Concepts and Problem Types
Reclamation Cost Funding Problems
MNTC 409 - Mineral Economics
Doug Macaulay
Learning Outcomes
This video will assist you in
achieving the following Learning
Outcome(s) for this week:
• Select the appropriate type of
information and concepts, and
use them to solve set problems
of a variety of types [CLO 3, 4, 6]
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
Key topics
• Description of reclamation cost
funding problems
• typical situations
• Information needed
• types of cost and other items
• Time value of money
• time value factors
• Worked example
• Other considerations
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
Description of reclamation cost funding problems
• Technical
• clean-up of site
• contouring and (re)planting
• water management (physical, quality)
• Cost
• estimates of future costs – inflation, technology advances
• Funding assurance
• escrow arrangements
• irrevocable letters of credit
• corporate guarantees
• trusts – e.g. Qualified Environmental Trust
Description of reclamation cost funding problems
Typical situations
• Technical and cost analysis produced as part of feasibility
assessment work
• Jurisdiction requires assurance of reclamation cost funding
• calculation of reclamation liability
• company presents proposal to regulator
• company and regulator negotiate details of assurance regime
Information required
Types of technical and cost information
• Technical
• mine life
• tailings storage – capacity, long-term stability
• reclamation activities and timeframe
• water treatment – pit discharge and site run-off, timeframe
• Cost
• estimated cost of physical activities
• timing of costs
Information required
From: “Integrated Mine Closure – Good Practice Guide, 2nd Edition”. International Council on Mining & Metals (ICMM) (2019) (47)
Information required
From: “Integrated Mine Closure – Good Practice Guide, 2nd Edition”. International Council on Mining & Metals (ICMM) (2019) (47)
Information required
Other items
• Evolving technology and regulatory requirements
• tailings storage
• water treatment
• Opportunity cost
• capital escrowed today is unavailable for other uses
• alternative involving no escrow must be available to company
• Forms of assurance accepted by regulator and available to company
Time value of money
Time value factors
• [P/A, i, n]
• calculate equivalent cost in last year of mine production of a
subsequent multi-year reclamation program
• [P/F, i, n]
• calculate present value equivalent of estimated reclamation
cost
• [A/F, i, n]
• calculate annual sinking fund amount equivalent of future value
reclamation cost
Worked example
Calculate amount for reclamation cost funding assurance
• Calculation to prepare company for negotiation of details of assurance
• management view
• regulator view
• Result of internal work to date provided:
• estimated 2-year construction, then 20-year mine life
• engineering team estimates cost of reclamation to be $14-16 million, equal
annual amount over 3 years
• management requests funding assurance calculations based on:
• mid-point of cost estimate ($15 million)
• assurance of funding of $5 million per year each of project years 21-23
• discount rate of 5%
Worked example
Other information provided
• Regulator believes funding assurance calculation should be based on:
• top end of cost estimate ($16 million)
• assurance of funding of $16 million by end of mine life (project life 20)
• discount rate of 2.5%
• Company is required to place cash in escrow prior to construction
Worked example
Solution
• Step 1 – type of DCF problem = reclamation cost estimation and
funding problem (funding assurance required to be in place at
start of construction)
Worked example
Solution
• Step 2 – cash flow diagram
Construction Operation Reclamation
-2 -1 1 2 20 21 22 23 Project year
1 2 3 4 22 23 24 25 CF forecast year
Worked example
Solution
• Step 2 – cash flow diagram
1 2 3 4 22
$5 million
Worked example
Solution
• Step 2 – cash flow diagrams
Company
1 2 3 4 22
$5 million
Regulator
1 2 3 4
$16 million
Worked example
Solution
• Step 3 – assess information
• cost estimate (engineering) - range
• management and regulator view of cost estimate, timing of
assurance, discount rate
• no missing, or irrelevant, information
Worked example
Solution
• Step 4 – DCF calculations needed
Company
1 2 3 4 22
[P/F, 5, 22] [P/A, 5, 3]
Regulator
1 2 3 4
[P/F, 2.5, 22]
Worked example
Solution
• Step 5 – generate needed time value factors
• [P/A, 5, 3] = 2.7232
• [P/F, 5, 22] = 0.3418
• [P/F, 2.5, 22] = 0.5809
Worked example
Solution
• Step 6 – perform calculations
• management
• assurance amount in yr 22 = $5 million * [P/A, 5, 3]
= $5 million * (2.7232) = $13.616 million
• present value equivalent = $13.616 million * [P/F, 5, 22]
= $13.616 million * (0.3418) = $4.654 million
• regulator
• present value equivalent = $16 million * [P/F, 2.5, 22]
= $16 million * (0.5809) = $9.294 million
Worked example
Solution
• Step 6 – perform calculations
• management
• assurance amount in yr 22 = $5 million * [P/A, 5, 3]
= $5 million * (2.7232) = $13.616 million
• present value equivalent = $13.616 million * [P/F, 5, 22]
= $13.616 million * (0.3418) = $4.654 million
• regulator
• present value equivalent = $16 million * [P/F, 2.5, 22]
= $16 million * (0.5809) = $9.294 million
Worked example
Additional observations
• Technical and economic assumptions and analysis both important
• Consider regulator’s mandate and perspective
• Negotiation may be involved in amount and form of funding assurance
• Often, a bonding schedule is agreed and reviewed periodically (e.g.
every 5 years)
Other considerations
• Water treatment requirements
• tailings storage
• water quality, acid rock drainage (ARD) potential only known with
precision once mining in orebody
• long-term / perpetual monitoring and treatment requirements
• Underfunding of reclamation liabilities in industry
• BC auditor general (2014) concluded $1.2 billion shortfall in security
• Evolving practices
• companies – progressive reclamation
• assurance – Qualified Environmental Trusts (QETs)
Other considerations
From: “Mine Closure Checklist for Governments” by APEC Mining Task Force. Asia-Pacific Economic Cooperation (APEC) Secretariat (2018) (63)
Summary
• Reclamation - technical, cost,
funding assurance aspects
• Funding assurance form and
timing
• Company vs regulator
perspectives
• Evolving practices
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.