Contract mining offers edge in depressed market

There is a direct correlation between the market size of contract mining and the commodities cycle/prices and investment patterns in capital projects Historically, mining was a highly protected industry and had a low propensity for outsourcing, but more operations are being outsourced across Africa, says global consultant and adviser Deloitte.

This is owing to mines not having access to robust mining systems and processes, expertise and the ability to control the entire mining value chain, limiting the realisation of a project’s operational potential, asserts Deloitte associate director Mahendra Dedasaniya. “There is a direct correlation between the market size of contract mining and the commodities cycle/prices and investment patterns in capital projects.

Amid current market conditions, many mining operations have started to consider outsourcing part of or all their operations to the best contractor to achieve the best cost and productivity possible,” Dedasaniya comments. He notes that using contract-based mining services is a strategic, long-term decision and must be integrated into a mining company’s business and operational strategy to achieve the best possible outcome.

Contract mining is used not only to implement rapid strategic change but also to assist in providing a competitive edge in the global market, Dedasaniya points out. He illustrates that many mining companies in South Africa, Namibia, Botswana, the Democratic Republic of Congo and Zambia have outsourced their mining operations, such as Kimberley Diamonds, Kalagadi Manganese and Langer Heinrich, as well as the zinc mines of Black Mountain.
The decision to outsource is normally based on operational cost, capital efficiency, flexibility, relationship and competency, as well as the owner’s current status in terms of the age of the fleet, required skills availability, productivity, overhead cost, the type of mining operations and the mining method employed, Dedasaniya adds.

Contract Criteria
He emphasises that, when considering outsourcing mining services, it is important to weigh the organisation’s options in terms of the type of contract, selection of the right contractor and the measurable output requirements while balancing socioeconomic considerations. The selection of a contractor should be based on their past safety statistics, alignment with business and corporate strategy, shared values and cultural fit, as well as understanding the potential risks associated with contract mining and the probability of mitigating these risks based on actual requirements.

He puts forward that selecting the right business partner, in terms of the type and form of contract, will result in defining balanced commercial terms involving the incentive of shared benefits between owner and contractor and flexibility with regard to changing the contract scope. In terms of output control, Dedasaniya says defining the mining company’s objectives and goals in terms of outsourcing plays an important role in ensuring that the contractor will be able to perform accordingly. He notes that by defining the dependencies that other operations could have on a contractor’s performance and how to reduce this reliance when output is at risk, will also assist in preparing recovery plans. “Once you enter into a contract, it’s very difficult to exit without disturbing operations. It is, therefore, of great importance to chose the right business partner who shares a company’s values and envisions the same end goal,” he declares.

Outsource Models
Dedasaniya asserts that there are various models available when selecting contractors that will best meet the requirements of a project and those of a company. These models can be identified as full outsourcing or partial outsourcing models, he says, explaining that full outsourcing includes all project needs such as equipment, labour, materials and infrastructure. Partial outsourcing is when the equipment and infrastructure is supplied by the owner, with the contractor supplying labour and, at times, maintaining equipment.

Dedasaniya notes that, if outsourced mining is not part of a business’s operational plans, it could result in the cost of mining being higher by as much as 15% to 20%, adding that there could also be a loss of intellectual property since there is no continuity in knowledge, which ultimately affects the decision-making process. Therefore, should the contract be prematurely terminated, the entire operations cycle will be disrupted, resulting in revenue loss. He also notes that an inadequately defined scope and responsibility matrix leads to conflict and unhealthy relations between the parties, affecting the targeted outcome of the outsourcing business case.

Dedasaniya highlights that, when contract criteria are met and the best model has been selected for an operation, outsourcing has many advantages, such as the achievement of production targets within budget and on schedule. Additionally, he says contracts can also be structured to allow for operational costs to be converted from fixed costs into variable costs during times of low production volumes, reducing the risk of negative profit margins.

“The mining environment has an influence on many variables, such as ground conditions and market conditions, which sometimes erodes the business case; however, outsourcing provides flexibility and scalability in [a mining company’s] model to meet ever-changing production requirements, resulting in a smooth transition between mining methods such as openpit to underground mining.” Dedasaniya points out that the effective use of resources and the deputation of a subject-matter expert from one operation to another is also an added advantage. “Outsourcing should emphasise and create bonds and networking in an organisation to ensure it achieves the best possible production at the pre-agreed production cost, while achieving higher capital efficiency and flexibility [at] mining operations,” concludes Dedasaniya.


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