Contract Mining: What’s your Style?

There are many scenarios that might result in a mine owner looking for assistance from a contract miner.  Choosing the right contracting strategy can be something of a mine-field (see what I did there?), depending not only upon the project objectives the mine owner is trying to achieve. But also a mix of other considerations such as: operating experience; in house capability (or “bench strength”); resources (people and equipment); attitude to risk; geographic location; and financial capacity – to name just a few.  Often the timing around engagement of a mining contractor is a critical consideration as well.

The options around contract styles are virtually endless, although generally fall into one of two types:  “hard dollar” – where the fee is fixed in advance for a particular service or  “relationship” contracting – where the pricing principles are agreed (based upon an agreed allocation of risk) and the fee then depends upon the work undertaken.

In contract mining world, typical examples of “hard dollar” contracts include:

  • Schedule of Rates, with different rates for different materials. This is a straight forward procurement option where the scope (usually the mine plan or part thereof) is more-or-less fixed for the duration of the works;
  • Rise & Run matrix – an extension of the Schedule of Rates pricing mechanism, whereby the contractor prices material movement by vertical elevation (“rise”) and horizontal distance (“run”). This mechanism provides for some scope flexibility, although can be a difficult option for a contractor to price efficiently, as different combinations of rise and run may require differing numbers of trucks.  The question then arises as to how many trucks should the contractor provide, and how well utilised will they be?
  • Single rate for coal (or ore) – e.g. a $/tonne, paid only on coal (ore). This is similar to a “Schedule of Rates” approach, with a different allocation of risk.  Under this pricing mechanism, the mine owner is asking the contractor to take the risk on the strip ratio (ratio of waste : ore).  Where beneficiation might be involved, such as with a Coal Handling and Preparation Plant, the contract might specify payment only on product tonnes – now the owner is asking the contractor to take risk on yield (feed tonnes : product tonnes) as well as strip ratio.

Relationship contracting can also take many forms, from simple “cost plus”, through to cost-plus-sliding-scale margins (based on a set of Key Performance Indicators, or KPIs), through to full Alliancing.

Relationship-style contracts include an element of risk sharing, and may be better suited where there is some uncertainty regarding the scope.  To ensure these type of contracts get off on the right foot, it is vitally important that the parties work together to agree on the allocation of risk, the base data (such as mine design criteria), and the principals and/or methodology used to determine the price.  That way there are no surprises when it comes time to review and agree the “open book” budget.

Whichever the style, being able to articulate the project objectives and timing are critical to a successful contracting strategy.  To arrive at the best outcome for both parties, the procurement exercise should allow sufficient time for contractor to fully inform themselves and price the works as precisely as possible – this will provide the best outcome for both parties and (hopefully!) result in a “win-win”.

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