s regulation in the area.

It found financial assurances were often grossly inadequate to ensure proper remediation of mined land. Furthermore, the audit office said, “the departments are reluctant to take appropriate action to revoke permits and claim financial assurance”.

It found only two cases where action had been taken. “In one case the financial assurance held was 1.5 per cent of the estimated rehabilitation cost and in the other case it was approximately 10 per cent…” 

The inadequacy of provisions made for mine clean-ups usually becomes obvious only after disaster. Take the fire at the Hazelwood Power Station, in Victoria’s Latrobe Valley, that started in February 2014.

The inquiry into the fire at the brown coal-fuelled station revealed the operator, GDF Suez, had put up just $15 million in rehab bonds. The government-commissioned estimate of the true cost of clean-up was $251 million.

“Even in cases where mines are owned by what you’d think were reputable companies, the rehabilitation bonds are commonly just a fraction – often about a tenth – of what’s required to do the job properly,” says Hannah Aulby, clean energy campaigner at the Australian Conservation Foundation, who is currently completing a study on the issue.

“There are other instances in Queensland – Clive Palmer’s nickel refinery for example – with no rehabilitation plan in place at all.”

Most attention, since Palmer’s operation went into administration a few weeks ago, has been on Queensland Nickel’s $21 million-odd donations to Palmer’s political party. But that sum pales in comparison to the likely cost of rehabilitation if the company cannot trade its way out of trouble. The Queensland government has estimated the cost of cleaning up the Yabulu site – which sits perilously close to the Great Barrier Reef and which has a history of pollution incidents – at $30 million to $40 million. That seems like a very lowball estimate. The state opposition says it may be upwards of $300 million. Last weekend saw media reports based on leaked internal estimates by the former owner, BHP, which put the total cost of decommissioning, including other costs such as payouts to employees, at $1.4 billion.

So why does no rehabilitation bond attach to Palmer’s nickel refinery?

“It appears to be the case that the state government, as a matter of policy, has only sought financial assurances from mines,” says Jo-Anne Bragg, who is a lawyer and chief executive of the Queensland Environmental Defenders Office. “But under the Environmental Protection Act there is no restriction. They could choose to seek assurances from others.”

She thinks the government should demand such assurances. There should also be an audit of assurances now in place, she says.

“The problem of mining companies not cleaning up after themselves is not a new one. In 1992, when I started this job, there was controversy because a public servant had blown the whistle on $800 million of unrehabilitated mine sites. So it was a public issue that long ago.

“Last year it came up again when a silver mine on the Queensland–New South Wales border went into liquidation. It was discovered it had a financial assurance of $2 million, but the estimated cost of cleaning up was $9.7 million. It keeps happening.”

The Queensland auditor-general’s report estimated some 15,000 abandoned sites in that state alone would cost $1 billion to clean up. Tim Buckley reckons it is 10 to 20 times that.

Across the nation there are 52,500 unrehabilitated sites, according to Corinne Unger, of the Centre for Mined Land Rehabilitation at Queensland University.

“The big picture,” says one senior analyst, “is that we are moving to a situation where we will see a large number of mines closing and a number of the companies that have developed them wanting to play pass the parcel.

“You don’t have to be a rocket scientist to see that the more selling there is, the greater the risk that at the end of the day they won’t be able to find the capital to do the rehab.”

The threat applies to all commodities that have fallen in value during the resources bust, but it applies most acutely to coalmines. While there is reason to hope other mineral resources could boom again, coal is increasingly seen as being in structural rather than cyclical decline.

The result is a fire sale of assets. 

Rio Tinto’s Blair Athol coalmine in Queensland, for instance, was put into care and maintenance in 2012 – an alternative to closure that companies use while hoping for improved prices or to avoid having to meet rehabilitation obligations. In 2013, the mine was sold to Linc Energy for $1. The rehabilitation security was $84 million, although credible experts suggest the true cost is likely much higher.

Linc Energy in turn sold the mine to another small operator, United Mining Group, although the deal allowed Linc to share in any future revenue stream. 

“Importantly,” Linc noted in a statement notifying the sale, “UMG will be responsible for all future development costs and liabilities…”

Pass the parcel. 

There are many other examples of major companies selling out to small players who may or may not be able to meet future liabilities. The big accounting firm Ernst & Young, in a report just this week, predicted much more parcel passing in the year ahead.

But there’s more. The NSW government recently agreed to allow Anglo American to simply leave a huge void behind when it finished mining operations at its Drayton mine near Muswellbrook in the Hunter Valley.

The miner successfully argued it would simply be too expensive to fully restore the landscape.  Instead it would leave a hole which would gradually fill with water to a depth of 160 metres.

“That’s their idea of rehab, to build a massive toxic lake and build a fence around it,” says Hannah Aulby.

Rio Tinto also plans to save money by leaving a massive void behind at its expanded Mt Warkworth mine.

“It’s a big saving for the miner. It takes about $2 billion off  the estimated cost of fully rehabilitating the site,” says Buckley.

Some 30 similar toxic lakes are in prospect at other places in the Hunter and, says Aulby, in Victoria’s Latrobe Valley.

“It all points to the fact that governments should hold these bonds as cash rather than bank guarantees, and also in adequate amounts,” says the Greens’ environment spokesperson, Larissa Waters. “It should be a cost of operating. Mines borrow billions already to get operations under way. Why should they not borrow more to cover the full cost of rehabilitation, and be held to it? Why should it be the taxpayers who bear the liability?”

It’s a fair question, but neither major party appears serious about answering it.

And so the third law of holes continues to apply in Australia: even when they stop digging, we’re still in one.

This article was first published in the print edition of The Saturday Paper on Feb 6, 2016 as "Loop holes". Subscribe here.

Mike Seccombe
is The Saturday Paper's national correspondent.