There is an age old question when it comes to mining machinery – to hire or buy?
During the height of the boom this caught many miners out, as machinery costs were at an all-time high, but the lead-up times for hire and rental equipment was exceedingly long, putting project schedules back.
Many miners were caught between a rock and a hard place – shell out for the high cost capital equipment now, or save money and rent but potentially miss out on record high commodity prices.
Now, with the boom well and truly over and the industry facing a crisis in confidence over whether costs can be controlled due to a downturn in profits, budgetary decisions are becoming crucial.
According to Evans & Partners’ Mike Hawkins “the drag emanating from cutbacks in capital expenditure looks to intensify”.
Aggreko has explained the current state of the market, and why companies are now choosing to rent instead of buy, especially when it comes to power generation equipment.
“During an economic up-turn, the lead-time for the purchase of generation equipment can be anywhere up to two years, meaning that companies which need power urgently will find a rental option very attractive, due to the ‘fast-track’ aspect of rentals,” Aggreko said.
“However companies are now considering rental, for different reasons, such as how to better utilise working capital and to ensure that it is not tied up in large capital purchases for items such as power plants.
“In addition, power rental guarantees fixed and regular payment schedules over an agreed term with options to extend the rental period if required which improves cash flow and allows for more accurate budgeting.”
It went on to explain that “when making the decision between purchasing and renting equipment, it is important for a company to evaluate the hidden costs that are incurred when equipment is purchased such as insurance, spare parts, and ancillary items to ensure the equipment is able to operate”.
“With a rental solution all spares and ancillary items are the provision of the rental provider, enabling the customer to budget more effectively.”
On top of this, rental also includes refuelling.
“Another factor is human capital [as] all major equipment purchases require experts to manage the new equipment, either by allocating existing staff to the project, or by hiring new employees,” Aggreko said.
It went on to say that flexibility is also provided compared to purchasing.
“Projecting the power demand of projects also becomes a problem for companies when finances are tight; purchased generators are often either under or over-utilised since the power need on a construction site tends to follow a specific pattern of ramping up and then falling away, meaning that a contractor who purchase enough equipment to meet peak demand on site will find the generators are underutilised and burn fuel less efficiently for most of the project.
“Renting power generation equipment allows the contractor to increase or decrease their capacity depending on the demand of their specific projects.”
There is also the issue of risk management, as the rental avenue has a cushioning effect on companies which are uncertain about the long-term future of their projects, especially as investment concerns increase.
“By renting equipment companies can ensure that they will not be left with equipment which will sit unutilised,” it said.
“The flipside is the financial damage incurred by having purchased large amounts of heavy equipment can be a major blow for a company without large cash reserves.”
The shrinking capital market is making the future difficult for miners.
“While the economic downturn rumbles on,” Aggreko said, “it seems unavoidable that there will be some fundamental changes to the way that people think about investment and financing and how companies handle their asset management”.
While cash reserves could regain common usage “it seems unlikely that companies will be willing to leverage their assets to the degree that has been the norm in the past decade”.
“With a greater emphasis on keeping capital available and with rental providing benefits such as lowered capital expenditure, flexibility and risk management, the option of renting as opposed to purchasing equipment will likely remain an attractive,” Aggreko said.
“Although the question: ‘Is it better to buy or rent?’ will continue to be asked by companies contemplating large equipment purchases, many companies will likely find themselves deciding that during this period of uncertainty, ownership may not be worth the hassle.”