Australia: MERFP – Environmental insurance sureties in Queensland


  • CEOs, CFOs and project managers of Queensland mining operations


  • As outlined in our most recent Focus Article the newly enacted Mineral and Energy Resources (Financial Provisioning) Act 2018 (Qld) (Act) has changed the face of financing environmental remediation liabilities for mining and resource projects in Queensland;
  • As of April 1 2019, mining operators in Queensland can participate in an alternative Financial Assurance (FA) mechanism to alleviate some of their working capital pressures by contributing to the Queensland Government (State) managed Pooled Scheme Fund (PSM), or in some cases, by way of surety bonds underwritten by insurance companies; and
  • To recap, prior to the amendments under the Act, cash-backed Bank Guarantees (BG) and cash were the only means for many mine operators of complying with the Act for the liabilities in rehabilitating mining, gas and petroleum activities.1  The result of this restricted FA provision was that there ended up being approximately $AUD6.19 billion in cash tied up by the State.2

What is a Surety Bond?

  • A Surety Bond is an undertaking provided by an insurance company on behalf of the bonded party (mine operator) to a beneficiary (State) to pay the face value of the Surety Bond on presentation (like a BG).

How does a Surety Bond work?

  • A premium is charged by the insurer through an annual percentage amount applied to the value of the bond, in this case the ERC value that has been calculated for the project.
  • In the event that a bond is 'called' by the State due to the mine operator not being able to fulfil their rehabilitation obligations, the State may present the surety bond to the insurer and the insurer will be obligated to pay the face value of the bond to the State.  The insurer then pursues the mine operator to be put back in funds for the amount paid to the State.
  • In exchange for issuing the Surety Bond, in addition to receiving a premium, it is common for insurers to take 'security' of their own.  This usually takes the form of collateral security, parent guarantees, charges or deeds of indemnity.  Over time, and depending on the financial performance of the mine operator, these forms of security may be diminished or removed altogether by the insurer.
  • If the mine operator is not able to place the insurer back in funds for the amount of the insurance surety paid to the State, the insurer, if they hold such collateral security, charges, or deeds of indemnity, these will be exercised.  In the event the mine operator is placed into administration, the insurers line up with the balance of the unsecured creditors.

When can you use a Surety Bond?

  • As outlined in our recent Focus Article, you will not have an option to use Surety Bonds if you are eligible for the PSM.
  • To put it as simply as possible, the risk-ratings fall into the following categories:
    • Very Low
    • Low
    • Moderate
    • High
  • Only those projects and/or mine operators that are assessed as a High risk by the SM will be eligible to provide a Surety Bond to meet their FA obligations.
  • The main exception to this is where the projects' ERC exceeds the PSM threshold (currently at $450M).  In this scenario, the mine operator will contribute up to the threshold amount and complete the remaining obligation through the provision of a Surety Bond or BG.

How do you get a Surety Bond?

  • An insurer will look for the same characteristics as a bank in terms of financial strength and resilience; a well-developed core business with a good performance track record, strong management, corporate governance and a generally sound financial position along with other business and sector metrics.  In the absence of some of these characteristics, insurers will also take into consideration the financial position of the shareholders or parent companies.  As already mentioned, it is highly likely that an insurer will require their own security for the issue of the Surety Bonds.
  • When deciding whether it will issue a Surety Bond the insurer will take into account the following:
    • 2-years (3 preferred) audited financial statements and latest management accounts
    • Cash flow statements
    • Details of the company's current banking facility(ies)
    • Mine Plan
    • Company and Project Profile
    • Organisational structure (entity and personnel)
  • The insurer will request regular reporting of the mine operator's financial statements including regular cash flow forecast updates and updates on progressive rehabilitation.

Next steps

McCullough Robertson's Insurance and Corporate Risk Team together with Allegiant IRS are available assist you in considering your options and to exploit opportunities to secure Surety Bonds.



2 Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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