DEA CLARIFICATION NOTE ON FINANCIAL PROVISION REGULATIONS PUBLISHED
The Regulations Pertaining to the Financial Provision for Prospecting, Exploration, Mining or Production Operations (GN R1147 on 20 November 2015) (“the Regulations”) were published on 20 November 2015 and the mining industry has raised its concerns regarding the implementation of these regulations. In response to the concerns the Department of Environmental Affairs (DEA) compiled a Clarification Note document which DEA believes will aid in interpretation and smooth implementation of the regulations.
The Clarification Note confirms that the scope of the financial provision includes rehabilitation, decommissioning and closure activities at the end of the life of mine and remediation and management of latent or residual environmental impacts that may become known in the future, including the pumping and treatment of polluted or extraneous water. The intention of the Regulations is to ensure that there is adequate and appropriate provision for managing environmental impacts throughout the life of a mine, as well as for latent/ residual impacts.
Rehabilitation Plans and Required Funds
The new Regulations require the following three plans from mining right holders:
- Annual rehabilitation plan that lists the ongoing rehabilitation activities required during the operational life of mine (Annual Rehabilitation);
- Final rehabilitation plan, decommissioning and mine closure plan (Mine Closure Rehabilitation) that includes details of the final rehabilitation and consider how the land will be used post-closure; and
- Environmental risk assessment on latent impact (post-closure).
A financial provision must include the cost associated with implementing the abovementioned plans 10 years going forward based on the current mine plan.
The Chamber of Mines has raised its concerns regarding double-funding, since financial provisions must include costs for annual rehabilitation, although these costs also form part of an operations annual operational budget (http://www.financialmail.co.za/features/2016/06/03/mine-rehabilitation-new-regulations-for-clean-up). The Clarification note confirms that financial provisions must provide for the costs included in the annual rehabilitation plan and that the costs spent can be deducted from the financial provision during the annual review. It should be kept in mind that the financial provision will not necessarily reduce as the costs for new areas to be disturbed in the year must be included.
The Clarification Note states that “the rates that must be used must be with external contract rates according to general practice, although the Regulations do not specifically provide for this”. In calculating financial provisions quantity surveyor rates will therefore have to be used.
The Regulations specifically provides that Rehabilitation Trusts may only be used for post-closure funding (latent or residual environmental impacts) and not for annual and mine closure rehabilitation. Trust funds can therefore only be utilised once the final rehabilitation and closure plans have been carried out.
DEA has indicated in its Clarification Note that existing trusts funds may be managed as before, but new trust funds may only be used for post-closure funding and not for annual and mine closure rehabilitation. Existing rehabilitation funds will therefore not be required to be wound up and re-allocated to alternative financial vehicles to meet the requirements of the Regulations.
Care and Maintenance
The Regulations provide for the care and maintenance of mining operations and “deemed closure of mines”, which were not so comprehensively regulated under the Mineral and Petroleum Resources Development Act 28 of 2002 (“MPRDA”) and the Mineral and Petroleum Resources Development Regulations (“GNR 527”). The Clarification Note defines Care and Maintenance as “…… the state of a mine’s operations where there is deviation from the normal mining operations”.
The mandate for care and maintenance have been questioned, but the Clarification Note explains that the care and maintenance provisions contained in these Regulations deal with aspects inherent to financial provision in cases of care and maintenance to ensure that financial provision is regulated during periods when mines are placed under care and maintenance. Without these provisions there will be no clarity on how to deal with financial provision in situations of care and maintenance.
The requirements include inter alia that:
- Operations must apply to be placed under Care and Maintenance and must prepare a Care and Maintenance Plan.
- Operations may not operate under Care and Maintenance without an approval from the Minister of Mineral Resources.
- The Care and Maintenance Plan must comply with the information requirements set out in Appendix 6 to the Regulations.
- The Care and Maintenance Plan must be updated and audited annually. The audit report must be submitted to the DMR with a motivation to remain under such care and maintenance and a forecast of care and maintenance will no longer be required.
- Care and maintenance is only applicable for 5 years where after re-application must take place.
- The DMR must be notified when a mining operation wants to resume operations. The Care and Maintenance
- Plan must be audited and reviewed on an annual basis.
- All other requirements as specified in these regulations must be adhered to during this period.
The Clarification Note confirms that a public participation process is not required for a care and maintenance plan and that Appendix 6 should be amended by deleting the reference to “interested” in the wording of the Appendix.
Operations that obtained its mining right or permit after 20 November 2015 will be required to apply for care and maintenance in terms of the requirements of the Regulations. Operations that were placed under “care and maintenance” in terms of a MPRDA directive before the coming into effect of these Regulations must give effect to the directives issued and will not be required to comply with the care and maintenance requirements of the Regulations. Operations that obtained its mining rights before 20 November 2015 are not included in Regulation 16 and will not be required to submit an application for care and maintenance. According to the Clarification Note Regulation 16 will have to be amended to correct the oversight to include “holder”.
