Contract mining: An attractive and economical alternative to owner operations

W Joseph Schlitt, Donald B. Swanson, and Don S. McCoy

Introduction
Contract miners have long played an important role in the minerals industry. Historically, these were individuals who worked as underground miners and were paid by the ton or the day. These hardy types still ply their trade in the industry. However, today the term contract miner generally refers to an independent contractor who supplies the people and equipment needed to conduct surface mining operations for an owner or lease holder. At one time or another, contract miners have probably handled virtually every mineral commodity from sand, gravel, and stone quarrying to mining uranium and precious metal ores. In todays market, though, contract mining appears to be concentrated in just a few areas. These include precious metal mines, various types of solid fuel operations, and reclamation of abandoned mines. This article covers market areas, contract mining organizations and services, and their advantages and disadvantages.

Drilling operations pit gold mine.

at a California

open

Gold and silver mines

Although exact figures are not available, contract mining represents a significant element in the precious metals segment of US mining. For gold and silver, the growth in contract mining appears to be paralleling the overall growth in mining activity itself. Nevada is the largest gold producer in the US. The latest available data (1985) on dpen pit gold/ silver mines is summarized in Table 1 (Nevada Division of Mine Inspection, 1986). These figures show that contractors mined nearly half of the ore in 1985. Total tonnage mined, of course, was much higher for both owners and contractors.

Assuming an average stripping ratio of 2.5 to 1, the total daily mining rate for the contractors was more than 145 kt (160,000 st). This translates into a contract mining rate of about 36 Mt/a (40 million stpy) based on 250 operating days a year. This approximate 50-50 split between owner and contractor also appears to hold for the future. Metals Economics Group (1987) published a survey of 51 shortrange and 54 long-range precious metal projects being considered throughout the US. Contacts with owners, requests for proposals, and past corporate philosophies all suggest that about 5570 of the

open pit operations scheduled for the near-term will be contract mined. This represents an estimated 26 kt/d (28.5 stpd) of ore. A similar assessment of the longterm projects indicates that about 12 kt/d (13,000 stpd), or just under 50?70of the open pit tonnage will be contract mined. There are several reasons why gold and silver represent such an attractive opportunity for contract miners. One is that many properties are owned or leased by individuals or partnerships that are essentially entrepreneurial. Many of these owners or lease holders have minimal mining experience. They must therefore either rely on contract mining organizations, sell an interest in the project to another mining company that will become the operator, or hire an experienced management team. For about the same reason, junior mining companies also represent good prospects for contracting. This is because most junior companies focus on exploration. They would prefer to spend their generally limited funds on drilling programs. Thus, they tend to minimize additional capital requirements by using contract miners or farming out the property to another mining company. Another good reason for using contract miners is the size of the deposit. Many properties are so small that their reserves will not support the capital expenditures

Table lOperating Nevada open pit gold/silver mines, 1985

Number of mines Daily ore tonnage 1. of daily ore Owner Operation 20 53,550 53.7 Contract Mining 18 46,200 46.3 Total 38 99,750 100

W. Joseph Schlitt, Donald B. Swanson, and Don S. McCoy, members SME, are manager of technology, Mineral & Metal Industries and business development manager, and general manager contract mining, respectively, with Brown and Root USA Inc., P.O. Box 3, Houston, TX 77001-0003.

needed for both mining equipment and the process facility (Schlitt and Swanson, 1987). Thus, contract mining represents the only viable option for exploiting such deposits. Finally, some mining companies follow a corporate strategy that calls for contract mining of all properties.

Other contract mining markets

Solid carbonaceous fuel operations and abandoned mine reclamation also offer markets for contract miners. For surface coal and lignite mines, contractors can be particularly effective in providing services that are sporadic or intermittent. Examples include periodic stripping and stockpiling of topsoil, occasional opening of a new box cut, intermittent prestripping of excessive overburden, and recontouring and reclaiming areas as they become mined out. All these activities require specialized equipment, or at least additional equipment and personnel over and above those needed for normal mining operations. Thus, even the large mining companies usually contract for such services. This avoids tying up capital in equipment that would not be fully used. Contracting also minimizes the number of employees the mining company must carry on its own payroll. Although coal-related work is not experiencing the same rate of growth as gold mining, the market for contract services is large and fairly stable. Again, specific data are difficult to find. However, in the Wyoming coalfields alone, an estimated 15 Mm~ (20 million cu yd) of material is moved in an average year by contractors. Unlike other markets, abandoned mine reclamation represents a virtually uncontested area for contractors. This is because the original owner or operator is no longer in business or cannot do the work himself. Funding sources include the federal government, state mine severance taxes, and forfeiture of reclamation bonds. The size of reclamation projects will likely vary. Some are quite small. For example, 11 recent projects in Wyoming are involved anywhere from less than $100,000 up to about $500,000 (Wyoming Department of Administration and Fiscal Control, 1987).
1074 OECEMBER 1987

