Case Study “Quick Response”

HMP Constructions Pty Ltd

CASE STUDY - BUSINESS IMPROVEMENT AND

“QUICK RESPONSE” IN MINING CONTRACTING

Presented by Bernie O’Neill

Managing Director HMP Constructions Pty Ltd

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Bernie O’Neill Biography

Bernie O’Neill is a mining engineer with 30 years experience in the open cut mining industry.

He is a graduate of the University of Queensland with an Honours degree in Mining Engineering. He is

also the holder of a Mine Managers Certificate for open cut coal mines.

He is a Fellow of the Australasian Institute of Mining and Metallurgy and a Member of the Mineral
Industry Consultants Association.

Bernie also holds Masters of Business Administration and Masters of Management qualifications.

Bernie has held a full range of open cut mining industry positions from Mine Planning Engineer to Chief
Engineer to Mine Manager to General Manager. Since 1995 he has been the Chief Executive of Helvory
Contractors and now fills that role with HMP Constructions following the recent merger of Helvory with
Mizutani Constructions of Japan.

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Coal Miners’ Summit - 2005

“Business Improvement and ‘Quick Response’ in Mining Contracting”

Bernie O’Neill
Managing Director HMP Constructions Pty Ltd

1. Executive Summary

Three private individuals discussed a concept in June 1995 and came up with the idea of starting a
contract mining and civil construction business. These three people had complementary skills which
contributed to the ongoing success of the business. There was a Surveyor, a Mechanical Engineer and
a Mining Engineer. A combination of their names resulted in the company name of Helvory Contractors.

From that modest beginning comprising 4 scrapers, 1 dozer, 1 grader and a water cart the business,
founded in 1995, has grown substantially. It is now aiming to become one of the next major forces in the
contract mining and civil construction industries.

One of the three founding shareholders retired 2 years ago as the business grew and he became unwilling
to accept the accompanying level of debt and personal commitment associated with that debt. The
remaining 2 shareholders purchased his shareholding and have continued on with an expansion program
which has subsequently led to the recent merger of Helvory with Mizutani Constructions of Japan.

In a capital intensive industry such as earthworks contracting, Helvory grew as far as it was able by acquiring
debt finance. This was achieved by spreading commitments around virtually all financial institutions as well
as reducing capital exposure by generally purchasing good quality second hand equipment.

In 2003, a decision was taken to expand the business further with the realisation that this expansion
would require the injection of additional capital. An exhaustive process was commenced which included
review of all possible options and subsequent discussions with financial institutions, stock brokers, private
equity investors and other contracting companies. In proceeding down this path, a number of selected
individuals were commissioned to quietly explore potential opportunities on a confidential basis.

Unknown to Helvory at the time, Mizutani Constructions from Japan was also looking for investment
opportunities in overseas countries, including Australia. With the assistance of one of the selected
intermediaries an initial meeting was arranged. This subsequently led to the formation of a Joint Venture
with the aim of bidding for new contract work. This Joint Venture, at the time, did not include the existing
contracts then being carried out by Helvory Contractors.

Whilst the Joint Venture arrangement was an exciting prospect for potential clients, it suffered from the
disadvantage of being perceived “as the new kid on the block” and was unable to adequately leverage
off the previous reputation that Helvory had built up.

This led to further negotiations with Mizutani which subsequently resulted in the formation of “HMP
Constructions”. This new company took over all of the existing Helvory contracts from 1July 2004.
As part of this arrangement Helvory is providing the management services and Mizutani is providing the
new equipment required to service the current and future works.

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The HMP name comes from the first initials of Helvory - Mizutani - Pacific and has a shareholding
of 49 % Helvory, 49 % Maruichi (Mizutani’s Australian registered company) and 2 % Pacific Mining
Investments (the reward for the facilitator who brought us together). Regardless of the shareholding
%, all major decisions require the agreement of 60 % of shareholders, thus ensuring that Helvory and
Mizutani must agree for things to happen.

