PART 1 – PROBLEM

1.1. Introduction

The mining sector is apparently experiencing remarkable revolution due to an increasing demand for mineral resources (gemstones and clays), metals (gold, aluminum, copper, nickel and iron) and energy resources (such as coal, uranium and oil) across the globe. The industry is enthusiastically utilising advanced exploration, improved recovery and unique recycling technologies in order to respond to the sustainability issues particular to economic growth and development.  The ability of the Australian mining industry to recognize and establish improved mine closure practices and mining regulations is fundamental for the development of a sustainable mining industry in Australia (Department of Industry, Tourism and Resources, 2006). This is because the mining operations and activities that in the past resulted in legacies of abandoned, derelict and orphaned mine sites, ‘are now unacceptable, and require improved mining legislation and control to ensure mine site closure is completed successfully, in a sustainable manner’ (Peck, 2005). Pertaining to these revolutionary changes, responsible mining companies have identified the importance of sustainable mine closure and rehabilitation practices and a great emphasis is being laid on management of the environmental aspects of mine closure and decommissioning has shifted towards the notion of planning for closure’ (Sassoon, 1996).

Axiom Mining Limited (Axiom) is an Australia-based mining company that currently deals in mineral exploration particularly in Australia, Vietnam and Solomon Islands. The company is almost ready to execute mine development at two different sites in the Solomon Islands; namely, Isabel Nickel Project and West Guadalcanal Project.

1.2. Problem

As per the recent disclosures, Axiom is planning mine development in Solomon Island which is supposed to cause a permanent variation of presented landforms, interruption to flora and shrubbery, hydrological influences and a substantial level of pollution or contamination. Further, the estimated cost of the Isabel Nickel Project does not encompass closure cost at all. This short-term vision may render high costs on the company when the mine will not be able to produce revenues at the time of closure. Consequently, there stands an immediate need for the company to develop ‘Closure Plan’ for the Isabel Nickel Project.

1.3. Environmental Issues

The advancement of a progressive rehabilitation plan is fundamental to a closure plan. The current planning of Axiom does not ensure that:

• the post-mined setting is protected and is secure from physical, environmental, and geochemical standpoints
• the quality of the nearby water resources is confined
• the decided sustainable post-mining land exploitation is set up and openly demarcated to the contentment of the society as well as government
• accomplishment criteria are settled with pertinent stakeholders, scrutinized and conveyed to stakeholders

In general, mining operation’s development (consisting of linked processing services and infrastructure) entails the permanent variation of presented landforms, interruption to flora and shrubbery, hydrological influences and potentially certain degree of pollution or contamination.

In addition to this, environmental management issues must be put into consideration by Axiom. During operations, environmental management issues can facilitate in curtailing the effects. On the other hand, there will be residual impacts at the mining’s completion and processing operations that are needed to be handled with reference to the given main concerns:

• Community safety risk
• Possible sources of continuing contamination
• Potential land exploitation and resource demands
• Environmental compatibility
• Society prospect
• Aesthetics and cost

1.4. Socio-economic Issues

In general, social sustainability signifies both formal and informal procedures, structures, systems and associations within a society that keenly support the ability of present and potential generations to make healthy, sound and live-able societies. And according to Western Australian Council of Social Services (2002), such societies are evenhanded, diverse, associated and autonomous, and give a superior quality of life.

Specifically, Axiom’s planning for mine closure does not make certain that

• The potential public health and community’s safety is not overlooked.
• The resilience of the community to the unpleasant impacts of mine closure is reinforced.
• The community can make the most of opportunities for consequential land exploitation.

 1.5. Evidence of the problem

It has been pointed out by Mackenzie, Lacy and Koontz (2006), the future of the mining industry is expected to turn out to be more and more reliant on its status as well as its aptitude to maintain a social authorization to function. Undesirably, the status of the mining industry has been affected as a result of poor instances of mine closure – resulting in long-standing environmental influences as well as legacy sites.

1.6. Timing considerations

Government is considered as the promoter of sustainable development. The aforementioned problem of Axiom has to be solved by the government at present because it directly affects environment, education and health, social infrastructure, and ecosystems. Elucidation is given below;

• It has been identified that the environmental impact of mine closure is critical and usually recognized, even if the clear-cut sign of the effect is exceedingly site-specific.
• Also, mine closure affects education and health which are significant locally-provided social services.
• In addition to social consequences of mine closure that are implicit in the problems of employment and social infrastructure.
• Operational control measures must be selected for implementation during mining in order to minimize the impact on the surrounding ecosystems.

Nonetheless, if the company fails to put up the closure cost and goes bankrupt at the time of mine closure, the government is liable to execute the closure and the cost is born by the taxpayers. Therefore, the government should immediately emphasize on assurance of the availability of capital at the time of closure and development of suitable closure objectives in collaboration of the local community.

 

PART 2 – BENEFITS

2.1. Benefits

Numerous benefits will be obtained by adopting planned, structured and systematic mine closure and completion of mines in the context of sustainable development. The benefits include:

2.1.1. Improved mine management

• Opportunities to optimize mine planning and operations during active mine life for efficient resource extraction and post-mining land use (for example reduction of double-handling for waste materials and topsoil, and reduced areas of land disturbance).
• Identification of areas of high risk as priorities for ongoing research or remediation
• Progressive implementation of a mine closure plan with opportunities for ongoing effectiveness testing, assessment and feedback
• Lower risk of regulatory non-compliance.

