NEMA: New regulations, new opportunities

Much has been said lately about the recently amended National Environmental Management Act (NEMA). The new regulations are far more stringent in terms of the financial provisions required for rehabilitation and the financial vehicles allowed to provide for the rehabilitation liabilities. Amendments to the regulations include the restructuring of the underlying investments in the Section 37A Trust, ensuring all investments have an explicit capital guarantee. One of the most significant challenges faced by companies in the mining industry is how to make adequate financial provision for these costs (which now include the difficult-to-quantify post-closure rehabilitation liability), without compromising the financial sustainability of the mine and still complying with regulations.

In spite of the requirement to ensure that all the underlying investments made in the 37A Trust have an explicit capital guarantee, mining companies must still be able to maximise the returns on their underlying investments in their chosen financial vehicle. One way to do this would be by taking advantage of the natural efficiency of capital markets and range of investable opportunities on offer to grow returns by more than inflation. Cash is just not good enough. It is critical that mining companies make informed decisions when considering which funding vehicle to use when making provision for their mining rehabilitation liability and considering the investment flexibility associated with the chosen financial vehicle.

What is clear from NEMA’s new regulations, says Andrew Rumbelow, Segment Head of Sanlam Investments Institutional Business, is that changes are inevitable. This is an opportunity not a curse. It is a chance for mines to radically rethink their current investment strategies, to optimise their mining rehabilitation funding and maximise returns by consulting with the specialists in this niche field. Sanlam Investments are active in structuring investments to fund for the rehabilitation liabilities (provided for in 37A trust or insurance guarantee products).

What has changed?
Prior to NEMA, the Section 37A Trust was a very commonly utilised vehicle for meeting the rehabilitation obligations, and as a funding vehicle, had both advantages and disadvantages. One of the disadvantages of this vehicle was the difficulty in accessing the funds upon closure. Rehabilitation had to be funded from operational cash flow and only once the cost had been incurred, could the mine institute a claim against the trust. This resulted in additional unnecessary cash flow constraints. At the time, there was also no requirement for funding for any post-closure rehabilitation liability.

Now, with the new regulations, a Trust may only be used as a funding vehicle for the post-closure rehabilitation liability, whose quantum may only be known at some point in the future. The calculation of the overall rehabilitation liability is therefore more difficult to measure and quantify.

Moreover, the underlying investments for the 37A Trust is more restrictive in that it has to be of a capital guaranteed nature.

How to structure investments going forward?

Guarantees for the existing (continuous rehabilitation) solution
There are a limited number of funding vehicles allowed to make financial provision for the annual and final rehabilitation, decommissioning and closure liabilities and post-closure liabilities. These include bank or insurance guarantees, or alternatively an upfront cash deposit that can be made with the DMR.

The insurance guarantee solutions offered by Cenviro Solutions (underwritten by Centriq Insurance Company Limited), part of the Sanlam Group, provides the most flexibility. These solutions are structured, customised and crafted in various ways to suit the particular needs of the mine. These insurance guarantees are issued to the DMR upfront, while the underlying funds that are built up to cover the mining rehabilitation liability are invested in portfolios that will optimise investment returns and mitigate unnecessary risks. Optimisation of investment returns and mitigation of unnecessary risks are achieved by Sanlam Investments through the structuring of an asset-liability-matching strategy or investing in one of the absolute return funds designed specifically to optimise the rehabilitation funds of mining companies in South Africa.

Customisation and structuring
To develop the appropriate structured solution for you, we consult with you on:
1. Your cash-flow position;
2. Your tax position – optimisation of positive tax implications on solutions;
3. How to optimise the balance sheet position of the company;
4. The degree of flexibility required, taking into account various financial factors;
5. The possibility of utilising a cell captive structure;
6. Availability of financial assets or immovable assets to assist in the structuring of a cash-flow and cost-sensitive solution.

Post-closure liability (Trust):
In light of the difficulty of quantifying actual post-closure rehabilitation liabilities, as well as the stipulations regarding financial provisioning required for this liability, we believe that a philosophy of regular contributions to a moderate risk rehabilitation fund, with capital guarantees in place, makes financial sense and can help to provide efficiently for any growth in the post-closure liability.

For smarter ways to optimise investment returns, we also look at a range of tailor-made investment solutions that take into account asset liability matching strategies, or investment strategies that yield inflation-beating returns, such as absolute return products. We take into account NEMA’s regulatory requirements which specify the underlying investments allowed.

We can be flexible enough to allow for a more conservative approach or can explicitly design a more asymmetric payoff profile (that is, taking slightly more risk while limiting capital losses and maximising returns). In other words, we can meet the dual objectives of inflation-beating returns and a capital guarantee.

Conclusion
We see the new mining rehabilitation regulations as a real opportunity for clients to relook their current investment strategies, and put in place the most optimal funding solution to maximise returns and meet the capital guarantee requirements set out by the new regulations on their 37A Trusts. The idea is to help clients adapt to an ever-changing financial, mining and regulatory environment by offering flexible, customised solutions. Due to the level of customisation and flexibility we offer, we can help enhance the investment returns on the underlying assets, contributing to the overall financial viability of the mine.