Industry Discussion

Will the Mining Contract Sector Change With the Decision by BHP to Acquire HWE?

Since the early establishment of mining contracting operations around Australia we have seen a multibillion dollar industry grow and contract with the various economic upturns and downturns over the last twenty or so years. Today, there are still a significant number of mining contractors offering a variety of services; however there is some discussion that with the BHP Billiton Iron Ore's recent purchase of HWE, that this will trend will decline.

The head of Leighton Holdings announced that they had signed a Heads of Agreement for the Sale of HWE Iron Ore to BHP Billiton Iron Ore in WA. The move back to owner operator model by BHPB Iron Ore is well known and the sale of the HWE assets means that this can happen smoothly for both the contractor and the owner. The sale is estimated to be around A$705million.

BHPB Iron Ore first established contract mining in its Yandi mine with a view that it would save cost and improve efficiencies. However, today their Iron Ore President believes this will move away a layer of complexity and cost from the business. Only time will tell, but at least this model makes a smooth transition back to owner miner possible.

This may be the start of further changes to mining contractor operations. What is clear is that this sector will continue to have plenty of work overseas where contracting mining services are still highly sought after.

Getting the Contracting Terms Right

A significant proportion of mining business is done under contract so getting the terms right is key to establishing fair and reasonable contracting operations. Contracts vary in type and structure but there are varying complexities found in most contracts. Attention to detail is very important and may save the companies millions. Most contracts have mistakes or faults but some have more than others. Clear contracts go a long way to ensuring that the terms will survive. Where they can be administered more easily and therefore go the distance. Better terms and conditions benefit all parties.

General Observations to Managing Mining Contracts

• No two mining operations are the same;
• No two management teams are the same and have different agendas;
• Ore reserves and mine plans are only at best a reasonable estimate;
• Knowledge of mining condition is usually limited;
• Scopes of work and specifications are usually a "snap shot" in time;
• Risk assessment is made very difficult by the above;
• Having robust Contract Management Systems help minimize the exposure and risk in mining operations.

Tips for Understanding the Contract Requirements

• Develop appropriate administration procedures;
• Undertake regular risk assessments;
• Develop Contract Management Plans;
• Planning - understanding key drivers and processes;
• Establish appropriate contract review meetings;
• Undertake periodic reviews of contract procedures and site practices to see what has changed or needs to change; and
• Audit management plans and contract compliance.

Managing Risks That Are Directly Related to Mining Contracts

The key risks to Mining Contractors include:

• Maintenance of site infrastructure;
• Poor contract structure;
• Lack of commitment by contractor;
• Care of company provided equipment;
• Poor maintenance standard generally;
• Control and limitation of company provided items; and
• Ineffective contract management processes; etc.

Why do Mining Contractors Operate?

Mining Contractors believe they can:

• Make a profit;
• Satisfy the site contractual obligations;
• Become more efficient with the passing of time;
• By concentrating on the "core business" can deliver production more cheaply than an owner;
• That they can discharge their obligations under the contract etc.

Why do Owners Employ Contractors?

In undertaking a mining contract the Mining Contractors minimise an owners risk by:

• Accepting "transferred risks";
• Limiting the owner's capital expenditure by providing plant and equipment;
• Limiting the owner's operational expenditure by providing aspects/or all of the site infrastructure;
• Absorbing maintenance requirements;
• Limit owner's income risks by locking in a delivery of ore (quantity and quality) over a period of time at an agreed price.

The Undefined Risks to Mining Contractors

• Changes in product and/or product requirements;
• Changes in ownership - either Owner or Contractor;
• Politics - state agreements etc;
• Union/workforce activities;
• Inflation;
• Unforeseen consequences arising from risk transfer;
• Poorly defined scope of work and specifications;
• Poorly designed contracts;
• Economic pressures on the parties; etc