commerical strategies in an era of low commodity prices - sykes & trench - feb 2016 - uwa...
TRANSCRIPT
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
COMMERCIAL STRATEGIES
AND MINE DEVELOPMENT
IN AN ERA OF LOW
COMMODITY PRICES John P. Sykes12 & Allan Trench13
1. The University of Western Australia;
2. Greenfields Research;
3. CRU Group
University of Alberta visit to
UWA Business School
19th February 2016
Images: moviewallpapers101.com & miningmagazine.com
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
AIMS
• Discuss the short-term strategic challenges facing the
resources sector (i.e. commodity prices)
• Discuss the long-term strategic challenges facing the
resources sector (i.e. just about everything else)
• Compare and contrast the short- and long-term strategic
approaches of the mining and petroleum sectors
• Compare and contrast the industries of Western Australia
and Alberta (beyond the obvious…)
Images: moviewallpapers101.com & miningmagazine.com
University of Alberta visit to UWA Business School 19-Feb-16 Slide 2 of 40
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Alberta & WA are empty but rich
19-Feb-16 University of Alberta visit to UWA Business School
Area: 2,646,000 km2
Population: 2.57 million
Density: 1.0 / km2
GDP: US$152 billion
Per capita: US$59,100
Temp. (Perth): 8 to 32oC
Area: 662,000 km2
Population: 3.65 million
Density: 5.5 / km2
GDP: US$213 billion
Per capita: US$58,400
Temp. (Calgary): -13 to 23oC
Slide 3 of 40
Sources: Wikipedia; Images: Google Earth & Wikipedia
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Both are resource-rich but stable
Key resources: Oil, gas, coal
Key areas: Athabasca
Revenue: US$80 billion
Employment: 147,000
Fraser Institute PPI: 3rd
Key resources: Iron ore, oil,
gas, nickel, gold, alumina
Key areas: Pilbara, North
West Shelf, Goldfields
Revenue: US$72 billion
Employment: 94,000
Fraser Institute PPI: 10th
19-Feb-16 University of Alberta visit to UWA Business School Slide 4 of 40
Sources: Wikipedia, Government of Western Australia & Fraser Institute; Images: cbc.ca & mining.com
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Oil & mining face economic problems
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University of Alberta visit to UWA Business School 19-Feb-16
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Slide 5 of 40
Sources: Indexmundi
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…have a track-record of disaster
• Samarco
University of Alberta visit to UWA Business School 19-Feb-16 Slide 6 of 40
Images: Gizmodo & tpi.it
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…face global environmental issues
University of Alberta visit to UWA Business School 19-Feb-16 Slide 7 of 40
Images: justmeans.com & frontlineaction.org
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…an absence of local social licence
University of Alberta visit to UWA Business School 19-Feb-16 Slide 8 of 40
Images: news.nationalpost.com & frontlineaction.org
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…native land rights challenges
University of Alberta visit to UWA Business School 19-Feb-16 Slide 9 of 40
Images: canadianprogressiveworld.com & au.news.yahoo.com
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…& workforce diversity / quality issues
University of Alberta visit to UWA Business School 19-Feb-16 Slide 10 of 40
Images: excaliburdrilling.com & hagstromdrilling.com.au
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
So how do we
deal with this
strategically in
the resources
sector?
University of Alberta visit to UWA Business School
19-Feb-16 Slide 11 of 40
Images: moviewallpapers101.com & miningmagazine.com
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
3 Basic strategies
University of Alberta visit to UWA Business School 19-Feb-16
Resource companies usually employ which generic strategy?
A. Low cost B. Differentiation C. Focus A. Low cost
Image: Anne Hegerty – The Chase
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Which of the following major petroleum companies is the best-
in-class operator?
Royal Dutch Shell
Total Don’t know!
Image: Who Wants To Be A Millionaire Source: Allan Trench, 10 Dec 2012, Strictly Boardroom – From mediocrity to capability in explorers and miners, MiningNewsPremium.net
Exxon Mobil A: Exxon Mobil
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Which of the following major petroleum companies is the best-
in-class explorer?
Exxon Mobil Royal Dutch Shell
Total Don’t know!
Image: Who Wants To Be A Millionaire
B: Royal Dutch Shell
Source: Allan Trench, 10 Dec 2012, Strictly Boardroom – From mediocrity to capability in explorers and miners, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Which of the following major mining companies is the best-in-
class operator?
BHP Billiton Rio Tinto
Glencore Don’t know!
Image: Who Wants To Be A Millionaire
D: Don’t know
Source: Allan Trench, 10 Dec 2012, Strictly Boardroom – From mediocrity to capability in explorers and miners, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Which of the following major mining companies is the best-in-
class explorer?
