graham arvidson_cet presentation feb 2015_final_pdf-3.pdf
TRANSCRIPT
EMERGING RESOURCE COMPANIES:
THE CASE FOR EXPLORATION AS STRATEGY
An ASX Top80 Mining and Metals
Case Study
Graham Arvidson
Curtin University – Mineral Economics Masters Program
CET Discovery Day Fremantle, Australia: 24th Feb 2015
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Which strategy creates this kind of value?
2
Aver
age
Annu
alis
ed R
etur
n by
Stra
tegy
Em
ploy
ed 2
010
- 201
5, N
=80
-30%
-23%
-15%
-8%
0%
8%
15%
23%
30%
6%
3%
12%
20% 59%
% of Total Value Add by Strategy Employed,
2010-2015, N=20
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study3
Overview• An ASX Top80 Mining and Metals Case Study
Separating the Best (Top 20) from the Rest (Top 80): To set the scene:
– What did they invest in? – Where did they invest? – What financing method was preferred?
The gritty stuff: – Horizons of Growth: What growth strategies were
utilised? Hint: Exploration Success as a driver of superior shareholder returns?
• “The Best” (Top 20) – What makes them distinctive?
CET Discovery Day 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
AN ASX TOP 80 MINING AND METALS
CASE STUDY
24 Feb 20154
January 2010 to January 2015
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Top 80 Selection Criteria
• Filtered ASX Metals and Mining focused resource companies $50M< Market Cap <$1.1B (Source: S&P Capital IQ)
• Companies exceeding $1.1B market cap removed from study: considered to be ‘established’
• Minimum market cap of $50M chosen to indicate nascent/emerging success creating a data set of 80 companies
• Top 80 ranked by Total Shareholder Return (TSR) across 5 years (Jan 2010 - Jan 2015) (Source: Bloomberg Total Return)
5
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Critical Limitations of the Top 80 Study
• Does not take into account the failure rates by strategy category – inherent positive bias
• Research data was compiled by trawling trends, ASX announcements, and company presentations – not a perfect science
• Only one timeline looked at: 5 years
• ASX players only – Australian market centric
• Misses ASX companies acquired during the period (e.g. Papillon Resources)
6
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Top80 TSR Distribution - “The Rest”
7
Lots of losers… a few winners.
Median CAGR -12% (Loss) !
Only 27 of 80 companies make a return
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
In stark contrast, Top 20 - “The Best”
8
CAGR TSR above 15% for 17 Companies!
Annualised TSR - Top 20: An impressive line-up
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Why are we interested in good strategy? Top20 buck the trend
9
Returns linked to commodity price - swings/roundabouts - Except in the Top 20? Good luck or good business?
Source: S&P Capital IQ
Study Period
Mining/metals
Everyone else
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Fe, Cu, Au popular with “The Rest”, Gold the standout for “The Best” and…
10
Platinum
ZincTungstenPotashPhosphate
Rare EarthsManganese
Tin
Diamonds
Nickel
LithiumCoal - Metallurgical
Iron Ore9 Copper
15
Gold26
Mineral Sands
Graphite
Top 80: Primary Commodity
Rare Earths1
Manganese1Tin
1Diamonds
1Nickel
1Lithium
1Coal - Metallurgical
1Iron Ore
1Copper
3
Gold6
Mineral Sands2
Graphite1
Top 20: Primary Commodity
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
gold generated high returns most frequently…
11
Who’s Who in the Top 20 - TSR by Commodity
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Location - does not determine magnitude or likelihood of success
12
Australia is the easy choice?Africa -
sovereign risk not a deterrent?
Asia2
Europe1
Central Africa4
East Africa1
West Africa7
Southern Africa6
South Pacific3
South America6
Canada1
South East Asia10
Australia39
Top 80: Location
East Africa1West Africa
2
Southern Africa1
South Pacific2
South America2
Canada1South East Asia
1
Australia10
Top 20: Location
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Finance - Does not get you in the Top 20
13
Top 80 Primary Financing Methods
Equity66
Debt14
Top 20 Primary Financing Method
Equity16
Debt4
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Debt finance: higher returns a self-fulfilling prophecy?
