CHAPTER 12 PAYING AHEAD: USING TRUST FUNDS TO SECURE LONG-TERM EXPENSES AT CLOSED MINES

• Jurisdiction: United States

Mining Agreements: Contracting for Goods & Services
(Sep 2015)
CHAPTER 12
PAYING AHEAD: USING TRUST FUNDS TO SECURE LONG-TERM EXPENSES AT CLOSED MINES
David L. Deisley
Executive Vice President
Corporate Affairs and General Counsel
NovaGold Resources Inc.
Salt Lake City
Eric B. Fjelstad
Partner
Perkins Coie LLP
Anchorage
Cameron Leonard ^*
Senior Environmental Counsel
Perkins Coie LLP
Anchorage

[Page 12-1]

DAVID DEISLEY is Executive Vice President and General Counsel of NOVAGOLD RESOURCES Inc., a well-financed precious metals company engaged in the development of mineral properties in North America. At NOVAGOLD, Mr. Deisley is responsible for all aspects of the Company's legal governance and corporate affairs. With over 25 years of experience in the mining industry in the Americas, Dave has an extensive track record in project permitting, corporate social responsibility, mergers and acquisitions, and corporate development. Prior to joining NOVAGOLD, Dave served in positions of increasing responsibility with Goldcorp Inc. from September 2007 to October 2012. At the time he resigned from Goldcorp Inc., he held the position of Executive Vice President, Corporate Affairs and General Counsel for Goldcorp Inc. During his tenure with Goldcorp, Dave led Goldcorp's participation in an industry leading human rights assessment of Goldcorp's operations in Guatemala and the development of corporate human rights policy and practices for that company. Prior to his tenure at Goldcorp Inc., Mr. Deisley served in progressively responsible capacities with Barrick Gold Corporation, including Regional General Counsel for Barrick Gold North America, and General Counsel in Chile. Dave joined Barrick after 12 years of private practice in the natural resources area with Parsons Behle & Latimer, a Salt Lake City-based law firm. Dave obtained his Juris Doctor from the University of Utah, College of Law and his Bachelor of Arts from Brown University.

ERIC FJELSTAD is managing partner of the Alaska office of Perkins Coie LLP and leads the firm's Alaska environmental and resources practices. His practice is focused on oil & gas and mining project development and litigation in Alaska. Eric is a frequent speaker on permitting, social responsibility, aboriginal issues, and commercial issues relating to project development. He is a native of Wisconsin and has lived in Alaska since 1994. When he is not working, Eric enjoys fishing and exploring the many remote areas that Alaska has to offer.

CAMERON M. LEONARD is a Senior Environmental Counsel at Perkins Coie LLP's Anchorage, Alaska office. Cam has more than 30 years of experience practicing natural resources and environmental law in Alaska. His practice focuses on project development and permitting for the mining, oil and gas, and energy industries. He also represents ANCSA corporations in the environmental and natural resources fields. Cam's legal career in Alaska began in 1983, when he clerked for the Hon. Jay Rabinowitz, of the Alaska Supreme Court. After two years as a trial lawyer with the Alaska Public Defender's Office, he joined the Environmental Section of the Alaska Department of Law, where he practiced until joining Perkins Cole in 2013. During his career at the state, Cam was fortunate enough to be lead counsel on two cases that ended up before the U.S. Supreme Court, one an air permitting dispute arising at the Red Dog Mine, and the other a water permitting case involving the Kensington Mine. Cam has a B.A. from Cornell University and a J.D. from the University of California, Berkeley School of Law.

INTRODUCTION

Most jurisdictions have long required that miners reclaim the areas disturbed by mine operations to minimize environmental impacts and create a sustainable post-mining land use.¹ While some reclamation can be done concurrently with active mining, much must wait until mine closure. To protect the public from the risk that a mining company may default on its reclamation duties, many countries, states and provinces require that the miner provide financial assurance sufficient to fund necessary reclamation work.²

Various instruments have been used to satisfy the requirement of financial assurance. These include surety bonds, certifications of deposit, letters of credit, and insurance.³ All of these mechanisms, when managed properly, can be effective in securing the one-time, fixed expenditures required at mine closure, such as re-contouring, covering and revegetating waste rock piles and removing surface facilities, against the risk of operator performance default. But they are less suitable for securing post-closure costs, such as water treatment and dam maintenance, which typically are long-term and recurring. To fund those kinds of expenses, a financial assurance arrangement that can generate an income stream over an extended period of time is preferable.

