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SUKARI UNDERGROUND RESERVE GROWTH SUPPORTS TRANSITION TO OWNER MINING, DELIVERING COST SAVINGS AND INCREASED FLEXIBILITY
Centamin announces that, following an independently managed contractor tender process, the underground operations at its Sukari Gold Mine ("Sukari") will transition from contractor-mining to owner-operator mining with immediate effect. This change will deliver significant cost savings and improve operational control and mining flexibility, whilst also enabling the company to upskill the local workforce.
The decision to move to owner mining, following the expiry of the current five-year contract, has been based on the following:
· Reserve growth - the 200% increase in Sukari underground Proven and Probable Reserves, as announced in December 2021, underpins an eight-year underground life of mine, with identified near-term growth targets to extend beyond a ten-year life of mine
· Leadership team - the operational leadership at Sukari has been significantly strengthened, with experienced underground expertise and increased investment in the development of the national workforce
· Operational benefits - an owner-operator model including risk-based analysis against the submitted contractor-mining tender proposals identified significant operating synergies for the broader Sukari operations
· Cost savings - the transition to owner-operator mining is expected to generate long-term cost savings of an average US$19 million1 per annum from 2023 onwards compared to the 2021 cost base, and
· Mine life extension and upside - 90,000 metres of underground drilling is budgeted for 2022, including identified near-term growth targets to extend the underground beyond a ten-year life of mine and helping to support the underground expansion study which is due for completion in H2 2022.
UNDERGROUND MINING
A detailed transition plan to owner-operator mining is in place with implementation underway, including utilising a third-party underground mining specialist to assist with workforce training. The Company has also executed its contractual right to purchase the current underground mining fleet from the incumbent contractor for a total capital cost of US$10.5 million to be paid this quarter, Q1 2022.
UNDERGROUND DRILLING
Following the completion of an independent tender process, the Company has awarded Geodrill Limited ("Geodrill") a five-year contract to provide underground drilling services, including a minimum of 90,000 metres of drilling per annum and introducing reverse circulation ("RC") drilling to the underground which is faster and enables larger samples to be taken. The contract is to commence this quarter, Q1 2022.
2022 GUIDANCE
There is no change to the 2022 annual production and cost guidance. As a result of purchasing the incumbent contractor underground mining fleet, the annual capital expenditure guidance for 2022 is increased by US$10.5 million to US$225.5 million.
Cont…
MARTIN HORGAN, CEO, COMMENTED: "The decision to transition the underground to owner mining reflects extensive planning and evaluation to determine the most effective operating model as we continue to grow and maximise the value of the Sukari orebody. Following a 200% increase in underground reserves with further identified growth opportunities and an underground expansion study underway, we believe this move best places us to extract the maximum value safely, efficiently and cost-effectively from the expanding underground operations. In addition, we welcome Geodrill to Sukari and look forward to working with the team as a key partner and contractor as we continue to explore and develop the full potential of the underground operations."
End.
I think they have just touched the top of the iceberg for the underground. It is going to be interesting to see how they plan to mine this, as commented previously, especially with those grades, and the volumetric envelopes of uncertainty. To my mind, this will show the worth of the new CEO and team.
the Gnome, getting hotter about gold ...
can anyone explain the term owner mining and its impact?
The best news we have received since Horgan took over. Now that he is taking the reins himself and has shown faith in his team it reflects confidence in his own strategy.
it is ok I google it.
https://www.crown.co.za/images/LatestNews/ModernQuarrying/Owner_vs_contract_miner.pdf
More control- always nervous when an RNS hits- but so far flat so seems to be moving on gold etc- bit of a "phew" moment as you never know initial market reaction on RNS!
Taking more control is a good move, I worked in a business (OK so not mining) and we bought most in house, in preparation for a sell- and we did sell as demonstrated to investors we had increased control of our destiny.
My assumption of owner mining is that I stead of hiring sub contract compannies they are now carrying out mining with their own employed staff
Good move. Cheaper and more control. Looks like a no-brainer and something that was long planned as soon as the prior 5 year agreement expired. This will reduce AISC
Martiin Horgan seems to be pushing ahead with his strategy of moving key services back in house from contractors, after the balls up by Barminco underground drilling contractor in 2018 I think this is a move long overdue!
