Future-ready finance for mining fleets

To buy or not to buy (or, rather, lease)? That is a key question for operators when building a new mine fleet or expanding their current one.

At the mining scale, mobile equipment such as trucks, wheel loaders, dozers and excavators, represent both a significant capital outlay and source of operating expenditure for owner-operators and for contractors (mining companies don’t always operate their mines themselves). Depending upon the model and specifications, a single unit can run to millions of dollars. It’s therefore critical to maximise the service life of these machines as well as their utilisation.

It’s also important to choose wisely. While operators naturally want access to the latest technologies – the best machine sensors, the newest batteries and engines – they are, understandably, wary of selecting nascent technologies and of the potential costs involved with future component/system upgrades.

David Nus, Business Leader, Fleet Management – Americas, at Volvo Construction Equipment joined me to discuss the growing range of options for financing mine fleets.

CL: How are mining equipment/fleets traditionally financed? What options are usually available to mine operators?

DN: Mobile equipment is generally purchased or financed as a capital expenditure and then depreciated over many years. Leasing is popular in some markets as a way to keep equipment off of the balance sheet with a shorter commitment period – typically a few years. In North America for instance, leasing is common even in mining, though usually not for the largest, most expensive kit.

Do you think there is room for innovation in the plant finance space? If so, why?

Yes, a number of trends are driving change in fleet procurement and use.

The first trend isn’t new: companies want to focus resources on their core business as a way to improve competitiveness and profitability. Equipment is necessary to mine operations; even vital. But for mining, the core business is extracting, processing and selling ore or a commodity, not buying and sustaining a fleet. Yet this can all too easily suck finite talent and resources away from other core activities which can generate more business value.

A second trend relates to changing attitudes about equipment leasing. In 2019, the latest international accounting standard – IFRS16 – came into effect. This states that leases and long-term rentals should no longer be treated as an operating expense, off the balance sheet. That change removes a primary benefit of leasing and will lead to increased costs and capital expenditure (CAPEX) tied up by any leased equipment.

Volvo has developed a programme called Equipment as a Service (EaaS) which allows mine owners and contractors to focus on their core business, leaving the fleet and local support to be managed by Volvo. EaaS is structured with IFRS16 in mind so that equipment need not go on the operators balance sheet, preserving a major (former) attraction of leasing.

How do Equipment-as-a-Service (EaaS) or usage-based models work – are they new to the mining industry?

An EaaS contract is built around the specific need of each customer. Depending on the fleet required, a pool of operating hours is agreed based on usage needs over the long term – typically 20,000 hours or more per capacity unit.

In the case of Volvo’s programme, the equipment provided is owned and actively managed by Volvo. The customer operates the fleet and manages its operations; these remain their core competencies.

The customer pays as and when fleet is used, at hourly rates and terms agreed at the outset. The hourly rates cover equipment, all maintenance, life-of-contract warranty, management and local support of the fleet, as well as any value-added services.

Additional efficiency services are bundled in the programme – if the customer wants to improve fuel efficiency or measure/cut their carbon footprint, for instance.

Volvo ensures the fleet is available by giving an uptime commitment for the length of contract. Equipment may be rotated in/out of the fleet and the programme can be extended to other locations. The customer pays for the service as it is used without worrying about stranded assets or equipment disposal at the end. Since usage varies month-to-month, payments vary as well over time. Unlike a lease or rental, there is no upper limit to hours worked (or penalty) in a given month or year.

In some ways, the EaaS model may remind folks of the old ‘power-by-the-hour’ concept, except that it’s fleet-based and averaged, and not tied to specific assets. The idea of paying per unit work is familiar in mining; subcontractors are paid by the ton, bank cubic metre, or other measure. The difference with EaaS and the like is that operational management stays with the customer and they continue to do the actual work with the fleet service provided.

