The result of several contractors shying away from the sector may well prove to be a watershed. Industry observers claim the days of principals being able to play contractors off against each other over pricing are well and truly over.

Under-priced bids, lack of recognition of risk (by both principal and contractor), strategic buying of jobs and conflictive relationships between contracting parties are some of the reasons contractors are taking another look at this part of their business. Some claim that over 50% of contracting jobs have met the needs of neither principal nor contractor.

The most notable event this year was the apparent withdrawal from contracting of Allied Mining, part of the Allied Group also comprising equipment hirer Allied Plant Services. Over the past few years Allied Mining completed several successful contracts, including a major roadway development contract at Moranbah North. Most recently, the group owned and was operating (through its contracting division) the geologically complex Bellambi West coal mine in New South Wales.

The mine was closed in January 2002 after company directors said it was no longer commercially viable. The age of the mine, geological difficulties and equipment problems were some of the official reasons given for the mine’s final closure.

Recently, Allied appeared to pull back from further contracting work and withdrew from a major bid for roadway development at a new mine, apparently due to an unwillingness by company directors to adequately resource further work. At the same time managing director of the contracting division, Pat Ellis, and several other key staff resigned.

No formal announcement has been made and the company would not confirm their position when approached by Australia’s Longwalls, stating only that they were too busy to say anything at present.

Thiess, one of the larger players in mining contracting, has signalled greater caution in taking on further underground contracts in Queensland. This emerged in the wake of their withdrawal from operating the North Goonyella underground operation in Queensland. Thiess held a 40% stake in the troubled mine which it operated on behalf of majority owner RAG Australia. In January this year Thiess sold its portion of the mine to RAG and withdrew from the operating contract.

Word in the industry is that while Thiess took a substantial loss as an operating contractor, the sale of the stake along with profits from coal sales resulted in a cost-neutral result overall. A Thiess representative said the company would not be taking on high-risk jobs in Queensland and would be more careful to judge and apportion risk in the future.

While the brakes may be on in Queensland, in NSW Thiess is the operator of the Southland longwall mine, owned by Gympie Gold. In fact, it is the only longwall mine in Australia operated by a contractor and one of a few contracts based on alliancing principles.

Recent operational changes in mining seem to have helped with ongoing strata problems at Southland. But a major factor in the mine's performance appears to have been the introduction of the alliance contract characterised by greater risk sharing.

While contractors may prefer alliancing style contracts, principals still seem to prefer hard dollar contracts. In some companies board approval to green-light a new mining project is only given if a hard dollar contract forms the basis of a proposal. As one contractor complained: “We go to the substantial expense of putting together a tender for a job that may never eventuate.”

So who is left?

Walter Group currently has the lion’s share of underground contracting in Australia’s coal sector. The company has long-term development drivage contracts at North Goonyella and BHP Billiton Illawarra’s West Cliff and Dendrobium mines in NSW.

Mining manager Peter Roberts said the contractual arrangement at West Cliff was based on alliancing principles. “If we don’t cut x meters, it doesn’t matter who’s fault it is, the way the deal is structured we never have a dispute over money.”

“It works on good faith. Either party can pull out at any time and our project manager is part of the West Cliff management team.”

Walter recently decided to lift the profile of the mining division, following the appointment of new managing director Michael Frick in May this year. A new mining division has been formed with Gary Ash as general manager and direct reporting lines to Frick.

Roberts said the group had three contracting strands in the underground sector. These were: provision of a range of services such as installation of secondary support, medium to major contracts such as development contracts, and the joint venture arrangement with Continental Conveyor whereby Walter constructs conveyor projects in alliance with Continental.

“We’ve had three good years in a row and that is in part due to the fact that we continue not to tender for work we do not have the resources to complete,” Roberts said.

The other major contracting group that has survived is Roche Mining with three major underground contracts all in NSW. These include 18km of mains and gateroad driveage at the Tahmoor North mine, and 18km in-seam maingate development at the Kayuga development project, the Dartbrook mine replacement. The latter also includes stone driveage and development of a 930m decline.

A Roche representative said that in moving into the underground coal sector the company was looking to expand on its successful open-cut business. This involves the provision of capital and resources that are an investment in the future of the business. However, as companies look to spread their risk through contract development, the economics have to be looked at from both parties.

Roche predicts the industry may be entering a cycle in which mines will find themselves having to ‘capitalise up’ for development work if the true costs of in-seam development are not recognised. This will increase due to the unwillingness of contractors to come in at unrealistic prices for so-called ‘strategic’ reasons to take market share.

“Mining companies are looking for the contractor to have contract development costs less than their own development costs, however, in general their analysis only reflects the cash cost of their development, with other development costs being amortised across the other production activities in the mine, and hence does not reflect the contractor’s cost of development,” Roche said.

Another major mining contractor in the open-cut and metals sector, Henry Walker Eltin, has not been overwhelmingly successful in underground coal. Its first foray into underground coal via an underground mains development contract in 2000 at Moranbah North reportedly lost the company a lot of money. Its second job at Southern colliery was more successful.

A company spokesperson said HWE had deliberately stepped away from the sector to get its house in order. It is now hopeful of winning a major development contract for a new mine in Queensland for which it is shortlisted. Beyond this job, HWE is actively seeking additional work in the sector. Published in Australia's Longwalls, September edition.