I found it hard to understand why in 2018 Centamin failed kick Barmico out for failing to have critical spare parts available for the one and only and working on limits underground LHDR or invoke some sort of action re penalty clauses to claim back costs of lost production.
One of our members at the time (Schomosport) then informed me that in order order to keep contract costs lower/affordable such penalty clauses are generally not part of the T&C of contracts, so it seems in that instance bad supervision on the part of Pardey, Youssef & team was and lack of lost production penalty clause gave Barminco a get out of jail free card!
You may be interested in their informative comments in the next post re production risks and contracts T&C
Re Centamin production downgrade to 505,000 oz 2018
2018 tipped as ” a year to forget” for Centamin as grades falter
By David McKay -May 25, 2018
https://www.miningmx.com/news/gold/33018-2018-tipped-year-forget-centamin-grades-falter/
"The cause of the issue is two-fold. First, lower than expected grades in the transition zone of the open pit mean less gold than expected. This should pick up through the year as mining moves out of this area. Second, volumes of ore mined underground has been down on budget due to kit availability issues. These issues are being resolved (and a second crew has been mobilised by the contractors) and again should see improving tonnage through the balance of the year. Which should mean 2Q is the weakest production quarter this year."
https://www.markets.iweb-sharedealing.co.uk/research-centre/market-news/article/?id=3313405&type=bsm
Part of a post from Cowichan
Question: Has Centamin's management sufficiently explained the continual (going on two years!) poor grading control in the main pit?
Which just happens to be under the authority and watchful eye of Capital Drilling?
Or has management ever come clean with the ill fated long hole drill rig LHDR? I spotted this article which seems to imply the LHDR was damaged when it was left in the blast zone!? Who did that? Capital Drilling?!
https://www.thetimes.co.uk/article/endeavour-needs-to-dig-a-bit-deeper-g5p06w5fc
"All gold miners enjoy a spot of pyrotechnics. Take Centamin. It had such an explosive day of it last year that it clean forgot to remove its own kit from the blasting zone. The upshot? A poleaxed “long hole drilling rig”.
A trip down Memory Lane
https://www.lse.co.uk/ShareChat.asp?ShareTicker=CEY&share=Centamin-PLC&thread=00E2F959-BAC4-4978-B38A-42B319F53BDF
Moving more operations/services "In house"seems to confirm that at the very least if "Balls ups" happen in the future it will be easier to determine responsibility!
Schomosport from 2018
Posts: 11
Off Topic
Opinion: No Opinion
Price: 119.20
RE: Re Complacency
Today 20:45
In general I find this forum extremely informative and am most grateful for those such as MrT who agitate on behalf of shareholders and bring back information directly from the Company. I would however like to say a few words on the topic of the sudden loss of the single drilling machine.
I know very little about mining however I do know quite a lot about reliability, dependability engineering, contracting for availability, etc. which is the gist of the discussion regards the absence of a hot standby replacement for the single drilling machine. Fundamentally it is a cost/risk decision where in almost every case in every industry, management will ignore the recommendations of risk engineers and trade cost NOT incurred against the cost of what MIGHT be incurred if the risk comes to fruition. Sometimes management get it right, sometimes they get it wrong, often massively so, BP Macondo being an example of the latter.
So I am not even a little bit surprised at the predicament that arose when a single critical equipment item failed and bought production to a halt. Saddened, cynical, disappointed, world weary but surprised, no, it happens all the time. Given that a new machine has now been ordered it would appear that management have also concluded that they got it wrong as they have ordered a replacement. Hopefully they will extrapolate the argument to other single point failure parts of the production process, but don’t bet on it. People do not like spending money mitigating risk!
As to the wails about penalty clauses, liability insurance, contractor should pay for loss etc.; forget about it unless you want to add two noughts to the contract price. And spend years in court fighting for ‘victory’ at every twist and turn. Centamin management don’t appear to have been overly successful in this arena with their own government I note. Sorry, that sort of a world doesn’t exist and, if it did, nobody would bid for it, they all want to be like these companies who think they can experiment in running a railway at a profit and then give it back when it goes tit’s up. Dream on.
You might also like to ask the contractor how many times he has been encouraged to delay preventative maintenance just to get a little more output out to boost the month end figures. The contractor always agrees of course as its customer’s risk. That sort of mentality doesn’t do much for reliability either!
