Design of the Risk Assessment Process

for the Financial Assurance Scheme

Date 21 September 2017

KPMG in association with Australia Ratings

kpmg.com.au
Contents
1. Background and purpose of this report 3
2. Risk assessment framework 4
2.1 Overview of the process and framework 4
2.2 Initial filters 5
2.3 Financial Risk Assessment 6
2.4 Resource Project Risk Assessment 11
2.5 Summary of the framework 16
3. Ongoing monitoring and assessments 17
3.1 Annual reviews 17
3.2 Extraordinary reviews and monitoring 17
3.3 Ongoing monitoring of the process 18
4. Appendices 19
4.1 Example mapping of external ratings 20
4.2 Financial metrics 21
4.3 GICS 22
Glossary 23
Disclaimer 24

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 1. Background and purpose of this report
In 2016 the Queensland Government established a Financial Assurance (FA) Interdepartmental
Committee to conduct a review of Queensland’s FA framework (the Review). FA provides a source of
funds the State may draw on in the event it incurs costs or expenses for land remediation because of
the failure to do so by an Environmental Authority Holder (EA Holder), or any other entity required
under the Environmental Protection Act 1994.

The recommendation of the Review was for Government to consider implementing the ‘Tailored
Solution’, as detailed in the Review of Queensland’s FA Framework report dated April 2017. The
Tailored Solution proposes an FA scheme that, amongst other things, segments the current portfolio
of operators based on size and risk and provides a pooled fund approach for a number of operators.
The framework has been amended following feedback obtained during the public consultation period
in respect of the above report.

The proposed new FA scheme (the Scheme) is an innovative and progressive adaptation of
Government financial assurance for mining rehabilitation obligations, which would generate material
benefits for the State, the resource industry and the wider community in comparison to the identified
deficiencies of the current scheme. The preliminary design of the Scheme has been structured to
allow it to be implemented in a reasonable timeframe (aiming for commencement by July 2018) and
for the Scheme to evolve as additional information and refinements to the State’s various related
processes are further developed.

KPMG Australia ABN 51 194 660 183 (KPMG), in association with Australia Ratings Pty Ltd (Australia
Ratings) have prepared this report on the design of the risk assessment process for resource projects
under the Scheme. The actual implementation of the risk assessment process will follow separately,
at the determination of the State, as shown in Figure 1:

Figure 1: Implementation of the risk assessment process

The development of the proposed framework involved numerous consultations with various
Government bodies and departments, as well as consultation with various industry representative
bodies and select individual EA Holders. This report is not itself intended to be the final design of the
framework but to provide a set of guiding principles, prior to the operationalisation of the underlying
framework model and the initial implementation of the Scheme.

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2. Risk assessment framework
2.1 Overview of the process and framework
The risk assessment process is intended to cover the mining, oil & gas industries, as per the Review.

Purpose of the risk assessment process

The purpose of the risk assessment process is to assess the financial risk to the State of an EA
Holder(s) not meeting its rehabilitation or environmental management obligations.

Risk Category Allocations

The intention of the risk assessment process is to assist the Scheme Manager to categorise the risk
to the State (associated with an EA) into one of the four following Risk Category Allocations:
• Very low risk
• Low risk
• Moderate risk
• High risk.
Risk Assessments
The risk to the State is to be assessed by way of:
• a Financial Risk Assessment – which is a credit risk assessment of the applicable entity
associated with the EA as nominated by the Scheme Manager (Relevant Entity) to determine its
financial capacity to pay based on an assessment of the Relevant Entity’s probability of default on
its financial obligations, and
• a Resource Project Risk Assessment – to assess features of the EA site and the likelihood that it
may be sold in the event of the failure of the EA Holder(s).
The rules regarding selection of the Relevant Entity is to be confirmed by the State separately to this
report.
The risk assessments will be based on a framework as proposed in this report. Whilst the framework
details set risk factors/criteria, the Scheme Manager will have the ultimate decision regarding any of
the framework outputs, as well as the application of any modifiers and overriding factors the Scheme
Manager considers relevant in forming a Risk Category Allocation decision.
Figure 2: Summary overview of the risk assessment process

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Weightings
In order to inform the Risk Category Allocation for each EA, based on a combination of two separate
risk assessments (one for Financial Risk and one for Resource Project Risk), a weighting needs to be
applied to each risk assessment.
It is anticipated the Financial Risk Assessment will represent the significant majority of the total risk
weighted assessment in the initial years of the risk assessment process. This may change over time
once further data and information is obtained in respect of the resource project risks. The initial
weightings are subject to the final build and testing of the underlying framework model.
Risk Divisions
The Risk Category Allocations decided by the Scheme Manager will be used to determine:
1. the Risk Division that an EA may be eligible for (i.e. surety in its various forms, versus
contributions to a Pool)
2. if the EA is allocated to the Pool, the relevant contribution rate payable to the State.
Figure 3: Contribution to the Pool

It is proposed that an EA allocated to the ‘High’ Risk Category Allocation will be required to pay
surety, with the remaining three Risk Category Allocations requiring contributions to the Pool, but
subject to an overriding decision by the Scheme Manager as set out below.
An example of the Risk Category Allocation being subject to a Scheme Manager’s discretion relates
to the Pool threshold. A Pool threshold will be set to limit the Pool's exposure to any one Relevant
Entity. Where the total rehabilitation costs for all EA’s for one Relevant Entity exceed the Pool
threshold, the Scheme Manager may require an EA, which was otherwise assessed as eligible for the
Pool, to provide Surety.
It should be noted that the estimated rehabilitation cost (utilising the State’s ERC Calculator) is
captured separate to the Risk Category Allocation. Therefore, Industry should be sufficiently
incentivised to progressively manage, mitigate and complete rehabilitation costs in order to reduce
the estimated ultimate rehabilitation cost. Therefore the Risk Category Allocation has been purposely
designed to consider the relative risk to Government and seeks to avoid double counting.
Assistance to the Scheme Manager
The Scheme Manager will determine the Risk Category Allocation but may seek to engage an
independent and appropriately qualified risk assessor to assist with tasks such as:
• Build the underlying framework model and operationalise the risk assessment process
• Assist with the initial and ongoing annual risk assessments, and
• Review and recalibrate the underlying framework based on new data and information obtained.

