7/29/2019 An Attractive and Economical Alternative to Owner

1/4

Contract mining: An attractiveand economical alternative

to owner operationsW Joseph Schlitt, Donald B. Swanson, and Don S. McCoy

IntroductionContract miners have longplayed an important role in theminerals industry. Historically,these were individuals whoworked as underground miners

and were paid by the ton or theday. These hardy types still plytheir trade in the industry. How-ever, today the term contractminer generally refers to an in-dependent contractor who sup-plies the people and equipmentneeded to conduct surface miningoperations for an owner or leaseholder.At one time or another, contractminers have probably handledvirtually every mineral commod-ity from sand, gravel, and stonequarrying to mining uranium andprecious metal ores. In todaysmarket, though, contract miningappears to be concentrated injust a few areas. These includeprecious metal mines, varioustypes of solid fuel operations, andreclamation of abandoned mines.This article covers market areas,contract mining organizationsand services, and their advan-tages and disadvantages.Gold and silver minesAlthough exact figures are notavailable, contract mining repre-sents a significant element in theprecious metals segment of USmining. For gold and silver, thegrowth in contract mining ap-pears to be paralleling the over-all growth in mining activityitself.Nevada is the largest gold pro-ducer in the US. The latest avail-able data (1985) on dpen pit gold/silver mines is summarized inTable 1 (Nevada Division of MineInspection, 1986). These figures

show that contractors minednearly half of the ore in 1985. To-tal tonnage mined, of course, wasmuch higher for both owners andcontractors.

Drilling operations at a California openpit gold mine.

Assuming an average strippingratio of 2.5 to 1, the total dailymining rate for the contractorswas more than 145 kt (160,000 st).This translates into a contractmining rate of about 36 Mt/a (40million stpy) based on 250 operat-ing days a year.This approximate 50-50 split be-tween owner and contractor alsoappears to hold for the future.Metals Economics Group (1987)published a survey of 51 short-range and 54 long-range preciousmetal projects being consideredthroughout the US. Contacts withowners, requests for proposals,and past corporate philosophiesall suggest that about 5570 of the

Table lOperating Nevada openpit gold/silver mines, 1985 Owner ContractOperation Mining Total

Number of mines 20 18 38Daily ore tonnage 53,550 46,200 99,7501.of daily ore 53.7 46.3 100

open pit operations scheduled forthe near-term will be contractmined. This represents an esti-mated 26 kt/d (28.5 stpd) of ore. Asimilar assessment of the long-term projects indicates thatabout 12 kt/d (13,000 stpd), or justunder 50?70of the open pit tonnagewill be contract mined.There are several reasons whygold and silver represent such anattractive opportunity for con-tract miners. One is that manyproperties are owned or leasedby individuals or partnershipsthat are essentially entrepre-neurial.Many of these owners or leaseholders have minimal mining ex-perience. They must thereforeeither rely on contract mining or-ganizations, sell an interest in theproject to another mining com-pany that will become the opera-tor, or hire an experienced man-agement team.For about the same reason, jun-ior mining companies also repre-sent good prospects for con-tracting. This is because mostjunior companies focus on explo-ration. They would prefer tospend their generally limitedfunds on drilling programs. Thus,they tend to minimize additional

capital requirements by usingcontract miners or farming outthe property to another miningcompany.Another good reason for usingcontract miners is the size of thedeposit. Many properties are sosmall that their reserves will notsupport the capital expenditures

W. Joseph Schlitt, Donald B. Swanson,and Don S. McCoy, members SME, aremanager of technology, Mineral &Metal Industries and business develop-ment manager, and general managercontract mining, respectively, withBrown and Root USA Inc., P.O. Box 3,Houston, TX 77001-0003.

