Financial assurance and mine closure: Stakeholder expectations and effects on

operating decisions
Introduction
abstract

Financial assurance is increasingly seen as a means to ensure orderly, clean and lasting closure of mines.
Broadly interpreted, closure requires leaving viable ecosystems on mining lands that are compatible with a
healthy environment and with human activities, that have low hazard, and that encompass measures to prevent
ongoing pollution from the site in the long-term. Financial assurance encompasses environmental surety
instruments that protect the government and public in the event a mining company cannot meet its reclamation
or rehabilitation obligations. As such, financial assurance is in essence the money available for closure of the
mine in the case when the mine owner is not available to perform the work. A general trend towards greater
environmental concern among social stakeholders in mining further serves to focus attention on policies and
practices that can actually assure financial assurance.
Financial assurance is also perceived as a means to address closure-related challenges that are increasing in
number as well as diversity. Notably, current trends involve a shift towards a greater focus to the societal
aspects of mine closure rather than just the ecological. The use of financial assurance, however, also raises
some fundamental questions about how assurance mechanisms influence mining operations and the
relationship between mining operations and their surroundings. This paper examines both the internal effect of
a variety of financial assurance approaches on mining operationsin particular the manner in which
environmental and social concerns are addressed by mining firms, and the almost inevitable tension between
some form of financial provision for closure on the one hand, and governmental expectations of tax revenue
on the other. As a major argument for supporting the conduct of mining is that state revenues from the
extractive industries supply monies for the building of human and infrastructural capital, this second area of
tension also has strong social and developmental overtones.
Financial assurance is an emerging tool used to ensure that mines, the areas that they have disturbed, and the
facilities upon them are not abandoned and that measures to minimize or eliminate adverse environmental and
social impacts from mine sites are effective. In this paper we argue that to the extent that financial assurance
becomes standard practice, in the jurisdictions where it is applied at least, has implications that go beyond
securing the orderly closure and rehabilitation of [former] mine of operations or through the release of
pollution into the natural environment. While ownership of minerals as non-renewable resources is in most
cases vested to the State, the rights to extract minerals are most commonly awarded to operators or mining
firms according to whatever rules the local or national mining code specifies. Among the conditions that such
awards may be subject to are requirements that operators share their profit or income by paying some form of
mining tax(es) and requirements that operations are conducted in an environmentally safe manner. If
provisions for dealing with environmental (and social) externalities resulting from mining are not in place,
then the natural environment and local communities are often neglected during and after the conduct of
mining.
Furthermore, in such instances, observable (accounting) profits would accrue to the operator, and taxes would
be paid out of profits (unless they were royalties), even if there might not be any profit at all in a social sense.
In a number of jurisdictions, mines have long been subject to strict environmental regulation. However, even
under such circumstances problems remain in ensuring that the process of closing down a mining operation is
completed in an acceptable fashion. Indeed, what acceptable closure entails has many definitionsbut
common themes generally found are that of the reclamation and rehabilitation of the area impacted by mining
is achieved to a state that precludes further environmental damage, is suitable of alternative use, is compatible
with human activity and capable of supporting viable ecosystems that are low hazard (ANZMEC MCA, 2000;
Clark and Clark, 2005; Sassoon, 1996). A fundamental problem however, is that the process of closing a mine
so that it meets these criteria can be costly and that a significant proportion of this cost generally occurs as a
lump sum around the time when mining operations cease. Cost is a particularly marked problem at the end of
the productive life of a mine as cash flows are almost universally declining with reserves of diminishing
quality and size. Numerous examples of mines that were not closed or ran out of money before completion
of cleanup litter the planetindeed:
today the developed nations, as well as the developing and emerging economies, are faced with decades, if not
centuries, of mines and mining debris to clean up (Clark and Clark, 2005 p. 67).
As for many other activities that cause environmental damage, mines generally do not have motivation to
internalise the external costs they generate unless they are provided with market incentives or are strictly
regulated. Environmental regulation aims to solve the problem, but the combination of high cost at the end of a
mines life and the possibility that it will be bankrupted towards the end of its planned life, makes traditional
regulatory solutions difficult. Similarly, liability-based solutions to the closure problem can be confronted by
the possibility that the individual mine may be judgement proof in the sense that the individual mine may be
insolvent when the costs associated with restoration of environmental damage are to be met.
