Rehabilitation financial guarantee question?

The rehabilitation of the environment adversely affected by mining activities has been for some time a debate topic among role players in the mining industry. 

Procedures to withdraw?

One of these topics is whether there are any regulatory procedures to be followed by a financial institution to withdraw a financial guarantee that it may have furnished to the Department of Mineral Resources (DMR) on behalf of a mining company in respect of that company’s mining operations. 

The requirements to issue financial guarantees for rehabilitation obligations have come a long way under South African Law relating to mining operations. On 20 November 2015 the Financial Provision Regulations pertaining to the financial provision for prospecting, exploration, mining or production operations, published in GNR 1147 of 20 November 2015, under NEMA (the Financial Provision Regulations) were published. 

Regulation 17(17) of the Financial Provision Regulations (part of the transitional arrangements) specifically provides that, in the event of a bank or financial institution intending to withdraw the financial guarantee, which was issued prior to 20 November 2015, Regulation 8(3), 8(4), 8(5) and 8(6) of the Financial Provision Regulations, apply (notwithstanding that the financial guarantee was issued prior to the coming into force and effect of the Financial Provision Regulations). 

In effect, the Financial Provision Regulations regarding the withdrawal of financial guarantees, applies retrospectively. 

Procedures to follow

In this regard, Regulations 8(3) to (6) will determine the procedures that have to be followed by a bank or financial institution when withdrawing a financial guarantee. 

  • The bank would have to provide the Minister of Mineral Resources, the Minister of Environmental Affairs and the mining company who was covered by the guarantee, with at least four months’ notice of its intention to withdraw the guarantee, irrespective of what was initially stated in the guarantee furnished to the DMR.
  • Once the mining company has received the notice from the bank, the mining company will have seven days to notify the Minister of Mineral Resources and the Minister of Environmental Affairs of the bank’s intention.
  • The Minister of Mineral Resources shall, within 10 days of receiving the mining company’s notice, request the mining company to provide an alternative arrangement for financial provision within 60 days of receipt of the request. 
  • If the mining company fails to provide an alternative arrangement within the 60 day period, the Minister of Mineral Resources must call on the financial guarantee and deposit the money guaranteed in terms thereof into a bank account, which he will administer until such time as the mining company has provided the Minister of Mineral Resources with a suitable alternative.
  • The Minister of Mineral Resources will only release the guarantee once the money has been paid into the designated bank account, or an alternative arrangement has been made for the financial provision by the mining company. 
The Financial Provision Regulations make it mandatory for the Minister of Mineral Resources to call up the guarantee provided by banks and financial institutions in the event that the intended withdrawal of the guarantee has been communicated, and the holder of the right is unable to make any alternative arrangements for financial provision to the DMR. 

Financial institutions and banks are left exposed when they wish to withdraw a guarantee that had been issued to the DMR for rehabilitation purposes. 

In the event that the mining company is unable to provide a suitable alternative guarantee, the Minister of Mineral Resources will call up the existing guarantee, and administer it in a manner that he/she deems appropriate. It would appear that no provision is made for interest once the money has been paid in to the designated account, and there is no time period specified for the return of the existing guarantee or any money that may remain in the designated account once a suitable guarantee has been furnished to the Minister. 

It can be argued that should a mining company be placed under business rescue or liquidation, and as a result is unlikely to obtain a suitable alternative guarantee, the Minister of Mineral Resources will not release any money called up in terms of the existing guarantee, back to the financial institution or bank.

Published in Business Brief October/November 2016.

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