On the other hand, reclamation of Anacondas old Jackpile uranium mine in New Mexico is expected to carry a price tag of more than $40 million. This is now referred to as the JackpilePaguate Reclamation project. It will probably involve moving more than 318 Mt (350 million st) of rock and topsoil and reclaiming several pits in an extensive mining site covering some 10.5 kmz (2600 acres; Pueblo of Laguna, 1987).

q all types of backfilling, recontouring, and reclamation, and q gold ore processing for heap leaching. The latter service could include leach pad construction, ore crushing, fines agglomeration, ore stacking, and removal of leached material to a final tailings site. This site itself may be prepared and maintained by the contractor.

Contract

mining

organizations

Reclamation represents a market force with an impressive potential growth for contract project is

miners. While

sizes widely vary $100,000 to $500,000 small some projects, such as the Anacondas )ackpile uranium

Organizations that provide contract mining services range in size from large international engineering and construction firms to small local contractors. The latter generally have small equipment spreads and only serve their immediate areas. The intermediate-to-large contractors are active regionally or even throughout the western US. A few of these major operators include the Argee Corp., Brown & Root USA, NA Degerstrom, Gilbert Western, Granite Construction, Lost Dutchman Contractors, Morrison-Knudsen, R.E. Vining, and Washington Corp. Equipment spreads

reclamation, run as much as $40 million.

Contract organizations, equipment, and services

Regardless of the commodity or activity involved, the contract miner functions as an independent contractor that offers a variety of services. These may be limited primarily to mining activities such as: . constructing access and haul roads, . stripping and stockpiling topsoil, q Prestripping barren overburden, q drilling and blasting ore and waste, and . miningand haulingwasteand ore. Larger contract mining organizations are also providing additional heavy civil construction services to the mine owner. These may include: q exploration roads and drill pads, q site preparation for surface facilities, q earthen dams and diversion channels or pipelines for control of surface and subsurface water flows,

All contract miners, large or small, provide their own equipment spreads. The exact spread is matched to the job, with equipment drawn from strategically located equipment yards. For a typical mining project, major equipment may include drills and compressors, loaders or shovels, end dump haul trucks, bottom dump scrapers, and tractors with dozers and rippers. In addition, the contract miner will provide an array of ancillary equipment to support the mining operation. This may include a powder truck, mechanics and lubrication trucks, a tire truck, pickups, and a water wagon. Other ancillary equipment may include motor graders, backhoes, flood light stations, and pumps. The contract miner also normally provides trailers as administrative and safety offices, and as a parts warehouse. In cases where the contractor also handles gold heap leaching, several additional types of portable or semiportable equipment will be provided. Included will be crushers, screens, conveyors, and a loader for heap construction. Typically, a jaw crusher will be used as the primary unit, while standard and short head cone crushers will be used as the secMINING ENGINEERING

ondary and tertiary units, respectively. The minimum particle size for the crusher circuit discharge will seldom be less than 9.5 to 13 mm (0.3 to 0.5 in.). If such a fine particle size is not required, the tertiary or even the secondary crushers may be eliminated. .4 mobile crane will be needed for crusher repairs. A spray system for dust suppression will also be required. Where crusher fines or clayey ores must be accommodated, the contract miner may be asked to provide the agglomeration system. This will produce a feed that can be heap leached without solution percolation problems. As described by Chamberlain (Mining Engineering, 1986), this type of oprequires eration specialized equipment, such as drum or disk agglomerators or a conveyor system set up for belt agglomeration. Provision must also be made to add moisture (usually as cyanide solution) and binder (lime or cement) during the agglomeration process. Some of the larger contractors will also be able to provide other specialized equipment draglines, gyratory crushers, diesel generators, and the like. Under some circumstances, even large contract miners may have to lease a piece of equipment. Administrative services

