Costly Sins of the Fossil Fuel Father Bite ERA

Now here’s a story that should strike terror into the hearts of every shareholder of an Australian mining and oil company that has produced fossil-related fuel or metal in any form – it’s not the production and selling costs that catch you in the end, it is the rehab costs.

We have already seen that with an abandoned Northern Endeavour oil field in the Timor Sea whose owners collapsed, pushing the cost of the rehab work back on the federal government which will now levy the offshore oil and gas industry to meet the costs of that project and all future events (put at $60 billion by Federal Resources Minister Keith Pitt over the next 30 years).

There are looming rehab costs for on land oil and gas producers who hold dozens, if not hundreds of old wells. And thermal and coal miners face pressures to increase the size of their provisions/and or bonds with government to cover rehab costs, especially in the Hunter Valley region of NSW and parts of central Queensland.

Open cut metal miners are coming under pressure to improve their rehab of what are essentially huge, wild swimming pools. Full or toxic sludge and material.

Now uranium miner and producer Energy Resources of Australia (ERA) and its 86% owner Rio Tinto have rammed home the potential costs of the liability for rehab on land with the shock news that the cost of fixing up its Ranger uranium mine and associated workings has blown out by more than $600 million at a minimum and $1.4 billion at worst.

For a cashed up and operating company, the higher cost might not be a problem. But Ranger is closed. ERA is a shell with just on $700 million in cash from various sources – banks, government guarantees and other deposits.

That leaves a massive shortfall of up to $1.6 billion (and more because of inflating costs) that has to found.

ERA shareholder Rio Tinto says it is working with its former uranium miner on funding options and other studies. It will have to fund the extra cost which will be a big test of its attempts to repair its battered reputation.

ERA closed Ranger back in 2019 and the company has been working on its rehab now for several years, but at an increasing cost as more and more problems with ground water and other problems emerge.

All processing of ore at Ranger had to cease by the start of last year (which it did) and the rehab work had to be done by the start of 2026. That will now not happen.

On Wednesday, ERA announced preliminary findings for a re-forecast exercise the company is conducting on the cost and timeline for the rehabilitation project.

ERA now says the new estimate for the total cost of rehabilitating Ranger, including incurred money spent so far from January 1, 2019,  is now between approximately $1.6 billion and $2.2 billion.

The compared to the price outlined in the 2019 Ranger closure feasibility study of $973 million.

The project is taking longer than expected back in 2019.

ERA now hope to complete the project between the fourth quarter of 2027 and the fourth quarter of 2028. ERA had previously outlined its goal to complete rehabilitation by the start of 2026.

“ERA notes that the above revised estimates, as to both cost and schedule, are based on the Ranger rehabilitation project being completed in accordance with the methodology set out in the current Mine Closure Plan,” the company said on Wednesday.

ERA’s Ranger new forecast exercise has highlighted the many processes involved in closing a mine – especially a uranium mining and processing operation.

“The company has factored in additional costs and scheduled impacts in converting Ranger’s tailings storage facility into a water storage facility. Anticipated technical risks, additional costs and scheduled impacts in capping works at pit three have also been factored in.”

ERA said on Wednesday it is currently reviewing all available funding options “to ensure that the increased forecast cost of the rehabilitation of the Ranger Project Area will be adequately funded”.

“Rio Tinto has advised ERA that it is committed to working with ERA to ensure that the rehabilitation of the Ranger Project Area is successfully achieved.

As at 31 December 2021, ERA had $699 million of cash funding including total cash at bank of $164 million (unaudited) and $535 million in cash which is currently held by the Commonwealth Government as part of the Ranger Rehabilitation Trust Fund. The Commonwealth Government is also holding $125 million in bank guarantees. The company has no debt.”

That’s a big black hole funding wise – a bit like the rehab work at the ranger mine – both will have to be filled to the company, government and community’s satisfaction. The pristine nature of the Kakadu National Park depends on it, as will Rio Tinto’s reputation and that of its new management and board.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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