2.1.2. Improved stakeholder engagement in planning and decision-making

• Understanding the likely impacts on affected communities in terms of environmental, social and economic impacts of mine closure
• Informed development of strategies and programs to address closure impacts, ideally as part of a community development approach from early in the mine’s life
• Increased support from employees, government, landholders, local community and other stakeholders for closure decisions
• Improved community receptiveness to future mining proposals
• Enhanced public image and reputation.

2.1.3. Reduction of risks and liabilities

• Assured financial and material provision for mine closure through early estimation of mine closure costs
• Continual reduction of liabilities by optimizing operational works during active mine life in alignment with closure plan
• Reduction of exposure to contingent liabilities related to public safety and environmental hazards and risks
• Reduction of ongoing responsibilities for the site and facilitation of timely relinquishment of tenements and bond recovery.

2.2. Importance of the Benefits to Government

Planning for mine closure can assist Axiom in mitigating the consequent reduction in access to useful infrastructure. With advanced and careful planning, it will be possible to develop capacity to maintain certain infrastructure facilities and services for the local government ownership or as part of arising business development opportunities. Further, to avoid the incidence of closure cost on the local tax payers the government must assure that Axiom has a well defined closure plan for the Isabel Island Project.

2.3. Evidence of Benefit Delivery

The table below summarizes the identified problem, its solution, the time required for the delivery of solution, its cost and the person responsible for the job.

 

 

 

Problem	No Closure Planning
Solution	Closure Plan for Isabel Nickel Project
Time Required	3 to 5 Months
Estimated Total Cost	$150,000 to $ 200,000
Responsible Person	Environmental or Geotechnical Consultant

 

The delivery of the benefits shall be dependent upon following key activities:

S. No.	Key Activities	Required Time	Cost (as % of total cost)
1.	Hiring of Environmental or Geotechnical Consultant	3 Weeks	30%
2.	Data Acquisition	8 Weeks	25%
3.	Data Analysis	5 Weeks	30%
4.	Preparation of Closure Plan	3 Weeks	10%
5.	Disclosure of the Plan	1 Week	5%
	Total	5 Months	100%

 

P A R T 3 – MATHEMATICAL MODELING

3.1    Mathematical Model

3.1.1 Model 1: Net Present Value (NPV)

The net present value (NPV) is often used to compare competing investment opportunities. It is used to evaluate projects that involve an initial outlay of cash and positive cash flows in the future. The future cash flows are discounted by the required rate of return on the project. Mining projects usually produce a heavy negative cash flow at the beginning of a project pertaining to heavy expenditures for in exploration and mine development stages (Brigham & Houston, 2011). Once the extraction starts, a stream of positive cash flows begins. Not considering the probable closure of the mine in the future, companies fail to include or consider another negative cash flow expected at the time of mine closure. The closure cost is incurred to restore the land to its original condition once the extraction is done and it may considerably alter the feasibility of a project (Mackenzie, Lacy & Koontz, 2006).

3.1.1.1 Comparing the feasibility of a project with and without closure cost using NPV

A comparison the net present value of two mining projects is made to show the impact of including closure cost on the NPV of a mining project. Figure 1(a) and Figure 1(b) show the visual demonstration of the NPV graph of both the cases of project on Wolfram CDF (Maclachlan, 2006).

Following assumptions were made for the NPV model:

1. The life of both the projects is 40 years.
2. Every cash flow is made after an interval of 10 years.
3. The discounting rate is based upon the relative riskiness of the project, i.e. higher the rate more is the risk.
4. The amount for each cash flow is given in million Australian dollars.

In case A (without closure cost) the project needs an initial investment of 120 A$M, with two positive cash flows after each interval. The discount rate is 12% per interval. The NPV for this project is 25.09 indicating high feasibility of the project. However, in case B (with closure cost) the similar project is seen with an initial investment of 120 A$M, with two positive cash flows; but a huge negative cash flow is included at the third interval for closure. Inclusion of the closure cost dragged the NPV of the same project to -3.382 showing it non-feasible.

 

Figure 1(a): NPV of mining project A – Case A (without closure cost)

Figure 1(b): NPV of mining project A – Case B (with closure cost)

3.1.1.2 Accessing the impact of including closure cost on a project’s riskiness using NPV

Another mining project including the closure cost has been used to access the impact of closure pre-planning on the riskiness of the project. Discount rate is a function of the riskiness of an investment. Having a certainty of the future events minimizes the riskiness and thus the discount rate (Brigham & Houston, 2011). Project B demands an initial outlay of 160 A$M with two positive and one negative cash flow at the three intervals, respectively. The discount rate for Project A is 12% as compared to only 6% for Project B which indicates that including the closure cost and assuring its arrangement in the future minimizes the risk for uncertain cash outflows in future.

Figure 2: Project B showing Impact of including closure cost on the discount rate

 

3.1.2        Model 2: Parametric Value at Risk Calculator

Value at Risk (VaR) is the theoretical worst loss for a portfolio over a given time period at a particular confidence level. It estimates the maximum amount of money that may be lost for an investment (Best, 1998).  The parametric model is most suitable and accurate for linear investments which are short-term.

We are suggesting investing in the Closure Planning Project which shall last for 5 months (max). The assumptions made for this model include:

1. Portfolio value is in A$.
2. The time period 150 days represents 5 months.
3. The volatility 3.3 is the volatility constant for Australian material industry for 2012 (Davis, 2012).

Figure 3: Worst loss for the investment

Figure 3 shows the parametric value at risk calculation for the investment (Szoniec, 2014). T (Brigham, 2011)he worst loss for investing A$ 200,000 in the mining industry for 5months may in worst case result in a loss of 1.88*10⁷. This indicates a 99% confidence that there will be revenue of 1.88*10⁷ in while only 1% risk of loss.