Insurers barred from SA rehab funds

Allan Seccombe | Thu, 02 Jul 2009 17:27
[miningmx.com] -- SOME junior South African miners are fed up with the Department of Mineral Resources for unilaterally issuing a writ stopping companies from using insurance firms to underwrite their rehabilitation obligations in favour of more expensive cash or bank guarantees.

The department issued the writ in the first quarter of 2009 because it draws no comfort from the practice and prefers the security provided by cash or bank guarantees rather, said Jacinto Rocha, the deputy director general of mineral regulations at the department.

The department is to participate in a workshop with insurers like Sanlam to discuss the suspension of the practice, he said. It took the decision internally after a discussion with only the Financial Services Board.

“We have to manage state liabilities. Until we understand the issues around insurance companies and the environment they find themselves in now, we have decided not to use them,” Rocha told Miningmx.

“Should the insurance companies present to us and raise our levels of comfort, we will permit them to be used under certain provisions,” he said.

The concern was that a mining company could stop paying its premium - causing the policy to lapse - or the insurance company might run into financial difficulties as seen during the height of the global economic crisis, he said.

The department has not favoured the use of insurance companies to make financial provisions for rehabilitation funds, but managers of certain regions had continued to do so. This has now been stopped.

Rocha said there was less than R1bn provided for by insurance companies, with a few large and a number of junior companies taking this route.

The Chamber of Mines was not immediately available for comment.

A junior mining executive said the move could potentially curtail projects by junior firms, which in some cases are able to provide for a portion of the rehabilitation fund with the insurers underwriting the remainder. This enables the junior to focus its money on building a mine or being financially agile enough to grow the business through mergers or acquisitions.

Ferdi Dippenaar, the deputy chairperson of the South African Mining Development Association (Samda), which represents junior miners, said the practice of using insurance companies as a method of financing a project was a universally adopted one.

“It’s a way of not putting too much pressure on new entrants’ balance sheets,” he said.

“You’d think in these difficult times, the authorities would look at ways of making it easier to start projects and create employment,” he said.

Rocha said: “To argue that the juniors tend to use this is wrong. Some juniors and a few big companies have used this method but it’s not industry-wide.”

The companies can pay their rehabilitation fees to the department on an instalment plan rather than paying those funds to the insurance company, he said.

“We don’t want there to be the impression that because insurance is not used any more, junior companies cannot make financial provisions. That’s not true,” he said.

The junior mining executive argued that raising cash or bank guarantees in these times when shareholders and banks are not exactly falling over themselves to put money into the junior exploration or development sector would prove to be a costly and difficult process.

The South African mining industry has been in a recession for the past four years, judging by data from Statistics South Africa. Total mine production has been falling since 2006, with the worst year being 2008 when output came down 7%. In the first four months of this year it declined by 9%.

A variety of reasons make planning almost impossible. These include the legislative environment governing mining and exports, electricity shortages and now more expensive power, freight bottlenecks and an extremely volatile rand.

South Africa is one of the most difficult countries from which to conduct cross-border trade, according to a recent World Bank report.