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Mining strategies for the future - Trench & Sykes - Nov 2015 - Centre for Exploration Targeting / Curtin University / University of Western Australia
1. MINING SECTOR STRATEGIES FOR
THE FUTURE – PREPARING FOR
THE NEXT BOOM
Allan Trench1234
John P. Sykes235
[1] Department of Mineral & Energy Economics, Curtin University, Australia
[2] Centre for Exploration Targeting, Curtin University, Australia
[3] Centre for Exploration Targeting, The University of Western Australia
[4] CRU Group
[5] Greenfields Research
Wrays Resources Innovation Group Seminar,
Perth, Australia, 2 November 2015
2. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Some Takeaway Messages….
Mining Sector Strategies for the Future – Preparing for the Next Boom
‘Strategies for the future’ means far more than automation and technology….
Few resources companies stand out on strategy or capability…..
Doing something different can be a winner…. aside from picking the ‘next big thing’
on the Periodic Table
‘Low-cost’ is likely to still be the dominant strategy in 100 years time….
Niche mining business opportunities are all around us – even now….
Corporate strategy, even in commodity industries, is very far from boring…
3. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Let’s start with a truism…
Source: Trench & Sykes; Picture Source:
bigalmanack.com
Mining Sector Strategies for the Future – Preparing for the Next Boom
Everyone turns their attention to
innovations at asset and company
level when times are tough…
….Then go back to ‘business as usual’
at the first opportunity when things
pick up.
4. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
..and with a proposed takeaway…
Picture Source:
bigalmanack.com
Mining Sector Strategies for the Future – Preparing for the Next Boom
Opportunities are everywhere…
we just don’t easily see them
….There are however processes and
precedents as to how to find them
5. “We don’t like their sound and
guitar music is on the way out”
Decca
Records
1962
“Who the hell wants to hear actors talk?””
H.M.
Warner
1927
Harvard
Professor
1940
“The television will never achieve popularity;
it takes place in a semi-darkened room and
demands continuous attention””
Allied
Commander
WWI
“This is good sport, but for the military,
the aeroplane is useless””
..so spot the next generation of these…
9. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Effective minerals sector strategy requires:
• A knowledge of your industry (and beyond)
• A knowledge of your own company!
• An understanding of the effectiveness of generic (and
other) strategies
• And a way of acquiring and updating this information
quickly and cheaply
• Consideration of views on the future (e.g. scenarios)
10. 0 10 20 30 40 50 60 70 80 90 100
AL
CU
NI
ZN
FE
LRMC = 100 Ave qtly price (Q3) 2015
Source: CRU: LRMC = Long-Run-Marginal-Cost www.crugroup.com
A knowledge of your industry; Prices
11. Source: CRU
Big bets are made, big
risks taken often ending
in tears
Risks are avoided, small
bets are made
“Irrational exuberance”
• Excessive optimism
• Inability to see the downturn
• Major projects launched
• Acquisition activity
• Rising tide floats all boats
“Irrational depression”
• Excessive pessimism
• Inability to see the upturn
• Cost cutting, divestment, small
expansions & debottlenecking
• Develop future options
• We find out who is swimming naked.
A knowledge of your industry; Cycles
12. CRU CONSULTING Data: CRU
Rio Tinto’s mines occupy mainly
1st quartile positions on the global
cost curve
Port of
Dampier
Cape
Lambert
Port
Pannawonica (155Mt)
Nammuldi (73Mt)
Brockman 2 (15Mt)
Brockman 4 (381Mt)
Mt Tom Price (23Mt)
Marandoo (181Mt)
Paraburdoo (6Mt)
Channar (24Mt)
Eastern Range (40Mt)
West Angelas (150Mt)
Hope Downs (77Mt)
Yandicoogina (297Mt)
Western Turner Syncline
(257Mt)
Rio Tinto mining operations
Vale’s mines occupy mainly 1st and
2nd quartile positions on the global
cost curve
Tubarao
Port
Itaguai
Port
Guaiba
Island
Terminal
Madeira
Port
Southern
System
(2,080Mt)
Midwestern
System
(660Mt)
Southeastern
System
(2,110Mt)
Northern
System
(4,796Mt)
VALE mining operations
Global iron ore business cost curve, all products($/t, Nominal, 2015)Global iron ore business cost curve, all products($/t, Nominal, 2015)
A knowledge of your industry; Costs
13. DISTINCTIVE CAPABILITY*
YOUR REASONING /
PROOF / FACT-BASE
Your answer here...