2.2 Initial filters

The following filters are recommended prior to commencing any full risk assessments:
• Estimated Rehabilitation Cost – EA’s with an estimated rehabilitation cost (as determined by
the Department of Environment and Heritage Protection (DEHP)) below the relevant threshold
(currently set at $100,000) would not be subject to the risk assessment process and the holder
will provide surety in the amount of 100% of the estimated rehabilitation cost for the EA
• Insufficient track-record for Financial Risk Assessment – where a Relevant Entity, without an
acceptable external rating (see Section 2.3.3), is unable to provide a minimum of 3 years audited

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 financial statements, the Scheme Manager will not be able to satisfactorily complete a Financial
Risk Assessment
• Provision of minimum information requirements – where the minimum information
requirements, as required by the Scheme Manager, are not provided by a Relevant Entity / EA
Holder, the Scheme Manager will need to determine the implication on any Risk Category
Allocation and the contribution rate payable to / surety required by the State in respect of the EA.

2.3 Financial Risk Assessment

Financial (credit) risk assessments typically focus on historical data to assess an entity’s financial
strength to withstand shocks. A typical external credit rating process comprises an assessment of the
entity’s financial metrics, supplemented by a variety of qualitative risk factors, features a significant
number of data points and upwards of 25 different rating outcomes. These forms of detailed rating
processes are expensive and time consuming and would not meet the objectives of the Scheme.
In order for the proposed Financial Risk Assessment to be effective and efficient for a repeatable
assessment process covering the State’s EA portfolio, the proposed framework will focus on
quantitative risk factors where possible, given they are typically less subjective and comparatively
easier to measure. Notwithstanding the above, the framework will retain flexibility for the Scheme
Manager to consider qualitative risk factors and apply discretion in the Allocation decision.

2.3.1 Financial Risk Framework

The Financial Risk Framework is intended to measure the financial risk of the Relevant Entity in
respect of an EA. The framework is designed to be efficient and leverage any external rating that has
been applied by acceptable credit rating agencies (see Section 2.3.3 for details):
Figure 4: Overview of the Financial Risk Assessment and Framework

With external rating Convert an acceptable external rating Refer to Section 2.3.3 and
to a Financial Risk Assessment Appendix 4.1

Financial Risk
Assessment

Apply bespoke framework to calculate Refer to Section 2.3.2

No external rating Financial Risk Assessment

2.3.2 Financial Risk Assessment (no external rating)

If a Relevant Entity does not have an acceptable external rating, Table 1 outlines the methodology
used to assess the Financial Risk Assessment:
Table 1: Overview of the Financial Risk Assessment (no external rating)

Risk factors Risk factor weightings Modifiers and Output

overriding factors

Relevant Entity financial metrics [Significant]

Determined by Financial Risk

Industry sector [Minor]
Scheme Manager Assessment

Domicile of the Relevant Entity [Minor]

As shown above, the risk factors are primarily weighted towards the financial metrics of the Relevant
Entity followed by its predominant industry sector and finally the domicile of the Relevant Entity.

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The weightings are indicative only and are to be refined once the underlying model for the framework
is built and back-tested by a risk assessor with sample data to determine predictive accuracy.

2.3.2.1 Financial risk factors and criteria

The Financial Risk Assessment is underpinned by a variety of risks which are considered relevant for
assessing and measuring the financial risk of the Relevant Entity. For simplicity, the financial risk
criteria are grouped into three risk factors, being financial metrics, industry and domicile of the
Relevant Entity.

Relevant Entity financial metrics

The financial metrics risk criteria include various key financial ratios of the Relevant Entity, a sample of
which are detailed in Appendix 4.2. The ratios, to be obtained from the past 3 years audited financial
statements, can be categorised into the following key areas:
• Debt serviceability – assessment of the entity’s ability to service its debt, if any
• Balance sheet – a point in time assessment of an entity’s financial position and strength, focusing
on the net value and nature of its assets and its ability to withstand negative cash flows through
economic and industry specific cycles
• Gearing / leverage – assessment of the level of debt an entity has compared to other forms of
capital and its residual borrowing capacity
• Profitability – assessment of the profitability of the entity and if the earnings are sustainable to
ensure a viable business operation
• Other – captures any other relevant ratios that do not align to the categories above.
Each risk assessor has their own established method to rate entities into defined risk factors/criteria
and, whilst the State has an expectation around appropriate risk factors/criteria, ratios and weightings,
the Scheme Manager intends to engage a risk assessment expert to assist in refining the final
approach adopted and in making the assessments.
It is intended that the final framework will attempt to match, on a consistent basis and within a
reasonable degree of accuracy, the probability of default as specified for entities with acceptable
external ratings. The proposed framework is to utilise relevant ratios and weightings focused on the
resource industry as a benchmark. Any unrated but diversified entity (whose total revenues are not
primarily derived from the resource industry) may be subject to a more relevant corporate
methodology framework to ensure no perverse outcome is obtained.

