Leasing of mining equipment: an evolving trend that can benefit procurement teams

Many types of equipment are used in the world of mining. Of which, let us now focus on three categories: Earth Movers such as bull dozers and hydraulic shovels; Haulage equipment like dump trucks; drilling equipment such as drill rigs and down the hole rigs.

Category managers in charge of procuring these equipment will have to shell out huge sums of money -- for those machines don't come cheap.

For example, dump trucks and bull dozers can cost about $1 million; and drilling rigs sells for about $300, 000 -- they are not your usual office stationery.

Let us now consider the business environment of mining industry, especially the ones such as iron ore, coal and gold, where above mentioned categories of equipment are put to full use.

From 2014 to 2018, demand for mining equipment is expected to grow 6 to 8 percent, whereas growth in the mining industry will be around 3 to 5 percent.

On the other hand, ores are depleting because of decades of mining. Just to quote an example: to get 1 tonne of mineral, companies were earlier mining 10 tonnes of ore; whereas because of ore depletion, to obtain the same tonnage, companies will now have to unearth more than 10 tonnes of ore because of the lower grades.

The prices of ore, coal and gold have now fallen of their highs. What does this tell us? Mining companies can potentially get caught in the vicious circle: low prices coupled with depleting ore grades translates to low revenue.

And because of low revenue, companies could cut back on capital expense, which means lower production. But does lower production lead to higher price? Well, we may not know and as procurement professionals our focus should be elsewhere.

Since these mining equipment costs lot of money, would it matter if procurement managers are given a choice of leasing the equipment as opposed to buying the equipment as it would help companies bring down the cash costs? The answer, of course, is yes.

Due to increase in the price of equipment, obsolescence of owned equipment and limited financial sources of outside of debt, mining companies can consider alternative options such as leasing the equipment from custom operators.

Equipment leasing is a loan where the lender buys and owns equipment and ""rents"" it to a business at a flat monthly rate for a specified number of months. At the end of the lease, the business may purchase the equipment for its fair market value (or a fixed or predetermined amount), continue leasing, lease new equipment or return it.

During the Webinar scheduled for Feb 4, Santhosh Kumar Peshkar, AVP & Practice Head, Mining & Durables, and Senior Research Analyst Arun MV will talk about how category managers can analyze and quantify the tradeoff between purchasing and leasing of mining machinery.

Key Takeaways:

• Comparison of PV Method of Leasing vs. PV Method of Owning
• Calculating internal rate of return analysis on leasing
• Understanding the after-tax cost of leasing in comparison with purchasing
• Understanding the discount rate sensitivity on lease financing