Your answer here...
Your answer here...
Your answer here...
Your answer here...
Your answer here...
* A Distinctive Capability originates from a skill, or set of skills, that are superior to those of our peers
[NOT a physical asset or cash balance]
WHAT DO YOU CONSIDER THE THREE FOREMOST DISTINCTIVE CAPABILITIES* THAT
SET YOUR COMPANY APART FROM OTHERS?
A knowledge of your own company!
14.
Does company XXX have a strategic advantage over peer companies?
(YES or NO)
If YES, allocate100% of the root cause of the advantage across the following
three categories:
Our Distinctive Capabilities... Financial strengths of XXXX... Our mine and/or exploration assets..
? ? ?
e.g. - skills
- people
- systems
e.g. - strong balance sheet
- strong cash flows
e.g. - mines
- projects
- exploration upside
?
WHAT DO YOU CONSIDER THE CURRENT STRATEGIC ADVANTAGES, IF ANY,
THAT WILL FACILITATE PROFITABLE GROWTH?
15. Mining companies most often choose which of these strategies?
A: Low Cost B: Differentiation C: Focus
A knowledge of generic strategies
16. • Lowest cost equals highest margin
• Position of strategic strength averts price competition & allows
exploration of new opportunities
• ‘Only one firm wins’
Low Cost
Strategy
• Differentiated products &/or services equals highest margin
• Competitive position is protected via continuous innovation of product
& service attributes
• ‘Many winners’
Differentiation
Strategy
• Market segmentation approach eg. by niche or geography
• Experience effects in target market segment can create barriers to
entry for competitors
• ‘Many winners’
Focus
Strategy
Sources: Porter (1985), Trench& Judge (2002)
Note the danger of getting ‘stuck in the middle’
Generic Approach Attributes
Most strategies will remain generic
17. Source: “The Red Queen Effect” From Kauffmann 1995, McKinsey Quarterly: quoting Lewis Carroll
Price
Quantity
Kryptonite Cash Costs 2013
Kryptonite Cash Costs 2016
"You have to run faster and faster just to stay in
the same place!"
BE CAREFUL: COST & PRODUCTIVITY IMPROVEMENTS ARE NO
GUARANTEE OF GREATER MARGINS OVER TIME
Some things never change – like the
cost leadership strategy…
18. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
..and strategy effectiveness?…
Mining Sector Strategies for the Future – Preparing for the Next Boom
Source: Arvidson (2014)
19. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Effective minerals sector strategy requires:
• A knowledge of your industry (and beyond)
• A knowledge of your own company!
• An understanding of the effectiveness of
generic (and other) strategies
• And a way of acquiring and updating this
information quickly and cheaply
• Consideration of views on the future (e.g.
scenarios)…
20. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
..what about the ‘next big thing’ strategy
Source: Google images
Mining Sector Strategies for the Future – Preparing for the Next Boom
21. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Aluminium was once the ‘next big thing’
0
50
100
150
200
250
300
350
400
1913
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Market size of the Base Metals over the
last 100 years in 2012 dollars (millions)
Copper
Tin
Zinc
Lead
Aluminium
Nickel
An Economic History of the Esoteric Metals Markets
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1913
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012
Data: USGS
22. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
However a lot needs to fall into place
An Economic History of the Esoteric Metals Markets
Images: sandatlas.org; earlham.edu; tempraturedetectors.com & shutterstock
ABUNDANCE
CONCENTRATION
8.2%
Factors in place prior to 20th century
MINING
PROCESSING
DEMAND
Solved in late 19th & early 20th century
Source: Sykes et al., 2015, in press
23. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
And not all metals hold the potential
Rank
Critical Metal
Discovery
Supply
Demand
Total
1 Antimony 1 2 1 4
2 Barium 1 2 0.5 3.5
- Germanium 1 1 1.5 3.5
- Indium 1 1 1.5 3.5
- Tellurium 1 1 1.5 3.5
Mining Sector Strategies for the Future – Preparing for the Next Boom
Rank
Critical Metal
Discovery
Supply
Demand
Total
44 Holmium (REE) 0 0 1 1
- Lutetium (REE) 0 0 1 1
- Terbium (REE) 0 0 1 1
- Thulium (REE) 0 0 1 1
- Tantalum 0 0 1 1
Source: Sykes et al., 2015, in press
24. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Automation is not a strategy – so we
Won’t Mention Driverless Trucks
Sources: Rio Tinto, FT, ABC, Courtesy Dr Carla Boehl (2015)
Mining Sector Strategies for the Future – Preparing for the Next Boom
Again!
25. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
So no need for NASA urine technology!
Sources: Google Images, NASA
Mining Sector Strategies for the Future – Preparing for the Next Boom
26. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Strategies for the future requires an
entrepreneurial mindset
Source: bigalmanack.com
Mining Sector Strategies for the Future – Preparing for the Next Boom
27. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Some strategies for the future will
require an entrepreneurial mindset
Source:http://www.cleanlink.com/productwatch/details/Urinal-Fly-Target—741
Urinals at Amsterdam Schiphol Airport
Mining Sector Strategies for the Future – Preparing for the Next Boom
Urinal Fly Target - The Urinal Fly Target Sticker
is an inexpensive, easy way to improve restroom
cleanliness. The product acts as a target,
reducing splashes on the floor by up to 80
percent. With a long life and installation ease, the
flies are available in 20 per pack.
28. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Strategies for the future requires a
process to see what is in plain sight
Mining Sector Strategies for the Future – Preparing for the Next Boom
1. Think through what makes a very
successful company in another
industry so special? Is it a
renegade?
2. Carefully document the elements of
its strategic approach
29. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Source: Trench 2002 ‘Make Your Firm a Business Renegade;
Trench (2006) Resources Companies Should ‘dare to be Different’
Mining Sector Strategies for the Future – Preparing for the Next Boom
3. Think how similar approach to
business might be ‘translated’ back to
the world of mining and exploration
4. Determine whether the equivalent
strategic space is already occupied in
exploration and mining. If not ask why
not?
Strategies for the future requires a
process to see what is in plain sight
30. -50
-40
-30
-20
-10
0
10
20
30
40
Total Returns to Shareholders (1986-2003) Per Cent (US$ Real Rate of Return)
Source: NM Rothschild & Sons (2003), A Trench analysis
Renegades occupy the first four places……and are nowhere else to be seen!!
Franco Nevada 34% First global mining royalty company
Barrick 28% Financial management/M&A
Sons of Gwalia 18% Miner in the third cost quartile
Delta 17% A mining company that didn’t mine
Sometimes doing things differently
pays off…Historical Mining Examples
31. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Typical life-of-mine risk & value profile
Mining Sector Strategies for the Future – Preparing for the Next Boom
Concept Exploration Discovery Economics Development Mining
Value
Time
MINING
High Risk – High Potential Lowered risk
Full Value
Speculation Orphan Period
Speculators Leave
Institutional
Investment
EXPLORATION DEVELOPMENT
Uncertainty driven Risk driven
Source: Cook
(2010)
32. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Aside Generic Strategies – What are
successful Mining Sector Strategies?
Mining Sector Strategies for the Future – Preparing for the Next Boom
1. Best-in-Class Mine Operator
Source: Bill Gates; Rio Tinto
33. Which of the following mainstream gold companies are the
‘best’ best-in-class operator?
AngloGold Newmont
Barrick Newcrest
34. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Aside Generic Strategies – What are
successful Mining Sector Strategies?
Mining Sector Strategies for the Future – Preparing for the Next Boom
2. Faster and Under-Budget Project
Developer
35. Which of the following mainstream resources companies is a
‘best in class’ project developer?
Glencore BHP Billiton
South32 MetalsX
36. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Developers need to manage technical &
corporate risk profile
Risk
Change in risk type through the mine project development stage
Corporate
Risk
Technical
Risk
Sources: Modified from Trench et al., (2014); Trench & Packey (2012)
Mining Sector Strategies for the Future – Preparing for the Next Boom
37. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Concave projects present more
development risk
Mining Sector Strategies for the Future – Preparing for the Next Boom
ValueRecognition
Convex project
development
Concave project
development
38. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Aside Generic Strategies – What are
successful Mining Sector Strategies?