The Board is comprised of 6 directors - 3 from Helvory and 3 from Mizutani with Helvory providing the
Chairman. 2 of the 3 directors nominated by Mizutani are now full time residents in Australia.

2. Characteristics of the Australian Contract Mining Industry

The contract mining industry in Australia is characterised by a number of factors which set it aside from
many other types of business:

• It is highly capital intensive.

• Many Contractors have a small client base (only 2 or 3 Debtors is not unusual for the small and
medium sized Contractors).
• Work is generally in more remote locations.
• The workforce requires a high level of training which must be continually reinforced in order to meet
safety/training regulations.
• The workplace is fluid and turnover levels are high with competition from other Contractors as well
as Mine Owners.
• Working capital requirements are high and are compounded by the small number of Debtors and
their terms of payment.
• There is a significant shortage of skilled tradesmen such as diesel fitters and electricians and
professionals such as engineers and surveyors.
• Equipment delivery times are long especially in the current resource market.
• Equipment may need to be modified from OEM specifications in order to meet industry regulations
or specific Client standards.
• Many contracts are carried out on Client’s sites where the Client’s policies and procedures may take
precedence over those of the Contractor.
• There are a small number of large companies at the top end of the market who often require the
support of the smaller contracting companies in order to meet Client’s deadlines or for specialised
work. These companies are mostly Public companies but often with major overseas ownership.
• There are a large number of small companies at the bottom end of the market who service only
one client or work in restricted geographical locations. This feature is also a result of Australia’s
comparatively large land area and limited population.
• There are a number of companies (like us) in the middle ground who are continually presented with
opportunities and must make the decision whether to grow or to maintain a steady business. Many
of these are private family companies who must consider the prospect of growth hand in hand with
the personal commitment of the owners and other family members.

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3. The Desire to Grow

As one of the ‘middle ground’ players in the contract mining industry in the 2003/04 financial year
(Turnover $60 million), Helvory had reached the stage where its capital constraints resulted in it being
unable to grow any further. Expansion had occurred virtually every year and at a relatively rapid rate
since its inception with annual turnover increasing as follows:

YEAR GROWTH
Year 1 24 %
Year 2 29 %
Year 3 21 %
Year 4 1%
Year 5 87 %
Year 6 108 %
Year 7 42 %
Year 8 80 %

In an expanding market, Helvory was therefore placed in a position where it would naturally lose %
market share just by being unable to keep pace with industry expansion.

This was particularly evident in November 2003 when Helvory was awarded a relatively modest $2 million
contract with an existing Client and on an existing site. During the tender period, equipment that was
earmarked to perform the work was subsequently required by the same Client for additional site duties.

Helvory was then placed in the position where it did not have sufficient capacity to perform the work to
the Clients required timetable and had to withdraw its tender.

The net result was that we were unhappy because we could not meet the demands of the Client,
the Client was not happy because it had to find, induct and manage another Contractor and we also
introduced a competitor to our site, whereas before we had been the only Contractor on that site.

As work on that site continued to expand, two further and much larger contracts were subsequently let to
other competitors. So for a time there were 4 different contract mining companies working on the one site
and competing for the available resources such as personnel, accommodation and local support services.

The ability for Helvory to grow to meet the needs of our Clients therefore became a major strategic
initiative, subsequently leading to the formation of HMP Constructions.

By way of contrast, Mizutani, as one of the ‘top end’ players in the Japanese civil construction industry
had reached the stage where internal market constraints resulted in it being unable to significantly grow
any further. Turnover had been flat for a number of years with expansion only being possible by way
of overseas initiatives. In comparison to the Helvory opportunities and growth as detailed above, the
Mizutani profile was as follows:

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YEAR GROWTH
Year 1 -2 %
Year 2 1%
Year 3 -1 %
Year 4 1%
Year 5 1%
Year 6 -1 %
Year 7 -2 %
Year 8 21 %

In a flat market, Mizutani was therefore placed in a position where it needed to expand or lose its
position as a major construction contractor.

