Dodging clean up costs: Six tricks coal mining companies play
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This report looks at six methods that coal companies operating in Australia currently use to avoid, minimise or delay their rehabilitation obligations in New South Wales and Queensland. The existing legal framework and it seems, those overseeing it, allow public and private companies to game the system by avoiding their rehabilitation responsibilities. The result is unnecessary, and in some cases extreme, costs that are borne by the taxpayer when proper rehabilitation is performed.
As demand for coal falters and prices fall, mine closure looms, and the prospect of rehabilitation becomes a reality for most coal miners. Established, well-resourced coal companies are rapidly exiting their coal positions and there is a trend for inexperienced, newly created companies to buy marginally profitable mines, all of which will require rehabilitation. The case studies in this report, all within the last two years, illustrate the methods companies successfully employ to avoid, minimise or indefinitely postpone rehabilitation obligations. We include two additional case studies about banks and minnows purchasing unprofitable mines. One shows how ANZ bank nudged an ASX-listed coal company towards insolvency and then transferred its obligations to pay for financial assurance to a major shareholder of the company. The other case study details how a start-up company avoided scrutiny of its technical and financial capabilities when it took over a coal mine in Queensland.
Despite the dictionary definition of ‘rehabilitation’, rehabilitation does not necessarily require restoring a mine to its former state or to a condition of health or useful and constructive activity. In some instances, the site simply needs to be ‘safe’. Voids may not need to be refilled and prime agricultural land or state forest may not need to be restored to its former glory – and in many cases excessive disturbance caused by mining makes this impossible.
Before mining operations commence, coal companies typically commit to a ‘rehabilitation management plan’ in order to comply with the licences it needs to operate. A promise to rehabilitate will also go to a miner’s social licence. However, proper rehabilitation can be expensive. There is tension between companies acting in the best interests of their shareholders and committing to an expensive, but adequate, clean up.
In New South Wales and Queensland, where most of Australia’s coal mines are located, rehabilitation costs are secured by bank guarantees. This system provides benefit to both coal miners and the state. Miners do not pay any money to the government but organise a bank to provide a guarantee. The guarantees are often secured by the mine itself and serviced by a yearly fee. This frees up capital for mining operations. In turn, governments receive a very solid third party guarantee for rehabilitation costs in case the mining company is unable to meet its obligations. Unfortunately in many instances bank guarantees are insufficient and there is a risk that tax payers will foot the bill to rehabilitate land if a company goes bankrupt. Alternatively, sites may never be rehabilitated.
Other issues arise. For example, companies strive to minimise rehabilitation costs as well as keep those costs off their balance sheets. Doing so enables the companies to keep operating in times of financial distress despite looming rehabilitation liabilities.
Six ways to avoid rehab
#1 CARE AND MAINTENANCE
This is the term for putting a coal mine in mothballs. It’s on the spectrum somewhere between digging and closing down. At least one private law firm acknowledges that it is ‘not surprising’ that companies are placing mines into care and maintenance in the current economic climate. When a mine is in care and maintenance, its operator ostensibly waits for the saleable price of its product to increase so the mine can start producing again. As such, the mine does not need to be rehabilitated and future costs stay off the balance sheet. In Queensland, the term ‘care and maintenance’ is not defined in legislation. A mine could be in care and maintenance in perpetuity, or until the mining company goes bankrupt.
The Queensland Audit Office (2014) recognised that government responsibility for mines in care and maintenance is unclear which has led to inter-departmental disputes. The company controls whether the site is in ‘care and maintenance’ and those sites appear to be handled by the Department of Natural Resources and Mines. Environmentally speaking, the only requirement is to comply with ‘care and maintenance’ provisions. Thus, it appears difficult for the government push mines from ‘care and maintenance’ into rehabilitation. As at July 2013 in Queensland some 104 mines were in care and maintenance. In contrast, approximately 60 large-scale coal mines were in operation and between 15,000 and 17,000 mines of all types had been ‘abandoned’ in Queensland. There are approximately 50,000 abandoned mines in Australia.
#2 EXTRACT UNTIL CASH RESERVES RUN DRY
In February 2016 Goldman Sachs recognised that if a mine is running at a loss and expects to keep doing so, instead of ceasing operations, getting a start on rehabilitation and paying out workers’ entitlements, there is a financial advantage to the company to keep operating the mine until the company’s cash reserves run out. Of course, while the mine is operational, there is always the hope that the mining cycle will rebound. That seems unlikely in the current circumstances as many analysts recognise coal is in structural decline. If governments do not have sufficient financial assurance for the total rehabilitation costs, the site may never be rehabilitated or the taxpayer will foot the bill. With respect to climate change coal-producing, loss-making mines keep coal markets oversupplied and prices low, encouraging more short-term coal use instead of cleaner alternatives.
#3 DON’T REHABILITATE
In 2015, the New South Wales state government conceded it would cost $2 billion to fill in just one single void at Rio Tinto’s Mount Thorley coal mine. Since the amount was so high, a spokesman said, ‘it would not be reasonable to impose a condition that requires Rio Tinto to completely or even partially backfill the final void’. The void was four times the size of Sydney’s Centennial Park. Nevertheless, a Rio Tinto spokesperson reportedly said ‘[t]he final void will be largely hidden from view due to the surrounding landscape and extensive rehabilitation works planned after mining’. From this statement it is clear that Rio Tinto’s understanding of ‘rehabilitation’ falls well short of restoring a site to its former state.
