Environment and closure due diligence

Over the last 15 years, the importance of environmental, social and closure issues in the evaluation of mineral properties (MPE) has significantly changed. While once these issues were generally considered insignificant, they have evolved into an integral component of most MPEs. Many investors have specific environmental, social and closure standards that are as important as the resources, mine design and technical feasibility, due to their potential to increase the predevelopment costs and slow the return on investment.

With the advent of environmental and social benchmarks, such as World Bank and IFC standards, and the Equator Principles, most new mining developments today are subject to a level of scrutiny previously unheard of. Extended permitting and approval processes are commonplace, often lengthening the predevelopment phase of a project by years. Post-approval delays in project development are occurring more frequently due to lawsuits and protests by citizens and special interest groups. Several projects have even been stopped due to environmental or social concerns. Although rare, global political and environmental trends suggest more frequent occurrences in the future.

Closure and rehabilitation costs are the largest environmental costs associated with mining projects but are often overlooked because they generally occur decades into the future. When discounted as part of the Net Present Value calculation, they may be insignificant compared to development costs. Nonetheless, the mining industry has advanced the practice of mine closure considerably over the past two decades to control future costs and minimise the risks of developing a mine requiring perpetual care. Although the cost of perpetual care would be insignificant in NPV calculations, corporate business practices, and political and social pressures over the long-term management of closed mines is changing the way mining companies evaluate the business risks associated with closure.

Jeff Parshley: jparshley@srk.com



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