14
Top 80 Average Annualised TSR Debt V Equity
Aver
age
Annu
alis
ed T
SR
-7%
-5%
-4%
-2%
0%
Debt Equity
-6%-2%
Top 20 Average Annualised TSR Debt V Equity
Aver
age
Annu
alis
ed T
SR
0%
9%
18%
26%
35%
Debt Equity
30%35%
Suggestion: Better project is required to attain debt finance?
May inherently bias debt to higher returns
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Location, commodity, and finance mostly inconclusive… the real story: Strategy
15
Horizons of Growth - Top80 Strategy Framework (Adapted from: Baghai, Coley, and White 2000 Alchemy of Growth)
Time (Years)
Prof
it
Horizon 1 – Extend and Defend Core Business
Horizon 2 – Build Emerging Businesses
Horizon 3 – Create Viable Options
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Top80 Strategy Categories Strategy analysis was retrospective
16
COMMON STRATEGIES AMONG EMERGING RESOURCE COMPANIES
Exploration Discovery Significant mineral exploration discovery leading to substantial shareholder returns
Purchase and Produce Growth is realised by acquiring an existing resource asset (either operational or previously operational) and rapidly moving the asset into full production (typically less than 12 months and less than $50M).
Project Development Growth is realised by developing a green fields asset (typically a new-build) targeting production from a previously defined resource. This strategy seeks to add shareholder value by taking a well defined resource through the entire development cycle and into production (typically greater than 12 months and greater than $100M).
Mergers and Acquisitions Significant merger or acquisition leading to shareholder return
Strategic Investor / Strategic Alliance
Attraction of a strategic investor leading to shareholder return
Unclear No clear evidence of successfully executed growth strategies during the study period
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Strategy: Exploration Discovery Example: Sirius Resources
17
Nova discovery
Source: S&P Capital IQ
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Strategy: Purchase and Produce Example: Northern Star Resources
18
Purchase and Produce Paulsens
Paulsens debt paid off
Horizon 1: Purchase and
Produce
Horizon 2: Exploration Discovery
Paulsens significant exploration results
Horizon 3: M&A
Acquire Plutonic
Acquire Jundee
Source: S&P Capital IQ
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Strategy: Project Development Example: Orocobre
19
Olaroz scoping study released
DFS Complete
Project approvals
Patience required!
First lithium production
Source: S&P Capital IQ
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Strategy: M&A… success? Example: Evolution Mining
20
Cracow and Mt Rawdon
M&AASX:CAH
ASX: EVN
Source: S&P Capital IQ
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Strategy: Strategic Investor / Alliance Example: Western Mining Network
21
Source: S&P Capital IQ
Strategic Alliance formed with Borneo Brothers Ltd to attain option on Manganese Tenement
Strategic Investor
“Milestone” for Tamboli
Prospective Graphite
Tenement
Strategic Alliance/Investor can generate significant (speculative?) near term investor returns with minimal capital commitment
Both strategic investors incentivised based on WMN market cap
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Top 80 - Unsure what their strategy is or which strategy to pursue
22
Unclear19
Strategic Investor2
Project Development22
M&A5
Purchase and Produce8
Exploration Discovery24
No clear preference in
strategy
Top 80: 1st Horizon Strategy
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
How to add value? Exploration!
23
1st Horizon Growth Strategy by TSR -Top 80Exploration and Purchase/Produce are the Winners
Aver
age
Annu
alis
ed T
SR fo
r Top
80
Emer
ging
Res
ourc
e Co
mpa
nies
-30%
-23%
-15%
-8%
0%
8%
15%
23%
30%
Explorat
ion Discove
ry
Purchas
e and Produce
Project D
evelo
pment
Strateg
ic Inve
stor
M&A
Note: Inherent positive bias: study does not
take into account failure rates!
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
“The Best” use Exploration as a Strategy for Success…..
24
12 of the Top20 realised high returns because of
Exploration Success!
Strategic Investor1
Project Development3
M&A3
Purchase and Produce1
Exploration Discovery12
Top 20: 1st Horizon Strategy
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
And they reap the rewards….
25
Strategic Investor3%
Project Development12%
M&A6%
Purchase and Produce20%
Exploration Discovery59%
Exploration Discovery is the dominant driver
of shareholder return in the Top 20.
