Top 3 Facts About Reclamation Bonds
When mining companies begin to develop their mining assets and disturb the land they are mining, many jurisdictions within Canada require those miners to place security with the government. The security that is placed with the government guarantees that if the mine was abandoned or once it reaches the end of its useful life, that there is money or collateral set aside for the land to be placed back into its original condition and for any continuing monitoring of the site to occur. Usually these obligations are set out under a reclamation plan which is filed and approved by the local jurisdiction.
Governments in Canada usually accept a few forms of collateral. This includes the posting of a reclamation bond, a letter of credit from a bank or cash security. For miners, the ability to free up cash or borrowing capacity and avail of a reclamation bond can have significant positive implications for a miners capital structure. When thinking about reclamation bonds there are a few things to remember.
1) Reclamation bonds are now easier to obtain.
Applying for a reclamation bond used to be relatively hard to given the length of time that bonds are outstanding (sometimes in excess of 20 years if the mine is at the early stages of its life) and the onerous on demand nature of the bonds. However, in recent years, surety companies have begun to broaden their appetite and look at providing surety bonds to smaller junior minors. It is now possible for many junior miners in Canada to obtain these bonds.
2) What is required to obtain a reclamation bond?
A surety company will typically look at a few items when deciding whether or not to provide a reclamation bond. They will look at the financial strength of the mining company, they will look at the specific mineral being mined (precious metals are more appealing), the cost profile of the miner (miners with strong margins and low costs of production are more appealing), whether the miner is a single mine or mutli-mine company. Multi-mine businesses have additional diversification. Lastly – they will look at the life of the asset. This is especially important if it is a single mine business. If a miner has one asset and it is close to the end of its life, this can create concerns for the surety on how future reclamation costs are being funded especially if they haven’t been reserved.
3) What are the benefits of a reclamation bond for the mining company?
Surety bonds will typically offer multiple benefits for a miner as opposed to providing a letter of credit. Not only are surety bonds unsecured, but they are often much cheaper than the cost of posting a letter of credit. This allows miners to reduce costs, free up cash or lending capacity and take the security off balance sheet.
Having a surety broker that understands the mining and reclamation space in addition to which sureties specialize in these types of bonds is critical to ensure that the deal is structured appropriately for your specific company. If you have any questions, please reach out to one of our reclamation bond specialists.