7/29/2019 An Attractive and Economical Alternative to Owner

2/4

needed for both mining equip-ment and the process facility(Schlitt and Swanson, 1987). Thus,contract mining represents theonly viable option for exploitingsuch deposits.Finally, some mining com-panies follow a corporate strat-egy that calls for contract miningof all properties.Other contractmining marketsSolid carbonaceous fuel opera-tions and abandoned mine recla-mation also offer markets for con-tract miners. For surface coal andlignite mines, contractors can beparticularly effective in provid-ing services that are sporadic orintermittent. Examples includeperiodic stripping and stockpil-ing of topsoil, occasional openingof a new box cut, intermittent pre-

stripping of excessive overbur-den, and recontouring and re-claiming areas as they becomemined out.All these activities require spe-cialized equipment, or at leastadditional equipment and per-sonnel over and above thoseneeded for normal mining opera-tions. Thus, even the large miningcompanies usually contract forsuch services. This avoids tyingup capital in equipment thatwould not be fully used. Con-tracting also minimizes the num-ber of employees the mining com-pany must carry on its ownpayroll.Although coal-related work isnot experiencing the same rate ofgrowth as gold mining, the marketfor contract services is large andfairly stable. Again, specific dataare difficult to find. However, inthe Wyoming coalfields alone, anestimated 15 Mm~ (20 million cuyd) of material is moved in an av-erage year by contractors.Unlike other markets, aban-doned mine reclamation repre-sents a virtually uncontested areafor contractors. This is becausethe original owner or operator isno longer in business or cannotdo the work himself. Fundingsources include the federal gov-ernment, state mine severancetaxes, and forfeiture of reclama-tion bonds.The size of reclamation proj-ects will likely vary. Some arequite small. For example, 11 re-cent projects in Wyoming are in-volved anywhere from less than$100,000 up to about $500,000(Wyoming Department of Admin-istration and Fiscal Control,1987).

On the other hand, reclamationof Anacondas old Jackpile ura-nium mine in New Mexico is ex-pected to carry a price tag ofmore than $40 million. This isnow referred to as the Jackpile-Paguate Reclamation project. Itwill probably involve movingmore than 318 Mt (350 million st)of rock and topsoil and re-claiming several pits in an exten-sive mining site covering some10.5 kmz (2600 acres; Pueblo ofLaguna, 1987).

Reclamation represents amarket force with animpressive growthpotential for contractminers. While projectsizes widely vary $100,000 to $500,000 issmall some projects,such as the Anacondas)ackpile uraniumreclamation, run as muchas $40 million.

Contract organizations,equipment, and servicesRegardless of the commodity oractivity involved, the contractminer functions as an indepen-dent contractor that offers a vari-ety of services. These may be lim-ited primarily to mining activitiessuch as:. constructing access and haul

roads,. stripping and stockpiling top-soil,q Prestripping barren over-burden,q drilling and blasting ore andwaste, and. miningandhaulingwasteandore.Larger contract mining organi-zations are also providing addi-tional heavy civil constructionservices to the mine owner. Thesemay include:q exploration roads and drillpads,q site preparation for surfacefacilities,q earthen dams and diversionchannels or pipelines for controlof surface and subsurface waterflows,

q all types of backfilling, recon-touring, and reclamation, andq gold ore processing for heapleaching.The latter service could includeleach pad construction, orecrushing, fines agglomeration, orestacking, and removal of leachedmaterial to a final tailings site.This site itself may be preparedand maintained by the con-tractor.

Contract mining organizationsOrganizations that provide con-tract mining services range insize from large international en-gineering and construction firmsto small local contractors.The latter generally have smallequipment spreads and onlyserve their immediate areas. Theintermediate-to-large contractorsare active regionally or even

throughout the western US.A few of these major operatorsinclude the Argee Corp., Brown &Root USA, NA Degerstrom, Gil-bert Western, Granite Construc-tion, Lost Dutchman Contractors,Morrison-Knudsen, R.E. Vining,and Washington Corp.Equipment spreadsAll contract miners, large orsmall, provide their own equip-ment spreads. The exact spread ismatched to the job, with equip-

