What it means
When a mining company digs a pit or strips the surface from a site, it leaves behind holes, waste rock and sometimes polluted water. Reclamation covers refilling and shaping the land, treating water, replanting vegetation and making the area safe.
The aim is to return the site to a state that meets legal and community standards. Regulators often require companies to prove they can pay for it.
A mining company may need to post a reclamation bond, which is a guarantee from an insurer or bank that money will be available if the company fails to clean up. This protects taxpayers from having to fund the work when a company goes bankrupt.
Accounting rules also require action. Under many frameworks, a company must record a liability for the expected cost of restoring a site, called an asset retirement obligation, as soon as it creates the obligation.
It reports the present value of the future cost and adds a matching amount to the cost of the asset. Over time, the liability grows as the date of spending gets closer, through an expense often called accretion.
If cost estimates change, the liability is revised. Investors and lenders pay close attention to these obligations because they can be large relative to a small miner's value.
The word has other meanings too. In commercial law, reclamation can refer to a seller's right to take back goods delivered on credit to an insolvent buyer, subject to strict conditions.
In this entry, the focus is land restoration, which is the most common meaning in finance. Planning ahead brings real savings.
Progressive reclamation, where land is restored as each area is finished, spreads the cost over the life of the operation and reduces the size of the final bill. It also lowers the amount of bond a regulator may require, because less disturbed land remains open at any time.
In practice
Real-world examples.
Example
A gold miner posts a $12,000,000 reclamation bond with its state regulator. The bond is provided by an insurer for a fee of 2% a year, or $240,000. The cost appears in the miner's operating expenses.
Example
A cement company finishes extracting limestone from a quarry and converts the site to a lake and nature reserve. The reclamation costs $3,500,000, which was already provided for in its accounts. Because the liability was recorded early, the work does not reduce profit in the final year.
Example
A lender considering a loan to a small coal producer finds that its reclamation obligations are $20,000,000, against equity of only $8,000,000. The lender asks for extra security. It sees the obligation as a debt-like claim that ranks ahead of its own.
Formula
Calculation
Present value of reclamation liability = Estimated future cost / (1 + discount rate) ^ years
Suppose a quarry operator expects to spend $5,000,000 on reclamation in 10 years, and uses a discount rate of 6%. The present value is 5,000,000 / 1.06 ^ 10 = 5,000,000 / 1.7908 = about $2,792,000. In the first year, accretion expense is 2,792,000 x 0.06 = about $167,500, which increases the liability to roughly $2,959,500. By year 10, the liability will have grown to the full $5,000,000.Case study
Seen in the real world.
Ridgeback Aggregates is an illustrative, fictional gravel producer with a pit that will be exhausted in 12 years. Its engineers estimate that restoring the site will cost $4,800,000 in future dollars.
The finance director records a liability using a 5% discount rate, which gives a present value of about 4,800,000 / 1.7959 = $2,673,000. She also sets aside cash in a restricted account each year to avoid a funding gap at the end.
When the regulator raises the standard for restoration, the cost estimate rises to $6,000,000, and the liability is revised. In this illustrative case, the company learns that reclamation costs are moving targets and should be reviewed every year. The increase of 6,000,000 - 4,800,000 = $1,200,000 in the future estimate raises the present value by about $668,000 at the same discount rate.
Watch out
Common mistakes.
- Leaving the reclamation cost out of the accounts until the work is done, instead of recording the liability early.
- Treating the bond as the cost, when the bond only guarantees payment and the real cost is the work itself.
- Using an out-of-date cost estimate when regulations or prices have changed.
Questions
People also ask.
Who pays for reclamation?
The operator is normally responsible, and regulators require bonds or funds so that money exists if the operator fails.
Why is the liability recorded at present value?
Because the money will be spent in the future, and discounting shows what the obligation is worth today.
Does reclamation always mean mining?
Mostly, but it also covers land affected by oil and gas wells, landfill sites and other industrial uses, and the word has a separate legal meaning for recovering goods. Check the context before applying either meaning.
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