A key outcome of usage-based models, like EaaS, are that they align the provider’s interests with that of the customer. Both have a clear interest to keep equipment running. For example, with Volvo’s EaaS, if a machine breaks down, it’s not earning income for Volvo and may even trigger penalties. The more equipment is used, the more Volvo gets paid. Pain is shared and incentives are aligned.

What benefits can usage-based models, like EaaS, deliver in mining?

Usage-based models are well suited for mining operations as they tend to be fixed locations with extensive fleet requirements and long timelines (many years). Equipment is typically operated at a high rate; the higher the utilisation the better, and the lower cost/hour becomes.

Financial benefits include better cashflow and capital management as stated above. Cash flow, in that the customer pays as the equipment service is used rather than up front like a purchase, so spend aligns more with revenue or value generation.

On the capital side, keeping the fleet off of the customer’s balance sheet , saves costs and frees up CAPEX for more value-added investment.

Operationally, mine operators gain a predictable, transparent cost structure customised to their need. They can then devote their manpower and resources to more value-added activities. They have one point of contact with simple lines of communication and responsibilities, even when multiple sites or fleets are in the programme.

With usage-based arrangements, financial and operational risks are managed, shared or reduced. For example, Volvo provides an uptime guarantee for the life of contract, makes the investments needed, and takes risks tied to asset disposal or fluctuations in the economy. It’s easy to underestimate the advantage of managing risks together.

Are there any disadvantages or limitations that mines should be aware of?

For usage-based models to work well, customers need to know their business needs and be able to plan significantly in advance. If their business is seasonal or cyclical, that’s OK as long as it’s planned for. But if a contract is set up on unrealistic terms and the fleet runs at much different levels, it can create problems for both parties. Most mines have detailed plans and production schedules which make a natural basis for well-structured usage-based programmes.

Usage-based models are different than a lease or rental because they are geared towards usage: the more the better. The flipside is that if utilisation is low and machines run for just a few hours, usage-based models will look expensive on an hourly basis. There are applications where machines don’t work much. In those, usage-based programmes can work but should be based on a different unit of value than working hours.

The final point is less of a downside, more a reality – EaaS or usage-based models require a long-term commitment and fleet scale to allow the supplier to make appropriate investments to support it. If a project is small or only lasts months or a few years, a usage-based model may not be the best solution unless they can string together a couple projects.

How can alternative finance models like this aid the adoption of electromobility and autonomous technology and, ultimately, move the industry towards its overarching sustainability goals?

This is another trend I expect will benefit from EaaS or other usage-based procurement models.

These innovative technologies are maturing rapidly but are far from done. If a mine buys electric machines today, how long will the battery technology stay leading-edge; for 2, 5 or 10 years?

Autonomous systems are highly, if not entirely, software driven. If a mine invests in a system today, how will the updates be provided, and for how long? Who decides the performance settings? How are product improvements shared or implemented?

These questions will be settled as the technology is commercialised and refined. Until then there is a case to be made (for customers) that such evolution can be left to the supplier to sort while it happens, and just pay for the use or output of the tech solution instead.

Could they also help to boost circular economy in mining and encourage the recycling and reconditioning of older machines/components?

I believe usage-based models will aid industry’s efforts to develop more circular economies in many ways. For example, selling 500 electric machines to 500 customers presents quite a challenge for a supplier to plan, manage and implement any eventual battery replacements. Those 500 customers will find many ways to resell or eventually dispose of their machines, and not all of them will be equally responsible or efficient.

Running 500 machines through an arrangement like EaaS does not change the need for battery replacements or eventual disposal. But it does allow centralised lifecycle management and a level of scale to drive sustainable processes and recycling solutions.

The manufacturers, or at least the program providers, will take more ownership of the assets across their lifecycle, and having economic and environmental impact targets will drive responsible stewardship in all aspects. That means they have an interest to maximise use and reuse, recycling where possible and managing any eventual disposal.

Disclaimer: The information in this article does not constitute investment advice. Seek appropriate professional advice before making investment related decisions