ment drawn from strategically lo-cated equipment yards.For a typical mining project,major equipment may includedrills and compressors, loadersor shovels, end dump haul trucks,bottom dump scrapers, and trac-tors with dozers and rippers.In addition, the contract minerwill provide an array of ancillaryequipment to support the miningoperation. This may include apowder truck, mechanics and lu-brication trucks, a tire truck,pickups, and a water wagon.Other ancillary equipment mayinclude motor graders, backhoes,flood light stations, and pumps.The contract miner also normallyprovides trailers as administra-tive and safety offices, and as aparts warehouse.In cases where the contractoralso handles gold heap leaching,several additional types of porta-ble or semiportable equipmentwill be provided. Included will becrushers, screens, conveyors, anda loader for heap construction.Typically, a jaw crusher will beused as the primary unit, whilestandard and short head conecrushers will be used as the sec-

1074 OECEMBER 1987 MINING ENGINEERING

7/29/2019 An Attractive and Economical Alternative to Owner

3/4

ondary and tertiary units, respec-tively.The minimum particle size forthe crusher circuit discharge willseldom be less than 9.5 to 13 mm(0.3 to 0.5 in.). If such a fineparticle size is not required, thetertiary or even the secondarycrushers may be eliminated. .4mobile crane will be needed forcrusher repairs. A spray systemfor dust suppression will also berequired.Where crusher fines or clayeyores must be accommodated, thecontract miner may be asked toprovide the agglomeration sys-tem. This will produce a feed thatcan be heap leached without so-lution percolation problems. Asdescribed by Chamberlain (MiningEngineering, 1986), this type of op-eration requires specializedequipment, such as drum or diskagglomerators or a conveyor sys-tem set up for belt agglomeration.Provision must also be made toadd moisture (usually as cyanidesolution) and binder (lime or ce-ment) during the agglomerationprocess.Some of the larger contractorswill also be able to provide otherspecialized equipment drag-lines, gyratory crushers, dieselgenerators, and the like. Undersome circumstances, even largecontract miners may have to leasea piece of equipment.Administrative servicesObviously, the principal ser-vices provided by contract minersare to mine and haul ore andwaste, and perhaps to processgold ore for heap leaching.However, the contractor alsoprovides many administrativeservices. These free the owner toattend to other matters and tominimize his own staffing.Thus, the contractor provides aproject or general manager, other

operating, maintenance, and ad-ministrative supervisors, emer-gency medical technicians, anyfield engineers, and his own oper-ators and craft (maintenance)personnel. All these people willbe on the contractors payroll andwill be his responsibility, not themine owners.Staffing will vary in proportionto the size, duration, and com-plexity of the mining operation.However, overstaffing is seldom aproblem due to the competitivebidding originally done to obtainthe mining contract. Larger con-tractors can also provide addi-tional home office support asneeded.

Along with the operations, thecontractor will provide all hisown fuels, oils, and lubricants. Hewill also handle his own equip-ment maintenance and provide afull repair program. This will in-clude all necessary maintenancebuildings, usually the preell-gineered type. These will be sizedto handle the largest pieces ofmobile equipment, generallyhaulage trucks.The buildings will also reflectthe expected climatic conditionsat the site. Spare parts and sup-plies will be kept in the building,in separate trailers, or, for dieselfuel and tires, in fenced yards.Other services provided to theowner may include field engi-neering, permitting, and variousadministrative functions. Thecontractor will administer suchareas as payroll, personnel andproduction records, insurance,and purchasing. Engineering caninclude day-to-day mine plan-ning, plus any engineeringneeded to layout, install, and op-erate ore processing equipment.Permit engineering will also berequired if the contractor is re-sponsible for getting the neces-sary approval for his own activi-ties. Here, the contractor andowner are likely to closely coor-dinate their activities in order topresent a united front to the ap-propriate agencies and officials.Where the contractor is responsi-ble for his own permitting, he willbe directly responsible for in-spections by MSHA and otherregulatory agencies.A final administrative area cov-ered by the contractor will besafety and training. He will be re-quired to conduct a safety pro-gram that meets or exceedsMSHA, and state and local re-quirements. Most of the largercontractors have their ownMSHA-certified instructors.These people provide on-sitesafety certification training andalso conduct refresher training.The contractor will then maintainthe necessary safety program andrecords.Commercial considerationsMost mining contracts areawarded on the basis of competi-tive bidding. Bids are normallyprepared in response to a specificscope of work issued by the mineowner or lease holder. The biddocument defines such things asthe schedule and tonnage re-quirements.Prospective contractors thensupplement the information by