An obvious solution to these liquidity problems is to require miners to set aside monies for the cleanup at
closure at times when there is sufficient capital available to be transferred (such as at the time of mine
development when equity is raised) or while there are healthy cash flows from mining.
Making financial provision for closure is commonly known as financial assurance and it exists or can be
formulated in many variations (e.g. closure bonds, financial assurance and financial surety). However,
research on these instruments discussed in this paper agrees that there is a need for some form of financial
instrument that can address the risk of insufficient provision of cleanup when mines close. While the choice of
instrument can be debated at some length, the basic intent is to force the internalisation of further
environmental and social costs. This is a particularly relevant issue during the volatile years in the period
20062009. Soaring commodity prices in the period 20062008 stimulated massive worldwide interest in new
mines (and work to reopen old ones)this has been followed by a free-fall of commodity prices in the closing
months of 2008 and start of 2009. Almost without doubt, many unplanned mine closures are now taking place
as the global economy has entered its financial crisis.
Over the past decade there has been a constant and growing interest in the wider legacy issues among a range
of audiences (UNEP et al., 2005) and a growing body of praxis. These factors serve to lift the discussion of
financial assurance to higher levels both at a governmental level (Clark and Clark 2005; UNEP et al., 2005;
Strongman, 2005) and in terms of the amounts of financial assurance to be required (Miller, 2005).
In this paper we seek to extend the debate surrounding financial provision for closure with arguments that the
use of financial assurance must be considered in the context of an ongoing competition for rents. Further, we
argue that this competition has important implication for how mining companies decide to operate and interact
with their stakeholders. Section mine closure issues and the growth in expectations provides detail of the
nature of stakeholder demands from miners and highlights the ongoing escalation of expectations. It provides
an introduction to the expanding number of mine closure aspects that are under discussion in the mining and
society field. The sections financial assurance and challenges for the application of financial assurance
provide a brief summary of financial assurance models and introduce a number of inherent challenges for
financial assurance. A discussion of the economic effects of financial assurance on the internal decisions at
both the mine (operational) and corporate levels is then provided in Section financial and operational effects
of financial assurance on mining firms/operations. Discussion of the implications for mining firms in terms
of their relations with host governments, competitors and other stakeholders is included in Section
stakeholder relations: financial assurance and sharing of mineral rents and conclusions are offered in
Section concluding remarks.

Mine closure issues and the growth in expectations

Increasing expectations for environmental protection, desires for reduced human health risks, competition for
land, and the increasing value of the natural environment as recreational space have led to markedly tighter
regulatory requirements and more restrictions upon mining practice in a number of countries. Concomitantly,
mining firms have introduced management policies, practices and technologies that markedly reduce the
environmental harm caused by mining (Environment Australia, 2002; Miller, 2005). When viewed in
combination with growing desires to preserve land areas as a repository for valuable biological assets, for
natural environmental services and for aesthetic appeal, these developments appear likely to continue to drive
continued improvement in mining practice.
As a part of this trend, mine planning, mine closure practices and the conduct of mine operations to facilitate
environmentally and socially acceptable closure have also evolved significantly in recent years. While in the
past communities often saw that the only choice available was whether a deposit should be mined or not, it has
been clearly shown that the manner in which a mine is planned can have major positive influences on the
magnitude and duration of impacts over the life of the development and following its closure (Environmental
Protection Agency, 1995, p. 2). The mining sector is also a very important contributor to local and national
economies in a number of countries. This is particularly relevant in developing countries where the extractive
industries play a vital role in development and opportunities in the sector often constitute some of the first
attractive investment opportunities for private investors and international bodies such as the International
Finance Corporation (a branch of the World Bank Group) (Liebenthal et al., 2005, p. 117). Similar
generalisations can be made for transition economies (Nazari, 1999). It is expected that the extractive
industries will continue to underpin the development and the economies of many countries in the future
(Liebenthal et al., 2005). At the same time however, extensive adverse environmental and social impacts
arising from mining activities must also be recognised (US Department of Interior, 1998; Balkau, 2005a,b;
Clark and Clark, 2005; UNEP et al., 2005). Moreover, the very real potential for similar problems to arise
from new mineral developments remains. In many countries, particularly developing countries (Clark and
Clark, 2005) and former centralised economies also referred to as transition economies (Nazari, 1999) the
mining sector has often been characterised by inappropriate planning and operational/postoperational practices
and inadequate regulatory frameworks (Clark and Clark, 2005; Sassoon, 1996; Van Zyl 2000; Van Zyl et al.,
2002). In many jurisdictions this has resulted in and continues to contribute to significant adverse
environmental, health and safety, social and economic impacts and related liabilities (Nazari, 1999;
ICPDR/Zinke Environment Consulting, 2000; Peck and Sinding, 2003; Burnod-Requia, 2004).