Mr Tibbles I remember it well in 2018 LHDR left within the blast zone, that's just crazy and such an elementary mistake that cost a bloody fortune.
Gnome interesting most definitely will test the CEO and his team. A major decision and not without considerable risk. Yes it is good in many ways to go it alone but it isn't just "the mining" part of the decision as maintaining, servicing and repairing underground machines and equipment ain't easy, let alone taking over a fleet of used kit. I hope the contractor has maintained detailed records for each piece of kit.
Also the underground gear isn't manufactured and supported by the same team as the open pit equipment.
Interesting times but they aren't reliant on the underground performance as much as they are the open pit and will have time to adapt before the demands become far greater. Guess they will be taking on a good number of the contractors people even if only for short term.
Very interesting times and a gutsy decision.
Absolutely Ken and Pardey tried to lie his way out of it with when reporting t o the market and shareholders!
So did Barminco forget to order LHDR spares or did Capital just not check before pushing the plunger and blowing the LHDR up, either way appallingly bad site management!
Mind you when this happened where was Youssef, probably checking out real estate to spend his bonus shares on!
Hi Dasut, Your understanding on these matter is better than many of us on here, although after the apparent failure of "whoever" to take proper care of the sole LHDR and the failure by Centamin to ever disclose just who was responsible for the balls up and the inability or reluctance to claim any compensation from the guilty parties for dereliction of duty then taking these specialist services in house seems to be long overdue.
Opinion of a very experienced and respected mining analyst-
Using contractors for mining is almost always a bad idea.
Only when there is a short term mining project such as the pushback at the open pit there, you could argue to use contractors. It is not worthwhile and efficient to equip and staff up for such a project.
That said if you have a longer term mining project you should use an owner miner approach for the following reasons:
- Mining is the core activity of any mining business. If you outsource this activity you never build up an in-house expertise. It would be similar for an information business to outsource design of information system and programming activities.
Also It is more expensive as the contractor will build-in a profit margin and should they miscalculate and go under, you will have to take over at short notice, which results in a shamble, loss of revenue, appointing another contractor which knows it has you by the balls or you have to equip and staff up quickly, which in practice is impossible having worked for a company that experienced this when their contractor went bust!
In general there is a loss of control in directing mining activities having to work through another party.
Tibbs you need to forget about the LHDR as this is well in the past and unfortunately mechanical equipment breaks, it is the nature of the beast and without knowing what part broke it is difficult to understand whether the part should have been in stock. The mistake was maybe they should have had a standby machine but there again underground production is and always has been a low percentage of the overall business and you can't have standby machines for every piece of equipment, just not practical and extremely expensive. A **** up but needs to be put down to experience as hindsight is so very precise.
I know you might not agree with the above but I have in the past had responsibility for stocking parts to cover fleets of equipment and it is impossible to have everything available in stock at the drop of a hat especially when so far away from the manufacturers or their parts warehouses.
Also why Capital are getting the blame for blowing up the rig I don't understand as why would someone park an underground machine in the blast zone of the open pit. Sorry no logic whatsoever unless even more worrying a blast in the above ground open pit caused a cave in or some such thing underground.
When there is an in pit blast everything stops, everyone on the mine including visitors knows when and where the blast will be taking place, the blast team pretty much take total control of the mine during this period of time there will be sweeps of the blast area made by the blast team all will be in radio contact and all clear from each member of the team prior to anyone hitting the button.
All blasts are treated very seriously and to think an underground piece of equipment would be left sitting in the blast zone just wouldn't be allowed. When I say the blast team it won't just be Capital people it will be senior supervisors, managers including the pit boss of Centamin who will be involved in the sweep.
Tibbs,
There are many schools of thought when it comes to contractor or owner mining no such thing as one case fits all. Much too large a subject to go into in any detail but there are many very successful, experienced and highly professional contract mining companies that provide excellent work for mining companies of all sizes including the majors.
As I said earlier it isn't just about the mining but I do agree that mining is the core activity of a mining company or if it isn't it should be but as I say it isn't always that simple.
There again what is mining is it digging ore and loading trucks and driving trucks to the hopper or is it who owns the equipment and employs the operators/drivers, or is mining telling the operators and drivers where to dig and dump? With mining being processing the ore and selling the mineral. Is it employing people or bringing in self employed do you maintain your own equipment or do you contract out to someone to do this for you? Just a couple of questions and these will all need to be taken into account as getting rid of a contractor will add additional responsibilities, personnel, activities, knowledge and the list goes on so as I say not clear cut.
