Types of Security Instruments
The availability of funds to carry out sire remediation is heavily dependent on the type of security instrument used. The preferred type is an AA (double “A”) security instrument, which includes bonds, assurances, warrantees, insurance and sureties. High-risk instruments, such as self-bonding and corporate guarantees, generally require diligent management and contingency procedures in case of bankruptcy and should therefore be avoided.38 Some basic requirements to ensure the effectiveness of security instruments include:39
- security instruments should not contain defences or exclusions that might hamper the government’s ability to collect obligations;
- security instruments should not be easily withdrawn in the event that large environmental costs develop; and
- any cancellation clauses should require notification before cancellation.
Current legal requirements in BC, along with Recommended Solutions from other jurisdictions are discussed in the following sections.
Overview of BC Law
The selection of an appropriate security instrument should be based on the level of assurance it provides that the miner will take all necessary and reasonable measures to protect the environment, balanced with the need to minimize tying up capital required for progressive reclamation.40 A combination of different types of instruments is commonly used to achieve this goal.41 For example, in BC combinations of hard security and performance bonds have been accepted as security.42 Provincial policy defines hard security as including cash, irrevocable letters of credit, fully registered marketable bonds issued and/or guaranteed by the Canadian or provincial governments, treasury bills, guaranteed investment certificates and term deposits with up to three-year terms.43 According to provincial policy, the amount of hard security is determined using a net present value calculation with a discount rate of 3.5% (the discount rate is subject to change).44 Provincial policy also states that sufficient hard security must be posted to cover the following costs for the upcoming 5-year period:45
- expected post closure costs;
- periodic capital replacement costs related to the operation of a water collection and treatment facility and for the management and disposal of associated secondary wastes; and/or
- expected post closure site monitoring and maintenance costs.
According to provincial policy, the outstanding liability may then be covered by a performance bond provided by an approved bonding company (where total security exceeds $100,000).46
Regardless of the above-mentioned policies, the ultimate decision on what constitutes an acceptable instrument is left to the discretion of the Chief Inspector.47 This level of discretion is much greater than many other jurisdictions and increases the likelihood that high-risk forms of security will be accepted. For example, the provincial government has accepted charges on equipment and buildings as security; a practice the BC Auditor-General described as “questionable”.48 Equipment and buildings are not appropriate as security instruments because they depreciate over time and may be subject to competing claims from other creditors, including employees (unpaid salaries) or the federal government (for income taxes owed).49
In contrast, as described in the following Recommended Solutions, lower-risk securities are legally required in other jurisdictions.
BC law does not provide adequate guidance to the regulatory authority regarding the selection of appropriate security instruments or how accessible the security deposit must be.
Specific factors must be considered when selecting appropriate security instruments, including miner’s past performance
[Tags: Bonds; Assurance; Surety; Company Performance; Security; Calculating Assurance]
Some jurisdictions have imposed legal limits on the regulatory authority’s discretion in accepting different types of security instruments by specifying factors that must be taken into account in choosing an acceptable security instrument. For example, in South Dakota, the regulatory authority must consider the following factors when determining whether the proposed form of security is acceptable:50
- operator’s financial status;
- operator’s existing assets within the jurisdictions;
- facilities available to carry out the planned work; and
- operator’s past performance on contractual agreements.
Require security instrument to be quickly and easily convertible into cash
[Tags: Security; Bonds; Assurance; Surety; Convert; Cash]
Environmental conditions at mine sites can deteriorate quickly causing a sudden increase in reclamation costs. It is therefore imperative that securities can easily and quickly be converted into cash. This is recognized in Colorado where legal provisions provide that any proposed form of security can be rejected if it is not convertible to cash within 180 days.51