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natural resources and environment | 09 Jul 2019
BY Edwin Berman , Ntsiki Adonisi-Kgame AND Zinzi Lawrence
ENSight

natural resources and environment


How will the 2019 Proposed Financing Provisioning Regulations affect mining companies?

In May 2019, the South African Proposed Regulations Pertaining to the Financial Provision for the Rehabilitation and Remediation of Environmental Damage caused by Reconnaissance, Prospecting, Exploration, Mining or Production Operations, 2019 (the “2019 Regulations”) were released for public comment. The 2019 Regulations are informed by industry consultation, however, they still fail to address some of the serious concerns raised by the mining industry and introduce new onerous provisions.

The first attempt at regulating financial provision for costs associated with the remediation and rehabilitation of impacts to the environment associated with mining activities, was through the Financial Provisioning Regulations, 2015 (the “2015 Regulations”). Following an outcry from the mining industry, the 2015 Regulations were amended on 26 October 2016. Since then, two iterations of the financial provision regulations (2017 and 2019) which sought to repeal the 2015 Regulations, have been published.

Some of the effects of the 2019 Regulations on mining companies are the following:

Applicants and holders

Applicants and holders of reconnaissance permits will be required to provide financial provision for rehabilitation. By definition, reconnaissance permits, as contemplated in the Mineral and Petroleum Resources Development Act, 2002, involve non-invasive work and therefore do not lead to environmental harm. Accordingly, there is no basis for requiring holders of reconnaissance permits to make financial provision.

Double provisioning

Regulation 7(3) provides that funds set aside for financial provision must remain in place until a closure certificate is issued, unless a withdrawal as contemplated in regulation 11 is allowed”. Regulation 11 outlines the procedure for holders to follow when seeking to withdraw financial provision, and provides that the Minister of Minerals and Energy (“Minister”) must approve withdrawals with the concurrence of the Ministers of Human Settlements, Water and Sanitation and of Finance. The withdrawal of financial provision can only occur after the stringent requirements stipulated in regulation 11 are met and are only allowed for decommissioning and final closure and not for ongoing or concurrent rehabilitation.

Since the financial provision is not accessible to the holder for use during the life of the right, the holder has to effectively make double provision (the first being financial provision and the second being actual expenditure incurred for rehabilitation). The implications of regulation 7(3), read with regulation 11, is that there will be a rise in the cost of mining.

Auditing and specialist reviews

Regulation 12(2) prescribes that the determination, review and assessment of financial provision must be undertaken by a specialist. Regulation 13(1)(a) requires that the assessment undertaken by a specialist must be audited by an independent auditor, included in an environmental audit report and must be submitted for approval to the minister. This however places an extraordinarily administrative and cost burden on the industry, more so on junior mining companies.

Value-added tax

Another onerous provision introduced in the 2019 Regulations is the inclusion of value-added tax (“VAT”) in the financial provision calculation. Expanding money for rehabilitation is not a vatable supply as contemplated in the VAT Act, 1991. Inevitably, this will result in a further increased cost of mining in addition to the issues of duplicate funding/double provisioning and the burden of auditing discussed above.

Date of compliance

Holders of prospecting rights and mining rights or permits, who applied for the right or permit prior to 20 November 2015, will be required to comply with the new regulations no later than three months following the first financial year end of the holder post 19 February 2020. Given that the due date for submission of comments to the 2019 Regulations was 1 July 2019, the 2019 Regulations are most likely to be finalised later this year, giving holders insufficient time to comply with the 2019 Regulations. Current financial provision quantum calculations for holders would need to be revised in accordance with the new methodology and this would require existing holders to fund the increased financial provision. Practically, most mining companies will encounter difficulties with complying within the contemplated compliance date.

Penalties and offences

The 2019 Regulations have increased the number of offences thar are punishable, by a penalty of up to ZARR10-million, or up to 10 years imprisonment, or both a fine and imprisonment. The offences include inter alia, the failure to provide funds for annual rehabilitation from the operational budget and set aside funds for financial provision; the failure to provide funds using one of the agreed vehicles and failure to make reviews and decisions accessible to the public.