visiting the mining site. This al-lows firsthand assessment of thesite-specific conditions that couldimpact the cost of mining. A bid isthen prepared. A partial list ofthe many items to be consideredfollows:. Ore and waste tonnages andthe schedule for each.. Haul distances and haul roadgradients for ore and waste.

q The nature of the material tobe mined hard and abrasive orsoft and friable.q Area topography flat, roll-ing hills, or steep canyons withlittle space for waste dumps.. Climatic conditions ex-tended cold snaps, heavy snow orrain, high winds, or extreme heat.q Utilities specifically power,water, and telephone.q Site accessibility remote orreadily accessible to populatedareas that can supply people and

services.q Environmental and regulatoryrestrictions limitations on dustor noise, or the need to protectsurface or ground water sources.. Mobilization and demobiliza-tion requirements.. Special hiring restrictions the need to use Indians for workto be done on a reservation.. The required size distributionand moisture content for ore, ifcrushing is required.Once the contractor is awardeda project, he will meet with theowner and finalize the contract.This is not always easy as thereare almost as many contract vari-ations as there are jobs. For ex-ample, the contractual timeframe may cover the availablemining season, a fixed periodsuch as a year, or the life of theoperation.The contract may also cover aspecific tonnage. Or, it may be anevergreen type that can be ex-tended under a set of mutuallyagreed-to conditions. For long-term contracts, there should bereopening clauses to protect bothparties. These would allow for ad-justments in fuel prices, insur-ance requirements, or mandatoryregulatory changes.Depending on the type of con-tract used, pricing will usually bespecified as either a firm fixedprice for the job or as unit ratesper yard or ton for different activ-ities. Other types of contractssuch as cost plus a fixed fee arenot as common.In any case, prices will be allinclusive and will cover the con-tractors mobilization, mainte-nance, overhead, demobilization,and profit, in addition to direct

MINING ENGINEERING DECEMBER 1987 1075

7/29/2019 An Attractive and Economical Alternative to Owner

4/4

operating costs. A single weightedfigure for ore and waste miningand hauling is commonly used toavoid accounting problems. Fi-nally, any bonuslpenalty arrange-ments will be clearly specified.As with any contractual agree-ment, the mining contract mustclearly define the responsibili-ties of both the contractor andowner. Some key contractualpoints include the basis ofpricing (compensation), billingand payment, method of produc-tion accounting, and definition ofsuch important areas as gradecontrol where there is owner-con-tractor interaction.Other important contractualareas will include:. definition and pricingof extraservices,

q safeguarding of owners pro-prietary information,q standards of performance and

warranty,q insurance and allocation of

risks,q remedies, and. termination of services.Quite aside from the normalcontractual considerations, somecontract mining firms, particu-larly the larger ones, will offersome type of project financing.Such a service is particularly val-uable to small or new mineoperations.Following their exploration

and development programs, thesecompanies are often short of cash.They cannot cover fixed andworking capital requirements un-til a positive cash flow is estab-lished from the operations.Thus, in extending some type offinancing, the contractor can helpthe mine owner by allowing theoperation to commence withoutsecuring additional loans or go-ing into the equity markets. Ofcourse, financing may also securethe contractor the job.The contractor will certainlyreceive some compensation forassuming the additional risks andcosts associated with the financ-ing package being provided. Gen-erally, financing organizationslike to see twice the reservesneeded to recover their loans.The contract miner may partici-pate in project financing in sev-eral ways. The simplest involvesdeferred payments. Under thisapproach, the contractor beginsprestripping the deposit and thenbegins mining the ore body.The owner is billed each monthfor the current months work, plusan agreed-to-fee or interestcharge for overdue invoices.Once refinery receipts start