The contribution that mining can deliver to emerging or transitional economies (in particular) is also
compromised for other reasons. In addition to dealing with environmental, health and safety (EH&S)
challenges associated with current and new mining activities, the European Bank for Reconstruction and
Development (Nazari, 1999) reports that emerging and transitional economies also have to deal with the
significant adverse impacts of past mining activities and their legacies. Nazari indicates that inadequate mine
closure activities and rehabilitation works have continued to result in significant adverse EH&S impactsand
moreover that such failure was normally a result of financial constraints (Nazari, 1999). Such failure was
normally as a result of financial constraints. Similarly, there are countless examples of the same problems in
developing nations that host mining activities (UNEP et al., 2005).
The financial, environmental and social liabilities associated with such sites also pose a barrier to development
in the jurisdictions where they are located (Strongman, 2005; O stensson, 2005; Clark and Clark, 2005). In
contrast to countries that have already implemented good international mining practices, most developing
countries and transition economies have yet to develop corporate governance, regulatory frameworks, or
financial and insurance markets that are sufficiently sophisticated to adequately address mine closure rules or
funding (UNEP et al., 2005; Clark and Clark, 2005). The lack of such governance frames can lead to delays in
developing projects and investments in the sector, potentially inequitable distribution of benefits,
externalization of closure costs, and costly and time consuming tailormade solutions developed on a case-by-
case basis. Moreover, such situations can even serve to disadvantage (potentially) more responsible investors
who seek financing or political risk insurance through international financial institutions (Nazari, 1999).
Indeed, international financial institutions as well as national legislation increasingly require consideration of
closurerelated issues (Liebenthal et al., 2005; Clark and Clark, 2005).
The development of corporate governance, regulatory frameworks, financial and insurance markets to address
the funding of mine closure may be further complicated by involvement of junior investors. Unlike many
major mining companies, these often have only limited resources to back up the mining companys
obligations, and arguably lower sensitivity to other drivers for responsible behaviour such as reputation risk.
Such actors may be more prevalent in developing countries and in transition economies than in more
developed mining nations (Stec et al., 2001).
In addition to the environmental concerns, current debates about mine closure have come to include a number
of important social issues. When mines of any size are developed a number of potentially problematical social
issues can arise. These encompass relations with local stakeholders (including local indigenous communities),
migration of labour to the vicinity of the mine often young(er) single men, and a range of related flow-on
effects such as prostitution, alcohol and drug abuse, increased instances of communicable diseases, domestic
and community violence, squatter settlements, and so forth (Clark and Clark, 2005; Strongman, 2005; Low
and Gleeson, 1998; Gibson et al., 1998). In some areas such pressures can also contribute to civil unrest and
even civil war (Liebenthal et al., 2005, p. 1).
Both the narrow environment-focused debate about closure and the broader social issues or
sustainable development debate also related to closure issues are characterised by the need for a
distinction between closure-specific duties resting with the mining firm and broader social welfare
considerations or duties that are traditionally held to fall within the sphere of government activity. Sometimes
governments are well functioning and well positioned to solve broader welfare issues, providing measures
against squatting, and control (unwanted) urban development around mine sites, etc. In a very significant
number of other instances however, governments do not function well (Liebenthal et al., 2005; Strongman,
2005; O stensson, 2005; Clark and Clark, 2005). As a result they may not support, control or provide such
measures adequately. In the light of stakeholder expectations that broader welfare issues are catered for by
someone, this situation can lead to conditions that tend to blur the line between closure-specific tasks that are
the responsibility of mining firms, and the broader governmental responsibilities. As the expectations of what
duties mining firms should take on increases, a crucial decision has to be made by the firms. Only two options
are really available: leave the field for less sensitive competitors willing to ignore expectations, or engage in
making clear what is expected of the firm (Husted and de Jesus Salazar, 2006). Mining firms that choose to
stay clearly have to negotiate some level of service provision in this regard.
