Following a prolonged boom, current indicators suggest there could be tough times ahead for Australia’s resources sector. The Federal Resources, Energy and Tourism Minister, Martin Ferguson is one of a growing number of insiders to suggest that the mining industry brace for a downturn. This briefing presents eight ways for mines to proactively prepare for tougher times.

Will your assets to be stranded

In a downturn, major infrastructure projects may be stalled, postponed or cancelled, leaving mining assets stranded without access to port and rail, power, water and other infrastructure. Where the development of roads, rail and ports are stopped, product cannot be transported for sale resulting in potential penalties under user and off-take agreements. Now is the time to consider whether or not expected infrastructure developments are secure. If not, proponents should consider financial exposure and whether there are alternatives to ensure project development and operations. An example occurred in May this year when the Queensland Government notified North Queensland Bulk Ports Corporation that the proposed expansion at Abbot Point of a multi-cargo facility and six extra terminals would not proceed. The proposed expansion would have increased capacity by almost 800 percent, enabling significant mining developments in Queensland. Other projects which have been withdrawn, jeopardised or delayed include the Connors River Dam and Pipeline project, the large Wandoan project proposed by Xstrata Coal (which could threaten the viability of port and rail projects tabled to service the Surat Basin), and BHP Billiton’s $20 billion outer harbour expansion at Port Headland in Western Australia.


If off-take agreements have not yet been entered into (or can be renegotiated as part of other transactions), it would be timely to consider conditions precedent to effectiveness – for example with respect to the development of third party infrastructure. Off-taker security and assessment of counterparty risk are also going to require more detailed investigation. Consideration should also given to carefully selecting the governing law and sites of disputes, particularly to ensure that a reasonable forum is agreed and, if arbitration is selected, that the purchaser is a resident of a country that is signatory to the NY Convention on the Enforcement of Foreign Arbitral Awards. For those major contracts which have already been entered into, monitor performance closely to secure rights under the contract and ensure adequate perfection of any security interests in accordance with the Personal Property Securities Act 2009.

Proactively review and renegotiate your contracts

Proactive review of contacts and management of issues in line with contractual rights and obligations can save time and money in managing the issues that emerge in downturns. Provisions on suspension of services, late payment, penalties, termination and suspension of the contract provisions, and consent rights on assignments may be relevant in helping to shape your strategic plans with respect to suppliers and counterparties. Early analysis of dispute resolution recourse rights, and what potential court action could be taken in relation to a contract breach (and whether court action is available to prevent an anticipated breach of contract) are also key to determining how far to manage non-performance.

Mitigate your construction and site works exposure

If the decision is made to slow or stop construction or other works, there are steps to be taken which can mitigate exposure to loss.  First steps require a review (and potential renegotiation if necessary) of your construction contract arrangements. With careful project planning a contracting party can negotiate flexibility in construction contracts including:

  • dividing the work into separable parts;
  • treating separable parts as "hold points" requiring a further notice to proceed to be issued before commencement;
  • ability to omit work from the scope;
  • broad rights of suspension including if possible a pre-agreed schedule of suspension costs; and
  • ultimately, a right to terminate for convenience with no notice period.

Think carefully before any action is taken to ensure it is not seen as repudiatory. Appropriate notices must be served in accordance with the particular contractual requirements. 

Simultaneously, consider what other steps can be taken to mitigate loss, for example cancelling or suspending insurance; attending to security of payment claims not extinguished with termination of a contract; dealing with security held and whether there are existing claims between the parties and the operation of any set off rights.

Beware the risk of trading while insolvent

As the market contracts, so too will access to traditional funding, causing many businesses to delay paying their debtors.  In these times, it is imperative that directors and officers monitor cash flow closely as severe penalties can be imposed, including on directors personally, if a company continues to trade while insolvent. Call in insolvency practitioners early to conduct proper assessments and put in place restructuring plans as early as practicable. If required, restructuring plans may include restructuring payments to creditors, seeking additional funding or securing collection with respect to debtors. Remember, the test for insolvency is based on cash flow so being asset rich will not protect a company from insolvency if there are insufficient funds available to meet known obligations as they arise. Directors may be personally liable for any expenditure while the entity is insolvent in addition to exposure to any penalties and prosecutions by ASIC or other regulators. Vigilance should be extended to contractors and third parties that may be subject to increase risk of insolvency. 

Directors are obliged to continuously disclose

Directors of listed companies are obliged to ensure immediate disclose information which a reasonable person would expect to have a material effect on the value of the company's securities. During a downturn, directors must remain vigilant to the aggregate effect of market and industry changes that emerge gradually if the net effect of such changes has a significant impact on material contracts or strategic plans of the business. For example, if the key infrastructure provider for a region delays or withdraws the project from development, a board should consider at what point the consequential impact of that market change results in an immediate disclosure obligation to their shareholders as a result of material flow on effects to the business. 

Beware not to compromise on Health, Safety & Environment compliance

With immense pressure on time, money and human resources, compliance with licence and approval conditions, and reporting obligations, cannot be compromised. Significant penalties can be imposed for breach of licence conditions and for environmental offences, even when a mine is facing possible shut down. Directors and managers can be liable (including criminally liable) for environmental and safety offences so ongoing compliance is critical. Increased diligence into monitoring and auditing occupational health and safety plans and procedures on sites can help ensure that even in a downturn, your business prioritizes the safety of employees and contractors above all else.

Remember also to diarise the expiry of planning and environmental approvals and other licences so appropriate action can be taken. Significant time and money has gone into obtaining approvals and required licences and it is important to protect this investment when a downturn occurs.

Carefully consider workforce issues

A changing market will impact the equilibrium between employer and employee, and may provide an opportunity for hiring skilled labour at lower costs for resource houses not covered by collective labour agreements which have locked in higher rates of pay. Resource houses with excess capacity may need to consider effecting redundancies. When an employer has decided to lay-off employees it will often be legally required to enter into consultations with staff and unions. Failure to properly consult can result in hefty financial penalties and injunctions that will prevent the retrenchments from taking place.

For those businesses that are also about to negotiate a collective labour agreement, the need for a realistic outcome on labour rates will be acute. At the same time we are seeing increasingly strong positions from one of the principal unions which represents employees in the area. This may lead to more industrial action, and companies in this position will should consider in advance contingency plans for dealing with such action. This may include being able to make quick applications to the Federal industrial tribunal (Fair Work Australia) or the civil courts to obtain orders to stop the action.