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Choosing Between Owner and Contract Mining .Or Is There A Happy Medium?

This document discusses the factors to consider when choosing between owner mining and contract mining. It outlines the key pros and cons of each approach, and also presents an alternative strategy called an ICU (integrated cost unit) contract that aims to provide a happy medium. The document emphasizes that the best strategy depends on the unique characteristics of each individual mine. It proposes a two-pronged approach to deciding what is best, involving a decision matrix questionnaire and developing cost/revenue models to rank owner, contract, and ICU options based on net present value over the life of the mine.

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emmanuel
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99 views12 pages

Choosing Between Owner and Contract Mining .Or Is There A Happy Medium?

This document discusses the factors to consider when choosing between owner mining and contract mining. It outlines the key pros and cons of each approach, and also presents an alternative strategy called an ICU (integrated cost unit) contract that aims to provide a happy medium. The document emphasizes that the best strategy depends on the unique characteristics of each individual mine. It proposes a two-pronged approach to deciding what is best, involving a decision matrix questionnaire and developing cost/revenue models to rank owner, contract, and ICU options based on net present value over the life of the mine.

Uploaded by

emmanuel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 12

Choosing between owner and contract

mining…….or is there a happy medium?


Format of Presentation

 Factors influencing the choice between owner and


contract mining
 The pros and cons of contract mining
 The pros and cons of owner mining
 An alternative strategy?
 Deciding what is best for your mine

2
Defining the Terms

 Whilst most mining operations involve a mix of in-


house and outsourced functions, the control of the
mining process per se, is what distinguishes an
Owner mined from a Contract mined operation.
 Control of the mining process vests with the party
owning (or leasing) the mining equipment.

3
Factors influencing the
implementation strategy
 Corporate
• Competitive advantage / core business
• Cost, source, and required return on capital
• Tax incentives
• Outlook for commodity
• Strong personalities
 Operational
• Life of Mine
• Nature of ore body (selective or bulk mining)
• Need for operational flexibility
• Availability of resources (personnel and equipment)

4
Factors influencing the
implementation strategy
 Cost
• What proportion of the total cost of the mine is attributable
to physical mining?
• Is the question of cost critical to the viability of the project,
superseding quality and production considerations?
• What cost premium (if any) is justifiable when considering
contract mining?
 Risk
• Reliability of ore body model and ore grade projections
• Geotechnical stability
• Environmental and social issues (eg. tsunami and uranium)
• Vagaries of the market and reliability of revenue projections

5
Contract Mining : Pros and Cons
 Advantages
• Rapid deployment of skilled personnel and modern equipment from a
large resource pool – ability to respond to change
• Cost efficiency and effective performance management (core business
focus and reward systems)
• Able to secure better commercial terms for equipment
• Competitive bidding process should yield value

 Disadvantages
• Contractors do not typically own specialised equipment (drag lines)
• Driven by quantity rather than quality (NB contract terms)
• Possibility of costly and protracted disputes (NB contract terms)
• Scope change and resultant change orders are often very costly
• Rates include provision for perceived risk (NB contract terms)
• Efficiency savings primarily accrue to contractor

6
Owner Mining : Pros and Cons
 Advantages
• Direct control over mining process – owners priorities receive
precedence
• Contractor’s risk premiums and profit margins eliminated from costs
• Risk of litigation removed
• Risk of cost increases due to change orders is eliminated
• Direct control of health and safety
• Creation of permanent employment opportunities

 Disadvantages
• Ties up capital which could be put to better use
• Dilutes focus on core business functions
• Unavoidable limit on skills and equipment resources which can
realistically be acquired by owner (lack of versatility)
• Likely increase in labour disputes and industrial action

7
ICU - the happy medium?
 ICU – cost efficient and flexible risk management contract
methodology (FIDIC or NEC3)
 Contractor’s risk is limited to provision of resources which
comply to performance and availability specifications : reduced
risk = (much) lower cost.
 Contractual flexibility easily accommodates changes in scope,
nature, sequence, and tempo of the works without the need for
variation orders, and without the risk of contractual claims.
 Owner retains control of resources (and therefore the mining
process) without having to recruit, replace, own, operate,
maintain, or insure them.

8
Deciding what is best for your mine
 First principle – mines are unique, so implementation
strategies will necessarily differ from mine to mine
(as opposed to from mining house to mining house -
avoid preconceived solutions)
 Case study – two pronged approach
• Decision matrix (questionnaire)
 Questions with ratings and weightings
 Questions/statements have a distinct and constant bias
• Ranking Model
 Develop cost and revenue model for contract mining option,
owner mining option, and ICU approach for life of mine.
 Rank strategies according to time based NPV (or IRR)

9
Deciding what is best for your mine

10
and if the decision is to contract
mine…..

….the quality of your


contract document
can cost or save you a
fortune – the choice is
yours!

11
Thank you !

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