In the case of Sukari underground one of the issues I have is taking ownership of a used fleet of underground machines that may or may not be reliable. Something else that worries me is continuity of knowledge and experience, with the contractors leaving with considerable knowledge and experience and trust me Barminco have considerable experience. However, it is relatively early days in the development of the underground so whilst a gutsy decision we will have to put our trust in the new team.
Hi Dasut,
"But then, I suppose, when with the benefit of hindsight one begins to search one's past for such 'turning points', one is apt to start seeing them everywhere."Kazuo Ishiguro
Looking back now the concerns flagged up in 2015 & 2018 by Kees Dekker about the way that Pardey his team were running Sukari were opportunities for them to change their ways.
But instead they continued to compound bad mining practice onto the previous bad mining practice whist denying that anything was wrong and papering over the cracks until a crack appeared that no papering over could cover!
i accept that unexpected difficulties can present themselves in mining but when that happens they should be truthfully acknowledged , explained fully and dealt with professionally in the most appropriate manner, none of which happened!
To say Share holders and the market were misled is an understatement, Pardey, Josef and Youssef continued to trumpet unrealistic and certainly as now apparent unsustainable guidance predictions in the Egyptian media and in Centamins quarterly reports to share holders and the market.
The link that Cowichan provided to the 'Times" article raising questions about what or whom was responsible for happened to the LHDR, this has never been explained to this day,why not?
I agree that mining equipment is very expensive, that said in comparison though failing to mitigate production risk by not having a contingency plan or even a spare LHDR can cost a lot more.
How many millions of dollars have been spent drilling holes for no return in the WA projects, some of that funding would have been better spent on Sukari producing ore rather than unfulfilled promises.
Barminco may have considerable experience in underground drilling,although their performance at Sukari does seem questionable in many respects.
In the absence of any explanation to the contrary after the failings in 2018 it is hard to have any confidence in the way that certain contractors operated which seems to have been on the limit or even possibly in a careless manner?
True the contactors staff have experience, but then the client/comapny must also have gained some understanding of the contacted out operations or works.
There seems little justification in staying with with a contactor for fear that that their equipment or fleet is unreliable or nearing the end of its life.
Contractors are in the business to make profits out of the client and certainly as happened in the the UK the NHS & Local authorities that entered into PFI partnerships in good faith by outsourcing to contactors have always ended up being taken advantage of because they are regarded as over a barrel which as been the case in every other industry as we are now painfully aware in today's world.
Far better to take control of essential operations by employing the right staff investing in the right equipment/plant and managing them in the proper way.
Equipment depreciation cost are reclaimable against tax.
Tibbs You are preaching to the converted and I thoroughly agree that the old guard were way short in too many areas but there is nothing you or I can do about history. As I say we now need to have trust in the new team and keep asking pertinent questions when the opportunity arises such as the phone ins, and doesn't have to be a phone call as they take questions in writing during the presentations.
As a bogger flogger of mining equipment I would have loved for the customers to double up on equipment but it was never ever the case and as I say to predict everything by way of parts that are going to fail over the life of a machine is only possible to a certain extent. I do have first hand experience of a mining company that did over spend on parts and components so much so they had more parts in their stock by value than the local dealer who were supporting numerous mines. The mining company unfortunately actually went bankrupt and the new owners a major mining house chose to go the contract mining route and it is still operating 20 years on with good profits.
I don't have any specifics as to Barminco's short comings during their contract so can't comment on your criticism of them.
I am not sure what hands on experience Centamin on site team has in working the Sukari underground resource, why should they as they have had a contractor doing the mining?
I have seen contractors actually make more money through efficiencies for the mining company than the mining company was able to achieve when previously doing the mining themselves. It isn't just contractor mining being changed to owner mining it works the other way around.
I can't comment on Egyptian tax laws as it relates to depreciation.
The NHS heaven forbid Tibbs this can't be compared with a mine and I was once a member of a trust and goodness inefficiencies and down right incompetence was enough to tear your hair out. I only refer to management not the medical teams who I have the utmost respect.
Thank you Dasut,
Fair comments, especially about the management side of NHS trusts!
I only wish that Martin Horgan had taken over in 2018!