SEMINAR ON “NSC RECOMMENDATIONS ON

CONTRCTUAL MINING”

ON DATED 3rd November, 2012

ORGANISED BY KUTCH LOCAL CENTRE OF MEAI,

AHMEDABAD CHAPTER.

Choosing between owner and contract mining…….

or is there a happy medium?

By : Parimal Naik, Lignite Project, Tadkeshwar

Presentation Content:

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

Definitions:• Owner Mining: It is where management, control, supervision and all the activities related to mining operations such as production, safety, environmental and other legal or statutory obligations are carried out by the owner/ corporate.

• Contract Mining: It is whereControl of the mining process vests with the party owning (or leasing) the mining equipment on the whole or sometimes a part thereof.

Factors influencing the implementation strategyCorporate:

• Competitive advantage / core business• Cost, source, and required return on capital• Tax incentives• Economic Outlook for commodity/ mineral product.• Strong personalities

Operational:• Life of Mine• Nature of ore body (selective or bulk mining)• Need for operational flexibility• Availability of resources (personnel and equipment)

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

Contract Mining : Pros and ConsAdvantages:

• 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 specialized equipment.• Driven by quantity rather than quality.• Possibility of costly and protracted disputes .• Scope change and resultant change orders are often very costly• Rates include provision for perceived risk .• Efficiency savings primarily accrue to contractor.

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.

What is the happy medium?

§ A cost efficient and flexible risk management contract methodology where:

§ 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.

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 a flexible approach for the life of mine. § Rank strategies according to time based NPV .

Deciding what is best for your mine

and if the decision is to contract mine…..

….the quality of yourcontract documentcan cost or save you afortune – the choice isyours!

THANK YOU.