Financial assurance
The notion of the need for financial assurance is derived from the frequently noted examples where mine
operators have abandoned a site without adequately addressing environmental problems arising from their
mining activity. Some firms, generally large and internationally recognised ones, have a long tradition of
addressing these issues as part of their operations. Other miners have a less proud record in this respect (Peck
and Sinding, 2003). Similarly, some are more aware than others of the increasing and expanding nature of
stakeholder expectations in this regard.
The concept of financial assurance, while most extensively used in countries with well-developed regulatory
systems, is also held to be vital in addressing environmental problems in countries that have not developed a
regulatory infrastructure (UNEP et al., 2005; Clark and Clark, 2005; Strongman, 2005). While there appears to
be broad-based agreement that financial assurance should be an integral part of any moves forward for the
mining sector, these concepts are often referred to without real critique as a panacea for many problematic
issues. Similarly, due reference is not given to the advantages and disadvantages associated with different
types of financial assurance (Poulin and Jacques, 2007). Financial assurance instruments are variously defined,
but can generally be referred to as:
guarantees issued by a bonding company, an insurance company, a bank, or another financial institution (the
issuer is called the surety) which agrees to hold itself liable for the acts or failures of a third party (Miller,
1998)
At the present time, the most common use of financial assurance instruments is when they are applied to
guarantee environmental performance at the time of (and after) cessation of mining activities through the
funding of mine site reclamation or rehabilitation. As such, financial assurance is also the amount of money
available to a government entity for closure of the mine in cases such as bankruptcy, when the mine owner is
not available to perform the work, during operations or at any time thereafter. The financial assurance can be
provided by a variety of financial instruments or cash deposited in a bank. However, it is important to
recognise that the governmental policy and local financial markets may determine the type of instrument
available for a specific location (Miller, 1998, 2005; Van Zyl, 2000; van Zyl et al., 2002).
Financial assurance instruments are also increasingly accepted by industry as perhaps the most effective
manner in which to ensure that protection of the environment can be achieved and that public expectations can
be met in the mining sphere. According to van Zyl (2000) another important concept to be considered and/or
recognised is that of financial accruals by mining companies for closure. It is common to base accruals on a
unit production basis (such as $ per ounce of gold produced). The total amount of the accrual is estimated from
the environmental closure cost plus other liabilities specific to a mine such as land holdings and personnel
costs associated with the end of operations. Financial auditors can perform annual reviews to determine the
adequacy of these closure funds.
A number of additional features also characterize financial assurance and closure cost accruals (van Zyl et al.,
2002; Miller, 1998). Conceptually, financial assurance is in place during the life of the mine and will only be
released (in part or in total) after the regulatory agencies have established that rehabilitation has been
completed to their satisfaction. However, the financial
surety does not necessarily constitute a fixed amount throughout the life of the mine. Rather, it may vary
pursuant to the conduct of mining and rehabilitation (e.g. as one pit is filled by transfer mining) as
environmental issues develop at a mine, as regulatory changes occur and as community expectations change.
Closure cost accrual should take place over the life of the mine on the basis of an agreed and continually
updated mine plan. As such, accruals are not necessarily a linear function but rather will also vary over the
mine life. In the US and some other countries, the financial assurance fund is not available to a mining
operation for closure work at the end of the mine life, but rather may be released shortly after the work has
been done. The mining company must be a going concern in order to perform, or contract some entity to
perform, the required closure activities. As a variation, a number of mining companies have established
sinking funds to pay for the closure of a mine. Money from a sinking fund will be available in cash to pay for
closure in contrast to an accrual that is an accounting allowance and as such is not liquid. However, while
sinking funds may be attractive because they are liquid, in the case of a bankruptcy these become part of the
assets of the company and will not be available to pay for closure.
