MUNICIPALITY OF CHATHAM-KENT INFRASTRUCTURE AND ENGINEERING SERVICES PUBLIC WORKS

Transcription

1 MUNICIPALITY OF CHATHAM-KENT INFRASTRUCTURE AND ENGINEERING SERVICES PUBLIC WORKS TO: FROM: Mayor and Members of Council Wayne Pollock, Director DATE: May 7, 2013 SUBJECT: Service Sustainability Review Process (SSRP) RECOMMENDATIONS It is recommended that: 1. 80,000 to 85,000 tonnes be mined annually for the next four years (2013 to 2016) until the gravel pit is depleted. With added coarse aggregate, this would produce 100,000 tonnes of M gravel annually. 2. The per tonne acquisition cost amortization rate be increased from $1.12/tonne to $1.61/tonne, based on an estimated 345,000 tonnes of un-mined material. 3. Administration be directed to seek expressions of interest to acquire, operate, or other viable options for the gravel pit property. BACKGROUND At the December 10, 2012 Council meeting, Council directed administration to proceed with Phase III and IV of the SSRP. SSRP Phase III is the stage in the process where cross-departmental review committees, including public members, study, appraise and make recommendations on: 1. Items for review identified by the business unit and EMT 2. Other items for review identified by review committee members 3. Other items for review identified by business unit staff and stakeholders 4. Phase IV is the review of user fees and revenue opportunities. In 1989, the Township of Harwich purchased 20 acres of land near the intersection of Mull Road and Pinehurst Line for the intent to mine and process M gravel for distribution

2 2 on Harwich Township roads. The agreement of purchase and sale provided for repurchase by the vendor when mining operations were terminated. Original equipment was purchased used, from Adams Sand and Gravel, located nearby. Since its inception, the Gravel Pit has operated on a 5-day per week/52-week per year basis. The gravel pit is licensed under the Aggregate Resources Act, which legislates terms and conditions for the operation and rehabilitation required for the site at time of closure. At the 1998 Chatham-Kent amalgamation, the gravel pit expanded its distribution areas to include gravel roads serviced by Kent Centre, Raleigh and Ridgetown, and has been operated under the direction of the Chatham-Kent Public Works Division. As depletion of the original gravel pit was approaching in 2008, an additional adjoining 14 acres of land was purchased to continue the operations. Mining commenced in the newly acquired property in Vendor repurchase options were also included in the 2008 purchase and sale agreement, and the license was renewed. Over the years, there has been discussion regarding the quality of M gravel produced from the municipal gravel pit compared to M gravel purchased from external sources. The granite-based M gravel produced at the municipal gravel pit does not compact as quickly as the M gravel acquired externally. Larger aggregate material (approximately 17%) has to be purchased to be mixed with mined material to produce M gravel. The M gravel produced internally generally has more fine material than externally acquired material but meets the Ministry of Transportation specifications for M gravel. It was projected in 2008 that internally produced M gravel would provide a significant cost advantage to product acquired externally. By 2013, the cost advantage has been eliminated, and a Service Review was carried out to assess future sourcing of M gravel. Currently the Gravel Pit operates under regulations specified by: a. Ministry of Natural Resources Mines and Quarry Act b. Ministry of Labour Mines and Mining Plants Division c. Aggregate Resources Act

3 3 The following is the 2013 organization chart for the Gravel Pit: Director Public Works Superintendent Gravel Pit Equipment Operators (4) Surface Miners Certificate Staff consists of four equipment operators, represented by CUPE local 12.1, who require DZ class licenses and Surface Miner certifications, plus a non-union Superintendent who has similar certifications. Limited amounts of by-products are sold commercially; primarily asphalt sand serving to defray operating costs. Demand for these products may fluctuate yearly and are not reliable. The following services were identified as provided by the Gravel Pit through Phase I of this review: Service Gross Op Budget Revenues Net Budget FTEs Service Preference 1 Gravel Pit operations $998,478 -$975,199 $23, Eliminate 2 Sale of by-products $0 -$17,115 -$17, Eliminate TOTALS $998,478 -$992,314 $6, In PHASE I of the Service Review, administration stated a service preference to eliminate gravel pit operations, based on the annual fixed operating costs (with little

