Are These 3 Mining Stocks Far Too Risky?

Library Of Congress: Coal Workers, 1911

In the past many mining companies have simply gone bankrupt or sold the mine to a smaller company, in order to avoid mine rehabilitation costs. In those days, mines were smaller and environmental regulation was weaker.

However, in this day and age of the mega-corporation, it may not be so easy for all miners to avoid rehabilitation costs or escape environmental regulation. Indeed, many prefer large mining companies over small ones because they are more likely to pay environmental fines. But that can be a big problem for shareholders who are hoping for dividends.

Take, for example, New Hope Corporation Limited (ASX: NHC). Its proposed Acland Coal mine extension is currently being challenged in court, by residents who object to the potential “disturbance of approximately 1300 ha of strategic cropping land, the drawdown of groundwater levels for an area up to 21 km, further degradation of air quality, increased noise, and related health impacts.”

The proposed extension would expand the existing mine, and prolong its lifetime from 2017 to 2029, so it’s a reasonably important step for the company — though not necessarily a wise one, given that lower coal demand points to falling prices. Of course, if the company can’t extend the life of Acland, it might have to rehabilitate it instead.

Another company with rehabilitation on the horizon is South32 Ltd (ASX: S32) which had US$1.5 billion set aside for future mine rehabilitation when it was spun off from BHP Billiton Limited (ASX: BHP).

In 2013, Wongawilli Creek, near South32’s Dendrobium coal mine, flowed with water. By 2015, many held grave concerns for the waterway. You can see why in the picture below.

Wongawilli Creek tributary

Source: “Wongawilli Creek tributary WC21, looking downstream” NSW Government, Planning & Environment


To quote the report by the Environment and Planning Department, the mining has lead to “significant rock fracturing, reduction in water levels in pools and an absence of surface flows.”

Further, the report found that the “extent of the subsidence impacts… has exceeded the predictions of Illawarra Coal and its specialist advisers.”

That means that the company may not have provisioned enough for the rehabilitation of the damage, both at that location, and elsewhere, when damage exceeds predicted damage.

Of course, the most obvious example of the huge rehabilitation and compensation costs faced by mining companies is the Samarco disaster in Brazil. In that case, BHP agreed to pay US$3.2 billion to the Brazilian government, to cover its portion of the costs. That’s more than double South32’s rehabilitation provisions at demerger, for just a single accident.

Partially as a result of the Samarco disaster, BHP shareholders saw their dividends cut this year. But in my view investors looking to a mining company for dividends is barking up the wrong tree, since there are much safer income stocks available.

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Motley Fool contributor Claude Walker has no position in any stocks mentioned. You can follow him on Twitter @claudedwalker.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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