CHAPTER 10 MINING SERVICES CONTRACTS: THE AMPLA EXPERIENCE

• Jurisdiction: United States

Mining Agreements: Contracting for Goods & Services
(Sep 2015)
CHAPTER 10
MINING SERVICES CONTRACTS: THE AMPLA EXPERIENCE
John G. Grace
Grace Legal Pty Ltd
Melbourne, Australia
Stephen Boyle ^*
Partner
Clayton Utz
Perth, Australia

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JOHN GRACE is an international Project lawyer with over 40 years' experience in projects in over 50 countries, involving major mining, petroleum, forestry and other infrastructure developments, and shipping, in all types of legal systems. Amongst other matters, he is presently the Coordinator and Chief Draftsperson of the AMPLA Reference Groups, which have developed the range of AMPLA Model Agreements, including the well-received AMPLA Model Mining Services Contract. He has written and published extensively on matters of interest to mining and petroleum lawyers, and presented numerous seminars on these subjects and others. In his extensive career, John was: Partner and head of the energy and natural resources group at Freehills, International Lawyers, Melbourne, Australia office for 9 years; Chief Legal Officer of BHP Petroleum International for 8 years; Executive director of the BHP Petroleum Group of companies and a non-executive director of Gas and Fuel Corporation of Victoria and other Australian companies; Councillor of the IBA Section on Energy and Natural Resources Law for 10 years and editorial board member of the IBA SERL Journal; Legal Manager of Australian Shipping Commission (ANL), the international and domestic shipping line for 5 years; Senior Solicitor, Parker & Parker, Perth, Australia for 5 years. John is presently Managing Counsel of his own firm, Grace Legal Pty Ltd, advising local and foreign clients on investments in Australia, Asia, Africa, and the Middle East, including the Commonwealth Secretariat in London as an Expert Legal Adviser.

Since 2005, the Australian energy and resources law association, AMPLA Limited (ACN 006 037 529) (AMPLA)¹ has developed and published over 50 model agreements for use in the minerals and oil and gas industries. These models are published on the AMPLA website at www.ampla.org.

The AMPLA Model Mining Services Contract (AMPLA Model Contract), and its Model Alternative and Optional Clauses (Model A & O Clauses), were the first AMPLA Model Documents. This Model is intended to provide a comprehensive framework for use in the building, operating, suspension, termination and rehabilitation of any and all aspects of a mining operation. The Model can be modified by the insertion of specific Model A & O Clauses to address specific non-standard matters. The Model provides a flexible, generic and modular template able to be used, with suitable local adaption, in any jurisdiction.

The original AMPLA Model Contract was developed for use in Australia and has been progressively improved. It has been translated into Spanish and developed further as a French civil law model amended to comply with the rules of public policy commonly applied in civil law jurisdictions.

This paper presents and explains the considerations behind the drafting of the first AMPLA Model, and its Model A & O Clauses, which set the template for all the later AMPLA Model Agreements.

The context of Topic 10 and this paper

In the context of the theme for today of this Special Institute on Contracting for Goods and Services in the Mining Industry, the previous Topics 7, 8 and 9 have addressed:

• a fair bidding process for the construction of a multi-billion dollar mine;

• the various standard forms of contract for the development of the mine; and

• various mechanisms to ensure contract performance and allocating risk.

The purpose of this Topic 10 is to present and discuss a novel way developed by AMPLA in Australia of approaching the issues faced by a mine Principal when contracting for the supply by an independent contractor of the goods and services necessary to build, operate, suspend, terminate and rehabilitate a mining operation from "go to whoa". But first some background.

