A STUDY OF REHABILITATION FUND PAYMENT MECHANISMS FOR SMALL SCALE MINES IN MALAYSIA by Salmiah Nawi A thesis submitted to the Department of Mining Engineering In conformity with the requirements for the degree of MASc. Mining Engineering Queen’s University Kingston, Ontario, Canada (December, 2017) Copyright ©Salmiah Nawi, 2017 i Abstract The purpose of this study is to investigate and identify the best financial assurance payment mechanism for mine rehabilitation in Malaysia, and to make recommendations for a practical system to be used in the Malaysian small scale mining industry. Financial assurance is a requirement for potential miners to demonstrate that they have the resources for any environmental damage correction that may be caused by their operation. Currently, the Malaysian Government has imposed on every mining company a certain fee for payment to a common rehabilitation fund in every state that already has adopted the State Mineral Enactment. This common fund is meant for rehabilitation of small scale mines. However, there is no detail or standard mechanism on how payments should be made to the fund. This thesis first examines the types of financial assurance used in four selected countries which are Canada, the USA, Australia and Ghana, reviews some of the common forms of payment currently used in these countries and presents the results. Based on the findings in this recent literature review, several criteria for establishing a rehabilitation fund and a method of collecting the fund were tested and weighted, in order to get the best method that is suitable for the Malaysian mining environment. The methods that have been tested were Upfront Full Payment, Upfront Partial Payment, Pay As You Go and No System. The results show that the Pay As You Go system scores the highest among the other methods that were tested. The Pay As You Go method is the recommended method for companies that operate small scale mines as it will not significantly harm marginal small businesses which operate on short term mining leases. These companies will deposit their payments into the funds as land disturbances increase after the mining production has started. The funds collected from this system will protect the government from liabilities, and at the same time encourage progressive land rehabilitation by the mine operators. The researcher recommended the Pay As You Go system as the best system to be applied for the mine rehabilitation fund in Malaysia. ii Acknowledgements Firstly, I would like to express my gratitude to my supervisor Prof. Ursula Thorley for the continuous support of my masters' study and research. I really appreciate her guidance which helped me in all the time of research and writing of this thesis. I also thank Prof. James F. Archibald for his sincere valuable guidance and encouragement extended to me during my masters' study. Heartiest thanks to my husband and my children for their understanding and supporting me throughout this study. I also place my sense of gratitude to all the people in the Robert Buchan Department of Mining who have lent their helping hand and support to me. iii Table of Contents Abstract ii Acknowledgements ......................................................................................................................... iii List of Figures ................................................................................................................................ vii List of Tables ................................................................................................................................ viii List of Abbreviations ...................................................................................................................... ix Chapter 1 Introduction ..................................................................................................................... 1 1.1 Research Background ............................................................................................................ 1 1.2 Research Objective ................................................................................................................ 3 1.3 Thesis Topics to be Reviewed ............................................................................................... 3 1.4 Research Question ................................................................................................................. 3 1.5 Methodology .......................................................................................................................... 3 Chapter 2 Literature Review ............................................................................................................ 5 2.1 Introduction ............................................................................................................................ 5 2.2 The Relationship between Financial Assurance and Mine Closure ....................................... 6 2.2.1 Mine Rehabilitation in Mine Closure .............................................................................. 8 2.2.2 Rehabilitation Cost Estimation for Financial Assurance ................................................ 9 2.3 Recent Literature on Financial Assurance for Mine Site Rehabilitation ............................. 10 2.3.1 Identifying the Need for Financial Assurance .............................................................. 10 2.3.2 What are the Forms of Financial Assurance Instruments? ............................................ 14 2.3.2.1 Hard Securities ....................................................................................................... 14 2.3.2.2 Soft Securities ........................................................................................................ 16 2.3.3 The Problems Concerning Financial Assurance ........................................................... 18 2.3.3.1 Surety Industry Increase Rate for Mine Reclamation Bond .................................. 18 2.3.3.2 Double Bonding on the Same Project .................................................................... 18 2.3.3.3 Liability Rule Encourage Bankruptcy .................................................................... 19 2.3.3.4 Environmental Cost is External Cost ..................................................................... 19 2.3.3.5 Firms are Responsible up to the Value of the Bond............................................... 20 2.3.3.6 Historic Site Bound to Present Day Standards ....................................................... 20 2.3.3.7 Inadequate Mechanism or Amount of Financial Assurance: ................................. 21 2.3.3.8 Policies Vary Between Jurisdictions ...................................................................... 21 2.3.3.9 The Lacking of Prediction of Environmental Impacts for Financial Assurance .... 21 2.3.3.10 The Burden of Proof on A Surety Firm ............................................................... 22 iv 2.3.3.11 The Bonding Authority may be Reluctant to Specify the High Amount Bonds .. 22 2.3.3.12 Lacking Information if Assurance Received is Sufficient ................................... 23 2.3.4 The Enforcement of Financial Assurance ..................................................................... 23 2.3.5 Specific Financial Assurance Examples by Countries: ................................................. 24 2.3.5.1 Canada.................................................................................................................... 24 2.3.5.2 United States of America: ...................................................................................... 28 2.3.5.3 Australia: ................................................................................................................ 30 2.3.5.4 Ghana ..................................................................................................................... 30 2.3.5.5 Malaysia ................................................................................................................. 30 2.4 A Review of Financial Assurance Requirements by Lending Agency and Jurisdictions .... 31 2.4.1 International Lending Agency Requirements ............................................................... 32 2.4.2 Canadian Requirement .................................................................................................. 33 2.4.3 United States of America Requirements ....................................................................... 34 2.4.4 Australian Requirements: .............................................................................................. 35 2.4.5 Ghanaian Requirements: ............................................................................................... 35 2.4.6 Malaysian Requirement. ............................................................................................... 37 2.5 The Return of Financial Assurance to the Mining Company .............................................. 38 2.6 Discussions on financial assurance requirement based on studied countries....................... 39 2.7 Conclusion for Literature Review ........................................................................................ 41 Chapter 3 Malaysian Mining Industry ........................................................................................... 43 3.1 Brief Overview..................................................................................................................... 43 3.2 Malaysian Mining Laws and Regulations