Obviously, the principal services provided by contract miners are to mine and haul ore and waste, and perhaps to process gold ore for heap leaching. However, the contractor also provides many administrative services. These free the owner to attend to other matters and to minimize his own staffing. Thus, the contractor provides a project or general manager, other operating, maintenance, and administrative supervisors, emergency medical technicians, any field engineers, and his own operators and craft (maintenance) personnel. All these people will be on the contractors payroll and will be his responsibility, not the mine owners. Staffing will vary in proportion to the size, duration, and complexity of the mining operation. However, overstaffing is seldom a problem due to the competitive bidding originally done to obtain the mining contract. Larger contractors can also provide additional home office support as needed.
MINING ENGINEERING

Along with the operations, the contractor will provide all his own fuels, oils, and lubricants. He will also handle his own equipment maintenance and provide a full repair program. This will include all necessary maintenance buildings, usually the preellgineered type. These will be sized to handle the largest pieces of equipment, generally mobile haulage trucks. The buildings will also reflect the expected climatic conditions at the site. Spare parts and supplies will be kept in the building, in separate trailers, or, for diesel fuel and tires, in fenced yards. Other services provided to the owner may include field engineering, permitting, and various administrative functions. The contractor will administer such areas as payroll, personnel and production records, insurance, and purchasing. Engineering can include day-to-day mine planning, plus any engineering needed to layout, install, and operate ore processing equipment. Permit engineering will also be required if the contractor is responsible for getting the necessary approval for his own activities. Here, the contractor and owner are likely to closely coordinate their activities in order to present a united front to the appropriate agencies and officials. Where the contractor is responsible for his own permitting, he will be directly responsible for inspections by MSHA and other regulatory agencies. A final administrative area covered by the contractor will be safety and training. He will be required to conduct a safety program that meets or exceeds MSHA, and state and local requirements. Most of the larger contractors have their own MSHA-certified instructors. These people provide on-site safety certification training and also conduct refresher training. The contractor will then maintain the necessary safety program and records.

Commercial

considerations

Most mining contracts are awarded on the basis of competitive bidding. Bids are normally prepared in response to a specific scope of work issued by the mine owner or lease holder. The bid document defines such things as the schedule and tonnage requirements. Prospective contractors then supplement the information by

visiting the mining site. This allows firsthand assessment of the site-specific conditions that could impact the cost of mining. A bid is then prepared. A partial list of the many items to be considered follows: . Ore and waste tonnages and the schedule for each. . Haul distances and haul road gradients for ore and waste. q The nature of the material to be mined hard and abrasive or soft and friable. q Area topography flat, rolling hills, or steep canyons with little space for waste dumps. . Climatic conditions extended cold snaps, heavy snow or rain, high winds, or extreme heat. q Utilities specifically power, water, and telephone. q Site accessibility remote or readily accessible to populated areas that can supply people and services. q Environmental and regulatory restrictions limitations on dust or noise, or the need to protect surface or ground water sources. . Mobilization and demobilization requirements. . Special hiring restrictions the need to use Indians for work to be done on a reservation. . The required size distribution and moisture content for ore, if crushing is required. Once the contractor is awarded a project, he will meet with the owner and finalize the contract. This is not always easy as there are almost as many contract variations as there are jobs. For example, the contractual time frame may cover the available mining season, a fixed period such as a year, or the life of the operation. The contract may also cover a specific tonnage. Or, it may be an evergreen type that can be extended under a set of mutually agreed-to conditions. For longterm contracts, there should be reopening clauses to protect both parties. These would allow for adjustments in fuel prices, insurance requirements, or mandatory regulatory changes. Depending on the type of contract used, pricing will usually be specified as either a firm fixed price for the job or as unit rates per yard or ton for different activities. Other types of contracts such as cost plus a fixed fee are not as common. In any case, prices will be all inclusive and will cover the contractors mobilization, maintenance, overhead, demobilization, and profit, in addition to direct
DECEMBER 1987 1075