Among currently applied financial assurance instruments, bonding is the most widely used. It involves the
payment into escrow of an amount determined by regulators to be sufficient to ensure an acceptable level of
remediation; it is an established manner to provide protection against unfunded liabilities as in the event of
bankruptcy. An alternative suggestion is for the creation of a captive insurance company for the mining sector
(Poulin and Jacques, 2007). All such tools, however, face challenges and have advantages and limitations; a
number of these are briefly outlined in the next section.

Challenges for the application of financial assurance

A fundamental problem with the imposition of financial assurance requirements (or higher levels of assurance
than are now applied) is that environmental protection, as well as social expenditures directly related to a
mining project, must come out of the same pool of gross revenue. Given homogenous commodities and with
prices determined in competitive markets, gross revenues depend on the quality of orebodies (in terms of
grade, tonnage and location). Mines will usually extract those volumes of ore that generate a profit. However,
internalising environmental and social costs raises capital and operating costs and raises the cut-off grade (the
lowest grade of ore that will be mined) as well as the average grade of ore actually mined. With a higher cut-
off grade, the volume of ore mined over the life of the mine will be lower (assuming no further reserves are
discovered and with constant prices and costs). Profits and the tax base will be lower as a result. Mining firms
may dislike internalisation if their profits fall.
Discussion of environmental and social externalities also touches upon a second challenge. The sharing of
profits between companies and governments also involves a number of other
local or social stakeholders. These look to both mining firms and government to obtain a share of
mineral rents. Mining firms are sometimes caught up in conflicts between the other stakeholders and
governments. A notable case is the civil unrest on the Island of Bougainville in Papua New Guinea (PNG) in
which a conflict between islanders and the central government of PNG over the distribution of resource
income and environmental damage led to unrest, sabotage and the closure of the rich Panguna copper, gold
and silver mine. Panguna was one of the worlds largest open-pit mines during its period of operations during
the 1970s and 1980s and dominated the overall PNG economy. The mine closed in 1989 as a result of
sabotage by Bougainvillian secessionists. The mine is still closed, but interest in reopening it remains (Mining
Journal, 2009).
Table 1

Advantages Disadvantages
Protection against unfounded Depends on monitoring, including the
Reclamation needs. resources allocated and the expertise
Relies on individual performance available, both to governments
objectives, rather than broadly applied negotiating bond size and terms, and to
standards. bond issuers.
Bond payments into escrow Bond size and thus minimum
accounts have great symbolic and reclamation is a floor, not an optimum.
hence political value. Bonds are not immune to political
Posting a bond is a form of pressure.
commitment by mine company Difficulties in measuring future
managers. reclamation costs and setting bond
amounts.
Insufficient bond amounts due to
unforeseen changes.
Bonds create liquidity constraints.
Adapted from Poulin and Jacques (2007).
Earlier we indicated that money could be set aside at the time of equity-raising, or when a mine has healthy
cash flows (if the latter eventuate). In any event, the size of realized cash flows is only indirectly linked to the
need for financial resources for closing a mine and restoring a site. This raises another challenge. Crudely
stated, the degree of environmental impact is proportional to the volume of ore extracted or the area of land
affectedboth related to the size of operations or length of time of operations, but not necessarily to profits.
Adding to difficulties with the accumulation approach, a significant proportion of the eventual footprint of
a mining operation often occurs during mine construction and preparation for operations. In this case, a
significant impact can exist prior to the commencement of cash flow. One might argue that to provide
adequate assurance the amount of money set-aside should be determined according to the initial footprint and
linked to marginal increases or decreases in mine footprint over its life.
As indicated in Section financial assurance, bonding is already a widely adopted approach. In many mining
countries the application of bonding (i.e. the up-front or gradual set-aside or guaranteeing of expected cleanup
cost) might be perceived as a panacea that will solve all major problems related to mine closure. As examples,
most Canadian provinces make bonding a requirement in their mining codes (Poulin and Jacques, 2007) as
have most Australian States (Clark and Clark, 2005). Notwithstanding its popularity as a policy instrument,
there remain serious concerns about the efficacy of bonding (Shogren et al., 1993; Boyd, 2002; Poulin and
Jacques, 2007). Poulin and Jacques (2007) contrast the advantages and disadvantages of the bonding
instrument and Table 1 summarises their main observations.