#4 SELL TO AN UNKNOWN MINNOW
The dual threat of rehabilitation liabilities going way beyond financial assurance and banks calling on assets securing the guarantee might make holding on to mining operations too financially risky for parent companies. Unfortunately for coal miners, there are a number of coal mines on the market in Australia (and around the world) so sales prices are depressed. A recent example of a fire sale occurred following global trading giant Sumitomo Corporation’s 2011 purchase of 50% of the Isaac Plains mine in Queensland for $430 million. In the middle of 2015, the mine was sold for $1 to Stanmore Coal. Likewise the once-global mining giant Anglo American Plc in December 2015 sold for A$25m the Dartbrook ‘mine’ (actually a non-rehabilitated ex-mining site in care and maintenance for a decade) in the Hunter Valley to an ASX-listed minnow called Australian Pacific Coal (market capitalisation of A$13m at the time), which was then headed up by the now bankrupt Nathan Tinkler.
CASE STUDY: MINNOWS AVOIDING SCRUTINY
Batchfire Resources Pty Ltd, a company registered on 29 July 2015, entered into a ‘share sale agreement’ with Anglo American Coal to purchase the Callide mine in Queensland in early 2016. Batchfire is associated with failed coal ventures abroad and raised only $750,000 to proceed with the transaction. The ‘share sale agreement’ is where the shares in the operating company, Anglo Coal’s subsidiary, are sold to Batchfire. This means the ABN of the company operating the Callide mine does not change, and Batchfire was able to avoid scrutiny by the minister of the company’s ‘financial and technical capabilities’ required to run a coal mine in Queensland. This appears to be a loophole as any transfer of mining licences to a different company, or an application for a new licence, would be subject to governmental scrutiny. Furthermore, since the corporate identity of the environmental authority did not change, there was no requirement for DEHP in Queensland to review whether Batchfire had an appropriate environmental history for it to be an eligible ‘suitable operator’ that could run the mine.
If an existing mine expands instead of closing, companies can put off provisioning for rehabilitation costs on to their balance sheets. For example, when the expansion of Drayton mine in New South Wales was refused, Anglo American made the step of provisioning US$224 million in its financial accounts to pay for shutting down the mine. Not only does expanding a mine buy time to avoid rehabilitation and other closing costs crystallising on balance sheets, it also makes the mine a more attractive prospect for potential buyers.
Objections to mine expansions on the basis of rehabilitation and the future financial success of the proponent face difficulties. A recent example comes from Queensland concerning the expansion of the Baralaba coal mine. A neighbouring farmer objected on these grounds, but the amount of financial assurance for the expansion was at the time unknown. The legislative process for objections in Queensland means objections are dealt with before the amount of financial assurance is proposed by the company and then assessed by DEHP, the Department of Environment and Heritage Protection. There is no specific right of objection to the level of financial assurance finally set. Arguments were put by an objector that coal markets were in structural decline and the mine would not be profitable. The company, Cockatoo Coal, responded that the market would improve and the mine would return to profitability. During the case the company was placed into administration. Further evidence was provided by staff previously employed by Cockatoo that the administrators could return the mine to profit. The court, reviewing the evidence before it, agreed with the position that things would improve. Within two months of the court’s decision the administrators placed the mine into care and maintenance and provisioned for rehabilitation costs. The proposed expansion never occurred because of the dire outlook for coal, but the expansion plans still received judicial approval. Despite the downturn in coal prices, a number of mines are seeking to expand operations. Amongst them is the Callide mine in Queensland that was recently sold by Anglo Coal Plc to a minnow with minimal assets, and the Wilpinjong mine in New South Wales which is owned by Peabody Energy Inc, a US coal giant on the verge of bankruptcy.
CASE STUDY: BANKS TRANSFERRING LIABILITIES OF GUARANTEES
ANZ bank threatened to pull its financing facility from Cockatoo Coal in 2015. Cockatoo operated the Baralaba mine in Queensland which was seeking to expand. ANZ’s facility included $34.5 million in bank guarantees for rehabilitation. The guarantees were not secured by cash but presumably by other assets, possibly the mine itself. Cockatoo acknowledged ANZ’s review of its financing facility could impact its solvency. ANZ appears to have successfully withdrawn from its responsibilities under the bank guarantee, and in the end, Cockatoo’s 41% shareholder took over responsibility for financing the company. Unfortunately for the shareholder, Cockatoo entered into administration and the shareholder, whose shares are essentially worthless, is ultimately responsible for any draw downs on the bank guarantee. The 22 February 2016 report by Cockatoo’s administrators confirmed provisions of $7,256,373 and $4,547,401 were raised for the Baralaba mine, now in care and maintenance.
#6 INAPPROPRIATE DISCOUNTS
The government of Queensland applies discounts to the amount of financial assurance held by way of bank guarantees. The financial assurance amount asked by the government will probably be less than actual costs of rehabilitation. On top of that mining companies can receive discounts of up to 30% on the calculated financial assurance amount.
Discounts can be granted in relation to the ‘financial standing’ of a company. The requirement is that the miner must be ‘solvent and not in external administration’. Companies on the brink of bankruptcy are still seeking this discount. Peabody Energy Inc, the world’s largest private-sector coal mining company, is the 100% owner of the Millennium coal mine in Queensland. Bloomberg reported on 21 January 2016 that Peabody was the coal miner ‘on everybody’s list as [the] next bankruptcy victim’. On 25 February 2016, the Millennium mine’s compliance statement said ‘[a] 10% discount for the financial stability of the company … has been applied for’. Peabody did the same for the Burton mine. The total known discount for Peabody’s ‘financial stability’ is approximately $10 million. According to documents obtained by EJA the total discounts for three Peabody mines in Queensland is $24 million.
Another example is Adani’s proposed Carmichael mine. Despite the public backlash, analysts stating the project is a stranded asset, economists saying it is not viable, the Queensland Treasury department’s recognition of financial risk, the refusal of international banks to back it and the $20 billion required to finance it, the company could still apply for a discount on the basis of ‘financial stability’ since the threshold is so low.