4 4 variability), combined with the fact that 2009 to 2011 M gravel production levels at 80,400 tonnes/yr average below the competitive break-even level at 92,500 tonnes/yr. The analysis in this report supports recommendations differing from the administration stated service preference. Issues identified for review are listed below: 1. Define remaining in-ground gravel available for mining 2. Define annual tonnes mined/shipped capacity 3. Identify unamortized acquisition capital cost and projected site tear-down and rehabilitation costs at closure 4. Compare 2013 gravel tender costs to internal costs 5. Expressions of interest Input was received from staff and was considered in formulating the recommendations of this report. COMMENTS The Gravel Pit Review Committee was comprised of business unit staff, cross-functional staff, and public volunteers who reviewed and analyzed the issues identified, and arrived at the following conclusions: 1. Define remaining in-ground gravel available for mining: Based on the 2004 analysis provided by Terraprobe Limited, the projected mineral content remaining in the un-mined property is estimated at December 31, 2012 as 491,000 tonnes. The mineral content projections have been factored down to 90% from the 2004 Terraprobe Ltd. estimates and are based on actual gravel yield of 54,000 tonnes per acre. The two acres occupied by the office/garage and crushing plant have been removed from the estimate for mineral extraction because the cost to move them and the availability of mobile processing/operating facilities are presently not fiscally viable to mine this area. Dec 31/12 projected remaining mineral 491,000 t $1.12/t amortization Minus: 2 54,000/acre -108,000 Experience reduction factor 10% - 38,300 Revised Dec 31/12 projected remaining mineral 344,700 t $1.61/t amortization The lowering of the estimated remaining in-ground gravel available for mining as of December 31, 2012 to 344,700 tonnes from the 2004 estimate of 491,000 tonnes will

5 5 cause the acquisition cost amortization rate per tonne to increase from $1.12/tonne to $1.61/tonne. This increase has been factored into the internal vs. external price comparison. The viability of mining the 2 acres currently occupied by the office/garage and crushing plant will be readdressed in 2016, factoring in current commodity prices and the cost of portable or remote crushing facilities, among other factors such as moving the existing facilities. 2. Define annual tonnes mined/shipped capacity: Historically, production from the Gravel Pit has been capped to produce certain tonnage for internal use. However, there have been other factors affecting production levels. For example, the timeliness of acquisition of the property addition in 2009 reduced production and deeper levels of overburden which caused delays in mining aggregate. In 2012, Council approved increasing production to 100,000 tonnes to offset increase production costs with a corresponding reduction in purchased gravel. Listed below is the last six years of material mined and shipped: Year Mined** Shipped* M Gravel ,702 76, ,266 93, ,331 83, ,549 80, ,185 76, , ,179 *does not include all by-products **includes all material mined Administration feels that it can average above 80,000 tonnes per year mined; producing 100,000 tonnes shipped for the next four years, and has factored these amounts in the internal vs. external pricing Revised estimates of the remaining in-ground gravel available for mining combined with 80,000+ tonnes of annual yield results in the Gravel Pit life expectancy of four years: 344,700 tonnes / 80,000 tonnes per year = 4.3 years

