ARTICLE IN PRESS

Resources Policy 34 (2009) 227–233

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

Financial assurance and mine closure: Stakeholder expectations and effects

on operating decisions
Philip Peck a, Knud Sinding b,c,
a
International Institute of Industrial Environmental Economics, University of Lund, Sweden
b
Department of Environmental and Business Economics, University of Southern Denmark, Denmark
c
Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, UK

a r t i c l e in fo abstract

Article history: Financial assurance is increasingly seen as a means to ensure orderly, clean and lasting closure of mines.
Received 17 March 2009 Broadly interpreted, ‘‘closure’’ requires leaving viable ecosystems on mining lands that are compatible
Accepted 19 March 2009 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
JEL classification: environmental surety instruments that protect the government and public in the event a mining
H23 company cannot meet its reclamation or rehabilitation obligations. As such, financial assurance is in
L72 essence the money available for closure of the mine in the case when the mine owner is not available to
M21 perform the work. A general trend towards greater environmental concern among social stakeholders
Q30
in mining further serves to focus attention on policies and practices that can actually ‘‘assure’’
Q32
financial assurance.
Q34
Q38 Financial assurance is also perceived as a means to address closure-related challenges that are
Q54 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,
Keywords: however, also raises some fundamental questions about how assurance mechanisms influence mining
Financial assurance operations and the relationship between mining operations and their surroundings. This paper
Mine closure examines both the internal effect of a variety of financial assurance approaches on mining
Stakeholder management operations—in 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.
& 2009 Published by Elsevier Ltd.

Introduction sites. These implications have both financial and stakeholder

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
 Corresponding author at: Department of Environmental and Business
Economics, University of Southern Denmark, Niels Bohrs Vej 9, DK-6700 Esbjerg,
Denmark.
E-mail address: ksinding@dundee.ac.uk (K. Sinding).
components.
Mining of metals, precious stones, coal and other commodities
has the potential to disturb or affect large areas of land, either as
a direct consequence 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.

0301-4207/$ - see front matter & 2009 Published by Elsevier Ltd.