BHP Billiton Rio Tinto
Glencore Don’t know!
Image: Who Wants To Be A Millionaire
D: Don’t know
Source: Allan Trench, 10 Dec 2012, Strictly Boardroom – From mediocrity to capability in explorers and miners, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Which of the following major automobile companies is the best-
in-class manufacturer?
Toyota Volkswagen
BMW Don’t know!
Image: Who Wants To Be A Millionaire
A: Toyota
Source: Allan Trench, 10 Dec 2012, Strictly Boardroom – From mediocrity to capability in explorers and miners, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Which of the following major mobile phone companies is the
best-in-class innovator?
Samsung Nokia
Apple Don’t know!
Image: Who Wants To Be A Millionaire
C: Apple
Source: Allan Trench, 10 Dec 2012, Strictly Boardroom – From mediocrity to capability in explorers and miners, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
19-Feb-16 University of Alberta visit to UWA Business School
Suggest sources of competitive advantage for large diversified resource
companies over smaller, less diversified resource companies…
Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com
Source: Allan Trench, 18 Nov 2013, Strictly Boardroom – Large mining companies: capability lost, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
19-Feb-16 University of Alberta visit to UWA Business School
• Greater access to capital
• Lower cost of capital
• Economies of scale and scope
• Tier 1 assets within portfolio
• Infrastructure ownership
• Counter-cyclical investment
• Stronger balance sheet
• Diversity of risk by commodity
• Diversify of risk by country
• In-house technical expertise
• Market share influence
TYPICAL ANSWERS
• Bargaining power with suppliers
• Optimisation of product specs
• Better access to governments
• Negotiating power with government
• Can ‘hibernate’ projects
• Game theory advantages
• Greater capacity for M&A
• Preferential access to M&A
• Local oligopoly advantages
• Supplier power
• Can take more exploration risk
• But where are the distinctive capabilities?
Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com
Source: Allan Trench, 18 Nov 2013, Strictly Boardroom – Large mining companies: capability lost, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Evidence from the cost curve
University of Alberta visit to UWA Business School 19-Feb-16
Theory suggests that low cost
assets should be leveraged…
...whilst high cost assets
should remain unleveraged…
…however we find it’s the low cost
assets that are unleveraged…
...whilst high cost assets are
highly leveraged…
…the owners of low cost assets seem
determined to stay at the bottom of
the cost curve and extract rents…
...whilst high cost asset owners are
desperate to borrow, and buy an
asset further down the cost curve…
…the low cost asset owners ride
the cycle and try to switch horses /
commodities as they go…
...whilst high cost assets owners
hope they can buy their way down the
cost curve before the cycle ends…
BOTH ENDS OF THE COST CURVE ARE FOCUSED ON GETTING BETTER
ASSETS NOT OPERATING THEM BETTER OR FINDING BETTER ASSETS
Slide 21 of 40
Source: Allan Trench, 21 Dec 2015, Strictly Boardroom – Gearing up for mining’s future leaders, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
19-Feb-16 University of Alberta visit to UWA Business School
Suggest ways a government can raise extra revenue in a
country from its minerals sector…
Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com
Source: Allan Trench & John Sykes, 04 May 2015, Strictly Boardroom – The forgotten economic potential of new mineral discovery, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
19-Feb-16 University of Alberta visit to UWA Business School
• Increase royalty rates
• Impose import tariffs
• Lift corporate tax rates
• More thorough government audits
• Favour use of local employees
• Require community projects
• Local infrastructure maintenance
• Raise charges for water / pollution
• Greater penalties / fines
• Increase withholding taxes
• Increase government admin fees
TYPICAL ANSWERS
• Both private and public sector
focused on extracting rents from
existing assets;
• Neither focused on growing the
industry;
• Two main ways of growing the
industry:
• Operate assets BETTER than
previously; or
• Discover & develop new and
BETTER assets!
• So what are the strategic options available?
Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com
Source: Allan Trench & John Sykes, 04 May 2015, Strictly Boardroom – The forgotten economic potential of new mineral discovery, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Best-in-class operator?
19-Feb-16 University of Alberta visit to UWA Business School
Miners appear to be “sustainers”…
Bigger,
Bigger,
Bigger…
…and now
automated! …the oil industry seems
a bit more disruptive?
Slide 24 of 40
Based on: C.M. Christensen, 1997, The Innovator’s Dilemma;
Images: miniature-construction-world.co.uk; The Telegraph; Shutterstock; mining-technology.com; stanford.edu; lancs.ac.uk
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Best-in-class employer?
