When the Mining Rehabilitation Fund was established in 2013, it was lauded as being a great thing for the mining industry.  Transition to the fund came at a time when capital markets were beginning to tighten and it presented an opportunity for much needed cash to be refunded to those who want to spend that money on the ground.  By early 2015, more than $1 billion in unconditional performance bonds had been returned to the mining industry and more than $33 million had been collected in levies for the Mining Rehabilitation Fund.

More recently, we have seen the first mine site in Western Australia being declared as an abandoned site for the purposes of the Mining Rehabilitation Fund and now, in light of the events regarding the Ellendale Diamond Mine (Ellendale), the consequences of that change in regulation are coming into question.

Background

By way of background, Ellendale is located on Mining Lease 4/372 and is accessed via an access road over Miscellaneous Licences 4/26 and 4/48.  These mining tenements were granted under theMining Act 1978 (WA) (Mining Act) to Kimberley Diamond Company NL (KDC), a subsidiary of Kimberley Diamonds Limited.

Recent events

Administration and appointment of liquidators

In July 2015, KDC appointed administrators and all mining activities at Ellendale ceased.  In August 2015, KDC’s creditors placed KDC into liquidation.  KDC’s assets were to be auctioned off by the appointed liquidator in September 2015, but no appropriate offers were received.1

Liquidator’s Notice of Disclaimer of Onerous Property

On 19 October 2015, KDC’s liquidators issued a ‘Notice of Disclaimer of Onerous Property’ under section 568A(1)(b) of the Corporations Act 2001 (Cth) and disclaimed any rights, interests and property held by KDC in the mining tenements.

This is the first time this provision has been used by a liquidator with respect to a WA mining project.  With respect to other mining projects in WA placed into liquidation, these have remained with the company in liquidation until a buyer had been found.2

Rehabilitation liability

It has been estimated that a rehabilitation liability of between $28 million and $40 million exists with respect to the Ellendale site.  It appears that KDC did not set aside funds for rehabilitation after it cashed out approximately $12 million in unconditional performance bonds in 2013 when it elected to contribute towards the Mining Rehabilitation Fund established under the Mining Rehabilitation Fund Act 2012 (WA) (MRF Act).  By comparison, and consistent with the requirements of the MRF Act, $818,826.40 was contributed to the Mining Rehabilitation Fund with respect to the Ellendale site.

On 4 December 2015, the CEO of the WA Department of Mines and Petroleum (DMP) declared the Ellendale site to be an abandoned site for the purposes of clause 9(1) of the MRF Act.3  Accordingly, the DMP is able to provide the funding to complete the on-ground works required to keep the site safe, stable and non-polluting.  The DMP has advised however that the site will not be fully rehabilitated and closed through the Mining Rehabilitation Fund as it remains a viable resource project.4

Phosphate Australia Limited’s (Phosphate) forfeiture application

On 21 October 2015, Phosphate (who controls the neighbouring Blina project) filed a forfeiture application over Mining Lease 4/372 for non-payment of fees and royalties.  This application fell between the date of the liquidator’s Notice of Disclaimer of Onerous Property and the expiry of the 14 day period for DMP to challenge the notice.  

If Phosphate is successful in its application, it will have a right in priority to apply for a mining tenement over the area of Mining Lease 4/372 free from the rehabilitation liabilities incurred by KDC.  This will prevent the DMP from finding a buyer for the site together with its rehabilitation liabilities.  

However, a file notation area is noted against the area of Mining Lease 4/372 providing that any application for a mining tenement made with respect to the area of Mining Lease 4/372 would be subject to the Minister’s powers under section 111A of the Mining Act and may be refused in the public interest.

What now?

A decision is still pending with respect to Phosphate’s forfeiture application.  

The DMP has also requested that the Mining Warden make a ruling as to whether the Ellendale mining tenements still exist – in other words, whether the disclaimer operates to extinguish the tenements themselves or just KDC’s interest in them.  A decision on this is yet to be made but will be vital in determining the DMP’s ability to prevent similar situations.5    

Given these provisions of the Corporations Act have not been used before in this context, it is unlikely that specific consideration was given to this scenario when the Mining Rehabilitation Fund was established.  In most cases it is likely that the value of the project will outweigh the obligations such that a liquidator will be able to find other options besides disclaiming the assets.  However, while these rights remain as currently provided for in the Corporations Act, the risk of this occurring again in the future continues. 

In the meantime, it is possible that the State will consider bringing back performance bonds in order to secure rehabilitation obligations for amounts which may be as high as 100% of the estimated rehabilitation cost with respect to the relevant tenement, given the Minister has retained the right to require such bonds under the Mining Act.  The DMP may even look to the model adopted in the Northern Territory where both securities equivalent to 100% of the cost of rehabilitation and an annual levy equivalent to 1% of the value of the environmental rehabilitation security must be provided. 

Another option for the State is to consider implementing new legislation like the Queensland Government is in the process of doing (i.e. imposing a chain of responsibility to ensure environmental obligations are complied with) in order to address concerns from recent events such as the difficulties at the Queensland Nickel Refinery.