operating costs. A single weighted figure for ore and waste mining and hauling is commonly used to avoid accounting problems. Finally, any bonuslpenalty arrangements will be clearly specified. As with any contractual agreement, the mining contract must clearly define the responsibilities of both the contractor and owner. Some key contractual points include the basis of pricing (compensation), billing and payment, method of production accounting, and definition of such important areas as grade control where there is owner-contractor interaction. Other important contractual areas will include: . definition and pricing of extra services, q safeguarding of owners proprietary information, q standards of performance and warranty, q insurance and allocation of risks, q remedies, and . termination of services. Quite aside from the normal contractual considerations, some contract mining firms, particularly the larger ones, will offer some type of project financing. Such a service is particularly valuable to small or new mine operations. Following their exploration and development programs, these companies are often short of cash. They cannot cover fixed and working capital requirements until a positive cash flow is established from the operations. Thus, in extending some type of financing, the contractor can help the mine owner by allowing the operation to commence without securing additional loans or going into the equity markets. Of course, financing may also secure the contractor the job. The contractor will certainly receive some compensation for assuming the additional risks and costs associated with the financing package being provided. Generally, financing organizations like to see twice the reserves needed to recover their loans. The contract miner may participate in project financing in several ways. The simplest involves deferred payments. Under this approach, the contractor begins prestripping the deposit and then begins mining the ore body. The owner is billed each month for the current months work, plus interest an agreed-to-fee or charge for overdue invoices. Once refinery receipts start

coming in and a positive cash flow is established, the owner begins meeting current invoices and paying off the overdue ones. One variation on this theme is for the contractor to receive all or a large portion of the net profit until the owner is current on his payments. Another approach is for the contractor to take an equity position in the mine or mining company. Under such an arrangement, the contractor may receive stock, part ownership in the claims, receipts for forward gold sales, or a share of the net profit or gross revenue from the mine. Such options can permit some rather creative financing arrangements. A third option is for the contractor to simply co-sign or guarantee loans from a bank or other investment group. The mine owner can then keep his payments to the contractor current. However, to protect his interests, the contractor may require some collateral a lien against the claims or some other assets of the mine or company. Any time financing is involved, the contract miner is entitled to considerably more information than he would otherwise need. This will allow him to properly assess the projected mine cash flow and the added risk taken when providing financing. This additional information may include: q tonnage and average grade of the deposit, q proposed mine plan and initial ore grade by week or month, q metallurgical results from laboratory or pilot tests, . design basis for the plant, q financial condition of the mine owner or lease holder, and . any restrictions or other liens against the mine claims.

Contract mining advantages and disadvantages

Over all, the advantages and disadvantages of contract mining can be categorized into two classes those that are primarily economic and those that relate to operating flexibility and control. In each case, the owner or lease holder must carefully evaluate his own situation to determine if he should contract for mining services or purchase the equipment and do his own work. If the situation is not easily assessed, the owner can estimate the cost of doing his own work and then solicit a bid from a contractor for comparison.

Some of the principal advantages of using a contract miner are: q a reduction in capital requirements for mining and sometimes crushing equipment, q a reduction in the period required to pay back the capital investment, . a reductio~ in direct payroll and administrative expenses, . a reduction in costs for safety and training programs, . a reduction in some engineer. ing costs day-to-day mine planning or engineering on a contractor-operated crusher circuit, . a clearly defined, fixed cost for mining and other contracted services, q relief from certain permitting requirements and regulatory inspections, . increased operating flexibility, particularly with regard to changes in production schedules, and q access to specialized services and equipment use of bottom dump scrapers to strip and stockpile topsoil at the start of operations. There are some disadvantages to using a contract miner. The principal one is that the unit operating costs will be higher. For hard rock gold operations, about $2.60 LO$3.90/m: ($2 to $3 per bank cu yd). Crushing and stacking ore for heap leaching will run between $1.65 and $3.30/t ($1.50 and $3 per st). The owner may also have to pay a termination fee or a special demobilization charge if the mine shuts down for reasons outside the contractors control. Reasons may include falling metal prices, poor metallurgical recovery, or lower than expected ore grades. The owner also faces the risk that the low bidder may be financially weak or may not actually have the equipment needed to maintain the required schedule. Thus, the bidders qualifications must be carefully considered. Finally, the owner will have less direct control over a contractor than he would over his own personnel. Such a factor is particularly important when it comes to maintaining close grade control. This is because a contractor will have less incentive than the owner to see that ore and waste are sent to their appropriate destinations or that all ore is crushed, screened, and stacked properly for leaching. s (References are available from the author. )