Mining Sector Strategies for the Future – Preparing for the Next Boom
3. Perennial Discoverer of New Mines – The ‘Great Explorer’ Strategy
39. Which of the following is a great explorer?
Sub-Economic Resources NL BHP Billiton
Mark Creasy-Mark Bennett Rio Tinto
40. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Great explorers must find the orebodies of
the future…which look like?
Mining Sector Strategies for the Future – Preparing for the Next Boom
Based on: Sykes and Trench (2014)
41. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Discovery impact is dependent on
commodity type
Mining Sector Strategies for the Future – Preparing for the Next Boom
ValueRecognition
Convex minerals:
• Gold,
• Diamonds
• Tin
• Copper
• Nickel sulphide
• Hematite DSO
• Oil
Concave minerals:
• Nickel laterite
• Vanadium
• Rare earths
• Graphite
• Magnetite
• Gas
42. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Aside Generic Strategies – What are
successful Mining Sector Strategies?
Mining Sector Strategies for the Future – Preparing for the Next Boom
3. Partner of Choice - The Great Socioeconomic Miner
Geographical (Country) Risk
Resource
Nationalism
LandAccess
LandClaims
RedTape
GreenTape
Corruption
CivilUnrest
Infrastructure
SocialUnrest
Natural
Disasters
Labour
Relations
Source: Trench et al., (2014)
43. Which of the following is an asset owner of choice (great
socioeconomic miner)?
Oceanagold Vale
First Quantum Anglo American
44. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Sources: Trench et al., (2014); Wilson et al., (2014); Multilateral Investment Guarantee Agency
(2013); Schwab et al., (2013); World Bank (2013); Transparency International (2013)
Great Socioeconomic Miner……Country Risk information
exists at high-level but is founded upon perception bias
Mining Sector Strategies for the Future – Preparing for the Next Boom
45. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Risk
Change in risk type through the mine project development stage
Corporate RiskTechnical Risk Sources: Modified from Trench et al., (2014); Trench & Packey (2012)
Non-Technical Risk:
Commodity Price?
LowerPrices
HigherPrices
Mining Sector Strategies for the Future – Preparing for the Next Boom
Understanding ‘composite risk’
46. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Risk
Change in risk type through the mine project development stage
Sources: Modified from Trench et al., (2014); Trench & Packey (2012)
Non-Technical Risk:
NIMBYism?
Corporate RiskTechnical Risk
Mining Sector Strategies for the Future – Preparing for the Next Boom
Understanding ‘composite risk’
47. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Risk
Change in risk type through the mine project development stage
Sources: Modified from Trench et al., (2014); Trench & Packey (2012)
Non-Technical Risk:
Political Risk?
Elections
Unsupportive party elected
Unsupportive
party
unelected
Risk
increases as
project
advances
Corporate RiskTechnical Risk
Mining Sector Strategies for the Future – Preparing for the Next Boom
Understanding ‘composite risk’
48. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
But what about industry scenarios?
Mining Sector Strategies for the Future – Preparing for the Next Boom
Increased
Decreased
PROSPECT AVAILABILITY
Increased
Decreased
CRUSADES COUNTING HOUSE
PEASANTS’ REVOLT UNDER SEIGE
ECONOMICMARGINS Source: Sykes (2015)
49. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Developing scenario-based strategy for
mining and exploration
• Centre for Exploration Targeting
“Future of Exploration” Scenarios
– Dec 2015: CET Students Trial Workshop
– Feb/Mar 2016: Perth-wide Students Trial
Workshop
– Jun/Jul 2016: International Expert Workshop
Contact: Allan or John to get involved!
Mining Sector Strategies for the Future – Preparing for the Next Boom
50. Wrays Resources Innovation Group Seminar, Perth, Australia, 2nd November 2015
Thank you to the organisers – Wrays -
and to all of you for coming along today
allan.trench@crugroup.com
john.sykes@greenfieldsresearch.com
Mining Sector Strategies for the Future – Preparing for the Next Boom