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

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 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.

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 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)

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 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

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 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

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 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

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 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.

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 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)

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Deciding what is best for your mine

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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!

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Thank you !