Five steps to improving financial provisions for mine closure

Challenges in planning and executing closure at the end of a mine’s productive life have commonly resulted in overruns in project costs. But by acting early, adopting a strategic approach and working closely with communities and other stakeholders, mining companies can improve the accuracy of cost estimating.

Mines are providers of essential commodities and significant generators of employment and economic activity for local communities, but they inevitably have a finite life. The way in which a mine’s closure is planned can have broad-ranging implications for the environment, the local people and the mining company responsible for safe and sustainable closure.

These and other aspects of closure demand considerable resources and funding from mining companies, and their inherent complexities and challenges all too often result in cost overruns. Our analysis of mine closure projects has found that most overrun their initial cost estimates by between 20 and 100 percent, and 92 percent of projects are inadequately funded.

Although it is tempting to view mine closure as a remote future expense, the costs of decommissioning, closure and reclamation need to be assessed early. Increasing scrutiny of sustainability efforts mean mining companies are being asked to show ahead of development how they will not only deliver the technical aspects of mine closure and reclaim the landscape, but also plan for socio-economic transitioning. As part of this scrutiny, mining companies may be required to make financial provisions, setting aside the funding needed to deliver on their plans.

The risks of inaccurate costing

Over the course of its productive life, the mine and its operating environment will evolve significantly. Mine layout, closure date and execution methodologies are likely to change and legislation to be updated while the often remote location of the mine itself can present barriers in managing multiple disciplines to deliver a tailored remedial solution. These factors can all make it challenging to accurately estimate a mine’s closure costs through its life.

For mining companies, the overriding risk is that poor closure planning and costing may result in capital-investment decisions being underestimated and even lead to incomplete reporting of financial obligation.

They may experience a range of negative consequences, including:

• Reduction in capital for development or expansion
• Claims and disputes with contractors, the community or the regulator
• Delays in revenue opportunities for repurposed sites
• Inability to maximise sustainable potential
• Increased bond requirements
• Reputational damage
• Inability to continue operations through loss of licence to operate.

Successful financial provisions for mine closure requires a strategic and collaborative route to addressing the challenges. Drawing on our experience working with clients in the sector, we have defined a structured approach for closure projects of all sizes, which is based on an in-depth consideration of the site, community expectations, regulator requirements, the impacts of global climate change and the project scope.

The five key stages are:

1. Look to the constraints and opportunities of location

When considering the mine site’s location, it is essential to look beyond geographical position to factors including climate, topography and access to water sources and materials. It is important to understand what is possible in terms of current site conditions, how infrastructure can be repurposed and site constraints. Ultimately, post-closure opportunities will be limited by the mine’s location and its ability to support activities.

2. Build understanding with communities

Surrounding communities and other stakeholders are central to the mining company’s licence to operate and are a key group to engage with on the potential impacts. For example, for smaller communities, mine closure could result in a major loss of revenue and employment.

Mine-closure planners need to interrogate what the local people want and need, possible alternative revenue streams for the specific site and the training required to implement change. Companies need to engage with people to understand and set expectations for the site, as well as likely timescales. Expectations of the mining company, community and regulators all need to be aligned.

3. Engage early with regulators

The way in which regulators plan to interpret regulations may have an impact on ability to implement revenue-generating opportunities, making effective and early collaboration between stakeholders critical.

The role of regulators is to return the site to beneficial land use, ensure it is safe, non-polluting and stable, and prevent long-term detrimental social, economic or environmental impacts, such as land subsidence. Regulators do that by setting objectives, preparing detailed requirements for the mine closure plan, establishing requirements for mine closure guarantees and implementing processes to ensure plans are implemented properly.

However, a survey that we carried out with Mining Journal and SRK Consulting in 2020 found only 15 percent of mining industry professionals had confidence that regulatory agencies in their jurisdictions had the capability and/or capacity to adequately monitor and approve closure projects.

The onus is, therefore, on mining companies and communities to determine and implement closure plans that meet the needs of stakeholders while complying with local regulations.

4. Factor in the impacts of climate-change issues

Global warming and climate change will potentially impact the closure cost of mines, particularly those with a long operational and/or post-closure duration. As the environmental impacts of global climate change on a site become understood, they need to be factored into provisions and into the ensuing closure plan and cost estimate.

5. Determine the full scope of closure

It is essential to gain a complete understanding of the scope of closure, spanning mine infrastructure decommissioning, demolition and reclamation activity. By beginning the cost estimation process at an early stage and maintaining focus on cost during the mine’s operational life, it is possible to gain an improved comprehension of closure costs and how they need to be re-baselined as the mine evolves.

Project management expertise is also critical in determining overall cost. The execution plan, contracting strategy and logistics plan all have an impact on cost and understanding these impacts. Using lessons learned to determine the best approach will help in controlling cost overruns.

Set for success

More accurate estimating of the costs of mine closure requires a structured and consistent approach, with involvement from all parties. Many factors play into developing a closure plan that meets expectations on cost, and strong relationships with regulators and community partners will ultimately determine project success.