Common goals were therefore able to be effectively established in the discussions and negotiations
which subsequently led to the formation of the new company.

What have other Contractors done to address similar issues?

• The larger Contractors target specific Clients and endeavour to fully satisfy their needs across a
broad spectrum.
• The larger Contractors provide access to additional services such as civil, electrical and mechanical
construction as well as design.
• The smaller Contractors become more site specific which may result in them being dedicated to
only one or two operations.
• Some sell up and leave
• Some go broke and leave
• Some, like Helvory and Mizutani, merge and look to expand their capital base and market share in a
mutual way.

Paramount in the Helvory search for a joint venture partner was to find someone with common goals
and ideals and with a long term position. Also paramount was the requirement by Helvory to retain
management control and to expand by way of a private rather than a public arrangement.

Paramount in the Mizutani search for a joint venture partner was to find someone who they could
entrust to efficiently operate and maintain the equipment to be supplied as well as provide for growth
opportunities outside of Japan in the future.

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4. When You Stick Your Head Up - You Will Get Noticed

So what does it mean to the overall business when it expands and particularly when a major growth
initiative like ours is undertaken.

One thing for sure is that you will get noticed. In our case this has occurred in the following areas:-

• The trade unions become more organised and more willing to gain a presence on our sites. We,
in turn, have to be more organised from a management perspective, delegate responsibility and
rearrange our organisational structure accordingly.
• The Clients expect a better standard of contract deliverables. We must therefore provide a higher
level of service with better equipment and management systems.
• The management gurus and consultants are suddenly your best friends, whereas we want to retain
our private company status and go about our business quietly and in our own way.
• The equipment suppliers and service providers want to take you to lunch, whereas we want to
maintain our existing relationships which we have built up over the years whilst still investigating new
opportunities.
• The bigger Contractors become more wary and occasionally more intimidating, whereas we want to
continue to grow in a controlled manner by taking on work which we can deliver. This is the best way
of enhancing our reputation.
• The smaller Contractors want to know how we did what we have done. We may grow by acquisition
as well as by organic growth.
• There is a requirement for a higher standard of rigor in areas such as safety management,
accounting, legal, insurance, employee relations etc which adds to overhead costs.

5. Where Is HMP Constructions Headed

Possibly the best way to explain where we are headed in the next 12 months is to simply compare truck
numbers. Before the joint venture, Helvory had the following truck fleet:

4 x Cat 777’s
24 x Cat 785’s
9 x Cat 789’s

The additions to our fleet in the next 12 months for trucks which have already been ordered (and for
some which have already been delivered) will be:

29 x Cat 777’s (an increase of 725 %)

15 x Cat 785’s (an increase of 62 %)
25 x Cat 789’s (an increase of 278 %)
12 x Cat 793’s

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Coupled with the acquisition of related excavators, dozers, graders, water trucks and other support
equipment a total of more than $250 million of capital equipment has been committed so far.

6. Company Capabilities

Overburden Removal - The current HMP loading fleet comprises 5 * 350t excavators, 3 * 250t
excavators and 1 * 180t excavator supported by additional front end loaders and smaller excavators. In
addition, there are 2 * 350t excavators and 4 * 500t excavators to be delivered in the next year.

HMP currently carries out major overburden removal contracts at a number of sites in the Central
Queensland coal fields.

Mine Site Rehabilitation - HMP has successfully completed a number of mine site rehabilitation
projects in the Metalliferous and Coal Mining industries. We were the principal contractor to the
Queensland Department of Mines for the rehabilitation of the Agricola Gold Mine. This work was carried
out in a sensitive environmental area surrounded by a National Park. We have also carried out final
rehabilitation works at the Jibbinbah Arsenic Mine for the Queensland Department of Mines, Temora
Gold Mine in NSW and at a number of coal mines in the Hunter Valley of NSW.

