Contract mining offers edge in depressed market

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

This is owing to mines not having access to robust mining systems and processes, experse and the ability to control the enre mining value chain, liming the realisaon of a project's operaonal potenal, asserts Deloie associate director Mahendra Dedasaniya. “There is a direct correlaon between the market size of contract mining and the commodies cycle/prices and investment paerns in capital projects.

Amid current market condions, many mining operaons have started to consider outsourcing part of or all their operaons to the best contractor to achieve the best cost and producvity possible,” Dedasaniya comments. He notes that using contractbased mining services is a strategic, longterm decision and must be integrated into a mining company's business and operaonal 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 compeve edge in the global market, Dedasaniya points out. He illustrates that many mining companies in South Africa, Namibia, Botswana, the Democrac Republic of Congo and Zambia have outsourced their mining operaons, 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 operaonal cost, capital efficiency, flexibility, relaonship and competency, as well as the owner's current status in terms of the age of the fleet, required skills availability, producvity, overhead cost, the type of mining operaons and the mining method employed, Dedasaniya adds.

Contract Criteria

He emphasises that, when considering outsourcing mining services, it is important to weigh the organisaon's opons in terms of the type of contract, selecon of the right contractor and the measurable output requirements while balancing socioeconomic consideraons. The selecon of a contractor should be based on their past safety stascs, alignment with business and corporate strategy, shared values and cultural fit, as well as understanding the potenal risks associated with contract mining and the probability of migang these risks based on actual requirements.

He puts forward that selecng the right business partner, in terms of the type and form of contract, will result in defining balanced commercial terms involving the incenve 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 objecves 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 operaons 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 operaons. 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 selecng contractors that will best meet the requirements of a project and those of a company. These models can be idenfied as full outsourcing or paral outsourcing models, he says, explaining that full outsourcing includes all project needs such as equipment, labour, materials and infrastructure. Paral outsourcing is when the equipment and infrastructure is supplied by the owner, with the contractor supplying labour and, at mes, maintaining equipment.

Disadvantages

Dedasaniya notes that, if outsourced mining is not part of a business's operaonal 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 connuity in knowledge, which ulmately affects the decision-making process. Therefore, should the contract be prematurely terminated, the enre operaons cycle will be disrupted, resulng in revenue loss. He also notes that an inadequately defined scope and responsibility matrix leads to conflict and unhealthy relaons between the pares, affecng the targeted outcome of the outsourcing business case.

Advantages

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

“The mining environment has an influence on many variables, such as ground condions and market condions, which somemes erodes the business case; however, outsourcing provides flexibility and scalability in [a mining company's] model to meet ever-changing producon requirements, resulng in a smooth transion between mining methods such as openpit to underground mining.”

Dedasaniya points out that the effecve use of resources and the deputaon of a subject-maer expert from one operaon to another is also an added advantage. “Outsourcing should emphasise and create bonds and networking in an organisaon to ensure it achieves the best possible producon at the pre-agreed producon cost, while achieving higher capital efficiency and flexibility [at] mining operaons,” concludes Dedasaniya.