59% of all value added in the Top 20 was a
result of Exploration as a primary strategy
Top 20: % of Total Value Added
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Want to maximise TSR? Exploration delivers high returns most frequently
26
1st Horizon Growth Strategy by Average Annualised TSR - Top 20
Aver
age
Annu
alis
ed T
SR fo
r Top
20
Em
ergi
ng R
esou
rce
Com
pani
es
0%
35%
70%
105%
140%
Purc
hase
and
Pro
duce
Expl
orat
ion
Disc
over
y
Proj
ect D
evel
opm
ent
Stra
tegi
c In
vest
or
M&A
12 C
ompa
nies
3 C
ompa
nies
3 C
ompa
nies
1 C
ompa
ny
1 C
ompa
ny
(Nor
ther
n St
ar B
ias)
Of which Exploration
contributed…..
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Multi-horizon more common among top performers
27
Top 80
Unclear or No Horizons19
Three Horizons7
Two Horizons14
One Horizon40
Three Horizons3
Two Horizons7
One Horizon10
Top 20Note: Horizon review was retrospective – ‘Unclear’ does not mean that companies do not have a strategy. It means no clear strategy execution was evidenced across the study period.
Of the 21 “multi-horizon” companies
14 included exploration as a
strategy.
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
The Case for Multiple Horizons
28
Average Top 20 Value Added - Annualised TSR BasisNumber of Horizons
Annu
alis
ed 5
Yea
r TSR
- Av
erag
e Ac
ross
Top
20
0%
15%
30%
45%
60%
One Horizon Two Horizons Three Horizons
53%
33%
23%
CET Discovery Day 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
DISTINCTIVE CAPABILITIES OF THE “TOP 20”
WHAT THE BEST APPEAR TO DO BETTER THAN THE REST
24 Feb 201529
(Top20 Interviews from April 2013)
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Want to be in the Top 20? Focus on People and Strategy
30
Asset5%
Technology5%
Finance9%
Strategy45%
People36%
Note: Cited by leaders within the 2013 Top20 - interview results.
When asked what distinctive
capabilities their organisations possess, their
responses were in these categories.
Scientific methodology? No…. but of some interest
nonetheless? Top 20: Leadership Cited Distinctive Capabilities
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Strategy: Examples of Distinctive Capabilities Cited by Top20 Leadership
31
• Asset Economics - Turn an idea on its head to see value that others can't
• Synergy Insights - Combine multiple assets where together their value far exceeds their value apart
• Make tough decisions - Don't fall in love with crappy assets. Move on and recognise mistakes early
• Sector Insight – predict fundamental industry structure changes and act early to create strategic advantage
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
People: Examples of Distinctive Capabilities Cited by Top20 Leadership
32
• Well Connected - Its who you know - Gaining insight into an asset’s potential through word of mouth
• Geological Insights – Expertise in exploration regions
• Smart incentives - E.g. ensure directors are incentivised by share price increases and not market cap increases
• Value Chain – Distinctive capability to resource the right people from exploration to production at the right time
CET Discovery Day 2015 24 Feb 2015
Emerging Resource Companies: The Case for Exploration as Strategy, An ASX “Top 80” Case Study
Conclusion: A great emerging company will most likely look like this…
33
• Commodity – Gold most commonly delivered high returns across the Top 80…
• Location – Agnostic no clear evidence that location determines success. Africa and Australia popular.
• Finance - Debt (may inherently indicate better projects) • 1st Horizon Strategy - Exploration Discovery!
• Also look for Purchase and Produce – second place but has short time horizons and may open exploration opportunities (e.g. Northern Star doubled down with Paulsens)
• Multi Horizon - The Top20 were more likely to execute multiple strategies successfully and were rewarded by the market
• Distinctive Capabilities - People and Strategy - Clear and credible advantage over competitors
THANK YOU
Contact information: Graham Arvidson
Email: [email protected]
Special thanks to Professor Allan Trench for his support and guidance.
Special thanks to Darren Martin of PCF for for assisting with data.
“We demand rigidly defined areas of doubt and uncertainty!”
-DOUGLAS ADAMS