Industry sector
The underlying data of the model is to be aligned to the Relevant Entity’s industry and operational
sectors to ensure a higher degree of relevance when assessing the financial characteristics of the
entity. This is to be achieved by the use of Global Industry Classification Standard (GICS) which is an
efficient tool to capture the breadth, depth and evolution of industry sectors. The relevant GICS sector
for a particular entity is primarily based on the sector deriving the majority of revenue, however
earnings (i.e. profitability) and market perception may also be taken into account.
It is expected that a different outcome will be achieved for different industry sectors based on the
factors that contribute to its relevant industry dynamics (i.e. different outcomes will apply for the
different industry sectors).
An example of the most relevant industry sectors expected to be used based on GICS is detailed
below. Further details on GICS are enclosed within Appendix 4.3.

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Table 2: List of most relevant industry sectors (based on GICS)

Industry Definition

Coal & Consumable Companies primarily involved in the production and mining of coal, related products
Fuels and other consumable fuels related to the generation of energy. Excludes
companies primarily producing gases classified in the Industrial Gases sub-industry
and companies primarily mining for metallurgical (coking) coal used for steel
production

Steel Producers of iron and steel and related products, including metallurgical (coking)
coal mining used for steel production

Diversified Metals & Companies engaged in the diversified production or extraction of metals and
Mining minerals not classified elsewhere. Including, but not limited to, nonferrous metal
mining (except bauxite), salt and borate mining, phosphate rock mining, and
diversified mining operations. Excludes iron ore mining (Steel Sub-Industry), bauxite
mining (Aluminium Sub-Industry), and coal mining (either Steel or Coal &
Consumable Fuels Sub-Industries)

Precious Metals & Companies mining precious metals and minerals not classified in the Gold Sub-
Minerals Industry. Includes companies primarily mining platinum

Oil & Gas Exploration Companies engaged in the exploration and production of oil and gas
& Production

Gold Producers of gold and related products, including companies that mine or process
gold

Silver Company’s primarily mining silver. Excludes companies classified in the Gold or
Precious Metals & Minerals Sub-Industries

Copper Companies involved primarily in copper ore mining

Aluminium Producers of aluminium and related products, including companies that mine or
process bauxite and companies that recycle aluminium to produce finished or semi-
finished products.

Domicile of the Relevant Entity

The underlying data of the benchmark model to be used is to be aligned to the domicile of the
Relevant Entity to ensure a higher degree of relevance when assessing the financial characteristics of
the entity.
This risk factor is designed to account for any (additional) risks associated with domicile of the
Relevant Entity, as compared to Australia (given the resource projects are located in Australia and
predominantly directly owned by Australian domiciled entities). This variable will reflect macro-
economic differences between various economies, which will differentiate between developed and
emerging economies, for instance.
For completeness, as the Scheme is based on Queensland resource projects only, the sovereign risk
of the projects themselves are all considered the same.

2.3.2.2 Modifiers and overriding factors

It is typical of a financial (credit) risk assessment that a risk assessor providing the rating retains an
ability to modify the outputs generated from a model-based system. This is to ensure that any
outliers, or obscure results, are identified and corrected.
It is intended the Scheme Manager may take into consideration any other relevant material factor that
may impact the perceived risk of the Relevant Entity as compared to the Financial Risk Assessment
as calculated under the framework (e.g. the Relevant Entity, or related parties, have a track record of
not fully supporting failed resource projects).

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The ability to amend the output ensures a level of flexibility within the framework. It is expected
modifiers and overriding factors would apply to a small percentage of the Allocation decisions, but this
can only be confirmed once the underlying framework model is developed and implemented.

2.3.3 Financial Risk Assessment (external rating)

As noted earlier, the Financial Risk Assessment is a bespoke financial risk analysis of an entity. Many
of the major credit rating agencies utilise in-depth and complex methodologies comprising
significantly more data points than those likely to be available to the State, some of which are
bespoke to the resource industry (or the applicable industry for a diversified entity / conglomerate).
The level of information utilised by rating agencies is not always readily accessible, can be viewed as
qualitative in nature and/or require thorough due diligence which would not be economical (or
feasible) for the Scheme.
The use of approved external ratings will aid the efficiency and cost effectiveness of the risk
assessment process. It may also encourage entities within Industry to obtain an acceptable external
rating, if they believe it is useful and appropriate.
Some, but not all, Relevant Entities may already have an external rating. These entities obtain external
ratings in order to be able to access debt capital markets and these ratings are widely adopted as a
useful tool to assess credit / financial risk for parties undertaking similar analysis as the Scheme
Manager.
On this basis, the framework is intended to utilise these ratings where appropriate. It is proposed that
entities which have a long-term credit rating from an acceptable source (refer to the headings below
for details), then the external rating is to be used in place of the Financial Risk Assessment.

Approved rating agencies

It is recommend that published credit ratings assigned by credit rating agencies that are licensed or
regulated and approved by the Scheme Manager are deemed acceptable.

Mapping rating agency outcomes

External ratings are to be converted by the Scheme Manager to a Financial Risk Assessment. A
mapping of external ratings between select rating agencies is detailed in Appendix 4.1.

