Reclamation Bonds

[BondLaw]

I was doing some research the other day and came across an article about the difficulty many mining companies have encountered in obtaining reclamation bonds. I have since read that reclamation bonds are close to extinct. Indeed there have been some Congressional hearings that attracted testimony from several mining companies about the severe lack of a market for these bonds. I now see that a few states have adopted what they call “pool bonds” or “bond pools” to cover reclamation requirements. Has anyone had any exposure to these pools? Are they guaranty funds or is there actually a “bond” involved? And is the reclamation bond really dead or is it part of the cyclical hard market that we are currently experiencing?

[Admin]

There is no doubt we are certainly in a hard bond market. There is also no doubt it will become less conservative again once sureties get hungrier and start taking more risk again. However, I don't think that we will see a market similar to the one at the turn of millennium for a long time, if ever. The sureties learned a valuable lesson and went back to the fundamentals of underwriting. In my opinion, they are too conservative and can write more risks while maintaining the same amount of claims, or at least close to it.

Reclamation bonds were hard to place even the soft market. These days, a reclamation bond can not be written even with 100% collateral! Sureties do not like long term liability and these bonds hold the bonding companies liable for around 10 years. The combination of a high claim ratio and long term liability is one that no bonding company will write. I think this class of business is dead, at least until the market goes soft again (even then it would be hard to place) It is time the state realizes that the surety bond is close to impossible to obtain.

I have not heard of "bond pools", but I would guess it is similar to the Interstate Commerce Commission's BMC-85. The ICC Bond is another high risk bond that is becoming increasing harder to place. The ICC offers the BMC-85 for brokers that can not obtain the bond. The BMC-85 holds 100% cash collateral ($10,000) in an account and pulls upon it in the event of a claim. However, with bond pools...I would venture to guess that everyone pays a % of the guarantee into the pool and it is pulled upon as necessary. So it is probably similar to the BMC-85, with the exception that there is one "pool" account rather than individual accounts for each. If that is the case, I guess you could call these "bond pools" a non-profit surety run by the state.

[Surety Guy]

You can read the article at the following link: http://library.lp.findlaw.com/articl...tilities_1_498