Top Five Things to Know About Reclamation Bonds?

Author: Andrew Cartwright

Reclamation bonds are required in various countries throughout the world to secure the closure and reclamation obligations of a mining operation. In many cases, a junior or preproduction minor will be required to post a bond. As mining activities commence, the size of the requirement will increase alongside the costs to reclaim the land and monitor any future environmental impacts.

When looking at meeting the requirements to secure a reclamation bond it is very important to understand what a bond company will review. Considering all the factors will ensure they understand the mining operation and will provide competitive terms and pricing.

1) For junior minors, the surety will look at the type of asset being mined. Precious metal commodities are preferred to non-previous metals. In addition, the surety will look at the AISC (all in sustaining cost) related to that mine. The lower the all in sustaining cost the more favorable the surety will view the operation. With a low all in sustaining cost, the miner has a greater ability to remain profitable with fluctuations in the price of the asset.

2) The surety will examine the reclamation plan and the details around the likelihood of the mines mines future success. These items are usually outlined in a reclamation plan and a “feasibility” study. The surety will want to ensure that these reports are prepared by well known consultants. They will confirm that detailed analysis has been performed about the availability of future ore at any particular site. They will also confirm whether the approach to reclaim the mine is reasonable and within best practices. Ensuring you are using a reputable consultant with experience in the field when preparing these reports is critical.

3) Most sureties in today’s world, especially on larger bonds, will review the environmental, social and governance practices of that a miner. This includes how they approach and mitigate the environmental and social impacts of their operation and whether they treat their employees fairly or have been subject to labor action. They also look at the local jurisdiction and whether it has a strong judicial and legal system. The bond company wants to ensure governments are dealing with mining operations in a fair, open and transparent fashion.

4) A surety will also review financial projections, current financial statements and other financial metrics to ensure the mining operation is or will be profitable. They will confirm whether the company is set up with balance sheet strength relative to the size of the bond required. This will also include a review of existing 3rd party lending arrangements and the miner’s ability to access cash flow.

5) Every bond issued in the mining industry is secured by an indemnity agreement. This agreement provides the surety with the ability to recover from the miner in the case of a valid claim against the mining closure bond. Most jurisdictions require what is called an on demand financial guarantee bond which means that the surety must pay claims within a very short time of receiving them.

Sureties also review the corporate structure of any mining entity to understand what indemnity or security will be required to secure the reclamation bond.

Ensuring that you are working with a surety bond expert that understands both how to apply for a reclamation bond and present your business in the right way is critical. Reach out to a representative at FCA with any additional questions.