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Towards sustainable mining (part II): Accounting for mine reclamation and post reclamation care liabilities

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  • Espinoza, R. David
  • Morris, Jeremy W.F.

Abstract

Valuation of mining investment opportunities typically focuses on revenues (i.e., amount of ore, mineral grade, and commodity prices), pre-production capital expenditures (CAPEX), and recurring operating expenditures (OPEX). Less emphasis is generally placed on longer-term costs that are harder to quantify, such as decommissioning, closure, and reclamation. Less emphasis still is placed on valuation of the very long term (or perpetual) costs of post-reclamation care (PRC) and long-term management (LTM) that should follow mine closure and reclamation, primarily due to technical and environmental uncertainties and the widespread practice of discounting, which renders the present value of distant future costs virtually nil particularly when typically high discount rates are used. Following on from the discussion of mine asset valuation in Part I (Espinoza and Rojo, 2017) of this two-part dissertation on sustainable mining, Part II discusses the inherent issues with the current practice of valuing project opportunities and accounting for PRC liabilities and LTM within the mining sector. The paper argues that mining sustainably starts with recognizing all potential future liabilities (routine and non-routine) through the life of a mine, ensuring that sufficient funds are available to address these liabilities, and investing these funds appropriately. Decoupled net present value (DNPV) analysis, which separates risk from the time value of money and treats risks as a cost to the project, is presented as a robust alternative to current accounting practices. This method can identify the effects of individual risk factors on the value of a project. A hypothetical example taken from the mining literature is used to compare the DNPV method with net present value (NPV) and modern asset pricing (MAP) analysis, and clearly illustrates the unsustainable consequences of using risk adjusted discount rates to value long term mining investments.

Suggested Citation

  • Espinoza, R. David & Morris, Jeremy W.F., 2017. "Towards sustainable mining (part II): Accounting for mine reclamation and post reclamation care liabilities," Resources Policy, Elsevier, vol. 52(C), pages 29-38.
    • Handle: RePEc:eee:jrpoli:v:52:y:2017:i:c:p:29-38
    DOI: 10.1016/j.resourpol.2017.01.010
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    References listed on IDEAS

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    1. R. David Espinoza, 2011. "Contingency estimating using option pricing theory: closing the gap between theory and practice," Construction Management and Economics, Taylor & Francis Journals, vol. 29(9), pages 913-927, July.
    2. Espinoza, R. David & Rojo, Javier, 2017. "Towards sustainable mining (Part I): Valuing investment opportunities in the mining sector," Resources Policy, Elsevier, vol. 52(C), pages 7-18.
    3. Richard Zeckhauser & W. Viscusi, 2008. "Discounting dilemmas: Editors’ introduction," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 95-106, December.
    4. David Espinoza & Jeremy W.F. Morris, 2013. "Decoupled NPV: a simple, improved method to value infrastructure investments," Construction Management and Economics, Taylor & Francis Journals, vol. 31(5), pages 471-496, May.
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    6. Gordon Salahor, 1998. "Implications of Output Price Risk and Operating Leverage for the Evaluation of Petroleum Development Projects," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 13-46.
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    1. Espinoza, R. David & Rojo, Javier, 2017. "Towards sustainable mining (Part I): Valuing investment opportunities in the mining sector," Resources Policy, Elsevier, vol. 52(C), pages 7-18.
    2. Dou, Shi-quan & Liu, Jiang-yi & Xiao, Jian-zhong & Pan, Wen, 2020. "Economic feasibility valuing of deep mineral resources based on risk analysis: Songtao manganese ore - China case study," Resources Policy, Elsevier, vol. 66(C).
    3. Endl, Andreas & Tost, Michael & Hitch, Michael & Moser, Peter & Feiel, Susanne, 2021. "Europe's mining innovation trends and their contribution to the sustainable development goals: Blind spots and strong points," Resources Policy, Elsevier, vol. 74(C).
    4. Christina G. Siontorou, 2023. "Fair Development Transition of Lignite Areas: Key Challenges and Sustainability Prospects," Sustainability, MDPI, vol. 15(16), pages 1-14, August.
    5. Suh, Dong Hee, 2021. "Exploring the U.S. mining industry's demand system for production factors: Implications for economic sustainability," Resources Policy, Elsevier, vol. 74(C).
    6. Taha, Y. & Benarchid, Y. & Benzaazoua, M., 2021. "Environmental behavior of waste rocks based concrete: Leaching performance assessment," Resources Policy, Elsevier, vol. 74(C).
    7. Juliana Segura-Salazar & Luís Marcelo Tavares, 2018. "Sustainability in the Minerals Industry: Seeking a Consensus on Its Meaning," Sustainability, MDPI, vol. 10(5), pages 1-38, May.
    8. Martyna Konieczna-Fuławka & Marcin Szumny & Krzysztof Fuławka & Izabela Jaśkiewicz-Proć & Katarzyna Pactwa & Aleksandra Kozłowska-Woszczycka & Jari Joutsenvaara & Päivi Aro, 2023. "Challenges Related to the Transformation of Post-Mining Underground Workings into Underground Laboratories," Sustainability, MDPI, vol. 15(13), pages 1-14, June.
    9. Simone Marsiglio & Nahid Masoudi, 2022. "Reclamation of a resource extraction site: A differential game approach," Metroeconomica, Wiley Blackwell, vol. 73(3), pages 770-802, July.
    10. Cox, Benjamin & Innis, Sally & Mortaza, Adnan & Kunz, Nadja C. & Steen, John, 2022. "A unified metric for costing tailings dams and the consequences for tailings management," Resources Policy, Elsevier, vol. 78(C).

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