Mine closure and rehabilitation

When does a rehabilitation obligation arise?

When the company disturbs land it is obliged to restore, by law, by the mining licence or by a constructive obligation from its published policies. The past event is the disturbance itself, so the provision covers only damage already done, not damage the mine plan expects in future. Building the pit, waste dumps, tailings dams and plant creates an obligation on day one; extending the pit and dumps during production adds to it each year. See IAS 37 provisions.

Where does the cost go?

It depends on what caused the disturbance. Obligations from constructing the mine are added to the cost of the mine under IAS 16 and depreciated with it. Obligations incurred as a consequence of producing ore in a period are costs of that production, included in inventory under IAS 2 and reaching cost of sales when the ore is sold. The distinction matters because the first spreads the cost over the life of mine, while the second charges it to the ore that caused it.

Mine rehabilitation provisions: the first year

When construction is complete, closure of the pit, dumps and plant is expected to cost US$ 80 million in 15 years, in money of that time. The discount rate is 4%, so the provision is 80 / 1.04¹⁵ = 44.4 million, added to the cost of the mine. In year 1 the discount unwinds by 1.78 million, and mining extends the pit, adding closure costs of 6 million due in 14 years, a present value of 3.46 million.

How is the provision measured?

At the best estimate of the costs to meet the closure plan, using current technology and laws and changes that are virtually certain, including costs of monitoring and maintaining the site after closure. Costs are estimated at the expected time of the work and discounted at a pre-tax rate that reflects the time value of money and any risks not already in the cash flows. Estimates are often prepared by closure specialists and updated with the life-of-mine plan. Expected sale proceeds from scrap or land are not deducted; any gain is recognised only when realised.

How are changes in estimate handled?

Under IFRIC 1, changes in the estimated cost, timing or discount rate adjust the cost of the related asset. A decrease larger than the asset's carrying amount goes to profit or loss, and an increase can indicate impairment. Once a mine has closed, or the related asset is fully depreciated, changes go straight to profit or loss. Changes relating to disturbance charged to inventory are charged to production costs. See decommissioning provisions in oil and gas for a worked change in estimate.

What about progressive rehabilitation?

Many mines restore areas as they finish with them, such as backfilling a mined-out pit or revegetating a completed waste dump. Spending on obligations already provided for is charged against the provision. Rehabilitation that is part of the normal mining process, such as placing waste in a mined-out area as part of the operation, is a production cost.

How are long-term water treatment obligations treated?

Some sites need water treatment for decades or indefinitely after closure, for example to manage acid rock drainage. The provision includes the present value of those costs over the expected period; for a perpetual obligation, that is the present value of an indefinite stream of costs. These amounts are very sensitive to the discount rate and should be disclosed with their key assumptions.

Do bonds and guarantees reduce the provision?

No. Regulators often require financial assurance, such as bank guarantees, surety bonds or cash deposits. A guarantee does not reduce the company's obligation. Cash placed in a rehabilitation fund is a separate asset, a right to reimbursement, and is not offset against the provision. See mining accounting.

How does US GAAP differ?

ASC 410-20 measures asset retirement obligations at fair value using a credit-adjusted risk-free rate, layer by layer, and does not remeasure existing layers for later changes in market rates. Under IFRS the whole provision is remeasured at a current rate each period, so the two can differ widely for long-dated closure costs. See IAS 37 vs ASC 450.

This guide is general information. It is not tax or legal advice for your situation.