Minerals production in Australia

Australia is one of the top mineral producing countries in the world and has a large resource inventory of most of the world's key minerals commodities. Minerals are produced in all Australian States, the Northern Territory and Christmas Island. Minerals are Australia's largest export.² As at end 2013, Australia position in world mineral production was:

• leading producer of iron ore, bauxite, ilmenite, rutile and zircon;

• second largest producer of gold, lead, lithium, manganese ore and zinc;

• third largest producer of uranium;

• fourth largest producer of black coal (also the largest exporter), nickel and silver; and

• fifth largest producer of cobalt, copper and diamonds. ³

According to the Australian Bureau of Resources and Energy Economics (BREE),⁴ the mining sector accounted for around 11 per cent of Australia's GDP in 2013-14, up from 7.8 per cent

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in 2003-04. As at September 2014 the BREE medium term forecast and projected outlook for Australia's total minerals production, including exports, was:

Mine production	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18	2018-19
Gross value5	167 037	187 335	184 663	209 234	232 043	254 938	263 425

The Australian resources and energy commodities industry's exports (excluding oil and gas) accounted for around 59% of goods and services exports, and 71% of merchandise exports.⁶ In terms of contribution to the Australian economy, measured by industry gross value added (GVA), mining has been the principal driver of economic growth over the past ten years. From 2003-04 to 2013-14 mining GVA increased 79 per cent, or $72 billion, to total $164 billion. This was both the largest and highest rate of increase of all industries in the Australian economy.⁷

By way of comparison, in Canada in 2013:

• Canada's value of mineral production was nearly $C43.6 billion.

• The mining industry accounted for 19.6% of the value of Canadian goods exports; and

• Mining contributed $C54 billion to Canada's GDP. ⁸

In the United States mining represents only about 2% of GDP.⁹

In Australia in the past decade over $400 billion of resources, energy and related infrastructure projects have been undertaken with around $220 billion of projects still under development. Annual mining capital expenditure has increased in line with the growth in project undertakings. In 2003-04 annual mining capital expenditure totalled around $10 billion and increased nine-fold to $90 billion in 2013-14. Importantly, much of this growth came after the Global Financial Crisis, spurred by demand principally from China. Subsequently, the mining industry's share of total capital expenditure increased from 33 per cent in 2008-09 to nearly 60 per cent in 2013-14.¹⁰

Along with the rise in capital expenditure, there was a significant rise in mining employment. In the five years to May 2012, mining employment rose by 131 700 to 269,300 representing an average annual growth rate of 14.4 per cent. In 2012 alone, employment increased by a further 53,400, or 24.7 per cent.¹¹ Since then with the decline in minerals prices, especially in iron ore and coal, mining employment has declined so that by March 2015 mining industry employment was just 220,400 people, down from the 2012 peak of 270,000.¹²

Contract mining in Australia

In Australia, especially during the recent mining boom caused largely by Chinese demand for raw materials across a range of minerals, mining companies found that, with costs rising significantly, it was cheaper to outsource a range of mining operations to specialist contractors who were more focussed and driven to keep costs down in order to be competitive, as well as being able to outsource the raising of capital needed to acquire mining plant and equipment.

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Until the recent downturn in minerals prices, contract mining represented more than $12 billion per annum of mining work in Australia,¹³ with an average growth rate of 11% per annum. The coal industry dominated the contract mining industry with a share of over 40%, whilst iron ore, gold and nickel had a significant contract mining presence. During the recent mining boom, the value of iron ore contract mining more than tripled. In Western Australia more than 40% of iron ore exports were produced by contract mining.¹⁴

More recently as the mining boom subsidised, mine Principals have been seeking to bring back mining operations in-house to provide continuity of employment for their own workforces during the downturn, so the value of outsourced contract mining has decreased.¹⁵ This is part of a normal cycle of mining. In the previous big resources downturn in the late 1990s, the value of contract mining fell by 17% overall, but by 50% in iron ore.¹⁶ For the Australian company, Leighton Holdings Ltd - the world's largest contract mining company, revenues from contract mining in 2014 were $A4 billion, down 21% from revenues of $A4.8 billion revenues in 2013.¹⁷

Even with the current downturn there are presently over 75 companies listed on the Australian Stock Exchange which generate more than 25% of their revenue from mining services, either through equipment or non-equipment (e.g. labour and consumables) services.¹⁸

The scope of contract mining in Australia

In Australia, and in overseas countries where Australian contract mining companies are active, contract mining activities can range from basic earthmoving to full services contracting. Contract mining activities can also extend to providing associated infrastructure such as wash plants and roads, rail and port facilities.

The scope of a mining contract can include all or part of this range of activities as defined and agreed between the Principal and the contractor. They may range from operational or maintenance activities, infrastructure development and upgrade, and whole of mine operational management.

Operational activities can be grouped...