The rapid expansion of the WA mining industry over the past decade has mostly been good news for mining contractors, but the benefits have not always come as expected.
The rapid expansion of the WA mining industry over the past decade has mostly been good news for mining contractors, but the benefits have not always come as expected.
In June 2006, Downer EDI announced what should have been a dream deal.
Its contract mining division, Roche, had entered a long-term alliance with Fortescue Metals Group, which at the time was gearing up to start its first iron ore mine in the Pilbara.
The Pilbara Mining Alliance was given responsibility for everything from mine planning and engineering to site establishment and ongoing production, at both the Cloudbreak and Christmas Creek mines.
The alliance was for an initial five-year period though Fortescue said it envisaged the alliance would continue beyond the initial term.
That changed just 18 months later, when Fortescue terminated the mining alliance, leaving itself in charge of mining at its first development, Cloudbreak. Downer sucked up the pain, as contractors do, and subsequently won several large blasting and crushing contracts with FMG.
The news got better in 2010, when Downer signed a six-year $3 billion contract to provide mining services at Christmas Creek.
That’s life in the contracting world, which can take unexpected turns.
A new mine owner, a new mining strategy or an unexpected market downturn can put a big dent in contractors’ growth plans.
But mostly the news has been good in Western Australia. In just the past year, more than half a dozen contractors have picked up work, mainly from the opening of new iron ore, gold and copper mines.
The big players
After all the changes of the past decade, underground specialist Barminco remains the largest mining contractor in WA, according to WA Business News’ Book of Lists.
A newly created Mining Contractors list puts Barminco at number one, with 1,546 staff and 10 mine sites in WA.
It sits ahead of underground mining rival Byrnecut (see Barminco floats past Byrnecut) and open-cut miners Downer and Macmahon.
The list highlights the underweight position in WA of Leighton Holdings. Through its subsidiaries Thiess, Leighton Contractors and John Holland, it is the largest contract miner in the country and has a growing international portfolio.
Of these companies, only Leighton Contractors has a reasonable market share in WA, where it ranks seventh.
Leighton Contractors is expected to jump higher in the rankings shortly, having been named in May as the preferred contractor on FMG’s third big mine – the Solomon project.
Leighton said it expected to sign the final contract this month. This would be a blow for its Leighton Holdings’ stablemate, Thiess.
Last September, Thiess won a $100 million mine development contract at Solomon. At the time, Thiess described the 18-month contract as a “welcome return to the west” for its mining business.
The company also said the contract made it “well positioned to bid for further works on the mine development and the main services contract”.
However, Leighton Contractors appears to have won the main mining contract.
Thiess also seems to be missing out on the mine development work, with NRW winning a $70 million ‘early mining services’ contract this month, as well as a contract for the Solomon rail spur.
The mining contractors list also highlights the dominance of Perth-based contractors in the WA market.
BGC Contracting, NRW, MACA and Australian Contract Mining all have a significant market share, followed by indigenous contractors Ngarda Civil & Mining and Carey Mining (see Carey Mining takes on power).
The big contractors also have a significant interstate and, in some cases, international portfolio of work.
One competitor moving in the opposite direction is Brisbane-based Watpac Civil & Mining, which won its first big contract in WA two years ago.
The five-year, $290 million contract was with BC Iron at the Nullagine iron ore mine.
Watpac added to its WA portfolio last year when it won a five-year $200 million contract with gold miner Ramelius Resources.
New contracts
One measure of success in contract mining is to look at who has won, and lost, contracts.
Assuming Leighton Contractors finalises its contract with FMG at Solomon, that is likely to be the biggest win of the year.
A second big contract win this year went to Downer, which was awarded a six-year contract for the Karara magnetite mine in the Mid West.
Downer said it anticipated total revenue of $570 million from the contract, which is based on a mining rate of 30 million tonnes per annum.
That will enable Karara – jointly owned by Gindalbie Metals and China’s Ansteel – to meet its stage one production target of 8mtpa of magnetite concentrate.
Downer will be required to invest $92 million in new mine infrastructure and is expected to employ about 120 people.
The magnetite agreement followed the awarding last year of a smaller four-year contract to Brierty for Karara’s hematite mining operation.
Looking back to 2011, the largest contract was awarded to Macmahon, for AngloGold Ashanti’s Tropicana gold project.
