THE RECLAMATION BONDING CRISIS and HARDROCK MINING

1. THE RECLAMATION BONDING CRISISandHARDROCK MINING MINING in the NEW MILLENNIUM Montana Mining Association September 18, 2002 Laura Skaer Executive Director Northwest Mining Association www.nwma.org

3. Surety Market Trends and Developments Uninterrupted Profitability in the 1990s Attracted new entrants Increased competition lead to reductions in premiums and a relaxation of underwriting standards Favorable loss experience with the mining industry 2000�01 � The Worm Turns Economic downturn and a record number of business failures The Enron, K-Mart, Global Crossing and W.R. Grace bankruptcies September 11, 2001 terrorist activities (insurance industry lost about � of its $150 billion pre 9-11 capital) In 2001, the surety industry lost 32 cents on every $1 of earned premium Mine reclamation bonds represent less than 1% of the surety business line, but have the longest tails Mining industry loss experience has remained favorable

4. Surety Market Trends . . . continued Current Surety Capacity � a Function of Available Risk Capital and its Allocation Reduced supply, options and competition due to mergers, bankruptcies, and withdrawals (top 5 surety companies now write 40% of the business) Absence of reinsurance support (reinsurers took the brunt of the 2000-2002 surety losses) Surety bonds are instruments of credit, and not insurance policies. The historical underlying fee structure assumed �no loss� to the surety Losses in 2000-01 have caused surety companies to alter underwriting criteria � historical loss experience is no longer the principal risk factor

5. Surety Market Trends . . . continued New Underwriting Criteria Lower bond limits to minimize exposure � both single obligation and aggregate amounts on a single principal Shorter duration � hesitant to exceed 5 years Substantially higher premiums (as much as 500%) Require cash collateral equal to bond amount Focus on �higher quality� transactions �benign obligations of short duration Essentially �pre-disqualifies� the mining industry Long term operations (more than 5 years) Large bond amounts required by regulatory agencies Near Term Prospects for Improvement in Surety Capacity Are Bleak, at Best Industry�s Favorable Loss Experience Is of No Help

6. Increased Need for Surety Bonds or Other Acceptable Forms of Financial Assurance Mine expansion and development Agency re-evaluation of existing bond amounts New and increasing regulatory requirements Bonding for excessive contingencies and speculative assumptions Agencies attempting to apply new regulations retroactively

7. Regulatory Impediments to Surety Bonds Duration of the obligation Exceeds current surety risk assessment criteria Inability to obtain full bond release after completion of reclamation and closure work Vague and burdensome release standards and procedures BLM�s 3809 regulations require the operator to meet water quality standards for one year without treatment Results in a shrinkage of surety capacity Large bond amounts Upfront posting of the �full� amount Artificially inflated bond amounts due to excessive contingencies, speculative assumptions and other cost factors (3d party, Davis Bacon, excessive overhead, etc.) 30-60% greater than the actual cost of reclamation

8. Regulatory impediments . . . continued Complex and constantly changing regulatory schemes Add to the perceived risk associated with mining obligations Attempts to apply new and changed regulations retroactively to mining activities permitted under different rules (HUGE ISSUE!) Retroactive application has been rejected by several courts (see, e.g., National Mining Association v. U.S. Dept. of Interior, 177 F.3d 1 (D.C.Cir. 1999) These regulatory impediments have contributed to the surety industry�s decision to place its capital in other forms of business with a more favorable risk/reward profile (less than 5 year duration, obligation certainty, industries with a more favorable capital structure and balance sheet, greater rates of return, etc.)

9. SOLVING THE BONDING CRISIS No Bond = No mine Alternative forms of financial assurance Cash Letters of credit Collateralized securities Trusts and sinking funds Annuities Corporate guarantees Risk based instruments (insurance policies) State bond pools � not intended to be full cost bonding Incremental bonding � bond only what you are disturbing Phased bonding � separate bonds for distinct phases Not all regulatory programs provide for all of these alternatives

10. Solving the bonding crisis . . . continued Any financial instrument or alternative that requires cash, cash equivalents, or draws on lines of credit diverts scarce capital resources from wealth and job creating activities Increases the capital costs of the project (in reality, a double-dipping) Lowers the rate of return to unacceptable levels (only �world class� deposits will have a rate of return capable of supporting this additional cash outlay) Project abandonment Solving the mining industry�s capital famine is a (the) key to solving the bonding crisis � How do we attract capital to the business of writing mining surety bonds and create an attractive risk/reward ratio?

11. A POSSIBLE SOLUTION GSE Based National Financial Guarantees System Similar to FNMA � designed to attract capital to reclamation bonding A national system of financial guarantees based on risk with tiered benefits and costs Would apply to all types of mining and commodities (locatable, leaseable and saleable) and to all lands Three components National performance bond pool(s) National reclamation liability insurance system (risk-based instruments) A �catastrophic� occurrence fund Bond pool and insurance fund based on revenues raised by a bond issue funded by a domestic non-fuel mineral production excise tax of approximately .0025 (would raise more than $100 million per year based estimated production value)

12. GSE . . . continued Part of the tax revenue would fund the annual bond issue Part would fund clean up orphan (abandoned) mine sites in all states Part could be used to do mineral related mapping and research Tax would apply to imports of raw ores or finished primary mineral product Flexibility is important, i.e., regional or national bond pools; separate pools for large companies, small companies, and small scale miners; primary and/or secondary (re-insurance) insurance markets; The GSE, like FNMA, would securitize part of the tax revenue by selling an array of long and short term bonds Mining and exploration companies would be able to obtain surety bonds from the GSE, provided they adhere to measurable, defined environmental and performance standards Well thought out political campaign required � Is industry ready to support a small national excise tax to solve the bonding crisis and eliminate its Achilles heel?