THE MAIN LEGAL AND FINANCIAL ASPECTS RELATED TO MINE CLOSURE IN PERU

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 1
(Apr 2007)
CHAPTER 9B
THE MAIN LEGAL AND FINANCIAL ASPECTS RELATED TO MINE CLOSURE IN PERU
Juan Carlos Escudero Velando
Fernando Valencia Dibós
Attorneys
Estudio Grau Abogados
Lima, Peru

JUAN CARLOS ESCUDERO

Juan Carlos Escudero studied law in the Pontificia Universidad Católica del Perú, obtaining his Bachelor Degree in Law in 1992. He pursued the Continuing Legal Education Program in the George Washington University in 1996 (Private International Law and Foreign Disputes) and studied his LLM at the University of Connecticut School of Law in 1995. He is a professor of the course of Finance for Lawyers in the Universidad de Ciencias Aplicadas - UPC.

Mr. Escudero is one of the partners responsible for the Financing and Merger and acquisition practice of Estudio Grau. He was the partner responsible for providing legal advice to the acquirer party in one of the biggest mining acquisition of the last years in Peru. He also actively participated in the structuring of the largest project finance ever in the Peruvian mining sector. Mr. Escudero has been involved in many other relevant mining transactions.

Regarding his financial experience in mining matters, during year 2006. Mr. Escudero was in charge of the design of the financial assurance schemes destined to secure the full compliance of the Mine Closure Plans corresponding to two of the largest and most important mining projects in the country.

He has worked as Visiting Attorney in the Washington law firm Swidler Berlin, LLP (1997), assuming responsibility for advice to US and Canadian investors interested in Latin America.

I. INTRODUCTION

Peru is a Latin American pioneer in establishing a specific legal regime that regulates mine closure activities. The significant number of mining environmental liabilities (orphan sites) generated by the development of mining activities made it essential to enact specific rules intended to ensure the remediation of such environmental liabilities.

The Mine Closure Act¹ (hereinafter, the "Act") was enacted in October 2003. However, the Act lacked the necessary regulations for its application. In this respect, the Mine Closure Regulations² (hereinafter the "Regulations") were published in the official gazette in August 2005, containing the necessary provisions for the Act's application.

In this paper we shall analyze the main legal and financial aspects contained in the Act and the Regulations in order to identify the main characteristics of the mine closure model adopted by the Peruvian legal framework. Therefore, we will examine the problems related to the application of such rules, the components of the budget of the Mine Closure Plans (hereinafter, the "Closure Plans"), the types of financial guarantees allowed, the regularity of compliance with financial obligations, among others. In addition, we shall discuss the modifications made to the rules under analysis after their effective date, which were made due to the problems that arose during the preparation of the Closure Plans.

II. LEGISLATIVE BACKGROUND

The development of the Environmental Legislation in Peru started in the early nineties with the enactment of the Environmental and Natural Resources Code (CMARN, for its Spanish acronym)³ and of the Private Investment Promotion Act.⁴

The CMARN introduced the concept of Environmental Impact Assessment hereinafter, "EIA", as per its Spanish acronym) in the Peruvian environmental legislation, establishing the obligation to submit it to the corresponding environmental authority as a requirement for carrying out certain economic activities such as mining.

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In addition, the Private Investment Promotion Act assigned environmental responsibilities among different levels and entities of the State. In that regard, such rule establishes that the Ministries and the supervisory agencies of the sectors corresponding to the activities developed by companies are competent for matters related to the application of the provisions of the CMARN. In particular, the aforementioned act established that each Ministry is competent to regulate and supervise the environmental aspects within its sector.

In this context, the Ministry of Energy and Mines (hereinafter, the "MEM"), as the competent environmental authority in mining matters, enacted the Environmental Protection Regulations for Mining and Metallurgical Activities.⁵ These regulations established, among others, the obligation of the holders of the mining activities, namely exploitation,⁶ beneficiation (processing),⁷ general labor⁸ and mining transportation,⁹ to submit an EIA.