HMP has also carried out rehabilitation work at six different coal mines in Queensland.

Dam / Haul Road Construction - HMP has constructed large earthworks dams and haul roads on
a number of mine sites. Dam construction has been carried out to control water management in
accordance with environmental regulations and licences.

Haul Road construction has involved the opening up of new mine sites and pit areas and the relocation
of exiting roads. HMP has also constructed environmental bunds for the control of visual, noise and
dust pollution and has also been involved in rail line construction.

Coal Mining - HMP has carried out coal mining operations on a number of sites at open cut mines
in Queensland. The HMP operations have maximised coal from different mining areas by utilising
equipment suited to the task. On various sites we have accepted the geological and mining risk
associated with coal recovery and extracted coal and associated overburden on a rate per tonne of coal
recovered.

Tailings Dam Rehabilitation - In association with its mine site rehabilitation contracts, HMP has carried out
the rehabilitation of tailings disposal areas at both coal and metalliferous mines. This work has included
the placement of sized material for capillary break layers, compacted clay capping and armouring layers
for erosion protection. It has also included appropriate reshaping and drainage work such as contour
banks and rock lined waterways to ensure that long term stability of the structure is maintained.

Equipment Hire - HMP is prepared to offer equipment on a wet or dry hire basis to mining and
construction companies. All equipment meets required mine site specifications and is available on an
hourly hire basis subject to minimum weekly usage.

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Machine Guidance Systems - HMP is associated with the development of advanced tracking and
computerised extraction systems through its involvement with Automated Positioning Systems. This
company has developed the ExactaTrak machine guidance system on our sites for use on bulldozers,
excavators, drills and graders.

7. Who Is Mizutani Constructions

Mizutani Constructions is one of the largest civil earthmoving construction companies in Japan. In that
country it has a turnover of approximately $A600 million.

In addition, a further 25% of Mizutani’s work is currently carried out in foreign countries. Preceding its
involvement with Helvory, much of this overseas work was in developing countries and generally as part
of foreign aid programs sponsored by the World Bank.

Works have been carried out in countries such as Ethiopia, Central Africa, India, Iran, Iraq, Indonesia
and Vietnam.

In Japan, Mizutani is primarily engaged in the construction of large scale projects such as dams,
railways, highways and airports. Some of these projects have a construction period of up to 10 years.
Mizutani had no previous experience in mining projects prior to its joint venture with Helvory nor has it
previously operated in Australia.

Mizutani was founded in 1933 with bullock carts and human endeavour being the initial resources used for
road and railway construction. It is still a private company proud of its pioneering spirit and its family history.

Mizutani owns more than 1,500 items of basic heavy machinery which are utilised in a wide range
of projects including dams, roads, airports, electric power, golf courses, apartments, port facilities,
agricultural works, pavement work, water supply, sewage, building construction and the manufacture
and sale of aggregate.

8. Quick Response - The ability to quickly respond to all situations

The following paragraphs are adapted from the Mizutani Company Profile and exhibit the philosophies
of Mizutani and Helvory in relation to HMP Constructions.

“ In this hectic world of rapid changes, it is the aim of HMP Constructions to provide even faster
Quick Responses. What must be done to achieve this aim? It will be necessary, without taking any
easy shortcuts, for the major shareholders (Helvory Contractors and Mizutani Constructions) and
the organisation and its employees to keep enhancing the productivity of the soil, as it were.”

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According to the precepts of the company:

“Helvory and Mizutani are like:

The two wings of a bird,
The two wheels of a cart,
Like fish and water,
They must support each other.”

This precept, created at the founding of the company, expresses the fact that the birds, carts and fishes
teach us how the stakeholders in the organisation should complement each other. Worthwhile work can
only be done with the mutual collaboration of all stakeholders. Therefore all sides of the company have
taken this precept to heart and are honing their capabilities to the utmost so that the company can make
its way forward in these turbulent times.

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