Different ratings from different rating agencies

Where a Relevant Entity has multiple credit ratings, it is recommend the weakest rating be used for
the purposes of the Financial Risk Assessment, as this is deemed to represent the most conservative
risk metric to adopt for the State’s purpose. Credit rating agencies regularly review their ratings as
part of their ongoing licence obligations. Any changes in external ratings are to be reported on by the
Relevant Entity and monitored by the State.

Long-term versus short-term ratings

It is recommended that only long-term ratings would be deemed acceptable by the Scheme Manager
given the long-term nature of a resource project and its underlying rehabilitation liability. Short-term
ratings are not expected to provide an appropriate benchmark for measurement for involvement in the
Scheme (anyone with a resource project that has a short remaining life is likely to be dealt with
separately).

Private credit ratings

It is recommended that private ratings obtained or updated within 12 months of an assessment be
considered acceptable to the Scheme Manager. This is considered relevant for entities that do not
wish for a rating to be made public. This will provide comfort to the Scheme Manager that a ratings
assessment has been conducted on the counterparty by the acceptable credit rating agency.

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Note that private ratings are not typically updated except at the request of the counterparty, which is
considered acceptable from the Scheme Manager’s perspective given the annual review nature of the
risk assessment and the long-term ‘insurance’ view being adopted by the State. Although this would
require the counterparty to obtain an updated rating on a similar cycle to the State’s requirements
(rather than simply relying on the State’s risk assessor to undertake an updated analysis), this would
be at the discretion of the Relevant Entity.
It should be noted that many rating agencies limit their disclosure / reliance obligations quite
significantly for any private rating provided, and the State would therefore be relying on reputation
risk.

Rating agency outlooks

For the purposes of this risk assessment framework, the rating outlooks (i.e. positive, negative or
neutral) are not taken into consideration for the purposes of determining a Financial Risk Assessment
or outlook. This is because the framework results in one of four (wide) Risk Category Allocations as
compared to typical external ratings which feature upwards of 25 different (narrow) rating outcomes,
the majority with an outlook for projected future movement.

2.3.4 Output – Weighted Financial Risk Assessment

The assessment is to be based on a ‘scores-based’ approach as opposed to a ‘rules-based’ approach
that utilises categories within:
• each risk criteria (i.e. ratio thresholds)
• each risk factor (i.e. financial metrics, industry sector and domicile of the Relevant Entity), and
• each risk assessment (i.e. Financial Risk and Resource Project Risk Assessment outputs).
The key benefit of a ‘scores-based’ approach is it provides relativity of where an entity may sit within
an output category (i.e. at the upper or lower end). Subject to the build and testing of the scoring
system, it also limits perverse outcomes that may feature under a rules based approach when you
combine various categories with underlying scores that are at extreme ends of the category
spectrums.
An overview on the Financial Risk Assessment process is detailed below:
Figure 5: Overview on the Financial Risk Assessment process

External rating
X
score
Financial Risk
Financial Risk Weighted Financial
Assessment OR weighting = Risk Assessment
[Significant]
Financial Risk
X
score

As shown above, the Financial Risk Assessment can either comprise use of an acceptable external
rating or application of the bespoke framework. It is intended that the Financial Risk Assessment from
the bespoke approach would be considered to have a reasonable relativity to the equivalent
assessment assigned for an external rating.
For simplicity, it is recommended both assessment methods feature the same scoring system, in
order to facilitate relative alignment of assessments. In order to obtain the Financial Risk Assessment,
each risk factor/criteria would need to be calculated, with the output being a score as determined by
the Scheme Manager. The final risk factors/criteria, relevant definitions, calculations and weighting
coefficients will be determined following the risk assessor’s build and back-testing of the underlying
model to the framework.

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2.4 Resource Project Risk Assessment
2.4.1 Resource Project Risk Framework
Resource project risks are typically considered as part of any due diligence process to purchase a
resource project. These typically focus on the strength of the project (i.e. remaining resources, quality
of the resources, economic viability to extract the resources), the market demand / outlook for the
commodity and many other relevant risk factors such as forecast cost of rehabilitation and any
compliance issues.
The proposed framework attempts to capture the key risk factors relevant to assessing the market
appeal of a resource project, focusing on risk factors that can readily and effectively be measured,
while noting the estimated rehabilitation cost itself captures other directly relevant elements. An
outline of the proposed Resource Project Risk Framework is detailed below:
Table 3: Resource Project Risk Framework

Risk factors Risk criteria Risk factor Modifiers and Output

weightings overriding
factors

Remaining economic life

based on reserves
Project Strength [Significant]
Off-take agreements Resource
Determined by
Project Risk
Scheme Manager
Assessment
Rehabilitation Relevant rehabilitation completed [Minor]

Compliance Relevant compliance issues [Minor]

As shown above, the risk factors are primarily weighted towards the project strength of the resource
project followed by relevant rehabilitation completed and relevant compliance issues. The off-take
agreements risk criteria provides Industry an opportunity to increase the Project Strength score for
projects that do not obtain a maximum score for remaining economic life.
The weightings are indicative only and are to be refined once the underlying model for the framework
is built and tested by a risk assessor with sample data to determine predictive accuracy.
The design of the Resource Project Risk Assessment is based on reviews of previous work to
develop an assessment approach, feedback from consultations and Industry.
The framework has initially been limited to a select number of critical risk factors/criteria that are all
measurable indicators of the underlying resource project risk to the State (see Section 2.4.3 for
further details, including details of risks for future consideration).
The State will work with the Industry to test the rigour and resilience of the framework and ensure it
remains dynamic and evolves over time as new data and information becomes available. This includes
the breadth of risks captured, noting the framework has been designed to encapsulate a broad range
of commodities, with resource projects at varying stages of its lifecycle and owned or controlled by
single or multiple Relevant Entities under various forms of corporate structures.

