Expert Views: Talvivaara Mining Company bankruptcy – financing the environmental risk
This case from Finland explains the issues under Environmental Liability Directive (ELD) legislation of financing remediation of the environmental damage caused by an industrial operator which has become bankrupt.
Talvivaara Mining Company
Talvivaara Mining Company was established in 2004 and started production in 2008. It operates an open pit nickel mine in Sotkamo in Eastern Finland with an annual production capacity of more than 10 million tonnes of ore. The metals are extracted by bioheap leaching, a method where natural bacteria living in the rock accelerate metal leaching by oxidation.
Financial status of the company
The company landed into financial problems for several reasons, among them lower than estimated productivity, nickel price change and environmental investments. Talvivaara applied for a debt restructuring programme, but it was not possible to find a viable solution, and the company filed for bankruptcy in November 2014.
The Finnish Government is the biggest single owner of the company’s shares. The Office of the Bankruptcy Ombudsman has taken the estate into the public bankruptcy process.
There are numerous environmental impacts from the company. They include the permitted release of effluent and chemicals into the environment. The partly unsuccessful production process has led to the collection of excessive amounts of water on the site. However, there have been also accidental individual larger releases. The excessive water balance led to releases in 2008 and 2010, but neither the company nor the authorities were able to intervene. In 2012, the water had to be pumped out of the pit and temporarily the gypsum pond was used for this purpose. This led to a breakdown of the pond and a major leak.
The environmental impacts are not regarded as a catastrophe. The chemicals in the environment are mostly those permitted by the environmental permit. However, there are more chemicals than permitted.
The Talvivaara mine is near Sotkamo on the Kainuu region. Image: Mikko Maliniemi / Aviation Studio / Suomen Luonto
The authorities have stated that the production process must be maintained for years to prevent further environmental impacts. The state is financing the current operation for “stabilising both the environmental situation and mining operations”.
According to the environmental permit and legislation, the operator must operate without causing damage to the environment, which applies also to the bankruptcy estate.
It is too early to define the liabilities at this stage. According to the Act on Compensation for Environmental Damage (EDCA), the civil liability for environmental damage is based on strict liability. Some land or cabin owners from the surrounding area have presented liability claims to Talvivaara based on decreased water quality in the lakes and other damage.
Under this ELD legislation, the authorities have the right to require or order remedial measures of the environment in case of damage caused to the environment in certain situations. The basic rule is that if a company’s operation continues by some other operator the environmental liabilities follow. This is under legal discussion as there has never been a case of this magnitude.
All claims presented so far by individual claimants or the authorities related to the environmental impacts amount to less than €20m, while total investments into the operation have exceeded €1bn.
Financial guarantees and insurance
The company may have general liability insurance to cover the environmental damage. The standard policy would cover only sudden and accidental damage, not the expected and permitted damage or any gradual pollution.
The company has also some collateral guarantee to cover damage or restoration activities if its operation is closed down. These costs may be quite high, but hardly unexpected.
Finland has a statutory environmental impairment insurance scheme. It is a secondary financial guarantee in case of an unknown or insolvent polluter. It is financed by premiums from about 1300 mainly industrial companies which need an environmental permit from the state. The maximum coverage per claim is €5m and €8,5 million in annual aggregate. The insurance covers only civil liability compensation under the EDCA. This insurance has not been triggered yet.
There are many unclear issues concerning the liabilities and responsibilities. The operation is still running with the financial support of the state and the state authorities are in charge of it. We can, however, say that this is rather a financial catastrophe for the company itself and its investors than for the environment. The environment has suffered and needs time to recover, and the future impacts need to be managed.
Matti Sjögren is Chairman of the Board of the Finnish Environmental Insurance Centre
“As Mr. Sjögren suggests, the bankruptcy of the Talvivaara Mining Company is first of all a financial catastrophe rather than an environmental one.
At this point, it is very complex for the risk management community to draw any conclusions on the Talvivaara case, but we will remain attentive as to how this incident will be understood by the European authorities in their current revision of the ELD.
FinnRima will raise these environmental issues in one of our quarterly mini seminars in 2015, and we will be pleased to share our conclusions with FERMA to support its action in Brussels.” said Tapio Huovinen, FinnRimma President