Under the transitional arrangements financial provisions approved under the MPRDA must be regarded as having been approved under these Regulations. Approved financial provisions must be reviewed and aligned with the Regulations either three months after the company’s financial year end following the coming into effect of these Regulations or 15 months after the publication of these Regulations (February 2017). The review, assessment and adjustment of the financial provision must be submitted together with required rehabilitation plans and environmental risk assessment report. According to the Clarification Note the transitional provision will be amended to extend the 15 months’ provision of regulation 17(5)(b) to a period of 24 months.
Other proposed amendments
The Clarification Note proposes the following amendments to the Regulations:
- In the Regulations “Holder” refers to holders of a prospecting right or mining permit or exploration right or production right who were required to make financial provision the MPRDA before 20 November 2015. Holder of a right or permit refers to those holders whose right or permit was issued after 20 November 2015. It is proposed to revise the definition to address the concern related to all relevant holders and holders of a right or permit.
- Appendix 1 to be amended to allow for certain types of amendments to be made, excluding the amendment of terms and conditions but for example the amendment of the period of validity of the guarantee.
- The Regulations will be amended to delete “which shall be reckoned from 1 March to 28 February” for rectification in 13.2 of Appendix 2. It was not the intention that all trusts must have its financial year end on 28 February.
- Regulation 8(1)(c)(i) specify that only financial guarantees and cash may be used for annual or final rehabilitation. Section 2.2 of Appendix 2 must be amended to exclude final rehabilitation; currently only annual rehabilitation is excluded.
- Regulation 13(3) provides that the Chief Executive Officer and the Independent Auditor must sign off all documentation submitted to the DMR. It is proposed to amend this regulation to clarify that the Independent Auditor is only required to sign off on the costing and financial aspects of the documents submitted.
Issues not addressed
The following tax concerns were not addressed in the Clarification Note, however DEA has undertaken to have discussions with national treasury, the South African Revenue Service and DMR on the trust fund issues and its tax implications:
- The tax benefit in terms of the section 37A of the Income Tax Act 58 of 1962 (“Tax Act”) has by implication been removed.
- The Regulations and the Trust Deed in Appendix 2 of the Regulations, to which current trusts must be aligned, do not conform to the Tax Act.
In terms of the Regulations a Financial Guarantee must now comply with the standard form in Appendix 1 of the Regulations. A tight deadline of two (2) business days to make payment to DMR should it call on the guarantee has been included in clause 2 of Appendix 1. It will be very difficult to assess the reasonability of the claim and to oppose the claim in the timeframe provided for in the Regulations. This concern has not been addressed or acknowledged in the Clarification Note.
Clause 2.1.3 of Appendix 1 provides that a guarantee may be called where rehabilitation has been undertaken, but “adequate progress” has not been made. It is firstly uncertain if the entire guarantee amount can be called up and secondly how “adequate progress” is defined. This concern has also not been addressed in the Clarification Note.
Clause 3 of Appendix 1 provides that “the Guaranteed Sum may be held and utilised by you on the condition that you, after having complied with all the provisions of the final rehabilitation, decommissioning and mine closure plan or environmental risk assessment report, will, within 1 year from the date of the payment of the sum by the Guarantor, give account to the Guarantor (in reasonable detail) of how the Guaranteed Sum was utilised and repay any portion of the Guaranteed Sum which was not so utilised to the Guarantor. All monies repaid to the Guarantor in terms of this Guarantee shall bear interest at the prime overdraft rate of your bank compounded monthly and calculated from the date payment was made by the Guarantor to yourself until the date of refund”. The DMR (Minister) will have to give account to the Guarantor of how the money was utilised within one year from the date of the payment by the Guarantor, any portion which remains unutilised must be refunded to the Guarantor with compound interest at the prime overdraft rate. It is unclear how a mining operation can be rehabilitated within one year and how this timeframe will secure the State against future latent liabilities.
The Clarification Note recommends that the transitional provision should be amended to extend the 15 months’ provision of regulation 17(5)(b) to a period of 24 months. It should, however, be noted that this Clarification Note does not have the legal standing to amend the requirements of the Regulations and that this is only a recommendation. The provisions of the Regulations are legally in force and form part of binding South African legislation and mining operations must comply with its provisions. Currently mining operations must ensure that its approved financial provisions are reviewed and aligned with the Regulations either three months after the company’s financial year end following the coming into effect of the Regulations or by February 2017. The reviewed financial provision must be submitted to the DMR together with required rehabilitation plans and environmental risk assessment report. One can only hope that the amendment of these Regulations will happen sooner than later.
For more information, please find a copy of the Clarification Note here.
For assistance with implementation of the new Regulations please contact Jan Nel 082 379 5935 or email@example.com from our Rehabilitation department.