2.4.2 Filters and alternative frameworks

Current status of the resource project

The starting point for the Resource Project Risk Assessment comprises an initial filter that is based on
the project status of the underlying EA. This is due to various risk factors/criteria only being applicable
at certain stages of a resource project’s lifecycle. The identified project status and applicable filters
are detailed below:

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• Exploration phase – the majority of the proposed risk factors/criteria are unlikely to be applicable
or highly relevant during the exploration phase of a resource project. Further, the estimated
rehabilitation cost of an EA in the exploration phase is likely to be low (as compared to resource
projects which are in an operational phase). As such, this would limit any contributions payable to
the Pool or surety required.

Recommended filter outcome: Conduct a Financial Risk Assessment only. An alternative

framework (or scale) is likely to be required to align the Financial Risk Assessment to the Total
Risk Weighted Assessment which is used to determine the Risk Category Allocation

• Operational phase – Projects in the operational phase are likely to be subject to all of the risk
factors/criteria and as such should be subject to the Resource Project Risk Assessment.

Recommended filter outcome: Proceed with the Resource Project Risk Assessment

• Care & Maintenance (C&M) and Decommission phases – Projects placed into C&M are
typically due to EA Holder(s) recognising current challenges with the resource project which may
impact its ability to be economically viable in the short-term. Projects which have been
decommissioned are likely to have little to no economically viable reserves remaining that would
warrant ongoing production at the site (both current or in the future).
In both cases, the underlying rehabilitation risk primarily shifts from the project itself to the
financial strength of the EA Holder(s).

Recommended filter outcome: Conduct a Financial Risk Assessment only. An alternative

framework (or scale) is likely to be required to align the Financial Risk Assessment to the Total
Risk Weighted Assessment which is used to determine the Risk Category Allocation.

Resource projects with limited remaining economic life

A separate assessment is proposed for a resource project that has limited to no remaining economic
life. Under this scenario:
• the risk of the resource project not generating sufficient surplus cash over its remaining life to
cover its residual estimated rehabilitation cost is high
• the estimated rehabilitation cost upon decommission of a resource project is likely to remain high
(relative to the size of the project).
As such, the risk to the State primarily rests upon the financial strength and capacity of the EA
Holder(s) to meet the residual rehabilitation cost.
Given the above, it is proposed a ‘targeted framework’ is adopted for resource projects that have a
remaining estimated life of [5] years or less (see Section 2.4.3 for details on how to calculate the
remaining estimated life).
The targeted framework would encapsulate the majority of the same framework risk factors/criteria,
however adapted to also assess the EA Holder(s) capacity to fund the estimated rehabilitation costs in
the near future (noting the estimated rehabilitation cost is unlikely to align to any internal budgets or
provisions of EA Holder(s) given the different calculation methods).
The targeted framework would be even more heavily weighted towards financial risks as opposed to
resource project risks given the limited capacity of the resource project to generate sufficient surplus
funds to cover its residual rehabilitation liability.

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2.4.3 Risk factors/criteria, modifiers and overriding factors
As detailed in Table 4 below, the Resource Project Risk Framework is underpinned by an initial four
critical risk criteria which are measurable in some form. Further risk criteria have been identified for
future consideration, however they have been assigned an initial “nil” weighting in order for the
framework to remain simple, efficient and able to be implemented in the proposed timeframes. Any
future inclusion of new risk factors would occur by changing relevant Department Guidelines
following consultation with Industry.
As per Section 2.3.2.2 on modifiers and overriding factors for the Financial Risk Assessment and the
desire to ensure no perverse outcomes, similar considerations should apply to the Resource Project
Risks. Any applicable modifier or overriding factor may need to be explained by the Scheme Manager
when finalising an Allocation decision.
For presentation purposes, the risk criteria have been placed into the following three risk factors
which are considered relevant to the risk of a resource project:
Risk factors
1. Project strength – comprises two initial risk criteria, being remaining economic life and, if
provided by industry, details of any acceptable off-take agreement(s)
This considers the strength of the underlying resource project and can be categorised as the
possibility of a resource project being purchased by another party if the current owner is in a
distressed position – it is one indicator of the attractiveness of the resource project to other
parties / potential purchasers
2. Rehabilitation – comprises one initial risk criteria
This considers the knowledge and learnings obtained from relevant progressive rehabilitation
(either past or present) which may de-risk an EA site from a rehabilitation risk perspective.
This risk factor is not intended to reward Industry for solely meeting rehabilitation obligations
(which would be reflected in a reduced estimated rehabilitation cost) but rather measure, where
possible, progressive rehabilitation methods that can reduce the risk of an EA site and therefore
increase its market appeal to potential purchasers. Progressive rehabilitation is to be separately
captured under the State’s proposed ERC Calculator, which would incentivise Industry to
progressively rehabilitate disturbed land in order to reduce the estimated rehabilitation cost
calculation, and hence it has not been included here to avoid double counting
3. Compliance – comprises one risk criteria
This considers relevant compliance issues associated with a resource project’s EA conditions.
The relevant areas of compliance are to be confirmed by the State prior to implementation and
are intended to focus on environmental risk factors that may have a direct impact on the on-
going risk of a resource project and therefore its market appeal to potential purchasers.

