03/12/2008 - 22:00

Enviro bonds cause concern

03/12/2008 - 22:00

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ENVIRONMENTAL performance bonds may be emerging as the latest source of angst for junior explorers and local miners, as tougher banking regimes and rising costs create a new hurdle to business in the minerals sector.

Enviro bonds cause concern

ENVIRONMENTAL performance bonds may be emerging as the latest source of angst for junior explorers and local miners, as tougher banking regimes and rising costs create a new hurdle to business in the minerals sector.

The global financial crisis is the key to the issue, with banks understood to have become less comfortable with providing guarantees underpinned by productive assets, and increasingly demanding cash before they will back the bond.

An executive at one big mining company said the rising cost was adding to the funding challenge.

"It is becoming a more difficult thing to arrange funding and debt arrangements have obviously become more contracted given the financial crisis," the executive said.

The credit crunch has also combined with the former state Labor government's decision to increase bond rates substantially in July this year, as much as doubling rates at the higher risk end.

Environmental performance bonds range from just a few thousand dollars to many millions. Supported in-principle by the industry, they are provided as security by companies involved in exploration or mining activity as part of their commitment to rehabilitating the land.

Grange Consulting managing director Ian Macliver said he was aware of the bond issue as a growing problem for companies given the current market for funding.

"It is becoming increasingly common for banks to insist on cash backing to support the bonds as opposed to other forms of security," Mr Macliver told WA Business News.

According to a Department of Industry and Resources report in December 2006, there was about $480 million in bonds across 500 active mine sites representing about 25 per cent of the total expected cost of rehabilitation.

It is understood the new government is reviewing the current and proposed pricing structure to reduce the compliance costs for miners and explorers facing a funding crisis amid big drops in commodity values.

In 2006 the cost at the highest risk end was $12,000 per hectare, but that is now $20,000/ha for new bonds. Moderate risk site costs have gone from $10,000/ha to $20,000/ha in the same period.

Before it's recent election loss, Labor had also announced a change to the method of calculation from the blanket per-hectare price regime currently used, to one determined on a case-by-case basis to come into force in July 2009.

Under the scheme proposed by former resources minister Fran Logan to commence in July 2009, mine owners would be required to provide a self-calculated, independently verified estimate of the rehabilitation and closure costs of proposed mining operations.

A new bond estimation tool was to be developed to produce a more consistent and accurate estimation of those costs, to be paid before a project started.

At the upper end of the bond scale are mining companies such as Iluka Resources Ltd, which has about $100 million of these guarantees in place across the country, with each jurisdiction having different requirements.

Minara Resources Ltd is another with big arrangements of this nature, having $36.3 million in such bonds at the end of 2007, a number believed to be more like $50 million now.

While the need for the bonds is not questioned by the industry, both the Chamber of Mineral and Energy and the Association of Mining & Exploration Companies said the issue of cost and compliance had come on their radar.

"We are aware of some concerns and have offered to work with the state government to see if there are any possible solutions," a CME spokesperson said

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