6 6 3. Identify unamortized capital cost and projected tear-down and rehabilitation costs at closure: The unamortized acquisition capital cost at December 31, 2012 was $553,315. As the Gravel Pit reaches its expected depletion date at the end of 2016, consideration must be provided for the cost of both tear-down and rehabilitation of the site. Site tear-down and rehabilitation are both contractual and legislative requirements of the license issued under the Aggregate Resources Act. A method of defraying these costs by expensing them over the remaining useful life of the Gravel Pit is currently used. Current projections for the cost of tear-down and rehabilitation of the site have been increased from original estimates to: Labour $ 200,000 Tools & equipment 100,000 External contractors 50,000 Other costs (utility removal etc.) 50,000 Contingency at 20% 80,000 TOTAL cost of tear-down & rehabilitation $ 480,000 Site Rehabilitation Funds to undertake site rehabilitation and building and plant removal will come from disposal of equipment, property disposal and gravel pit reserve fund as listed below. Disposal of Equipment * 2007 Komatsu loader $290, CAT 950g loader $69,100 Symons 3ft std cone crusher $43,000 Power screen $27,313 Double screen deck $8,000 Scalping screen deck $12,000 Jaw crusher $20,000 Dragline $10,000 All other $10,000 $489, realization factor - 50% $244,837 *Provided by Gravel Pit Superintendent

7 7 Property Recoveries Fixed repurchase price (as per agreement) $30,000 Unmined $3,000/acre $6,000 $36,000 Gravel Pit reserve: December 31, 2012 $62,720 Expensed through operations ( ) $136,443 $480,000 A conservative approach has been taken in estimating both the tear-down and site rehabilitation cost at depletion as well as sources of recovery. The amount to be expensed through operations has been factored into the internal vs. external price comparison. 4. Compare 2013 gravel tender costs to internal costs The Gravel Pit operates at a reasonably constant fixed operating cost per year, causing the cost per tonne to be highly dependent on yield. Trucking costs tend to increase each year. Projections were made based on operating factors identified in the following areas of this report: a. Remaining in-ground gravel available for mining b. Projected annual tonnes mined/shipped c. Unamortized acquisition capital cost and site tear-down and rehabilitation costs at closure d. Historical operating costs. Closure A December 31, 2013 shut-down of the gravel pit would require a one-time cost to be expensed: a. Unamortized acquisition cost $ 414,573 b. Site tear-down and rehabilitation 102,332 $ 516,905 Continued Operation The resulting estimate of gravel cost per tonne delivered to the road sites for 2013 is: Internal cost of production $ /t Cost of delivery to road site (2013 avg) Total internal cost/tonne $ /t

8 8 The 2013 Gravel Tender contract showed that the average delivered rate to the Kent Centre, Raleigh and Ridgetown Roads Divisions sites of comparable material was $14.93/tonne. Internal cost $ /t External Cost advantage: internal $ /t It is expected that similar inflationary factors would impact both internal and external costs in the near future. After reviewing the above factors, the recommendation is to support the continued operations of the gravel pit until depletion in Expressions of interest Although the Gravel Pit Review Committee recommends that the gravel pit continue to operate until its depletion in 2016, it also recommends, as reasonable due diligence, to seek expressions of any interest to acquire, operate or other options by interested parties in the Gravel Pit property. In the event that viable expressions of interest are received, a subsequent report to Council will be made. COUNCIL STRATEGIC DIRECTIONS The recommendations in this report support the following Council Directions: Healthy, Active Citizens Growth Through Variety of Post-Secondary Institutions High Quality Environment Through Innovation Destination Chatham-Kent! Magnet for Sustainable Growth Prosperous and Thriving Community Has the potential to support all Council Directions Neutral issues (does not support negatively or positively)

9 9 CONSULTATION The Service Review Committee consisted of: Supervisor, Accounting Operations Facilities and Systems Manager CK PUC Director, Public Health Wayne Schnabel Community Volunteer Director, Public Works Superintendent, Gravel Pit Budget & Performance Analyst Gravel Pit staff were asked for their input on Gravel Pit operations. The recommendations in this report are fully supported by all members of the Gravel Pit Service Review Committee without dissent. FINANCIAL IMPLICATIONS The recommendation is to continue the operation of the gravel pit. Therefore, there are no financial implications. Prepared by: Wayne Pollock Director, Public Works Reviewed by: Thomas Kelly, P.Eng., MBA General Manager Infrastructure and Engineering Services Attachments: None C: Gravel Pit Service Review Committee P:\RTC\Infrastructure and Engineering\I & ES\2013\ SSRP Gravel Pit.docx