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Mining update – Safeguarding your Australian mining project in the COVID-19 market

20 August 2020
In step with the broader Australian construction industry, the mining industry is recognised as an essential service by the Australian Federal Government which has allowed mining projects to continue their development and otherwise softened the impact on the mining industry in Australia due to COVID-19. 

Background

Proponents have had to adapt and adjust processes in order to maintain continuity of operations as many fundamental strategic, operational and financial assumptions underpinning mining operations have been undermined in addition to complying with a raft of recent government orders. Even sophisticated mining contracts are unable to respond to some of the uncertainties of COVID-19, the impact of paralysed supply chains and the increased risk of business failure. Collaboration and preserving relationships are key drivers of supporting supply chains and contractors and ultimately projects. We have seen this collaborative effort exemplified between government (both state and federal), industry participants and unions to ensure the workforce, communities and supply chains remain intact through a variety of safeguards to ensure mine sites remain 'virus free'. The isolated nature of mining projects has also assisted in the implementation of effective safeguards to control the spread of COVID-19.

The mining industry as a whole are exposed to the risks of COVID-19 and are unable to be effectively shifted on to any particular mining participant. As suppliers and contractors run the risk of failing to deliver under their contracts, the flow on effects can be severe – impacting revenue, time and cost overruns, defaults and termination and effects of force majeure. In Australia, a number of ASX listed miners have made announcements in relation to their production guidance and supply chain impacts. This sentiment in relation to supply chain impacts has been echoed globally, with a number of large mining companies notifying of force majeure events caused by country wide lockdowns.

As mining industry participants adapt to the new environment of operating and developing future mining projects in a global pandemic, consideration should be given to the current impact of COVID-19 by implementing practical safeguards to protect your projects, including: 
  • managing key personnel;
  • proactively engaging and collaborating with key contractors and your supply chain;
  • understanding your current contractual risk allocation; and
  • building resilience into your future contracts and supply chain.

Practical Safeguards

As industry participants transition from the immediate impact of COVID-19 and begin building resilience in their operations and supply chain, project proponents should recognise that addressing the issues caused by COVID-19 in a collaborative manner may be in the best interest for all concerned.
 
Some practical considerations and safeguards to bolster mining companies resilience through this time include: 

  • Key personnel - In the COVID-19 market, for some mining projects, non-essential expenditure may be delayed or eliminated. This means that project teams may be re-organised and back office support reduced. Mining companies will need to ensure they are adhering to their commitments under their contracts when changing personnel. The generally isolated nature of mining projects allows for more effective measures to be taken to protect the mines operation, however if an infection occurs on site the impact of the outbreak can be severe. 

    With the distraction and disruption prevalent in the market, it is essential that effective project management, decision making gateways and processes are in place to manage time bars, maintain entitlement and manage liability. 

  • Contractor and supply chain due diligence - There has been a strong focus by mining participants in recent times of supply chain optimisation through reducing inventories and developing stronger relationships with a fewer number of key suppliers. This optimisation does not necessarily allow for an agile and timely response to supply chain disruption, especially on the scale experienced due to COVID-19.

    COVID-19 has affected supply chains globally to varied extents, with equally variable responses by Governments. In order to build resilience into your supply chain, performing ongoing supply chain due diligence of your key contractors and supply chain participants is key to assessing risk to the wider project. The unavailability of a key input to production or a key contractor's insolvency has the potential to undermine the project as a whole. 

  • Understanding your risk allocation - It may be the case that industry participants have had to turn their minds more recently to clauses in their contracts which are not usually enlivened or the subject of serious negotiation. The allocation of the risk of 'COVID-19' to a party under a contract is unlikely to have been telegraphed with a specific reference to 'COVID-19', 'virus', 'pandemic' or 'epidemic'. As a result, it is important that parties understand the levers which exist in their contracts and how they may be utilised. 

    The ability to enliven (or not) contractual entitlement of a party to cost or time relief (or both), suspension, termination (fault based or for convenience) or force majeure may reside in less than obvious clauses. Understanding your business' base risk allocation and pinch points will allow you to best respond to the current market challenges and take advantage of the opportunities in the market.
  • Force majeure - Claims of force majeure affecting mining companies have been increasing, particularly for new mining operations. The impetus of this uptick is the inability to source personnel, plant and equipment and parts not only for operational requirements but also for the construction phase as well. Since there is no implied doctrine of force majeure in Australian law, and in lieu of an express force majeure regime in a contract, the project as a whole may have to share the burden of COVID-19 as a whole. 

    In the event a force majeure regime does exist, it does not automatically entitle relief. The following threshold requirements are usually required to be satisfied to establish a valid force majeure event: 
  • Class of force majeure event - Does COVID-19 fall within a class of event contemplated by the force majeure clause (or will you seek to rely on the broader 'act of god', 'natural disaster' or an event 'not reasonably foreseen' which may prove a higher bar to satisfy);
  • Causal link - Is there a causal link between COVID-19 and the delay? A party will need to establish that the delay is directly related to COVID-19 and the delay is not the subject of any other cause;
  • Mitigation - Has the party seeking to claim satisfied its duty to mitigate the effects of the force majeure event? This would likely extend to the party demonstrating compliance with COVID-19 health mandates imposed by Government; and
  • Entitlement - It may be the case that if you can successfully satisfy the requirements of force majeure (under your contract) then you may be entitled to relief of time but not cost. Commonly, cost implications stemming from a force majeure event are an insurable risk via industrial special risk (ISR) insurance, or similar policies designed for revenue generating assets. This is especially relevant for mining operations. 

Future projects

When negotiating future contracts, it is important to recognise that COVID-19 is now a 'known risk' to a certain extent. The various impacts and extent thereof are not all known and understood however seeking to rely on COVID-19 in a contractual context may not hold the gravitas, especially in the context of relief provisions, where the catalyst must be something that is 'not reasonably foreseen' or 'beyond the reasonable control of a party'.

The notion of COVID-19 being a 'known risk' also has relevance for the supply chain. Made all the more important by the heavy reliance on such supply chains to keep mining projects operating. It is common for supply engagements to require a party to be required to supply a good or service to certain standard and provide certain undertakings as to continuity of supply and quantity. Suppliers who have established an overreliance on one source of supply or manufacture have in some cases found themselves exposed. Especially in circumstances where alternative supply is constrained or results in greater cost exposure.

 

Action by you

Moving forward, mining industry participants should continue to monitor the status of COVID-19 restrictions and continue engaging with the stakeholders to ensure a measured and sustainable adjustment to the new normal. Project proponents should ensure their contracts and procurement processes are sufficiently flexibility to insulate them in such uncertain times. 

If you require further information or have any queries in relation to this legal update, please contact Goran Gelic or Alex McLeod.

Further Reading

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