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Table 4: Resource project risk factors and criteria

Risk factors and Definition Total Indicative measurement Indicative information Information source
criteria weighting requirements

Project Strength
Remaining economic The size, certainty and economic viability of the reserves should [Significant] A maximum capped score is • Annual report on proven and EA Holder for:
life (of the reserves) primarily drive the market appeal for the resource project / EA obtained from [20] or more probable reserves • JORC reports or equivalent
Economic life is measured in a formula: [Probable and Proven years, with minimum score • Past 5 years production (for coal & minerals)
(mining)/Proved and Probable (P&G)] Reserves divided by Annual obtained for greater than [5] statistics, where applicable • SPE-PRMS reports or
Production. 1 years. (excluding periods of C&M or equivalent (for P&G)
Annual production is the greater of: Any EA with remaining economic where a project is put on-hold)
• Production forecasts for
life of [5] years or less are • Forecast for next 5 years
• Historic average production of the past 5 years, or next 5 years
excluded from this part of the (excluding periods of C&M or
• Average forecast production for the next 5 years. assessment (see Section 2.4.2). DNRM / DEHP for annual
where a project is put on-hold) returns / Development plans
The above periods are exclusive of any timeframe where a project
was put ‘on-hold’ or in C&M, with the expectation production for historic production
statistics are to cover a cumulative 5 year period, where applicable. statistics
Off-take agreements Confidence in the end market for the product, under-pinning (included in A maximum score is obtained High level details for each off-take EA Holder(s) to voluntarily
(information to be economics of a venture. Relevance of off-take agreements is to the above) where acceptable off-take agreement covering: provide the information
voluntarily provided by initially be measured by the following criteria: agreements exist, subject to the • Counterparty and external
an EA Holder) • Counterparties must be unrelated parties to the Relevant capped project strength score. rating
Entity and have acceptable investment grade external rating(s) No score obtained if there are no
• Remaining length of contract
acceptable off-take agreements.
• Remaining length of a contract must be 5 years or more • Quantity of resources per
• Aggregated quantum of the off-take agreements must be 50% annum (as % of total
or more of the total production on the EA site production on the EA site)
• Declaration that the price determined under the off-take • Declaration regarding
agreement(s) exceeds all costs associated with operating the economic viability of the off-
project, including future rehabilitation costs, and supports the take agreement(s)
venture continuing for a minimum of 5 years or beyond
Quality of resource For future consideration [nil] TBD TBD TBD
The quality of the resource may drive the market appeal for the
resource project / EA. This risk criteria can be influenced in various
ways such as the demand for a particular grade of resource (i.e. for
blending purposes) or varying degrees of quality across a resource
project
Position on the cost For future consideration [nil] TBD TBD TBD
curve Relative comparison of the underlying cost base of an EA site
based on a global cost curve and its likelihood to remain
economically viable in the event of a prolonged downturn in the
market. This risk criteria can be influenced by numerous factors
such as off-take agreements, internal sales, strategic decisions in
respect of a project, which costs are relevant or not to the EA
Holder’s actual operations, reliability of data and other factors

1
Further work is anticipated to be undertaken to potentially capture the inclusion of other JORC/SPE reported resources, e.g. measured or 3P
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 Risk factors and Definition Total Indicative measurement Indicative information Information source
criteria weighting requirements

Market outlook for a For future consideration [nil] TBD TBD TBD
commodity Forward looking measure for the outlook of a commodity to
determine its future market attractiveness. This risk criteria is
influenced by the subjective nature of the outlook which may
capture changes in technology, restrictions or increases in supply,
market sentiment on future demand, environmental impact of the
commodity, changing capital markets, sovereign policy / legislation
and other factors
Value of non-resource For future consideration [nil] TBD TBD TBD
assets and liabilities A point-in-time assessment of the market appeal of a resource
project’s assets (or liabilities), such as net value and average age of
property, plant and equipment, but excluding the resource itself
and any real property/land. This risk criteria may be influenced by
the accounting treatment of the recorded assets (or liabilities)

Rehabilitation

Relevant rehabilitation Knowledge and learnings obtained from relevant progressive [Minor] A maximum score for certified • Certified rehabilitation DEHP to confirm any
completed rehabilitation may allow a third party to assess the rehabilitation relevant rehabilitation, a mid- • DEHP approval of relevant relevant rehabilitation
requirements of the EA site with a greater degree of accuracy and range score for relevant rehabilitation
potentially reduce the rehabilitation risk associated with the site. rehabilitation as approved by
Relevant rehabilitation (TBD) completed is to be measured by the DEHP or no if none of the above
following criteria: applies
• Certified relevant rehabilitation, or
• Rehabilitation which has been approved by DEHP as relevant.
The above processes to be determined by DEHP prior to
implementation of the risk assessment process

Compliance

Compliance with Relevant compliance issues may impact the market appeal of an [Minor] A maximum score where there TBD by DEHP with a focus on DEHP to confirm any
relevant EA criteria and EA site. Relevant EA criteria is to be defined by DEHP but is to are no relevant compliance environmental risk factors relevant compliance issues
environmental focus on environmental risk factors as opposed to administrative or issues or no score where
requirements of the other compliance issues that do not carry over risk to a new owner relevant material compliance
State of an EA site issues are identified

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2.4.4 Output – Weighted Resource Project Risk Assessment
Similar to the Financial Risk Assessment, the Resource Project Risk Assessment is to be based on a
‘scores-based’ approach as opposed to a ‘rules-based’ approach. The Resource Project Risk
Assessment will be weighted and combined with the Financial Risk Assessment in order to generate
a Total Risk Weighted Assessment.
Figure 6: Overview on the Resource Project Risk Assessment process

Resource Project Weighted

Resource Project Resource Project Resource Project
Risk Assessment Risk score
X Risk weighting =
[Minor] Risk Assessment

In order to obtain the Resource Project Risk Assessment, each risk factor/criteria would need to be
calculated, with the output being a score as determined by the Scheme Manager. The final risk
factors/criteria, relevant definitions, calculations and weighting coefficients will be determined
following the risk assessor’s build and testing of the underlying model to the framework.

