Feeling the pinch: NEMA & environmental rehab

For mines and quarries, the challenge has never been greater:  how will you efficiently manage your environmental rehabilitation obligations under the stringent new NEMA regulations?

NEMA (National Environmental Management Act) governs and dictates the mining industry’s rehabilitation obligations (how you will rehabilitate the environment you have impacted and the permissible financing vehicles). There are a lot of uncertainties facing the industry with regard to the interpretation and implementation of this act as it restricts the type of financial vehicles that can be used to finance this rehabilitation process.  NEMA’s revised provisions will have significant implications for mining houses and how they approach their environmental rehabilitation obligations going forward.

Sanlam/Santam are partnering with Cenviro (owned by Santam) to customise possible investment solutions for this.

As a business that is involved in mining, quarrying and associated operations, one of your biggest challenges is how to satisfy the exacting requirements of the DMR (Department of Mineral Resources) while remaining economically viable. Not only do you have to consider the financing requirements for the end-to-end range of mining/quarry activities, but you also have to ensure that adequate provision is made for the rehabilitation costs of the impacted environment, now and into the future.  Adding to the squeeze, your use of trusts – which were previously an attractive funding vehicle – have been restricted and capital guarantees are required.

All this without compromising the financial sustainability and cashflow requirements of your operations…

Says Andrew Rumbelow,  Segment Head for the Institutional Business at Sanlam Investments, these changes will have far-reaching consequences, particularly for the mining industry and their service providers. There has never been a more important time for the industry to sit together and contemplate the range of possible solutions.

Onerous requirements under NEMA
 Adding complexity to the picture is that the regulatory provisions now incorporated under NEMA (National Environmental Management Act) have become more onerous. Mining houses now have an additional requirement: to set aside funds for the environmental remediation related to any potential future environmental impact, such as water pollution, previously not a requirement. Furthermore, new limitations now significantly restrict the type of funding vehicles allowed for these environmental rehabilitation liabilities.

Previously, 37A Trusts were a popular vehicle for funding the full, end-to-end mining rehabilitation liability as they attracted favourable tax treatments in accordance with Section 37A of the Income Tax Act, No. 58 of 1962.  However, with the recent changes, NEMA now limits the use of trusts as a funding vehicle. Accordingly, trusts may only be used for potential future environmental impact (contingent liability), which may only be identified at some point in the future. The underlying investments in this trust must also be of a capital guaranteed nature.

Because NEMA limits the use of trusts to the future (contingent) environmental rehabilitation liability only, insurance guarantees will now become a popular funding vehicle for the ongoing rehabilitation and closure activities.

Apart from these changes to the permissible funding vehicles, it appears that more involvement is now required from both auditors and environmental specialists to ensure compliance with the new regulations. This will result in additional costs being incurred by affected companies.

The big question is:  how will you make adequate financial provision for the associated rehabilitation costs without compromising the financial sustainability and cashflow of the mine, and still comply with regulations?

Yesterday’s efficient solution will not the same as tomorrow’s…. A new tipping point for industry has been reached.

Pioneering new customised solutions
The Sanlam Group, through Sanlam Investments, Sanlam Trust, Santam and environmental rehabilitation specialists Cenviro Solutions, have stepped up to collaborate and structure workable new solutions in consultation with a number of industry experts, and the Department of Mineral Resources themselves.