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Closure cost confusion

Closure cost confusion

The last two decades have seen a significant evolution in both the methods and purposes for estimating closure costs. As part of this evolution, changes in how closure cost estimates are used have resulted in coincident changes in the scope, methods employed, and level of detail required.

Before regulatory requirements were developed, closure cost estimates were typically intended for the planning, design, and contracting of the actual closure, and were often developed late in the mine life cycle. These estimates became the basis for construction contract bidding and tracking purposes.

As mining laws changed and the need to provide financial surety for closure activities became a priority, the focus changed to estimating the liability of the government that would assume responsibility should the operator abandon the site prior to planned closure.

Most recently, techniques used in closure cost estimating have focused on accurate reporting of financial liabilities to shareholders and lending institutions, adding a new dimension to the scope and details of closure cost estimating. 

To address these different uses, three types of cost estimates have been developed: financial assurance estimates, Life-of-Mine cost estimates, and Asset Retirement Obligation estimates. Each has specific requirements.

Financial assurance cost estimates define the cost that a government agency would incur to perform all of the actions documented in an approved closure plan should the company abandon the site without implementing closure. These estimates are usually based on the maximum liability that will be incurred during the current permit term. They typically require the use of third-party equipment and labor rates and may include significant government-mandated indirect costs. 

A Life-of-Mine (LOM) cost estimate defines the cost that a mine operator would incur to perform all of the actions required to fulfill the closure portion of their current mine plan. LOM cost estimates typically use operator rates, include all closure costs associated with the current mine plan, and are usually reported on a cash-flow basis. Common uses for LOM closure cost estimates include prefeasibility and feasibility studies, due diligence audits, accrual allocation, annual planning and budgeting, and cost tracking.

Asset Retirement Obligation (ARO) is the term used for financial reporting of mine closure liabilities by U.S. GAAP and IFRS compliant stock markets. ARO cost estimates are prepared each year as part of the annual financial reporting process to disclose the fair value (U.S. GAAP) or best estimate (IFRS) of the current liabilities associated with a mine or mineral processing operation. Each year they are adjusted to reflect any changes in the operations that occurred in the financial reporting year.

Although it may appear that the differences between these types of closure cost estimates are subtle, the use, final product, and therefore approach will be different for each type of estimate. It is important to recognize the difference between these types and determine which type of estimate is required for each project and each purpose.

Jeff Parshley:

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