coming in and a positive cash flowis established, the owner beginsmeeting current invoices and pay-ing off the overdue ones. One var-iation on this theme is for the con-tractor to receive all or a largeportion of the net profit until theowner is current on his payments.Another approach is for thecontractor to take an equity posi-tion in the mine or mining com-pany. Under such an arrange-ment, the contractor may receivestock, part ownership in theclaims, receipts for forward goldsales, or a share of the net profitor gross revenue from the mine.Such options can permit somerather creative financing arrange-ments.A third option is for the con-tractor to simply co-sign or guar-antee loans from a bank or otherinvestment group. The mineowner can then keep his pay-ments to the contractor current.However, to protect his interests,the contractor may require somecollateral a lien against theclaims or some other assets of themine or company.Any time financing is involved,the contract miner is entitled toconsiderably more informationthan he would otherwise need.This will allow him to properlyassess the projected mine cashflow and the added risk takenwhen providing financing. Thisadditional information may in-clude:

q tonnage and average grade ofthe deposit,q proposed mine plan and ini-tial ore grade by week or month,q metallurgical results fromlaboratory or pilot tests,. design basis for the plant,q financial condition of themine owner or lease holder, and. any restrictions or other liens

against the mine claims.

Contract mining advantagesand disadvantagesOver all, the advantages and dis-advantages of contract mining canbe categorized into two classes those that are primarily eco-nomic and those that relate to op-erating flexibility and control.In each case, the owner or leaseholder must carefully evaluatehis own situation to determine ifhe should contract for mining ser-vices or purchase the equipmentand do his own work. If the situa-

tion is not easily assessed, theowner can estimate the cost ofdoing his own work and then so-licit a bid from a contractor forcomparison.

Some of the principal advan-tages of using a contract minerare:q a reduction in capital require-ments for mining and sometimescrushing equipment,q a reduction in the period re-quired to pay back the capitalinvestment,. a reductio~ in direct payroll

and administrative expenses,. a reduction in costs for safetyand training programs,. a reduction in some engineer.ing costs day-to-day mine plan-ning or engineering on acontractor-operated crusher cir-cuit,. a clearly defined, fixed costfor mining and other contractedservices,

q relief from certain permittingrequirements and regulatory in-spections,. increased operating flexi-bility, particularly with regard tochanges in production schedules,and

q access to specialized servicesand equipment use of bottomdump scrapers to strip and stock-pile topsoil at the start ofoperations.There are some disadvantagesto using a contract miner. Theprincipal one is that the unit op-erating costs will be higher. Forhard rock gold operations, about$2.60 LO$3.90/m: ($2 to $3 per bankcu yd). Crushing and stacking orefor heap leaching will run be-tween $1.65 and $3.30/t ($1.50 and$3 per st).The owner may also have to paya termination fee or a special de-mobilization charge if the mineshuts down for reasons outsidethe contractors control. Reasonsmay include falling metal prices,poor metallurgical recovery, orlower than expected ore grades.The owner also faces the riskthat the low bidder may be finan-cially weak or may not actuallyhave the equipment needed tomaintain the required schedule.Thus, the bidders qualificationsmust be carefully considered.Finally, the owner will haveless direct control over a con-tractor than he would over hisown personnel. Such a factor isparticularly important when itcomes to maintaining close gradecontrol. This is because a con-tractor will have less incentivethan the owner to see that ore andwaste are sent to their appropri-ate destinations or that all ore iscrushed, screened, and stackedproperly for leaching. s (Refer-ences are available from theauthor. )