BGC Contracting is aiming to deliver significant cost-savings for Arrium in South Australia through a collaborative contract signed between the two companies.
Reducing costs has been vital goal for Arrium at its iron ore operations in South Australia as the company set a strategy to overcome financial difficulties.
The steel-making and iron ore group, which is a key driver of the South Australian economy and has thousands of employees around the country, was placed in voluntary administration in April last year.
Administrator, KordaMentha, has worked hard with Arrium to maintain a ‘business as usual’ mentality within the group. This has involved identifying opportunities to cut expenditure at its operations.
At the Iron Knob and South Middleback Ranges iron ore mines near Whyalla, Arrium has found an answer to this objective through a new collaborative mining services contract with BGC Contracting.
In March, BGC secured a five-year contract extension worth more than $720 million at the two operations, which replaced an existing agreement between the two companies that was due for completion this year.
Perth-headquartered BGC will provide a range of mining services under the contract, including drilling, blasting, hauling, loading, dumping and train load-out.
But the key element of the contract is its collaborative model, which is set up with incentives that aim to benefit both parties as the five-year term progresses.
BGC chief executive officer Greg Heylen said the company was now offering the collaborative contract model to several mining clients seeking ways to reduce costs.
The model has already proven successful at other iron ore mine sites, including Cliffs Natural Resources’ Koolyanobbing operation, where BGC has helped saved more than $100 million in recent years.
By working closely with the client, BGC designs a collaborative contracting model which incentivises both parties to work smarter and reduce costs.
“This collaborative model allows the client and the contractor to have meaningful discussions on what the client is actually looking for. It is a commercial model that incentivises the contractor to reach those targets – whatever they are,” Heylen explained.
“It’s more about the model that we implement that rewards the contractor for achieving the targets the client has, whether that is improved productivity, lower costs or to produce a certain range of product.”
However, if market conditions change the collaborative model will also allow BGC to modify its agreement with Arrium to better reflect evolving outcomes that the miner is targeting from its operations.
“Over time client requirements change – if commodity prices continue to improve for example, clients may then want more product to port, opposed to the pure focus at the moment, which is generally around lowering costs,” Heylen said.
“If the client has a change of focus two, three or five years from now the model allows those targets to be changed – that incentivises the contractor to reach those targets.”
The catalyst for developing the collaborative model was the need for mining companies to adapt to changing market conditions after commodity prices plummeted.
Heylen said mining companies were looking to lower their cost base while also establishing a pathway to prosperity for when commodity prices do improve, which he believes the industry is now started to see the beginning of.
“It was the changes in the market that forced clients to do things a bit differently than what they were doing in the previous seven or eight years during the ever-increasing commodity prices, which I think shielded us a bit from taking some hard analytical decisions about the business,” Heylen said.
Arrium Mining executive general manager Matt Reed said the collaboration provided benefits for both companies, with BGC playing a major role in helping Arrium lower its mining costs.
“We look forward to developing this partnership with BGC over the coming years and continuing to reduce our costs as we create a world-class business,” Reed said in a statement.
The collaborative contract with Arrium in South Australia is not only expected to benefit the miner’s cost base.
It is also anticipated that the extension will provide more certain employment for workers and subcontractors in the Whyalla region, a welcome boost for the mining industry in South Australia.