doi:10.1016/j.resourpol.2009.03.001
 ARTICLE IN PRESS
228 P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233
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
definitions—but 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 planet—indeed:
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 mine’s 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 internalisa-
tion of further environmental and social costs. This is a particularly
relevant issue during the volatile years in the period 2006–2009.
Soaring commodity prices in the period 2006–2008 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 opportu-
nities 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
 ARTICLE IN PRESS
P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233
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/post-
operational 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 transi-
tional 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 rehabilita-
tion works have continued to result in significant adverse EH&S
impacts—and 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; Östens-
son, 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 finan-
cial 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, externali-
zation of closure costs, and costly and time consuming tailor-
made 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 closure-
related issues (Liebenthal et al., 2005; Clark and Clark, 2005).
The development of corporate governance, regulatory frame-
works, 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
company’s 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—
229
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 function-
ing 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; Östensson, 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:
yguarantees 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
 ARTICLE IN PRESS
230 P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233
environmental performance at the time of (and after) cessation of
mining activities through the funding of mine site reclamation
or rehabilitation.1 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.2
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 opera-
tions. 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
1
Note also that financial assurance arrangements often specifically target the
‘‘ongoing’’ rehabilitation and restoration of disturbed lands during the operational
life of the mine.
2 4
In some circles, these views have evolved markedly. Miller (2005) acknowl-
edged that in a previous study (Miller, 1998) he had reported that a group of
leading mining organisations showed a marked preference for ‘‘soft’’ assurances
such as: financial strength; self-funding of the obligation while retaining control of
the funds; a financial test which determines the grade of the company; a corporate
guarantee based on that grade; self-funding through financial reserves; parent
company guarantees and pledge of assets. By contrast, in a follow-up survey
conducted in 2004 by the same author, the majority of industry respondents
recognized that ‘‘harder’’ methods such as letters of credit, bank guarantees,
deposit of securities, and cash trust funds, may best serve the industry, as they are
required to satisfy public expectations. As to which instruments best serve the
interests of the government, the 1998 report noted that they would be those that
best serve the mutual interests of the government and the company.
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 commod-
ities 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.3 Mining firms may dislike internalisation if their profits
fall.4
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.5 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
3
Shorter mine life provides a shorter period of time to capture the benefits of
mining, but also a shorter period in which damage can occur. While some will hold
that a smaller volume of mining contributes to a lower overall environmental
impact, we believe that the ‘‘additional’’ environmental impact of longer mine
operation is likely to be marginal in nature as the overall ‘‘environmental and
social footprint’’ is rarely likely to be directly proportional to the volume of ore
mined.
It is important not to view this as a value judgment. Some firms operate
under the terms typical of the industry—others may choose to leave the industry
or the country if they feel that they have been regulated too restrictively.
5
This is a complex topic that is not dealt with in detail here. The reader is
referred to the literature of ‘‘distributive justice’’ for deeper insights. Lamont
(2003) for example, holds that the principles of distributive justice are normative
principles designed to allocate goods in limited supply relative to demand. The
principles vary in numerous dimensions. They vary in what goods are subject to
distribution (income, wealth, opportunities, etc.); on the nature of the subjects of
the distribution (natural persons, groups of persons, reference classes, etc.); and on
what basis the goods should be distributed (equality, according to individual
characteristics, according to free market transactions, etc.)—Lamont also provides
a concise overview of the topic.
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P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233
Table 1
Advantages and disadvantages of financial assurance through bonding.
Advantages Disadvantages
 Protection against unfounded  Depends on monitoring, including
reclamation needs. the resources allocated and the
 Relies on individual performance expertise available, both to
objectives, rather than broadly governments negotiating bond size
applied standards. and terms, and to bond issuers.
 Bond payments into escrow  Bond size and thus minimum
accounts have great symbolic and reclamation is a floor, not an
hence political value. optimum.
 Posting a bond is a form of  Bonds are not immune to political
commitment by mine company pressure.
managers.  Difficulties in measuring future
reclamation costs and setting bond
amounts.
 Insufficient bond amounts due to
unforeseen changes.
 Bonds create liquidity constraints.
Adapted from Poulin and Jacques (2007).
Bougainvillian secessionists. The mine is still closed, but interest
in reopening it remains (Mining Journal, 2009).
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 propor-
tional to the volume of ore extracted or the area of land
affected—both 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 require-
ment 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).
231
Similarly, difficulties in estimating the cost of future reclama-
tion 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 discovery–exploitation–closure
cycle (O’Hara, 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 mine’s 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.6
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 miner-
alised 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
6
The notion of taking organizational practices ‘‘for granted’’ is the subject of a
large, varied and widely accepted literature in organizational sociology, with
particular emphasis on this being placed with work following the thinking of
Meyer and Rowan (1977) and DiMaggio and Powell (1983).
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232 P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233
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 post-
closure 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.7
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 expendi-
tures 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
7
The difference between the two is difficult to generalise. Empirical studies
will always have to estimate the cost of the option NOT pursued. Cost arising from
remediation of abandoned sites can be calculated but would then have to be
compared to estimates of how remediation would have been carried out had it
occurred concurrently. The opposite difficulty is found where concurrent
remediation has taken place. Apart from separating remediation costs from other
costs, the difficulty would be to estimate the externalities that would have
occurred in the absence of concurrent remediation.
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-govern-
mental stakeholders force an operator to accept financial
assurance8 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 stake-
holders, and even global stakeholders, without efforts to inter-
nalise 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 long-
term 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
8
This is a real possibility. The Equator Principles is an initiative led by the
International Finance Corporation and the World Bank. These seek to ensure that
projects financed by signatories are developed in a socially responsible manner
and reflect sound environmental management practices. As part of adopting the
principles, financiers undertake to carefully review proposals and to refuse loans to
projects where the borrower will not, or are unable to comply with the required
environmental and social policies and processes. A large group of leading banks
already support the initiative (some 66 banking institutions as of March, 2009).
Further, the signatory international banks undertake not to finance any project
over US$ 50 million unless it meets World Bank and International Finance
Corporation environmental policies, standards and guidelines, which include a
requirement for closure funding (Miller, 2005, p. 6 & 17). Indeed, the principles
include a requirement for fully funding a mine’s closure plan by appropriate
instruments so that the cost of closure can be covered at any stage in the mine life,
including premature and unforeseen cessation of activities. For further detail, see
http://www.equator-principles.com/documents/Equator_Principles.pdf (accessed
March 4, 2009).
 ARTICLE IN PRESS
P. Peck, K. Sinding / Resources Policy 34 (2009) 227–233
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 stake-
holders 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 govern-
ment 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.
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