With on-going pressure in the current mining climate on commodity prices and the subsequent trend of downsizing project pipelines, resource operations and consulting engineers are faced with increasingly-complex challenges.
According to Gerrit Lok, general manager for resources at global engineering consultancy firm SMEC, there has been a significant reduction in projects, especially from larger mining companies. “There are very few Greenfield developments, and most capital projects are typically brownfield expansions. Given the current state of commodity prices, this trend looks set to continue for at least 18 months.”
Bearing this in mind, the main focus is currently on productivity improvements and the optimal use of assets. This has led to a measurable decrease in both engineering, procurement and construction (EPC), and engineering, procurement and construction management (EPCM) projects across Africa.
Lok indicates that the primary focus of many mining companies is operational efficiency. “As far as capital projects are concerned, there is a strong focus on capital efficiency to the extent that many capital project programmes in the local mining industry have been reduced by as much as 80 %. The current objective is, therefore, going back to basics and focusing on core business.”
Another primary concern in Africa is the lack of infrastructure to support mining projects. Lok warns that this, together with the current commodity price downturn, makes it incredibly difficult for projects to obtain finance. “As a result, the majority of execution projects are largely on hold, with greater focus being placed on concept, pre-feasibility and feasibility studies,” he reveals.
Lok believes that the development of infrastructure in Africa should be pushed more aggressively. He continues: “Infrastructure in this context is a major project enabler and should be seen as holding immense potential from a project and engineering perspective. For bulk commodity projects, access to power, water and product transport remains the main obstacles.”
EPC or EPCM?
Under an EPC delivery model, an EPC contractor will generally be responsible for the design, construction and commissioning of a facility. In an EPC contract, the EPC contractor is usually liable for costs and for meeting pre-determined performance specifications and standards.
In contrast, EPCM contractors focus more on a professional services agreement, taking responsibility for; the provision of engineering and design services; procurement of contracts with suppliers and contractors as agent of the owner; and management of the construction phase of the project. The commercial and financial risks in the case of the ECPM model is the responsibility of the client.
Lok points out that, in theory, projects will select the EPC model in higher-risk environments – due to the fact the appointed contractor carries greater responsibility and liability. “This does not always happen in practice, as the decision to select the EPC or EPCM model is often rather determined by the willingness of owners or engineering contractors to accept risk given the current market cycle and opportunities available.”
When the commodity pricing cycle begins experiencing an upward turn, the engineering consultant is often in the position to be more selective, due to the fact that they have a greater choice of projects to become involved in, and in so doing are less likely to assume any additional risks. “This means that they will almost exclusively move to an EPCM model in more prosperous times,” states Lok. “The opposite tends to be true during times of falling commodity prices.
- ‘One-stop-shopping option for project
- Hands-off approach to project from the owner’s perspective
- Minimal staff requirements from the owner’s perspective
- Less commercial and financial risk by owner
- Best for well-defined projects with detailed engineering complete
- Lower overall cost
- Sense of ownership for staff
- Greater control over processes
- Flexible financing for owner
- Better-suited to less defined projects with anticipated changes to scope of supply
Lok suggests that mixed models may be the most viable solution. “Ideally, resource companies and engineering consultants should come together and study the nature of the projects and the overall environment, thus making an informed decision on what delivery model they will be entering into, based on an in-depth understanding of all elements of the project and the operating environment.”
SMEC is a well-diversified engineering company and has the benefit of shifting work within the organisation over many sectors, geographies and engineering disciplines. “Given the nature of our projects and the services we provide from a mining perspective, we actually view the mining sector as a growth area in the medium to long term,” Lok asserts.