The industry that supports operations and new projects is suffering a rapid decline in the currently severely curtailed capital investment environment. This is evidenced by a decline in the number of skilled teams, who are now centred in fewer locations. Other features are an aging and retiring ‘Baby Boomer’ generation, coupled with a low uptake of new graduates and the uncertainty in predicting future capital expenditure programs and requirements. Combine this with a reluctance of cash-poor operations to modernise and adapt in an environment of low metal prices, and there is a real uncertainty in how service providers will meet industry needs as they evolve.
This paper looks at trends amongst service providers to meet these evolving industry needs as well as developing options and alternatives. These embrace a whole gamut of agile alternatives in the areas of partnering, alliances, commercial and shared risk models and mutual innovations. So, let’s review a couple of these suggested alternatives, supported by ‘real life’ case studies.
The broader METS (mining equipment technology and services) industry has grown since the early 2000s in response to the demand from the industry and is a significant employer and economic contributor in its own right. The METS subsector dealing with metallurgical technology development, process plant upgrades and new projects, had grown at a real pace and likely peaked in 2012. It is now in serious decline and losing capacity, capability and confidence. There are a number of reasons for the decline and they include:
- the well-documented and recognised step change in metal prices since 2013 from previous buoyant levels (Fiscor, 2015)
- the ‘hangover’ psychology from the project excesses, in terms of bloated capital cost compared to expectations, delayed deliveries and fierce project competition for scarce engineering and construction resources
- the generational change occurring as the ‘Baby Boomers’ move on from active project involvement
- the severe contraction in the skill level and number of teams now available for projects (Federation University Australia, 2014).
So the challenge is how to provide the level of service demanded by our industry in a sustainable and competent manner.
Drivers in the new environment
The industry itself – and the associated METS area – are acutely aware of how the industry has changed since 2012. The previous extraordinary emphasis on capital expenditure (and operating cost ill-discipline) in the drive to maximise production and capacity in the buoyant price environment has been very rapidly replaced by a completely new discipline and ethos. This is where capital expenditure is very constrained and mainly focussed on essential health, safety, environment and community (HSEC) drivers and often only where there can be a very rapid return on expenditure.
Many areas of previous outsourcing and use of contractors have now been returned to owner involvement as this is perceived (often correctly) as adding value and promoting increased owner awareness of operations and options.
The new environment is characterised by the following drivers:
- A complete change in focus from production and tonnage maximisation to capital and operating cost discipline (Clarke, 2015).
- An acute bottom-down driven capital expenditure discipline and budget.
- A fundamental review of operating practices and expenditure on operating costs.
- Changed philosophies towards outsourcing and service provider models.
- Changed perceptions by financiers and investors on the sector’s prospects, relative attractiveness, future profitability and drivers. This has totally changed the environment for the industry at all levels.
- The owner/operator view that the extraordinary demands up to 2012 for services had resulted in bloated costs (and charges) from the METS sector and poor performance in terms of productivity, relative international costs and project efficiency.
- Competition for resources (particularly in engineering, project management and construction resourcing) was a particular factor with coincident buoyant commodity pricing in energy and the ‘once in a generation’ establishment of the huge regional LNG projects in WA, Queensland, NT and PNG.
- Commercial discipline was viewed by many owner/operator organisations as having been compromised during the ‘boom’ and needed to be ‘normalised’.
- Many services organisations had expanded laterally, usually in response to client demand, into extra services outside their traditional core business.
The brownfield focus
‘Brownfields’ have become the main area of focus, with the aim of minimising operating costs and particular emphasis on ‘de-bottlenecking’ and ‘incremental efficiencies’. There are a number of specific features of such brownfields projects including the requirement for very close cooperation between the execution team, operators, maintenance and suppliers and a maximum usage of site resources and ingenuity. Often, required investment hurdle rates are high, downtime allowed is minimal and site resources usage is maximised. This requires mutual trust, good planning and high HSEC standards and practice. In many ways the practices and skills needed are the exact opposite of the historical ‘big greenfields’ project with which the industry has been geared for more recently.
Innovative commercial models
Another developing area has been with innovative commercial models and practices. These have been a direct result of the more challenging investment criteria being adopted and the relative hunger of service providers. It has become more common to look at these commercial/costing alternatives very early in the project cycle as an essential project tool and not just as a possible option. These commercial solutions cover such alternatives as leasing and rental, deferred payments, build-own-operate-transfer (BOOT) and build-own-operate (BOO), whole-of-mine preferred spares and maintenance terms, and aggressive performance targets with real assurance penalties. Once again this requires very close mutual dealings and trust, and sufficient time allocation compared to a conventional approach.
We will now discuss some indicative examples of recent projects. We acknowledge that there are a large number of competing models, companies and service providers in our industry who energetically compete and this is very healthy. The project developer faces the task of deciding how best to do his project and with whom.