19-Feb-16 University of Alberta visit to UWA Business School Source: WIMnet, International Mining Geology Conference, 2014 & Toro Energy; Images: Toro Energy
In recent years Toro Energy was one of
the few Australian minerals companies to
have two women in the most prominent
executive positions, with Dr. Vanessa
Guthrie (below right) as MD, and first Erica
Smyth, and then Fiona Harris, as
Chairperson. Ms Smyth retired in 2015.
Her replacement Ms Harris stepped down
later in 2015. Tim Netscher is now
Chairperson.
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Business model innovator?
University of Alberta visit to UWA Business School 19-Feb-16
-50
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Total Returns to Shareholders (1986-2003)
Per Cent (US$ Real Rate of Return)
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
There is a bit of
a track record of
this in mining…
…with mixed
results!
Slide 26 of 40
Source: Allan Trench, 2015, Strategic Management of Resource Companies course, UWA Business School; Images: nicholsoncartoons.com.au
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Faster-cheaper project developer?
University of Alberta visit to UWA Business School 19-Feb-16
VALUE
Front End Loading
The petroleum industry seems to do
this…
…the mining industry much
less so… if at all?
Slide 27 of 40
Sources: Sandy Bell, 2014, Value and Risk in the Oil and Gas Industry, CET
Seminar; Edward Merrow, 2011, Industrial Megaprojects; Allan Trench, 2015,
Strategic Management of Resource Companies course, UWA Business School
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
More frequent discoverer of mines?
University of Alberta visit to UWA Business School 19-Feb-16 Slide 28 of 40
Images: Mike Young (afr.com); Margaret Hawke (unimelb.edu.au); Lang Hancock (dailytelegraph.com.au); Fox Mulder (hellogiggles.com); Jon Hronsky (wesminllc.com); Mark Creasy
(smh.com.au); Mark Bennett (theceomagazine.com); Roy Woodall (berkeley.edu); Dana Scully (pinterest.com); Dan Wood (Highlands Pacific); Ian Sandl (AMIRA); Rohan Williams
(Dacian Gold); Ed Eshuys (au.news.yahoo.com); Peterson Pipe found on ebay.com
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
19-Feb-16 University of Alberta visit to UWA Business School
Scully’s skeptism
• Scientific, skeptical, rational,
optimiser, focused
• Efficient hypothesis tester
Scully-type exploration
• Improving the ‘exploration search’
algorithm
• Testing more targets, quicker and
cheaper than the competition
• Those that drill more holes
make more discoveries
Mulder’s musings
• Imaginative, creative, open-
minded, counter-thinker
• Free hypothesis creator
Mulder-type exploration
• Opens up new ‘search space’
• The best discoveries are made
first
• To find something new you
need to go where no one else
has been before
The X-Files approach to exploration
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
University of Alberta visit to UWA Business School 19 February 2016
Image: popsugar.com
Source: Allan Trench, Jon Hronsky & John Sykes, 25 Jan 2016, Strictly Boardroom – The X-Files in mineral exploration: Building the perfect team, MiningNewsPremium.net
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Measuring exploration efficiency
University of Alberta visit to UWA Business School 19-Feb-16
The petroleum
industry seems
to do this…
…the mining
industry
much less so
(if at all?)…
…but ultimately a
game of declining
returns…
Slide 30 of 40
Source: Allan Trench, 2015, Strategic Management of Resource Companies course, UWA Business School
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Opening up new ‘search space’
University of Alberta visit to UWA Business School 19-Feb-16 Slide 31 of 40
Source: T. Campbell McCuaig, Pietro Guj, Jon Hronsky & Richard Schodde, 2009, Exploration Targeting in a Business Context, CET, UWA
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…an oil industry speciality
University of Alberta visit to UWA Business School 19-Feb-16
Original surface oil discoveries
Deep offshore discoveries – Gulf of Mexico
Oil sands discoveries – Canada
Shale gas discoveries – USA
New geographic discoveries – Alaska
Slide 32 of 40
Images: hubbertpeak.com & Google Earth
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
…but the mining industry does a bit
University of Alberta visit to UWA Business School 19-Feb-16 Slide 33 of 40
Source: Jon Hronsky & David Groves, 2008, Science of targeting: definition, strategies, targeting and performance management, Australian Journal of Earth Sciences
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
The great socio-economic miner?
