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How our miners can reap a $10bn cash injection

Credit: iStock

Optimism is starting to creep back into our market with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) climbing at the open. But share prices of our miners could get an additional boost on reports that they could get a $10 billion cash injection.

The extra cash will come from any potential change in the government’s environmental rehabilitation policy where miners have to leave cash or company bonds as a deposit to ensure they return the land in acceptable condition after mining operations cease.

The near-bankruptcy of US coal giant Peabody Energy may have opened the door to a new way for state governments to fund this obligation as Peabody was allowed to use third-party bonds to cover US$115 million in rehabilitation obligations in Australia, according to the Australian Financial Review.

Such bonds are used as guarantees in other industries such as construction and are typically issued by insurers who can charge miners a fee for taking on the risk.

Moving to such a system will see miners receive a big refund and the cash can be used to expand operations and ramp-up production.

This would be good news for sector heavyweights with large Australian operations like Newcrest Mining Limited (ASX: NCM), BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO); although it is the smaller miners like Independence Group NL (ASX: IGO) and Sandfire Resources NL (ASX: SFR) that stand to benefit more as they lack the resources available to the big boys.

It would be a win-win for everyone. State governments can collect extra royalties on excess production while miners will have a stronger balance sheet to fund capital expenditure given the positive outlook for many hard commodities.

This of course assumes that the insurer can not only comfortably cover any potential shortfall in rehabilitating the environment but can do so at an equal or better risk profile than the current system.

The AFR has worked out that most of the deposits from miners are tied up in Queensland where that state government holds $6.19 billion in cash and bonds followed by New South Wales at $2.36 billion.

This doesn’t include sureties from oil and gas companies or assurances tied to landfills and quarries.

But it is believed that some states like Queensland may be reluctant to tinker with the system given that land rehabilitation is a controversial and sensitive issue.

Sadly, it’s testament to the current political environment, although New South Wales is seen to be more open to the idea.

Mining isn’t the only sector with a bright outlook. The experts at the Motley Fool are feeling very bullish about this other niche sector.

Find out what this sector is and the stocks that are best placed to benefit from this thematic by clicking on the free link below.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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 Scott Phillips.

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