Commodity price pressure and a volatile macro environment in a number of sectors have prompted a wave of cost-cutting across the mining industry, putting pressure on contract mining.

Raising equity and placing shares in the market has proved more difficult in recent years among juniors with small operations, the likes of which are most likely to outsource mining services.

However, this trend has also increased competition among contractors, creating some bargains for top talent and a higher availability of skills.

Over the last decade there has been a move to outsource more services like drill and blast and even equipment maintenance.

Eventually, this can lead to the industry becoming deskilled in these areas.

To get more insight on what factors should be weighed in the decision between owner and contractor mining, MiningNewsPremium spoke with AMC Consultants global head of business improvement Bruce Gregory.

Gregory advises a “horses for courses” approach, saying there’s no particular reason why an operator has to mine differently under contractor or owner operator models.

The economics often come out quite similar after testing cost models, leaving the main difference as the profit margin for either party.

“I’ve done a number of these analyses of owner mining versus contractor mining and what it tends to be is that there are all these softer aspects like risk and corporate philosophy,” he said.

“You can probably operate any mine in either way – owner mining or contract mining – but you’ve got to take into account all the factors.

“For a start, do you have the expertise to be a miner? Will you be able to attract the right people in the timeframe that you need them?

“What I’ve found is, even in the same operation, whether its owner mining or contract mining, it can work out quite well if you’ve got the right people.”

Company vision is also a major deciding point.

Miners with multiple operations or ambitions to expand could benefit from developing teams on their own and transferring them between sites.

Smaller, single-mine operators are unlikely to have this perspective of developing career paths but exceptions are everywhere.

Gregory illustrated this with BHP Billiton’s massive cutting of contractor work over recent years compared to AngloGold Ashanti’s strategy to keep most of its operations on a contractor basis.

“It comes down a little bit to corporate philosophy, what does the owner want,” he said.

“Do they want to become miners or do they want to focus on exploring, processing and other things?”

Gregory logically advises an initial cost estimate between the two options but is quick to point out that this is not the only consideration.

Nor is it easy to calculate.

When weighing the pros and cons of contract mining from a cost perspective, a million case-specific factors are likely to come into play.

Contractors or owners might have cost advantages in global purchasing agreements with equipment suppliers, good deals with fuel or explosives suppliers as well as incentives from the local government that may not be available to one or the other.

More subtle cost factors could include the likeliness of contract miners to work longer, more difficult rosters than owner miners, duplication in management costs under a contractor scheme, union issues overseas or determining which party would receive the greater financial benefit from efficiencies that are generated down the track through changes in the mine plan.

The balancing act at this point becomes highly complex, involving a web of technical, human, commercial and litigation risks.

And this can become exasperated when mine ownership is organised under a joint venture.

Gregory offered an anecdote on a conflict in a JV’s philosophy wherein one partner aimed to oust the other over a disagreement about whether the mine should be owner mined or contract mined.

While negotiations via an external third party may help resolve these kinds of situations, Gregory contends the best practice is preparation, particularly in a well written contract.

He observed a decrease in disputes over the past 15 years or so, noting the benefit of the different styles of contracts that are available, such as alliance contracts, partnerships and open-book cost plus type contracts that can be designed to spread the risk around.

Effective contract drafting is also essential to unlocking one of contractors’ greatest advantages: flexibility.

“A lot of errors are made in drafting contracts,” he said.

“Quite often people start off with contracts and find halfway through that they wish they’d done it a different way.

“You have to write the contract such that you can vary.

“If you draft a contract that’s all fixed and you’ve got fixed costs in it or your mining rate is fixed in the contract, that’s not going to help you.”