University of Alberta visit to UWA Business School
Geographical (Country) Risk
Re
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La
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Cla
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La
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Re
latio
ns
19-Feb-16 Slide 34 of 40
Source: Allan Trench, Daniel Packey & John Sykes, 2014, Non-technical risks and their impact on the mining sector, AusIMM Monograph 30: Mineral Resource and Ore Reserve
Estimation; Images: Elizabeth Fells, Joel Turco, Darren Glass & Rylan Nielsen (NewGen Mining logo) & Shutterstock
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Not a lot of progress so far…
19-Feb-16 University of Alberta visit to UWA Business School Slide 35 of 40
Images: justmeint.wordpress.com; logodatabase.net; bhpbillitonwatch.net; Financial Times
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
This is all getting complicated!
19-Feb-16 University of Alberta visit to UWA Business School
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Cu
ore
gra
de
(%
)
Cornwall (UK) Average
UK Average
Michigan (USA) Average
USA Average
Western World Average
World Average
Change from high grade
underground mining in UK to
low grade open pits in USA
Further low grade
copper mining
innovations
20th century copper
mining technology,
innovation &
discovery package
Steam power
The corporation
Better
work
practices
SXEW
Low cost
drilling
New geographies
Regime change
Major public
infrastructure
Porphyry
geological
model Flotation
Improved
smelting &
refining
Airborne
geophysics
Computation Globalisation
Forward contracts
Free trade
Dynamite
Mechanisation
Slide 36 of 40
Source: John Sykes, 2014, Influencing exploration choices in copper at a strategic level, CET Members Day
Data: Phillip Crowson, 2012, Some observations on copper yields, Resources Policy
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Thinking about the short & long term
University of Alberta visit to UWA Business School
Incre
ase
d D
ecre
ase
d
PROSPECT AVAILABILITY
Increased
Decreased
CRUSADES COUNTING HOUSE
PEASANTS’ REVOLT UNDER SEIGE
EC
ON
OM
IC M
AR
GIN
S
19-Feb-16 Slide 37 of 40
Sources: Shell, Scenarios: Mountains and Oceans; Clem Sunter & Chantell Ilbury, 2011, The Mind of a Fox (Anglo American Scenarios: High Road & Low Road); John Sykes, 2015,
Using scenarios to guide copper exploration targeting strategies, Curtin Business School HDR Students Colloquium; Images: Anglo American; Shutterstock; clipartpanda; plos.org
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Robust strategy over short & long term?
19-Feb-16 University of Alberta visit to UWA Business School
Company Type / Scenario Under Siege Counting House Crusades Peasants’ Revolt
Operating ? √ √ ?
Project X X √ ?
Open Pit ? √ √ X
Underground ? ? ? ?
Open Pit & Underground ? √ √ ?
Energy Intensive ? √ √ X
Water Intensive ? √ √ X
Talent Intensive ? √ √ X
Weak social licence X X √ ?
Domestic owned ? √ ? ?
Foreign owned X X √ ?
Slide 38 of 40
Sources: John Sykes, 2015, Using scenarios to guide copper exploration targeting strategies, Curtin Business School HDR Students Colloquium
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
Final thoughts • The resources sector faces short-term
economic problems;
• Combined with long-term socio-
political, environmental and economic
challenges;
• Currently the industry is asset focused
– simply acquiring assets to extract
rents – this does not grow the industry;
• The industry can only be grown by
operating assets BETTER or finding
BETTER assets;
• A number of potential strategies exist
for doing this:
– Best-in-class operator;
– Best-in-class employer;
– Business-model innovator;
– Faster-cheaper project developer;
– Frequent discoverer of mines;
– The great socio-economic miner;
• In most areas the petroleum sector
leads the mining sector, though
lessons still flow both ways;
In reality, the situation is strategically very complicated!
University of Alberta visit to UWA Business School 19-Feb-16 Slide 39 of 40
Images: moviewallpapers101.com & miningmagazine.com
Commercial Strategies and Mine Development in an Era of Low Commodity Prices
References
NEW
Strictly
(Mining)
Boardroom
Out mid-2016
Recent Peer-reviewed Papers
• Sykes, J.P., Wright, J.P., & Trench, A., (in review),
Discovery, supply and demand: From Metals of
Antiquity to Critical Metals, Applied Earth Science
• Sykes, J.P., Wright, J.P., Trench, A., & Miller, P., (in
review), An assessment of the potential for
transformational market growth amongst the critical
metals, Applied Earth Science
• Gardiner, N., Sykes, J.P., Trench, A., & Robb, L.,
2015, Myanmar: Tin mining in Myanmar: Production
and Potential, Resources Policy
• Trench, A., Packey, D., & Sykes, J.P., (2014), Non-
Technical Risks and Their Impact on the Mining
Industry, AusIMM Monograph 30: Mineral Resources
and Ore Reserve Estimation, Second Edition,
Chapter 7
19-Feb-16 University of Alberta visit to UWA Business School Slide 40 of 40