A significant issue when deciding to invest in a mine is the closure plan. Similarly a significant issue when deciding to invest in a mining company is the extent of its liability for closure of one or more of its mine properties.

Seldom can you get a full accounting of the true situation or the true costs by looking at the annual reports. To be fully prudent you would have to undertake a full due diligence audit. As this is generally not practical for the independent investor, here are some of the warning signs to watch for that may emerge from reading Annual Reports, news releases, and web-sources.

A proposal to turn the site over to the locals and tell them it’s an opportunity for stakeholders to participate in community-based deliberative decision making process about how to turn the site into a sustainable entity.

A plan to engage a firm of big-city accountants to manage the property in trust pending a rise in the price of the metal when you plan to raise more cash and reopen the mine.

The possibility of declaring bankruptcy. Taxpayers love that sort of thing: lots of opportunity for museums, research centers, learning circles, and the rest at government expense.

I always shudder when I hear of “suspending” operations pending a consultant’s review of alternatives.

Some folk cleverly undertake closure, then find another rich deposit that make the company an attractive target for takeover. Thus you dilute your closure liability, particularly if the purchasing company is bigger, newer, or have a lower ratio of closed (or about-to-be-closed) mines to new mines than your company.

Some jurisdictions demand that before you open a mine you have a closure plan. Some jurisdictions demand that during operation, you submit an updated closure plan at regular intervals. As an individual investor, you may be able to get and examine the mine’s closure plans. Generally it will underestimate closure costs. This is reasonable when it is necessary to post a bond for closure work: why unnecessarily increase non-revenue earning costs? A similar caveat applies to reported closure costs in companies’ annual reports; they too generally underestimate closure cost to make the balance sheet look more robust.

From the proceedings of Mine Closure 2006 and a paper Financial Assurance for Mine Closure and Reclamation by A. Fleury and A.S. Parsons, both of the International Council on Mining and Minerals, here are some of the instruments that companies may use to provide financial assurance for mine closure costs:

  • Third Party Guarantees
  • Cash Deposits
  • Letter of Credit
  • Trust Fund
  • Insurance Policy
  • Self Funding, including parent company guarantees.

This is not the place to explore the advantages and disadvantages of each. If, however, you are thinking of investing in a company check their status re one of more of these instruments.