Financial and operational effects of financial assurance on mining firms/operations

The liquidity problem noted by Poulin and Jacques (2007) in Table 1 arises because the ability to provide the
bond depends on the total assets of the firm having to post it. Bonds can be large if potential damage is large,
even though the risk of damage may be small. In some bonding situations, there is a real possibility that even
socially attractive projects may not proceed (Shogren et al., 1993).
Similarly, difficulties in estimating the cost of future reclamation work are a financial issue specific to each
project. For bonds based on expected future cost, Poulin and Jacques (2007) indicate that the only approach
likely to ensure adequate bond amounts detailed cost estimates must have the same quality and reliability
as other financial decisions related to mines. This may not be just a technical problem. Exploration and
engineering specialists have a long tradition of estimating the costs of various project items spanning the entire
discoveryexploitationclosure cycle (OHara, 1980; Mular and Poulin,1998). What may be lacking is a well-
established tradition for including environmental costs, especially in the earlier phases of the mine
development decision process. While cost estimation based on compliance with traditional command and
control regulation may be well established, the emergence of bonding and other types of financial assurance
adds to existing needs for precise cost estimation and is a capacity that must be built. Accurate cost
estimations of this kind must be performed in a field of practice that may be unfamiliar to cost estimators.
They also have to estimate costs occurring far in the future at the end of a mines life.
Existing methods for estimating costs are likely to be deeply ingrained in the patterns of conduct for
responsible engineers. Methods and thinking about cost estimation are taught at school, repeated amongst
colleagues and end up being taken for granted. Furthermore, cost estimation in mining is intimately connected
to project evaluation based on present value calculations. Financial assurance, presents a challenge to this type
of analysis. On the one hand, the costs of closure occur far into the future. Even at moderate discount rates,
these future expenses may seem small in terms of present value. On the other hand, stricter forms of financial
assurance require up-front deposition of the expected future cost, creating a large front-end payment.
The consequence of these raised costs is both a direct liquidity effect and a dynamic adjustment effect that
works through downward adjustment of ore volumes and upward adjustment of cut-off and average ore grade.
The difference however, is that financial assurance adds to the environmental and social costs that such firms
have already internalised. To the extent that expectations of what firms must do to mitigate social impacts as
well as environmental ones at the end of mining are increasing, both standard regulation and financial
assurance serve to shift the boundary between ore, which is profitable to mine, and mineralised rock. In other
words, regulation and financial assurance raise the cut-off grade.

Stakeholder relations: financial assurance and sharing of mineral rents

Some mines generate far more revenue and profits than others. They may have a higher content of valuable
minerals, the minerals may be simpler to extract, the mine may be located near a processing facility or a
market, or the operation may enjoy some combination of these features. The profits generated by successful
mining operations are key areas of focus for government taxation policy. There has been considerable progress
in establishing effective tax regimes (Otto et al., 2006) based on profits, but specific and ad valorem royalties
are also widely used.
Using financial assurance instruments to ensure regulatory compliance and reduce external costs has dynamic
impacts. Their use affects the size of ore bodies, the fraction of ore that will be removed, and ultimately which
ore bodies are developed into mining operations. An increase in capital cost (due to the up-front bond
payment) or an increase operational cost (brought on by the bond mechanism) or both, will change the optimal
operational strategy of the mine (the mine plan) to accommodate a lower amount of ore (due to higher cut-
off grade). These impacts can be measured in terms of average grade of ore (which will be higher) and the
total tonnage of ore mined (which will be lower). At constant demand individual mines are exhausted more
rapidly and have to be replaced earlier, potentially resulting in a greater number of mines.
Accountability for post-mining rehabilitation or cleanup has two components. One is related to the temporal
dimension, in the sense that prevention of the need for cleaning up at mine sites (e.g. through life-cycle
oriented design for closure and return of mining leases to the state) is likely to be much more efficient when
integrated into the operational life of the mine. This compares to a situation where cleanup requires renewed
access, new personnel who do not know the site, new facilities and equipment. The difference between
concurrent rehabilitation undertaken by the operator and government sponsored postclosure remediation work
has a further dimension since in reality the latter option will only be pursued after prolonged efforts to make
polluters liable for the cost. This brings additional expenses because mobilisation of resources and clean up
after the cessation of mining activities probably costs significantly more per unit of land than if the mining
company had carried out the work during the mine life and at the time of cessation of activity (but prior to the
demobilisation of personnel, skills and equipment). The eventual costs of rehabilitation and the cumulative
environmental and social damage mount as damage to the natural environment from the unremediated site
continues.