It should be pointed out that the concept of EIA resulted in the incorporation of the term "Closure Plan" in the Peruvian environmental mining legislation. According to the glossary of terms of those regulations, the Closure Plan comprised the actions that had to be taken by the holder of the mining activity, after the completion of operations, in order to prevent adverse effects on the environment caused by solid, liquid or gaseous waste that may exist or may emerge in the short, medium and long term.

In over 10 years from the express inclusion of the "Closure Plan" concept in the EIA, it has significantly evolved with the enactment of the Act and the Regulations to the benefit of environmental protection.

III. MINE CLOSURE: THE NEW CONCEPT

Since the enactment of the specific legal framework that regulates mine closure, the Peruvian environmental mining legislation has come closer to the modern concept of Mine Closure Plan.

The Act and the Regulations define the Closure Plan as an environmental management instrument that comprises technical and legal actions intended for the rehabilitation of the areas affected by the development of mining activities, which shall be performed before, during and after the closure of operations. This definition contrasts with the previous concept that considered the Mine Closure Plan as a set of

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rehabilitation actions that should be taken after completion of the development of the mining activity.

This new concept of mine closure is clearly contemplated in the Act and the Regulations by dividing the closure stages of a mining unit into "gradual closure",¹⁰ "final closure"¹¹ and "post-closure"¹² stages, each with a different legal treatment under the Regulations.

IV. SCOPE OF APPLICATION AND COMPETENT AUTHORITIES

As from the effective date of the Act and the Regulations, the development of mining activities in Peru not only requires the approval of an EIA but also, and specifically, the approval of a Closure Plan and the granting of the necessary financial guarantees.¹³

In regards to the Act and the Regulations scope of application, we shall analyze the term "holder of the mining activity" in view of the terminology used in those rules.

Article 2 of the Regulations establishes that it applies and refers to the mining activities defined in section VI of the Preliminary Title of the Consolidated Amended Text of the General Mining Act¹⁴ (hereinafter the "General Mining Act"), comprising the activities of sampling,¹⁵ prospecting,¹⁶ exploration,¹⁷ exploitation, beneficiation (processing), general labor, mining transportation and trading of minerals. In addition, the glossary of terms of the Regulations defines the "holder of the mining activity

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" as any individual or legal entity that performs or conducts mining activities under a legal title.

Based on the foregoing, we may conclude that the obligations contained in the legal provisions under analysis would be extended, and therefore, would be enforceable against all individuals or legal entities that perform any of the activities established in the General Mining Act. However, this is not entirely true.

Pursuant to the General Mining Act, the development of certain activities such as the sampling, prospecting and trading¹⁸ of minerals is free in all the national territory (subject to the exceptions related to the development of these activities in border zones, protected natural areas, crop-growing areas and third parties' concessions). Therefore, interpreting that the obligations pertaining to the submission of the Closure Plan established by the Act and the Regulations are enforceable against the persons who perform the activities of sampling, prospecting and trading is not entirely correct, specially when the General Mining Act has established that the development of these activities is free and does not require any previous authorization or supervision by the MEM.

Following, we analyze three important cases related to the development of mining exploration, construction activities and beneficiation.

a) Closure Plan and mining exploration activities

Regarding the enforceability of the obligations of the holders of the mining exploration activities contained in the Act and the Regulations, Article 2 of the Regulations includes within the application of the said rule, mining exploration activities without any distinction whatsoever. However, Article 8 of the Regulations referred to the enforceability of the Closure Plan restricts the scope of application of the rule regarding this kind of activity by establishing that the Closure Plan and the financial guarantees arising therefrom, are enforceable against the holders of the mining activity who perform exploration through underground works that imply the removal of more than ten thousand (10,000) tons of material or more than one thousand (1,000) tons of material with an acidity potential (AP) ratio less than three (NP/AP - 3), in representative samples of the material removed.

In particular, most of the mining exploration activities are not within the scope of application of the aforementioned rules. On the contrary, only those mining exploration activities that have the special characteristics established in the Regulations are...