Discussion of leases and MARCs

[catken]

The following 20 posts first appeared in the ETF mining truck thread. Since the discussion is not specific to that particular (maybe) manufacturer, and seems really interesting and informative, I thought I'd split it off into a thread of its own.

Carry on.

~Digger242j




Well if BS was a snow storm, I believe the world would be covered with snow! No one has yet to say what application this high priced toy would work in. My gosh the O-O cost would be
unbelievable! That many moving parts-DUH!!!! I think the model they have is the final production!? And I also don't get why just a lease? Oh well this got things cranked up again.

 

[lantraxco]

Just a lease because no one would take a flyer on it if they had to buy everything outright and pay out unknown parts and service charges to keep them going through the end of their financial payoff. With a lease you get a guaranteed price, guaranteed availability, guaranteed price per tonne moved and you can calculate the return based on those numbers with penalties for failure to meet them. Eventually most big corporate mining firms will probably move to this business model for most of their really large equipment, it just makes sense and it requires equipment manufacturers to actually meet those claims in the brochures and stand behind uptime programs.

:IMO

 

[John C.]

I've seen a few different lease packages and never seen a guarantee of anything except you having to make the payment each month or the lesser would come pick up the machine. In this case the lessee doesn't own the iron so there are no disposal costs should it not perform. A performance contract might be something used in addition to a lease to make the risk more palatable.

Leases have many uses for finance but at the heart of business leases are tax advantages. The mines I've had experience with didn't use leases for financing. They bought the units under contracts just about the same way anyone else would.

 

[Scrub Puller]

Yair . . . John C. that's interesting.

I suppose things are different in different places. I understood that some manufacturers did in fact offer availability assurances on some big iron. I know that years ago Wabco did on one particular twin engine scraper in order to do a deal.

As far as "Lease" versus "Buy" I believe I could go out and lease a machine or vehicle or I could go out and buy it . . . I can end up owning the thing with a predetermined payment at the end of the lease period if (I want to.)

As I understand it the difference between the lease and buy is that there is no upfront money on a lease and payments are deductible at a better rate. I have always been fortunate in being able to buy outright and negotiate at a far better deal that negated any "advantages" of leasing.

Money in a brief-case gave my accountant the eeby jeebies though. (big grin)

Cheers.

 

[catken]

How can you guarantee a cost per ton? I've never been around a lease like that. Did have the lease price stopped once on a break down happened but no $$$$$ on lose of production.
I would really be interested in something like you talk about Iantraxco. Have never heard of something like that with guarantees! Been involved in rental purchase which seemed to work
for us.

 

[Nige]

How can you guarantee a cost per ton? I've never been around a lease like that. Did have the lease price stopped once on a break down happened but no $$$$$ on lose of production.
I would really be interested in something like you talk about Iantraxco. Have never heard of something like that with guarantees! Been involved in rental purchase which seemed to work
for us.

well you're actually getting a guaranteed cost per hour, but if you move the tons it turns into a guaranteed cost per ton. If the machine or fleet supplier is maintaining the machine at a fixed cost per hour it all stems from that. They're known in the mining industry as MARCs. A lot more common than you'd think. On the downside they are not cheap by any means.

 

[John C.]

A MARC is not a lease. It is a separate contract and I've never seen one that I couldn't do for far less money with our own people. Those types of products work where there is a lot of government involved. When working with rock and dirt there usually isn't the profit margin to run the iron and have to pay a third party cost plus a profit to keep it running. A uranium mine producing materials to make nuclear bombs might be where it makes sense.

 

[blitz138]

or a gold mine.......

 

[catken]

Nige doesn't that only apply if you know the haul distance for cost-per-ton? The hourly rate will also vary pending the fuel usage- grade-ability, haul road conditions, and etc.
I always tried to get the most info on these items when bidding. There were always many variables.

 

[catken]

Nige I'm not familiar with the MARC lease.

 

[Nige]

In reply to a question above. You can lease equipment with maintenance done on a MARC. Therefore you get guaranteed cost/hr. In regard to the comment about "do it cheaper with our own labour" with all due respect I did point out that doing it that way is not cheap ...... it is however almost 100% risk free from the customer's standpoint.

If you are an already established operation and know what your haul cycles, distances, and production rates are then surely having a fixed cost per hour translates into a fixed cost per tonne moved, or as near as damnit. For a greenfield operation there would be, as Ken points out, more variables involved.

 

[catken]

Tks Nige-never had that proposal on the table before.

 

[Nige]

As I said before, t'aint cheap..............

 

[John C.]

A lease is a finance product that allows use of an item without owning it. A MARC is a "Maintenance And Repair Contract". They are two different animals. The lease will be handled through some kind of financial entity. A MARC will be handled through a dealership or service entity. The dealership or other entity will provide the service and repair work at a guaranteed cost per something. It might be per hour which is what I'm familiar with or item of production. A MARC can be part of the payment process in a lease but they are not the same thing.

As I said before, a MARC usually doesn't make any sense for private businesses. I have been involved with looking at them because college boys getting into the industry who have listened to their professors who have never worked a day at a mine start spouting about how much money and bother it will save because of the reduced number of employees and no need for additional maintenance equipment. The problem with them is that all the incidental costs are never covered and there are ceilings in the cost program which when going over are covered by the lessee. In the programs I've reviewed the entity covering the MARC is only responsible for the typical costs. Early failures are covered on a prorated basis and intensional failures are entirely the lessees' responsibility. The problem is who decides what is early or intensional. All this doesn't cover situations when the MARC entity doesn't perform service on a timely basis or changes the costs of materials used. As I stated above, usually only taxpayers get to play this game.

