Reducing mine closure liability with ESG in mind

What happened when the Kimberley diamond mine was abandoned will not happen today with stringent environmental and social regulations in place. Image credit: Leon Louw for WhyAfrica

Reducing mine closure liability with ESG in mind

 Mining companies are under increased pressure from regulators, investors, and communities to manage social and environmental risks arising from mine closure and rehabilitation

By Merlita Kennedy, Partner & Tobia Serongoane, Associate from Webber Wentzel

 Abandoned mines and their dumps are common features of the South African mining landscape. The mining sector continues to battle with mine-related environmental concerns. Apart from environmental damage caused while mining takes place, such as water pollution and the destruction of forests, environmental damage ensues from mines that are not rehabilitated after mining activities have ceased.

Human Rights Watch recently released a report which estimated that there are at least 400 abandoned coal mines in South Africa. These unrehabilitated mines exist for several reasons. For example, a mining company that is liquidated may abandon its mining operations before complying with the statutory obligations for closure. In other cases, the abandoned mine may be historic, having existed before the current regulatory regime came into operation.

Communities adjacent to these defunct mines are exposed to hazards which pose a risk to their health and property. According to Human Rights Watch, illegal mining is prevalent where there has been a failure to take adequate measures to close a mine. Illegal miners will go to great lengths to circumvent efforts to prevent access to unused mines. Therefore, incorporating ESG practices into mine closure and/or rehabilitation has become a priority to avoid ESG litigation.

ESG now top of mind

ESG has risen to the top of the board agenda. Companies are increasingly aware that a failure to address these matters can be detrimental to the company’s business purpose, reputation, corporate values, approach to risk management, and relationships with host communities, investors, suppliers, customers, employees, and other stakeholders. As ESG continues to grow in importance, the number of ESG litigation matters will become self-perpetuating.

Often, though not always, little consideration is given to ESG implications when a mining resource has been depleted or becomes uneconomical to mine. An appropriate legal framework that deals with mining rehabilitation is vital for sustainable mining.

Mining companies globally are realising that the key to social ethics in mine closure planning is proactive sustainability.

Litigation Risks

If you are a director in the mining industry today, you are facing dramatically changing market expectations on disclosure and transparency on the environmental and social impacts of projects. You will also be asked about your governance procedures to ensure you are effectively managing social and environmental risk. This type of ESG analysis is referred to as ESG performance by the investment community.

The Mineral and Petroleum Resources Development Act, 2002 (“MPRDA”) is the primary legislation that governs the South African mining industry and its activities post-2004. The mining industry also has to comply with the provisions of other environmental legislation, such as the National Environmental Management Act, 1998 (“NEMA”), The National Water Act 36 of 1998 (“NWA”) and the National Environmental Management: Waste Act 59 of 2008 (“NEM:WA”). For instance, Section 28 of NEMA and section 19 of the NWA (hereafter section 19) both impose a general duty of care on polluters to prevent pollution and address pollution caused.

Directors’ duties under environmental legislation (NEMA)

Section 24N (8) of NEMA provides that: “notwithstanding the Companies Act or the Close Corporations Act, the directors of a company or members of a close corporation are jointly and severally liable for any negative impact on the environment, whether advertently or inadvertently caused by the company or close corporation which they represent, including damage, degradation or pollution.” Directors of companies must therefore be wary of undertaking any business activities that can cause land to be significantly contaminated.

Under section 43 of the MPRDA, the holder of a prospecting right, mining right, retention permit or mining permit was responsible for any environment liability, pollution or ecological degradation and its management until a closure certificate was issued by the Minister. However, as a result of the 2008 MPRDA amendments, the mining company will remain liable for any latent environmental hazards, even if a closure certificate is issued.

MINISTER OF WATER AFFAIRS AND FORESTRY v STILFONTEIN GOLD MINING COMPANY LIMITED & OTHERS 2006 (5)

The seriousness of rehabilitation is noted in Minister of Water Affairs and Forestry v Stilfontein Gold Mining Company Ltd and Others (Stilfontein case), where the respondents were ordered to undertake the costs of continuing to pump underground mine water out of a liquidated mine. If this water was not pumped, it would cause significant environmental damage to underground water and would eventually pollute the Vaal River. The court imposed a fine of ZAR 15 000 or a prison sentence of six months on the respondents, as well as the costs of the application.

Mining companies are being increasingly questioned and expected to comply with their governance procedures to ensure they are effectively managing social and environmental risk. This Environmental, Social and Governance analysis is referred to as ESG performance by the investment community. Non-compliance exposes mining companies to potential criminal prosecution. It could also lead to possible suspension or cancellation of any prospecting or mining rights that the company may hold.

Mitigating the probability of directors’ liability

To manage and mitigate some of the risks of ESG litigation, the key is to be proactive and to:

  • identify all historical mining operations to confirm the location, as well as the current and historical ownership, of the mines, the timeframes of all previous mining activity, and the extent of previous rehabilitation to assess possible exposure;
  • involve legal counsel at an early stage to ensure ESG compliance with reporting and disclosure requirements;
  • conduct due diligence and environmental legal compliance with the suite of environmental laws;
  • point out possible exposure to liability under a changing environmental regulatory landscape;
  • audit the suite of contracts individually and ensure that they contain indemnification and other contractual terms to protect against the impact of environmental liabilities;
  • in the event of a breach, involve legal counsel to assist with crisis management;
  • undertake a feasibility study to see whether corporate structures and operations have the necessary resources and expertise to handle any ESG matters that may arise;
  • identify community concerns, needs, opportunities, risks and impacts associated with the site closure;
  • engage effectively with stakeholders, including regulators, investors, employees, consumers and communities; and
  • move beyond treating ESG as a tick-box exercise to ensuring robust governance and accountability at board level and integrating material ESG factors into strategic decision-making.

Companies should seek specialist legal advice before responding to any ESG litigation issues that they may face.

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