While the purpose of traditional reclamation bonding⁴ is to protect the public from the risk of default by the operator, the purposes of a long-term funding mechanism are different and broader. Relying on the mine operator, typically a corporation, to remain as the responsible party for long-term obligations is not realistic, given the typically transitory nature of commercial corporate institutions. When the funding time frame extends for decades, or even centuries, an institution more durable than a corporation is necessary. Admittedly, determining the amount of the fund corpus decades before the funds are needed to pay for required site care and maintenance is difficult, due to the uncertainty regarding future economic, regulatory and environmental conditions, as well as advances in technology. However, having access to a fund dedicated to paying for the site care and maintenance arguably provides greater financial

[Page 12-2]

assurance than assuming that a corporate mine operator will still exist and be financially responsible long after mine closure.

When the mine is located on private land, any long-term funding mechanism must also take into account the appropriate role for that landowner in future decisions and on-site activities. The traditional, reclamation-focused tools, such as surety bonds and letters of credit, do not provide the flexibility to accommodate the landowner's legitimate long-term role and interests. As discussed below, the trust fund model may provide the opportunity to accommodate a private landowner's interests.

Ultimately, the objective is to ensure that funds are available to cover activities that are anticipated to be required in the future, well beyond the "normal" lifetime of a typical corporation. This paper focuses on using trust funds as the mechanism to secure and finance long-term expenses at closed mines. Of course there will be a wide variety of circumstances requiring post-closure expenditures at different mines. The laws and institutions governing the creation of trusts will also vary between jurisdictions. So this paper focuses on a handful of practical issues to consider, and what sorts of documents will be needed, in evaluating whether the trust fund model may be suitable for a particular project.

Issue 1: Will The Project Have Post-Closure Expenses?

The classic scenario for substantial post-closure expenses at a closed mine involves acid rock drainage (or ARD). Because the chemical reactions that result in ARD, once begun, are extremely difficult to arrest,⁵ ARD issues can present long-term site management challenges and expenses.

But there are other circumstances, less dramatic and obvious, that also can trigger long-term post-closure expenses at a mine. For example, if the closure design includes a dam, that dam will require periodic inspection and maintenance into the indefinite future. Similarly, engineered caps on tailings or reactive waste rock piles, designed to prevent ARD reactions from starting (by restricting exposure of reactive materials to air and water) will require long-term inspection and maintenance. Or if a pit lake will remain after mine closure, the leachate from pit walls may impair water quality, requiring treatment if and when discharged to surface waters.

An even less obvious circumstance triggering long-term expenses is the conversion of ground-water into surface water. Many jurisdictions have more stringent water quality criteria for surface water than for groundwater, usually in order to protect aquatic life.⁶ If an excavated pit fills up after mine closure from groundwater recharge and surface runoff, and becomes a pit lake, the quality of its water may not comply with surface water standards, even absent any ARD effects or significant leachate from pit walls. That may trigger an obligation to treat any eventual discharge from the pit lake -- an expense that may not actually arise until many years after mine closure, but must still be funded.

[Page 12-3]

Ultimately, the relevant permitting authorities will determine the mine operator's obligation to provide financial assurance for post-closure activities. For purposes of this paper, we assume that such obligations exist and discuss the potential of using a trust fund to provide financial assurance to ensure the obligations are performed.

Issue 2: Creating a Trust

There are many kinds of trusts, arising in a variety of contexts, and their basic structure is familiar. The trustor (aka grantor or settlor) conveys property to a trustee to be used for the benefit of a third party (the beneficiary). For our purposes, the trustor is the mining company, and the beneficiary is the agency with jurisdiction over the post-closure activities which the trust is created to fund. Other potential beneficiaries may include the owners of the surface and mineral estates, or other local stakeholders with a discrete interest in ensuring proper long-term care and maintenance of the site (e.g., a local municipality or water district). Designating multiple co-beneficiaries...