The 10-year contract is expected to be worth $900 million and employ up to 250 people.
Macmahon will need to invest $130 million in new equipment for the project, including large hydraulic excavators and a fleet of 240-tonne capacity trucks.
Mining operations are due to start next month, with production expected to peak at 60mtpa of ore and waste.
As well as winning Tropicana, Macmahon started work this year on its first project in Mongolia, the Tavan Tolgoi coal development.
MACA added to its portfolio this week, with the awarding of three related contracts at Atlas Iron’s Mt Dove iron ore project. The civil construction, mining and crushing contracts have a combined value of $66 million.
MACA won two larger contracts in WA last year – at GEM Diamonds’ Ellendale mine and Regis Resources’ Garden Well gold mine.
It also won its first interstate contract, for mining and crushing at OneSteel’s Peculiar Knob iron ore project in South Australia.
The result of the contract wins was record revenue of $142 million for the half-year to December 2011 and a record order book of $1.4 billion.
BGC Contracting has also had success in South Australia, winning a five-year contract with OneSteel at the South Middleback Ranges iron ore mine.
That project is due to start in November and adds to three iron ore mining projects held by BGC in WA.
Owner-operators
The Roche example discussed above illustrated how contractors can lose work when mining companies decide to become owner-operators.
Barminco, BGC Contracting and Leighton Contractors met the same fate last year.
In two of those cases, the change occurred after the mine changed hands; in the third, it followed a change of strategy.
The biggest shift to owner-operator was BHP Billiton’s takeover of its Area C, Yandi and Orebody 23/25 operations in the Pilbara, which accounted for about 70 per cent of its iron ore output in the state.
BHP Billiton said the move to owner-operator was designed to remove a layer of complexity and costs from its business. The change also followed controversy over a series of deaths at BHP Billiton-owned mine sites.
It executed this strategy by buying the HWE Mining business for about $700 million in August last year.
In fact, BHP Billiton acquired a package – the mining equipment, the 2,500 people and the related assets that serviced the mines.
The sale took a big chunk of work – about $1.1 billion of annual revenue – out of HWE parent Leighton Holdings.
BHP Billiton has not commented on the impact of its owner-operator strategy on its remaining contractors – Macmahon at Orebody 18 and Wheelarra, and Ngarda at Yarrie
Northern Star Resources, whose managing director, Bill Beament, is a former Barminco operations manager, moved to owner-operator at the Paulsens gold mine after Barminco’s contract expired in April.
Similarly, Mt Gibson Iron moved to owner-operator at its Koolan Island iron ore mine after BGC’s contract expired.
Mt Gibson acknowledged at the outset the transition would temporarily affect production but expected this would be outweighed by longer-term cost and productivity benefits.
The main challenge for Mt Gibson was the commencement of 240 new employees. It also bought some new equipment, though it already owned most of the mining fleet at Koolan Island.
Managing director Jim Beyer, who joined Mt Gibson after the changeover, said contractors helped to get new developments up and running.
“They are usually quicker at mobilising to site,” he said.
For established projects, Mr Beyer said a key factor was the quality of the people running the mine. “The critical factor for me is understanding who the site management is,” he said.
Western Areas managing director Dan Lougher shared this view. Western Areas has contracted Barminco to run its Flying Fox and Spotted Quoll Mines but Mr Lougher emphasised that the company retained close oversight of its contractors and was even involved in the selection of foremen and other key contractor positions.
Mr Lougher said the use of contractors allowed Western Areas to focus on its exploration and mine development activities.
“My experience is that it is difficult to keep focus on both production and capital development under the owner-operator scenario,” he said.
“Therefore it is quite common for mines to have contractors running the development schedule whilst production is handled by the owners.”
Another advantage of contracting is that Barminco is responsible for acquiring and maintaining its equipment.
In contrast, owner-miners have to buy and maintain their own equipment or lease it from a manufacturer like Caterpillar or Atlas Copco.
Mr Lougher said the use of contractors like Barminco and haulage firm Bis Industries simplified head office functions like HR. Western Areas has about 140 staff while its contractors have a further 360 people.
He said Western Areas might be tempted to be an owner-miner if its mine sites were close to a large centre like Kalgoorlie, which would allow it to have a residential workforce.
However, with a fly-in, fly-out workforce, he preferred to leave the task to contractors.
