Mining continues to be Australia’s largest industry, comprising over 10% of the Australian economy. While this is hardly news, we are currently witnessing an emergence of new (and smaller) industry players or greater participation from ‘mid-tier’ companies. This is attributable to a number of factors, but most significantly resulting from the divestment by large blue chip companies of their coal assets in the face of ESG pressures, to the explosion in demand for battery metals.
High among the challenges faced by small and mid-tier industry participants is how to translate thin resourcing into a successful mining operation. Often, proponents will seek to achieve this by outsourcing mining operations to a third-party contractor. While the experience and ‘track record’ of the contractor is critical, the importance of the underlying contractual arrangements should not be underestimated. Getting the contract wrong can have a dramatic impact on a proponent’s bottom line.
When negotiating mining operations contracts, there are some key issues that should be considered by mining proponents.
Level of control over mining operations
A threshold issue is the extent to which control over mining operations will be ceded to the contractor. A proponent’s resourcing (and experience) levels may dictate that operations are primarily managed by the contractor. However, generally speaking, the higher the degree of control in the hands of the contractor, the greater the level of contingency in the contractor’s pricing.
This is notionally the result of the increased risk borne by the contractor as the manager of the mine. However, ‘risk transfer’ to a contractor will never be absolute, with contractors certain to insist on the inclusion of various limitations and exclusions of liability in the contractual arrangements (and not unreasonably so, given they will often not hold an equity interest in the project). Therefore, proponents will need to ensure that the risks ultimately retained by them are appropriate given the nature of the commercial (and operational) arrangements.
Therefore, even where key operational decisionmaking is in the hands of the contractor, the proponent should ensure that the contractual arrangements clearly provide for it to retain ultimate control over strategic matters, such as production requirements, mine planning and budgeting.
It is important that the mining contractor is sufficiently incentivised to achieve required production targets and other performance outcomes.
Performance requirements should be clearly set out in the contract, with clear consequences specified for failing to achieve these. This may take the form of a ‘key performance indicator’ (KPI) regime, with abatements to the contractor’s entitlement to payment applying for under-performance, and potentially, bonuses applying for exceeding KPI requirements. For significant or sustained underperformance, there should also be an entitlement for the mining proponent to terminate the contract (see ‘Default and termination’ below).
While KPI regimes are commonly used, there is generally a limit to the financial penalty applying under contract, as abatements are typically capped. An alternative regime that is becoming more common is for the contractor to be remunerated on a ‘dollar per tonne’ basis, meaning the contractor is only paid for tonnes of ore produced. While this may provide added incentive to a contractor to maximise production outcomes, proponents should beware that, given the additional level of risk assumed by the contractor under this model, significant premiums can be included in the ‘dollar per tonne’ rate.
Regardless of the performance regime selected for a project, it will therefore be important to ensure that the regime is supported by a clearly defined process for measuring the relevant performance metrics (and, ideally, for resolving disagreements in relation to these) in order to mitigate the risk of disputes.
Statutory safety roles
If the contractor is to be in control of day-today operations at the mine, the proponent will likely require it to fulfil (and be responsible for appointing) relevant statutory safety roles, such as the ‘principal contractor’, ‘mine operator’ and ‘site senior executive’ (SSE). This has the effect of clearly assigning safety responsibility which is likely to minimise the risk that the proponent (and it officers and senior personnel) will incur statutory liability for safety incidents at the mine.
Given the introduction of industrial manslaughter legislation for the mining sector in Queensland and other jurisdictions, care will still need to be taken by the proponent to ensure that it does not exercise such degree of control over operations that it is found to have caused the death of a worker on site. The fact that the proponent is not the principal contractor or statutory mine operator or is not appointed as the SSE do not provide the proponent or its senior personnel with a complete release of any potent
Default and termination
While terminating the contract is often the last thing on the parties’ minds during contract negotiations, it is prudent for proponents to ensure that they have sufficient rights to end the contractual arrangements if required.
The consequences of wrongfully terminating a long-term or high-value contract can be significant. As such, the mining operations contract should set out clear default triggers. Among these, the level of under-performance giving rise to a termination right should be clearly described (in the event of sustained under-performance, the proponent could do without having to rely on an ambiguous ‘material breach’ trigger in order to end the contractual arrangements).
Additionally, proponents will often require a right to terminate ‘for convenience’ to allow the contract to be ended for reasons other than the contractor’s default. This may include where it becomes uneconomic to continue mining due to an unexpected fall in commodity prices. While the inclusion of a ‘termination for convenience’ right is unlikely to be resisted in-principle by the contactor, discussions are likely to focus on the termination payments required to be made by the proponent in the event that this right is exercised. In this context, it is important for the proponent to ensure that the amount of the payment is not so high as to effectively defeat the purpose of the clause being included in the first place.
Liability and insurance
While sometimes regarded as subsidiary to the key commercial principles being negotiated, the liability and insurance provisions in a mining operations contract are of primary importance.
Poorly considered liability provisions with overly broad exclusions and limitations of liability in favour of the contractor can have the effect of undermining the risk allocation that the mining proponent believes is reflected elsewhere in the contract.
In addition, ongoing changes in the insurance market for mining operations may mean that ‘boilerplate’ insurance clauses (or clauses that have been used in the past), do not reflect the coverage currently available and leave key risks uninsured. Our earlier article, ‘Update of the developments in the shrinking insurance market’ discusses the current insurance landscape in more detail as more insurers withdraw from the coal sector.
It is critical therefore that the mining proponent takes appropriate legal and insurance advice in relation to these matters.
In the current climate of high (and rising) commodity prices, it may be tempting for proponents to treat contract negotiations as a ‘race to the finish line’ in order to start production as soon as possible, leaving trickier issues to be resolved down the track. However, experience shows that it is in proponents’ longer-term interest to take the time (and to get the right advice) upfront to ensure that that their contract is sufficiently robust and drives the correct behaviours and performance outcomes. It is important to note that the negotiation and drafting of mining operations contracts require care and it is not the case that they can simply be regarded as ‘off the shelf’ precedent documents. §