Mining equipment disposal
Top five frequently asked questions
In our recent paper The future for mining services: Keep calm and carry on… or shift to gas?, we noted that the volume of coal exported through Abbott Point, Hay Point, Dalrymple Bay and Newcastle had increased, despite the well-publicised decline in coal prices and resulting impact on contractor activity.
One key issue for the mining services industry remains – the market for second hand mining equipment. This has arisen for contractors primarily due to cost reduction strategies as producers re-enact owner-operator models, terminate contracts, renegotiate contract pricing or simply allow contracts to expire at the end of their term.
In the medium to longer term, the level of exported coal suggests that more second hand equipment and yellow goods will be required by miners and profitable contractors to replenish fleets and expand mine capacity.
However in the short term, and particularly in Queensland and New South Wales, a decision for the mining services operator affected by a contractual change quickly becomes whether to hold the equipment and attempt to win another contract or seek to dispose of the surplus equipment.
If the decision is to sell, how is the asset best realised to maximise return, given the majority of items are either common in the market place or are highly specialised.
Based on our recent experiences, here are five questions to ask.
Question 1: If the equipment is on a mine site or in a holding yard, what is the best place to hold the auction? Should the equipment be transported to Brisbane or Sydney for sale?
Access to the equipment and yellow goods, either by collection from the mine site or control at a holding yard, is the most important issue. Assuming the equipment is secured, we would recommend it be sold close to the mine or in one of the coal town hubs. Consideration needs to be given to the disposal strategy, taking into account the location of the equipment and the associated costs such as cranage, labour and transportation. As an example, an excavator could cost $1.5m to demobilise from site. It is highly likely that interested parties will either be the replacement contractor or a producer that will mobilise the equipment to a mine site nearby. Any un-recoupable cost to remobilise the equipment to site will be a factor in what the interested party is prepared to pay.
Transport to Brisbane or Sydney for sale is not generally recommended as there are additional transportation costs which may not be recoverable via an improvement in sale price and the majority of buyers are likely to return the equipment to the same area.
Question 2: What costs are expected when selling the equipment?
In addition to holding costs, auction costs and marketing commission, it is easy to spend a considerable amount of money on replacement parts, servicing second hand equipment and ‘make good’ without receiving the same amount in sale proceeds.
We recommend seeking advice from an auctioneer and that the items be cleaned and serviced at a level required to meet legislative requirement (e.g. road safety laws), while limiting non-essential replacement items. In some instances, a fresh coat of paint may assist in presentation
Question 3: What is key to selling specialised or high value equipment?
Some specialised or high value items have a thin market or are infrequently traded. In these instances, a direct marketing approach may be required rather than an auction or formal marketing process.
In this case, it is important to engage a specialist agent who can communicate directly with local and national mine managers to determine any short term demand for such items. If there is no short term demand for the asset, the contractor may need to consider holding the item for a longer period of time.
Question 4: Should transporting equipment and yellow goods overseas be considered?
The majority of movements in equipment and yellow goods in the past decade have been inward deliveries to Australia as medium and long term projections for iron ore and coal have been robust given demand projections from China and India. Second hand goods also continue to arrive in Australia from European-based auction agents and brokers.
There is a view that surplus equipment and yellow goods can be shipped around the world to where there is demand (i.e. North America, Africa and South East Asia). While there may be a general market in other parts of the world, this needs to be considered on a case by case basis as the costs to transport these items to the Australian port, deal with transportation and port costs and sell the goods on the other end are likely to erode the potential upside compared to the local market. Exchange rates can also have a bearing on demand and sale price.
Australian-based lease and finance companies are also unlikely to allow leased equipment to leave Australia, out of the local court jurisdictions and recovery processes. A sale approach can be to market globally but sell ‘in situ’, with the buyer responsible for relocating/demobbing.
Question 5: What if the goods and yellow equipment do not sell?
In the medium to long term, there will be demand for second hand equipment and yellow goods to replenish worn out items at a cheaper cost compared to brand new items. If equipment and yellow goods are not sold despite having agent guided prices, we would recommend a closer review of costs to allow the business to at least cover its financing and servicing costs on the equipment.