As a global supplier of equipment, industry solutions and services, and a developer of new technology and techniques, Outotec itself adapts with its customers and for specific applications the preferred execution models, partners and commercial model. There is no ideal single solution. We acknowledge that there are very competent competitors and alternatives, ensuring owners have good choice with their projects.
The opinions expressed on these selected examples are those of the authors and are intended to generate ideas on project improvement and how the optimal execution strategy can be selected.
1. Hybrid model
Carmen Copper (CCC) is a copper concentrator situated on Cebu Island in the Philippines. The concentrator was originally commissioned in 1955, and operated until 1994, when low copper prices forced the mine to cease production. The mine was rehabilitated in 2007 and brought back into production at a rate of 40 000 t/d, as outlined by Morgan et al (2014). The decision was then made to increase the production from 40 000 t/d to 60 000 t/d. The decision was also made to utilise existing installed equipment as far as possible to reduce costs.
The client wanted a world class project, with modern process controls, utilising in-house capacity for construction, and low-cost detailed engineering. This resulted in a hybrid model being utilised for the project:
- metallurgical testwork program designed and managed by CCC
- Outotec contracted to carry out the detailed design, including a 3D model of the plant
- a local Philippine company contracted by CCC to do the detailed engineering
- Outotec supplied and installed all the proprietary equipment
- CCC procured all non Outotec proprietary equipment
- construction carried out and managed by CCC
- Outotec provided expert advice including construction where requested
- CCC managed the commissioning supported by vendors and expert advice from Outotec when required.
CCC selected the above contractual model to fast track the project compared to the standard engineering, procurement and construction (EPC)/engineering, procurement and construction management (EPCM) model. This enabled early works to be carried out by utilising existing labour structures, circumventing the usual mobilisation phase of traditional projects. The project was designed, constructed, and commissioned in 20 months from receipt of a letter of intent. This was an excellent result considering that the base starting document was a pre-feasibility study, compared to the standard practice of first doing a definitive feasibility study as a minimum.
2. Owner project team
Masan Resources (MR) in Vietnam has developed the Nui Phao polymetallic project some 70 km north-west of Hanoi and this is a large modern project producing a large range of tungsten products, chemical grade fluorspar, bismuth metal and copper/gold as a concentrate (Masan Resources, 2016). The process plant is specific and complex involving many process steps and unique metallurgically (Morgan, 2016).
Establishment of the project emphasised local capability with western (Australia/India) engineering, along with procurement and construction by the owner. For the ramp-up/debottlenecking/process optimisation phase, MR chose to use a model of a strong plant site metallurgical team, supported by a specialist engineering owner’s team in Australia. Emphasis was put on partnering with OEMs/service providers and maximising the use of in-country construction capability. Projects are fast-tracked, fit-for-purpose and aggressively managed to align operations, plant improvement, OEMs and technology suppliers and the in-house team. This has enabled stepwise and regular improvements in plant performance at appropriate cost and tight capital control. A similar approach has worked very well recently at the Didipio project in Luzon, Philippines, operated by OceanaGold (Walker, 2013).
3. Build-own-operate model
Outotec has recently delivered a total system solution for a client in Australia to meet their underground mine backfill and operational needs (Suvio et al, 2016). The contract included an extensive backfill testwork program, backfill plant and underground piping EPC, system commissioning, complete mine backfill system operation and maintenance. This represents a classic build-own-operate contract.
This new contract contains a higher level of backfill engineering and expertise and provides the customer with unique expertise in state-of-the-art mine backfill engineering and plant operation. The major customer advantage is a lower-cost operation, operated entirely by Outotec and providing the customer with lower risk to their mining operations throughout the life of mine.
This type of contract represents the ‘ultimate process guarantee’ as the contractor carries the full financial, performance, operating, and maintenance risk providing an over the fence service to the client.
Looking to the future, we need to make some assumptions before venturing into this crystal ball space. We have assumed a time period of three to four years, with the industry capital activity relatively restrained as it is at present. Whilst this is hopefully a pessimistic view, we believe it is prudent and consistent with many of the industry commentators and the predictions made below. The keynote paper to be given at the Mill Operators conference details many more predictions; we present just a couple of those predictions below:
- there will be more contractual/commercial disputes than hitherto
- the EPC model will continue to be more attractive than the reimbursable EPCM method
- alliancing in all its forms will be a growing trend
- dedicated owner teams for projects will be more widely recognised as vital in terms of project success, necessity and continuity.
Alternatively, if there is an appreciable recovery in metals prices and market demand, we would expect that many of the recent excesses and problems that emerged in 2008 to 2013 will be repeated or even exaggerated. The capacity of the industry for projects, from a skills and coordination viewpoint, will be much reduced due to recent events. One could foresee a need for strong self-discipline and clear thinking to avoid past issues.
Stay up-to-date with all the latest news and analysis by joining minerals industry professionals in the AusIMM LinkedIn community.