Companies and individuals pulling natural resources out of the ground must often post reclamation bonds before disturbing the land. This guide will help you understand reclamation bonds and provide steps to obtain them.Â
Reclamation is the process of returning land to its normal undisturbed condition, or a different agreed upon condition once resources are harvested. Reclamation is usually a requirement for mining companies to gain access to natural resources.
A reclamation bond is a surety bond that guarantees that a party will restore land to its undisturbed condition or a new agreed upon condition. In most cases, this means that a mining operation must fill in the land with clean dirt and rock, make sure the land is free of hazardous materials, and regrow vegetation. The Bureau of Land Management (BLM), Forest Service, and many other government entities require these bonds before resources can be harvested from land. Â
There are many different types of reclamation bonds. For years, coal mining has been a big source of reclamation bond needs. However, many other operations need them as well such as hard rock mining, and now lithium mining.Â
Reclamation Bonds are considered high risk by surety bond companies. This is because they must typically remain open for many years. In fact, some mines have a life expectancy of 50 years or more. Here are some factors that surety bond companies consider when looking at reclamation bonds.Â
The type of resource being mined is a very important consideration when looking at long term obligations. For example, coal is considered very risky. Although historically a staple of power generation, legislation keeps pushing for more green energy. This adds risk to the future of coal mining and each company’s long-term ability to satisfy reclamation requirements.Â
On the other hand, hard rock mining such as decorative stone is considered less risky. Although other materials could be used in the future, rock has been a staple of construction for hundreds of years and will continue to be for the long term. This creates a more predictable future for these mining companies and gives the bond company greater confidence that they will be around to complete their remediation requirements.Â
Another important consideration is what type of mining will be performed. The two most common types of mining operations that need reclamation bonds are surface mining and underground mining.
Surface mining involves removing resources that are close to the surface by removing rock and soil and the resource together. It is the most common type of mining. Surface mining includes Open Pit Mining, Strip Mining, and Mountaintop Removal Mining.
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Strip mining presents less risk to the surety bond company writing the reclamation bond. This is because the mining is constantly being reclaimed as new mining is completed. This is the preferred method for most bond companies writing reclamation bonds.
Underground mining is the process of digging deep holes in the earth and extracting natural resources through those holes or tunnels. Unlike surface mining, the rock and soil (overburden) are left in place. When the resources are removed, the mining company must generally backfill the holes. This can be done with many substances which are often mixed with cement and concrete.
The process for backfilling underground mines varies and the process will need to be discussed with the bond underwriter. Although these tunnels can sometimes be filled throughout the life of the mine, they are often left open for very long periods of time. This creates additional risk for bond companies.Â
A second underwriting factor in remediation bonds is the expected life of the mine or area that will be remediated. Many things change over time including the demand for natural resources and the mining company’s financial position. In mining, shorter lifespans equate to less risk. A surety underwriter will be more willing to consider a mine that is expected to be closed in 15 years versus a mine that is expected to be closed in 30 years.
Because a company’s financial condition can change radically over long periods of time, a bond company will want to make sure a mining operation is very strong before writing reclamation bonds. Mining companies should expect to submit CPA prepared financial statements that include a Reviewed Financial Statements at a minimum with Audited Statements preferred.Â
Collateral is a very common requirement for writing reclamation bonds. Because of the long time that these bonds are open, most bond companies will want some percentage of the bond amount to be guaranteed by an Irrevocable Letter of Credit. Keep in mind that most reclamation bonds cannot be canceled. In order to get off the bond liability, the mine must either be reclaimed and closed, or they must be replaced by another bond company.
The amount of the ILOC depends on the obligation and the strength of the mining company. The ILOC requirement could be as small as 10% of the bond amount, all the way to 100% of the bond amount. It is important to note that very large or financially strong mining companies may not be required to provide an ILOC, but smaller companies should expect this requirement.
Another important underwriting consideration for reclamation bonds is having the appropriate insurance. Underground water can easily be polluted by mining operations. Surety bond companies do not want to be responsible for the cost of remediating any type of pollution. Mining companies should expect to provide pollution insurance with adequate limits in order to obtain a reclamation bond.
Finally, surety bond underwriters will want to see the detailed plans for how and when reclamation will occur, including expected costs. The more prepared the mining operation is for reclamation, the easier obtaining a reclamation bond will be.
Reclamation Bonds may cost less than 1% for large, strong mining companies. However, most mining companies should expect to pay 1.5% – 4% of the bond amount for each year that the bond is in place.
Reclamation Bonds are important for protecting lands. These bonds are required for most mining operations and understanding how bond underwriters look at these obligations should make bonding them easier. Contact the reclamation bond experts at Axcess Surety with any questions.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