2.5 Summary of the framework

In summary, the framework comprises the combination of Weighted Financial Risk and Resource
Project Risk Assessments to produce a Total Risk Weighted Assessment. Subject to the appointment
of a risk assessor, the Risk Assessor is to follow the risk assessment process, with modifiers and
overriding factors, and provide advice to the Scheme Manager. The Scheme Manager will take into
consideration the Risk Assessor’s advice in forming an Allocation decision.
Figure 7: Summary of the framework:

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3. Ongoing monitoring and assessments
After the initial implementation phase when the initial reviews of each relevant EA is complete, the
intent is that a regular review process will be conducted, including regular monitoring as required. This
process is described in more detail below.

3.1 Annual reviews

The current intention is for an annual review to be conducted of each EA.
The necessary information to conduct the annual review is expected to be collated by the Scheme
Manager to inform the updated assessment. The relevant information sources will need to be
accessed to inform the decision making process, including the most recent financial statements for
the Relevant Entity.
If there are any changes to the Risk Category Allocation from this annual review process, the Scheme
Manager will manage the required amendments to the level of contribution and / or requirement for
changes to surety direct with the EA Holder(s).

3.2 Extraordinary reviews and monitoring

In addition to the regular review process mentioned above, there are expected to be occasions when
the Scheme Manager may be required to be involved in assessing or reassessing the risk of an EA as
shown below:

Table 5: Events relevant to Scheme Manager review or monitoring

Item Description Industry Requirement

notification
Change of registered Where an entity is added Industry will Scheme Manager will need to
EA Holder to, or removed from, an advise the determine if a Financial Risk
existing EA State of any Assessment needs to be
change in EA conducted on a new / different EA
Holder(s) Holder / Relevant Entity
Change of control of Where change of control, Industry will Scheme Manager will need to
an EA Holder / as defined under the advise the determine if a Financial Risk
Relevant Entity Corporations Act 2001, of State of the Assessment needs to be
an EA Holder or Relevant change in conducted on the new controlling
Entity occurs control entity
Change of external If the Relevant Entity has As above Scheme Manager will undertake a
rating of the Relevant a change in external review of the assessment to
Entity credit rating determine if a change in Risk
Category Allocation is required

Material change in the An extraordinary event As above Scheme Manager to determine if a

estimated occurs (i.e. caused by a revised estimated rehabilitation
rehabilitation cost third party, natural cost is required, including a
disaster, greater than recalculation of the contribution rate
anticipated expansion of payable or surety to be provided in
a project) that materially respect of the EA
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 Item Description Industry Requirement
notification
increases the estimated
rehabilitation cost
Change in the status If an EA Holder(s) places As above Scheme Manager to undertake a
of a project a resource project into reassessment of the Risk Category
C&M (or similar) Allocation
Insolvency event or The appointment of a The Scheme Manager approach is to be
similar liquidator, administrator appointed determined on a case-by-case basis
or similar will liquidator, depending on liquidator /
immediately increase, or administrator administrator actions in respect of
possibly lead to the or similar the resource project, other entities
crystallisation of, the available for recourse, etc
State’s risk
Material change in the If a substantial change in Not required There is not intended to be any
dynamics of the demand for a particular – to be change until the regular cycle of
underlying commodity commodity occurs (either monitored by reviews occurs noting the annual
underlying market the State review process and elements of the
dynamics or supply separately framework that will incorporate this
issues occur) risk

3.3 Ongoing monitoring of the process

It is recommended that the Scheme Manager undertake a review of the risk assessment framework
on an annual basis. This review should include a validation and, if necessary, a recalibration of the key
financial and resource related risks and their weighting in the framework. The review should consider
any new or improved information and data sources available to the Risk Assessor, including Industry
feedback/consultation, and the ongoing appropriateness of the risk factors/criteria used in the
framework.

Over time a greater emphasis may be placed on the resource project risk component of the risk
assessment process, however initially the assessment of the financial risk is likely to be the most
objective and reliable basis to inform the Scheme Manager on the risk to the State.

The Risk Assessor should seek to deliver to the Scheme Manager a report on its own review together
with any recommendations for changes to be made to the framework. Initially an annual review is
recommended due to the rapid aggregation of data and information in respect of the newly
implemented risk assessment framework. It is anticipated the review could be conducted on a
bi-annual basis once the framework has been operational for at least three to five years.

