Contract mining: The good, the bad and the ugly

The mining industry is an integral contributor to the South African economy, especially in terms of employment. According to StatsSA, the industry contributes R8 for every R100 produced by the national economy and employs one in every 40 working individuals. Of these individuals, approximately 30% of total employment in the mining industry is made up of atypical forms of employment – and these numbers are steadily increasing (Source: www.miningne.ws).

With South Africa’s unemployment rate at a 15-year high, it is important to shed a light on the workforce that constitutes a third of employment in mining – what the challenges are, what can be improved, and what is working well.

This is set to become more relevant as the Department of Mineral Reserves (DMR) sets itself up to become more active in the stimulation of this sector.

Gwede Mantashe, DMR Mining Minister, said earlier this month: “Prioritising the exploration of new mineral deposits, and continuing to work together with the industry, we can turn our comparative advantage into competitive advantage and ensure the sector’s positive contribution to growth of the economy is sustained,” (Source: Mining Review).“Prioritising the exploration of new mineral deposits, and continuing to work together with the industry, we can turn our comparative advantage into competitive advantage and ensure the sector’s positive contribution to growth of the economy is sustained.”

This bodes well for the mining sector, and indicates a commodity boom may be imminent.

The Labour Broker phenomenon

The South African mining industry’s inability to create sustainable jobs is caused by complex challenges. Labour broking, casualisation, the sub-contracting of work in the mines and the weak South African legislation, as well as political interference, have been identified as some of the challenges. These factors are blamed for crippling the potential of the South African mining industry to create much-needed jobs (Source: News 24).

Legislation changes

In a recent Constitutional Court ruling, the age-old debate around labour broking was finally put to rest. As reported in a Timeslive article in July, the Constitutional Court has upheld a 2017 ruling by the Labour Appeal Court that found in favour of the National Union of Metalworkers of SA (Numsa), which represented workers in the employ of Assign Services who challenged the dual-employer interpretation.

Benefits (Focusing on the good)

Contract mining does not always fall firmly into the category of labour broking. Contractors are appointed for core and non-core services based on bids and tenders. These bids are won on the strength of the proposals and the reputation of these bidders, which is a standard procurement procedure.

Contract mining provides mine owners with some of the following advantages according to industry opinion:

* Economies of scale and scope through access to capital equipment and human resources;

* Optimised mining, plant, and equipment utilisation rates and labour productivity;

* Minimisation of the owner’s capital exposure, which allows the company to better utilise capital;

* Better equip (or re-equip) mines with restricted capital budget.

Simply, this summarises the benefit of contract mining as managing risk. This applies to workforce availability, occupational health and safety, and environmental incidents. The managed risks referred to here are mostly with regards to the separation of funding risk away from just one party. The bankability of an equipment funding transaction is often seen as riskier when one party is involved and less risky when multiple parties share the risk. For the principal, it means better balance sheet flexibility regarding the issuance of fixed-term suretyships or guarantees rather than commitment to hard fleet or equipment purchases. These liabilities are deferred to the contractor’s balance sheet.

For the principal, it means better agility in terms of scaling up or down of operations, and for the contractor it means the ability to leverage equipment or fleet building on the back of the guarantees, allowing bigger capacity later on a refurbished item. This ultimately enables these contractors, if managed smartly, to increase their margin later or bid for new work with existing capacity on balance sheet.

The management of labour is done at a contractor level allowing the principal to scale down their administrative costs in favour of the contractors undertaking this function. At the same time the principal from an ethical standpoint can insist on the contractors’ fair treatment of workforce in terms of the agreement.

Risks (Facing the bad)

The challenge that erodes the above-mentioned benefits is the mind-set that the mining process doesn’t need to be controlled. This is especially true when multiple contractors are on site. In the case of contract mining, each contractor usually seeks to ensure that their own functional contribution is met, but at times, without considering the overall aim.The mind-set that the mining process doesn’t need to be controlled.

A clear example of this is when, in a surface mining operation, the drilling contractor is a different entity from the loading and hauling contractor. The primary purpose of the co-venture will be the handover of mining blocks in sequence and on time. For the individual contractors, the primary drivers would be those that create revenue, thereby, surfacing natural conflict.

In addition, the attitude that the contractor should ramp up or ramp down capacity without notice or consideration for the financial wellbeing of the partner can do serious damage to the abilities of

the entire asset. A mind-set shift in this regard is necessary and two-fold: firstly, the contractor and mine owner relationship should be considered as a strategic sourcing arrangement and the success of each party is intertwined with that of the other. Secondly, the nature of the arrangement should follow strategic sourcing principles, incorporating the final step in post-bid management, which is to manage contractor performance.

Another challenge the South African mining industry faces is that contractors don’t have the same benefits as permanent workers, are signing incomplete contracts, and are, therefore, seen as easily ‘recycled’. Agreeing to these types of terms, and often less pay, may also place permanent workers in an unflattering light when they make ‘unnecessary’ or ‘difficult’ demands, explains Mamokgethi Molopyane, a mining and labour analyst.

It is important to note that principal mining rights holders do not always do the wrong things by contractor labour. Recent trends suggest that principals insist on fair treatment of employees of a contracted operator, especially when this relates to core mining services and are related to production and throughput.

Mitigating the risk (Overcoming the ugly)

The key elements of the solution include the incorporation of the contractor into the Management Operating System (MOS). This ensures that the management of processes across the value chain is centrally driven by key mining objectives and the heart of the success of each contractor. This serves to alleviate the subordination of the throughput and spatial compliance objectives. It also firmly focusses the individual contractor on inter-contractor teamwork.

For the principal, it also ensures that the head office or oversight employees are not drawn into the technical detail of the different disciplines, but rather manage the “Key Performance Indicators” (KPIs) of the entire value stream.

It sounds simple, but the barriers to be overcome are numerous.It sounds simple, but the barriers to be overcome are numerous.

The contractor’s site management is serving two masters, so the general management layer (contractor and principal) have a firm and definite role in the facilitation of future review sessions, which ultimately alleviates the culture of blame that might emerge. Senior contractor site staff must also contribute to planning the work on a quarterly and monthly basis to ensure that the scheduling of work is in clear alignment with the overarching aims.

An integral part of the on-site performance discussion is the individual contractor review conversation and should be carefully considered in the contracting stage. It should also be part of the Principal Management Control System.

The contract (At the core of contract mining)

In the end, it boils down to the active planning of management processes. The ability of the contract management staff to be in tune with their reality, which will be slightly different on each site, also plays an integral role in the success of the venture.

If one can look past the bad and the ugly, it’s clear to see that only good can come from taking care when drafting the contract and carefully setting it up. This is where, in my opinion, the heart of the solution lies.

About the author

Norman has 10 years of experience in operations management consulting in a broad spectrum of industries, from financial services to mining. His consulting career incorporates over 20 implementation projects with various improvement goals in mind. He previously has held lengthy workspells in the banking sector as well as in the publishing industry.