The second dimension of this problem may be termed the incidence question. In a simplified form, a mine
produces net profit or rent, which represents the tax base available for the jurisdiction owning the mineral
resource. Ideally, rent is the sum left when all costs, private as well as social, have been paid. This is the sum
available for sharing between stakeholders. In practical terms, however, the tax base is unlikely to coincide
with this definition of rent. Mining activity produces external costs that are imposed upon neighbours, other
adjacent stakeholders, and on future generations. Applying financial assurance instruments to ensure that
social costs are borne by individual mining projects changes an established (or customary) division of benefits
to stakeholders. The extra costs (environmental and social expenditures plus opportunity cost of the monies
deposited for assurance) must now be met from the revenue stream from a mine with higher capital and
operating costs. The overall net value of each mine becomes smaller as external cost are forced onto the
operators balance sheet, leaving less to be divided between operator, government and other stakeholders.
There is usually no way of passing on any cost increase to consumers.
So far we have assumed a responsible government that is concerned with the welfare of its citizens. However,
this assumption may not always hold. Governments may be more interested in revenue than in total welfare. In
such cases, their focus is not upon minimizing external costs but upon maximizing the tax base and tax
revenues. It is conceivable that governments may be either indifferent about regulating externalities or
enforcing regulations (or both) in order to prevent erosion of the tax base. This is not only a question of
regulatory form, even if financial assurance may cut into the tax base a little more efficiently than traditional
regulation, especially if non-governmental stakeholders force an operator to accept financial assurance and
effectively bypass the regulatory mechanisms in the host country.
The key feature of this second dimension is that the allowance of external cost imposition upon the
neighbours, local stakeholders, and even global stakeholders, without efforts to internalise effectively involves
wealth transfers from these stakeholders (or victims of externalities) to the government. The victims lose
quality of life and have their productive assets (farmland, rivers, forests, wildlife, biodiversity, etc.) damaged.
The government and operators share a larger pie than would have been available if external costs had been
internalised. Moreover, related to the relatively common location of mining activities adjacent to
underprivileged or indigenous communities, this may reflect serious negative aspects when viewed in the light
of environmental or distributive justice concerns (Gaventa, 1980; Klubock, 1998; Low and Gleeson, 1998;
Scheyvens and Lagisa, 1998; Evans et al., 2002; Amundson, 2005). As such, welfare transfers to government
(or de-facto taxes) may be inequitably imposed on those social actors with the least capacity to bear such costs.
Furthermore, the environmental and distributive justice literature clearly establishes that poor governance,
when linked to environmental and social degradation, disproportionately places the burden of pollution or
social fragmentation on the poorest sections of society, or both.

Concluding remarks

The risk of inadequate mine closure and the frequency of longterm negative environmental and social legacies
being imposed on mine stakeholders or most notably upon neighbours can be reduced by legislative measures
directly targeting the closure phase of mines. Financial assurance is one tool that can contribute to this.
However, in line with other research on financial assurance in particular literature addressing bonding such
economic incentives are unlikely to be sufficient.
The problem given particular emphasis here is that there is a distinct possibility for a trade-off between the tax
base and hence government revenues on the one hand, and good environmental and social performance on the
other. When mining companies wish to operate in a sustainable manner or where this term is found to be
poorly defined in an environmentally and socially responsible manner, this may be costly and serve to
reduce the tax base, the size of mineable deposits, and the total amount of valuable ore or metal extracted.
In this paper, we noted that concurrent remediation of environmental (and social) impacts would be more
efficient than post-mining cleanup. Mining firms facing demanding stakeholders on one side, and revenue
hungry host governments on the other, may have an opportunity to play these interests against each other.
More specifically, mining firms can argue to government that concurrent remediation funded from mine cash
flow is a much more efficient option than solutions such as bonding and post-mining cleanup, and that non-
government stakeholders will not tolerate the absence of cleanup. The prospect of financial assurance reducing
benefits to some stakeholders is an argument against using this type of instrument. Finally, we hold that good
national governance is essential for the achievement of equitable solutions that can meet future stakeholder
expectations.