 

[kshansen]

I have been involved with looking at them because college boys getting into the industry who have listened to their professors who have never worked a day at a mine start spouting about how much money and bother it will save because of the reduced number of employees and no need for additional maintenance equipment.

Sounds good till you have to fix something not covered under the MARC huh? Now instead of running machine to the shop and having your mechanic drop what he was doing and in a few minutes make a repair and send that half million dollar or more machine back to work you start calling around trying to find someone who can come out and look at it. Then if he does not have the part needed he charges you mileage to run to town and back all the time this machine and operator are sitting idle.

 

[alco]

As I said before, a MARC usually doesn't make any sense for private businesses. I have been involved with looking at them because college boys getting into the industry who have listened to their professors who have never worked a day at a mine start spouting about how much money and bother it will save because of the reduced number of employees and no need for additional maintenance equipment. The problem with them is that all the incidental costs are never covered and there are ceilings in the cost program which when going over are covered by the lessee. In the programs I've reviewed the entity covering the MARC is only responsible for the typical costs. Early failures are covered on a prorated basis and intensional failures are entirely the lessees' responsibility. The problem is who decides what is early or intensional. All this doesn't cover situations when the MARC entity doesn't perform service on a timely basis or changes the costs of materials used. As I stated above, usually only taxpayers get to play this game.

I think you need to get out more. MARCs are quite common in the mining industry, so it's not just government run industries that use them. In fact, one mine up here ran with nothing but dealer mechanics and MARC contracts for the first 10 years of their existence. The only reasons they moved away, were due to expansions and the diversity their fleet was developing with time......( as in the introduction of other brands of equipment).......it no longer made sense to have so many different contractors running around, instead of bringing it all under one roof so to speak.

We actually have 12 trucks that are leased and 6 of those are on MARC contracts. The only costs we incur are for damage. This wasn't done for a finance reason, but for use in what was potentially going to be a short term need for 6 of them, and for evaluation of 3 different makes of trucks for the other 6, which are the 6 on MARC....(2 of each brand of truck).

 

[alco]

Sounds good till you have to fix something not covered under the MARC huh? Now instead of running machine to the shop and having your mechanic drop what he was doing and in a few minutes make a repair and send that half million dollar or more machine back to work you start calling around trying to find someone who can come out and look at it. Then if he does not have the part needed he charges you mileage to run to town and back all the time this machine and operator are sitting idle.

I've never seen the situation you are mentioning. Any time there is extra work to do, as in work not covered by the contract, the same people do the work, you just get billed for it as opposed to it being covered by the MARC payments.

 

[Nige]

Sounds good till you have to fix something not covered under the MARC huh? Now instead of running machine to the shop and having your mechanic drop what he was doing and in a few minutes make a repair and send that half million dollar or more machine back to work you start calling around trying to find someone who can come out and look at it. Then if he does not have the part needed he charges you mileage to run to town and back all the time this machine and operator are sitting idle.

I'm not going to go into the pros and cons of MARCs and equipment leasing apart from saying I've been involved in it a fair bit, and to say there are many potential reasons for customers to consider leasing equipment or having their maintenance done on a MARC. A lease/MARC package would usually be all tied up in one contract set up up by the local dealer and backed up by the manufacturer's finance arm (e.g. Cat Finance just as an example). The ONLY thing that is not covered under the agreement is accident damage which is invoiced at cost as a separate item.

The dealer has personnel on site from a Maintenance/Contract Manager downwards. All spare parts and components are kept on site or at an off-site location that is close enough that they can be transported to site before a particular component can be removed from the machine. So all the "running back and forward to town" (if it has to happen) comes off the dealer's profit margin not out of the customer's pocket. Also the contract guarantees certain machine availability percentages depending on machine type with financial penalties for them not being achieved - again that comes out of the dealer bottom-line.

The last MARC I was involved on (on which the equipment also happened to be leased) I had 87 people on site working for me - that was a relatively small fleet. It may sound a lot but when you're working 24/7 on 12-hour shifts with a 4-on, 4-off work roster you need 4 people for every position. Include people like the PM crew, GET crew, tool store, lube & fuel truck drivers and the numbers soon add up. We also had Condition Monitoring and Reliability Engineering people on site as well, all under the same maintenance contract.

 

[kshansen]

The dealer has personnel on site from a Maintenance/Contract Manager downwards. All spare parts and components are kept on site or at an off-site location that is close enough that they can be transported to site before a particular component can be removed from the machine. So all the "running back and forward to town" (if it has to happen) comes off the dealer's profit margin not out of the customer's pocket. Also the contract guarantees certain machine availability percentages depending on machine type with financial penalties for them not being achieved - again that comes out of the dealer bottom-line.

Okay that does make it sound better. Learn something all the time here. Where I work is just a small stone quarry that on the best years does not produce 1,000,000 tons of product. Nige's operation probably moves that much before lunch on Monday!

 

[Nige]

Just to give you an idea on the MARC mentioned above we kept approximately $1 million in parts on site. That's just in parts, not components. Components were kept at 1 of 2 locations, small/medium stuff was about a 1-hour drive away (it was also a Parts Store and we had a daily Parts truck delivery). Larger stuff like engines was about an 8-hour drive away, but then again I'd like to see the mechanics that could get a 994 engine out in 8 hours ....!!