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4. Appendices
Appendix

4.1 Example mapping of external ratings

4.2 Financial metrics

4.3 GICS

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4.1 Example mapping of external ratings
An example of mapping of ratings applied by a select number of Australian registered credit rating
agencies to one-another is detailed below:

Table 6: Example mapping of external ratings

Australia Fitch Moody's S&P

Ratings

AAA AAA Aaa AAA

AA+ AA+ Aa1 AA+
AA AA Aa2 AA
AA- AA- Aa3 AA-
A+ A+ A1 A+
A A A2 A
A- A- A3 A-
BBB+ BBB+ Baa1 BBB+
BBB BBB Baa2 BBB
BBB- BBB- Baa3 BBB-
BB+ BB+ Ba1 BB+
BB BB Ba2 BB
BB- BB- Ba3 BB-
B+ B+ B1 B+
B B B2 B
B- B- B3 B-
CCC+ CCC+ Caa1 CCC+
CCC CCC Caa2 CCC
CCC- CCC- Caa3 CCC-
CC CC Ca CC
C C C C
D D D D

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4.2 Financial metrics
The table below provides a list of the key financial metrics intended to be the foundation for the
Financial Risk Framework. Each risk assessor has their own established ratios, including their
underlying definitions / calculations and weightings. This list broadly indicates key financial metrics
utilised by risk assessors which would be refined once the underlying framework model is built and
tested:

Table 7: Financial metrics

Financial metric to be tested Ratios to utilise

Debt Serviceability EBITDA to gross interest expense

EBIT to gross interest expense

Funds from Operations + gross interest expense to gross

interest expense

Balance Sheet total assets

property, plant and equipment to total assets

short term debt to total debt

current ratio

Gearing/leverage funds from operations to total debt

total debt to EBITDA

total debt to capital

net debt to net capital

Profitability EBITDA to total revenue

NPAT to average equity

EBIT to average capital

Other FOC to capital expenditure

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4.3 GICS 2
In 1999, MSCI Inc and S&P Global developed the GICS, to establish a global standard for categorising
companies into sectors and industries. It is a common global classification standard used by many
market participants across all major groups involved in the investment process: asset managers,
brokers (institutional and retail), custodians, consultants, research teams and stock exchanges
The intent is to utilise an efficient tool to capture the breadth, depth and evolution of industry sectors.
It is a four-tiered, hierarchical industry classification system consisting of the items shown below:
Figure 8: GICS industry classification system

Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS
classification at the sub-industry level according to its principal business activity.
“Revenues” are the key factor in determining a firm’s principal business activity, although earnings
(i.e. profitability) and market perception, are also recognised as important and relevant information for
classification purposes, and are taken into account during the annual review process.

2
Source: https://www.msci.com/gics

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Glossary
C&M Care and maintenance
Contribution Annual amount paid by an EA Holder to the Rehabilitation Pool
DEHP Department of Environment and Heritage Protection
DNRM Department of Natural Resources and Mines
EA Environmental Authority – this term is used interchangeably in this report with the
term ‘Resource Project’, noting an EA may comprise more than one Resource Project
EA Holder(s) all parties which are registered as holder on an EA
FA Financial Assurance
ERC Calculator Estimated Rehabilitation Cost Calculator, a tool used by an EA Holder to calculate its
estimated rehabilitation cost per EA
Industry comprises entities in the mining (coal and minerals), oil/petroleum and gas industries
JORC Joint Ore Reserves Committee Code
Pool the Rehabilitation Pool division, one of the two Risk Divisions of the Scheme
QTC Queensland Treasury Corporation
Relevant Entity the entity whom the Financial Risk Assessment will be conducted upon
Risk Assessor an independent contractor that assists the Scheme Manager in undertaking risk
assessments
Risk Category The banding of risks, currently defined as Very low, Low, Moderate or High
Risk Division Either the Pool or Surety
Risk Category Allocation the output of the Scheme Manager’s decision, informed by the risk assessment
(Allocation Decision) process
Scheme the proposed new Financial Assurance scheme as outlined by QTC on:
https://s3.treasury.qld.gov.au/files/review-of-queenslands-financial-assurance-
framework.pdf
Scheme Manager the Scheme Manager, the person responsible for determining the Risk Category
Allocation under the risk assessment process
SPE-PRMS Society of Petroleum Engineers – Petroleum Resources Management System
State (or Government) The State of Queensland, acting through Queensland Treasury, Department of
Heritage and Environment Protection and Department of Natural Resources and
Mines
Surety the Surety division, one of the two Risk Divisions of the Scheme
TBD To Be Determined

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Disclaimer
Inherent Limitations
This report has been prepared in accordance with KPMG’s Services Agreement with QTC dated 2 August 2017.
The services provided in connection with this engagement comprise an advisory engagement, which is not
subject to assurance or other standards issued by the Australian Auditing and Assurance Standards Board and,
consequently no opinions or conclusions intended to convey assurance have been expressed.
The report has drawn on the experience, expertise and insights of stakeholders through face-to-face and
telephone consultation meetings, submissions from stakeholders and our review of documents and other
information provided by QTC and the State.
No warranty of completeness, accuracy or reliability is given in relation to the statements and representations
made by, and the information and documentation provided by QTC, the State or stakeholders consulted as part
of the process.
KPMG have indicated within this report the sources of the information provided. We have not sought to
independently verify those sources unless otherwise noted within the report.
KPMG is under no obligation in any circumstance to update this report, in either oral or written form, for events
occurring after the report has been issued in final form.
The findings in this report have been formed on the above basis.
Third Party Reliance
This report is solely for the use of QTC and the State in line with the purpose as detailed in the Services
Agreement with QTC. It is not to be used for any other purpose.
Other than our responsibility to QTC, neither KPMG nor any member or employee of KPMG undertakes
responsibility arising in any way from reliance placed by a third party on this report. Any reliance placed is that
party’s sole responsibility.

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