Mining's $13.7 billion question: exposing Queensland's surety accessibility issues

Adam Battista, Executive Director CRE Insurance Broking

A comprehensive review and restructuring of the Financial Provisioning Scheme, considering the genuine needs of all stakeholders, could pave the way for a more robust and equitable financial framework.

The Mineral and Energy Resources (Financial Provisioning) Act 2018 (the Act) plays a vital role in Queensland's strategy to manage environmental risks linked to mining activities.

This framework is a response to the Queensland government's legacy liability for roughly 120 abandoned mines, which disturb 10,300 hectares of land—an area comparable to 20,000 football fields.

The Financial Provisioning Scheme (FPS) aims not only to mitigate this growing liability, but also fund the rehabilitation of legacy mines through various grants. Under the Act, mining companies must provide adequate financial assurance to cover potential rehabilitation costs for their operations, yet it appears that unchallenged risks continue to loom, reflecting a government approach that is both cautious and incomplete.

According to the 2023-24 FPS Annual Report released in September 2024, the total Estimated Rehabilitation Cost (ERC) in Queensland alone is assessed at $13.73 billion.

Out of this, around $5.6 billion is at direct risk to the FPS, while around $7.5 billion is secured through third-party instruments like Bank Guarantees, Insurance Bonds, and cash—collectively referred to as 'surety.'

Notably, Bank Guarantees account for the largest share at $5.8 billion, overshadowing the $1.7 billion accounted for by Insurance Bonds and just $277 million by cash.

The impact of surety accessibility

The FPS assessed its own risks in a post-transition review conducted in April 2022 (Review) and identified six key risks that needed addressing to maintain and improve its effectiveness. One risk is the accessibility and cost of third-party surety.

The industry raised surety accessibility as an emerging issue, given that the FPS’s viability is based on readily available third-party surety instruments. The government noted the requirement to continue to explore other options.

The Review indicated they were “currently in discussion with a number of alternate surety providers and will update stakeholders in due course.” Since then, surety accessibility questions have continued to stand out as the critical risk for the FPS's effectiveness and sustainability.

The Acting Scheme Manager suggested that there was confusion about whether the problems with third-party guarantees were due to financial markets being hesitant to provide them or if the costs were just too high for EA holders. But it’s clear the primary issue is about availability for those outside the FPS qualification framework, rather than cost.

By November 2024, only one instrument was accepted by Treasury outside of the recognised banks and insurers. This bottleneck limits the options available to Environmental Authority (EA) holders and raises urgent questions about the system's overall reliability.

FPS annual statistics confirm surety has been readily available to those with a ‘Very Low’ or ‘Low’ Risk Category Allocation (RCA), but not for those in the ‘Moderate’ or ’High’ categories.

No significant action is being taken to address these challenges. The 158 EA holders relegated to the ‘High’ RCA are exclusively funded through third-party surety, while ‘Moderates’ are exclusively funded through the FPS.

The continuation of limited access to third-party surety for those who need it most jeopardises the effectiveness of the FPS itself.

Legislative changes and implications

The recently passed Mineral and Energy Resources and Other Legislation Amendment Act 2024 (MEROLA) introduces critical changes to the FPS framework.

One significant shift is that all EA holders that have an Estimated Rehabilitation Cost (ERC) below $10 million will no longer require a risk allocation assessment. While this aims to reduce compliance burdens, it also shifts the requirement for surety entirely outside of the FPS, placing a substantial strain on smaller operators.

The minimum requirement for EA holders with a BBB+ credit rating or better will be raised from $450 million to $600 million. This benefits just 4 large companies and does little for the balance.

As a result, FPS contributions will rise by less than $400,000, but the risk increases by $600 million while concentrating liabilities among a few big players. This raises concerns about the stability of the FPS if any of these companies have their mining leases disclaimed.

Another key change is the new ‘Moderate-High’ Risk Category Allocation, which brings both opportunities and challenges. While it aims to attract more participants, some may be moved from their current 'Moderate' status to 'Moderate-High' or even out of the FPS entirely, creating extra burdens for those who can least handle it.

The future of mining and environmental policy

The question of coal royalties substantially complicates the landscape and raises concerns about the sustainability and long-term viability of coal as a resource in Queensland.

Bipartisan support of the Progressive Coal Royalties Protection (Keep Them in the Bank) Act 2024 showed industry that there was little governmental support on the horizon.

Coal is the major contributor to the FPS, and a push for rapid decarbonisation could threaten the whole system. The Queensland government's strict regulations and increased liabilities are creating challenges that risk undermining the sector and the effectiveness of the FPS and surety arrangements. You could say it may kill Queensland’s golden goose.

Evaluating risks and sustainability

New questions around surety risks are emerging and need rigorous examination:

• Are the largest EA holders disproportionately increasing the risks faced by the FPS for their own purposes, and for a minor financial contribution?

• Therefore, shouldn’t the FPS be more broadly assessed against the need of the many rather than the larger few?

• How do investments with the Queensland Investment Corporation (QIC) affect cash flow for covering claim expenses?

• Therefore, will the Queensland government’s financial obligations be addressed through emergency budget allocations, or will the scheme suffer from a lack of liquidity if there is a major claim?

With coal providing nearly 70% of funding for the scheme, the FPS is at serious risk if the coal industry continues to face unwarranted challenges. A politically driven decline in coal production won't just hurt regional communities reliant on this revenue; it will also negatively affect the financial well-being of Queensland and Australia as a whole.

Tightening regulations are further stifling the effectiveness of the FPS and its guarantees. External factors like fluctuating commodity prices, global political changes, and the ongoing sale of coal assets also put its stability at risk.

As mine closures get closer and governments make quick decisions based on popular opinions against fossil fuels, trust in the system will completely disappear. This leaves the government responsible for any consequences that arise.

Adapting to the changing landscape

So how can FPS contributions be improved to address EA holders' access issues and the future liabilities of the Queensland government?

The Queensland government needs to weigh the benefits of a broad-based financial strategy that caters to all participants in the industry, allowing all operators to participate in the FPS, not just a select few.

With $5.6 billion already on the Queensland government’s balance sheet due to selective participation in the FPS, is it really a stretch to expand the total ERC to $14 billion?

Wouldn’t it be better to charge a fair amount to cover costs more effectively while coal still has global value?

Perhaps it is time for a more unified approach that mitigates risks while ensuring financial sustainability.

A call for comprehensive review

If the government continues its systematic fleecing of the coal industry, then it should consider assuming more active control of the risks as well.

The ongoing crucifixion of the coal sector with stringent regulations and a burdensome royalty and tax regime, may give temporary political favour and revenue, but could ultimately destabilise both economic and environmental resilience.

The key lies in approaching these issues with both foresight and adaptability.

A comprehensive review and restructuring of the FPS, considering the genuine needs of all stakeholders, could pave the way for a more robust and equitable financial framework.

Ultimately, it is imperative to recognise that environmental stewardship and economic viability need not be mutually exclusive.

Through the implementation of effective regulations and strategic partnerships, there is an opportunity to reshape the interaction between sustainable mining, environmental stewardship, and community welfare for the future.

As the FPS faces its first actuarial 5-year review, the coming 12-18 months will reveal whether the FPS can evolve to meet these challenges, or whether it will become another example of regulatory failure in a rapidly changing industry landscape. 