www.cet.edu.au

Why is developing a new mine so difficult? A conceptual exploration of the management strategy literature

JOHN P. SYKES12*, DANIEL J. PACKEY1 AND ALLAN TRENCH12

1 Graduate School of Business, Curtin University, 78 Murray Street, Perth, Western Australia, 6000, Australia

2 Centre for Exploration Targeting (CET), The University of Western Australia, 35 Stirling Highway, Crawley, Perth, Western Australia, 6009, Australia

* Corresponding author: johnpaul.sykes@postgrad.curtin.edu.au

Introduction Over the last decade, several mineral commodity prices have reached real term

historical highs not seen in half a century (Jacks 2013). In response to higher prices

there has been substantial growth in “mineral resources” (Mudd, Weng, and Jowitt

2013). However, despite this substantial resources growth, very limited new mine

capacity has started up. Cairns, Hronsky, and Schodde (2010) question the economic

viability of the resource itself. As large and growing as it is; substantial portions of it

may not be “economic under current or immediately foreseeable circumstances”. The

exploration industry has thus failed to provide suitably ‘developable’ projects for the

mining industry. They highlight the “disconnect between the very short term focus of

the risk capital market compared to the longer-term gestation period required for well-

conceived greenfields exploration programmes” as one of the most “significant

contributing factors” to the “decline in greenfields discovery rates”. A challenge

presents itself to help the exploration industry discover deposits that are more

‘developable’. This paper outlines a high-level strategy for dealing with the paradox

that minerals exploration takes place on long timescales, however, ‘success’ is judged

along much shorter timescales (Cairns, Hronsky, and Schodde 2010). A review of the

business management and strategy literature suggests a number of ways of framing

the problem and developing a high-level strategy for moving around and opening up

the “exploration search space” (Hronsky 2009) to more ‘developable’ mine projects.

Life-cycle of a mine project

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

What makes a successful mine

project?

“Mineable”

“Undiscoverable”

(we tend not to find

these!)

“Unmineable”

(problems usually discovered

at the production stage)

Success

“Undevelopable”

(usually get stuck in the

economics)

McKinsey’s 3 Horizons of Growth

Horizon 3

Create viable options

Horizon 2

Build emerging businesses

Horizon 1

Extend and defend core businesses

Time (years)

Pro

fit

Source: Coley

(2009), Baghai,

Coley, and White

(1999)

The successful mine project is a developable one?

“Mineable”

“Undiscoverable”

(we tend not to find these

anyway)

Fewer “Unmineable” projects

(only the best make it into production)

Less

success?

More “undevelopable” projects

(many getting stuck in the

economics)

Life cycle “bow-tie” for global copper

mines & projects

Data: Infomine (2013), Ali (2010)

& Manning (1998)

Ra

w P

rosp

ec

ts &

Early

Exp

lora

tion

: 2,7

59 p

roje

cts

Ad

van

ced

Exp

lora

tion

:

633 p

roje

cts

Pre

- Feasib

ility:

84 p

roje

cts

Feasib

ility:

72 p

roje

cts

Develo

pm

en

t:

63

pro

jec

ts

Production &

Recently

Closed: 566

mines

Long Closed:

100,000s mines?

Development

“niche” point

(“Barrier to entry”)

Are mines modern

“Wonders of the World”?

Source:

Martin &

Morrison

(2012)

“…meeting the needs of the

present without

compromising the ability of

future generations to meet

their own needs…” - World Commission on Environment &

Development (1987)

A successful mine project is a sustainable one?

“Undevelopable”

(usually get stuck in

the economics)

“Unmineable”

(usually

discovered at the

production stage)

“Undiscoverable”

(we tend not to find

these) “Unsustainable”

(problems significant post-

production)

Even less

success?

Differing risk horizons?

Corporate

Risk

Technical

Risk Majors

better at

handling

this?

Juniors

better at

handling

this?

Conclusions The observation that the ‘development’ stage may be the most problematic,

matches tacit industry and academic observations, that this stage is the

highest risk. The financial community recognizes this as the “orphan period”

post-speculative exploration excitement, but still before reliable cash flows

from an operating mine (Cook 2010). This also corresponds to the

observation by Trench and Packey (2012) that this is the period of highest

“Corporate Risk”, when companies draw down substantial project

construction debt, but are not yet receiving cash flows from an operating

mine.

In turn, these tacit observations are recognised explicitly within the mineral

economics fraternity with the use of “Expected Monetary Value” and

“Preferred Value” techniques (Guj 2013). “Expected Monetary Value” factors

in that low probability of success during the earlier technically risky stages,

whereas “Preferred Value” considers a company’s ability to manage the

“Corporate Risk” during the development stage. Therefore, gratifyingly both

conceptual, tacit and more analytical, explicit explorations of the problem

seem to arrive at the same conclusion, that the ‘development stage’ is a key

strategic point in the industry. Thus, exploration can be targeted at

‘developable’ projects, which can be evaluated using “Expected Monetary

Value” and “Preferred Value” techniques.

However, also like industry, the academic community still has only a limited

amount to say on how “sustainability” should be incorporated into the mining

industry and what this does to a mine or mine project.

Outlining a framework for turning the concept of sustainable reserves into

practical exploration targeting measures therefore remains an important

challenge for industry and academia.

References Ali, Saleem H. 2010. Treasures of the Earth: Need, Greed, and a Sustainable Future. New Haven, USA: Yale University Press.

Baghai, Mehrdad, Stephen Coley, and David White. 1999. The Alchemy of Growth. New York, USA: Perseus Books Group.

Cairns, Chris, Jon Hronsky, and Richard Schodde. 2010. Market Failure in the Australian Mineral Exploration Industry: The Case for Fiscal Incentives. Perth, Australia: Australian Institute of Geoscientists.

Cook, Brent. 2010. "Gold Miners & Explorers Face Serious Supply Problems." The Gold Report, 28 June. http://www.theaureport.com/pub/na/6656.

Covey, Stephen R. 1989. The 7 Habits of Highly Effective People: Restoring the Character Ethic. New York, USA: Free Press.

Guj, Pietro. 2013. "Chapter 10: Mineral Project Evaluation - Dealing with Uncertainty and Risk." In Monograph 29: Mineral Economics, eds Philip Maxwell and Pietro Guj, 145-178. Melbourne, Australia: Australian Institute of Mining & Metallurgy.

Hronsky, Jon. 2009. "The Exploration Search Space Concept: Key to a Successful Exploration Strategy." Centre for Exploration Targeting Quarterly News (8): 14-15.

Jacks, David S. 2013. From Boom to Bust: A Typology of Real Commodity Prices in the Long Run. Cambridge, USA: National Bureau of Economic Research. http://www.nber.org/papers/w18874.

Martin, Todd, and Kimberly Morrison. 2012. "Closure Planning: Planning for "Perpetuity"." In Edumine Webcast: Tailings Management 101, Vancouver, Canada. Infomine.

Moore, Geoffrey A. 1999. Crossing the Chasm: Marketing and Selling Technology Products to Mainstream Customers. New York, USA: HarperBusiness.

Mudd, Gavin M., Zhehan Weng, and Simon M. Jowitt. 2013. "A Detailed Assessment of Global Cu Resource Trends and Endowments." Economic Geology 108 (5): 1163-1183. doi: 10.2113/econgeo.108.5.1163.

Otto, James M., and John Cordes. 2000. Sustainable Development and the Future Mineral Investment: Colorado School of Mines, Metal Mining Agency of Japan & United Nations Environment Programme.

Sull, Donald N. 1999. "Why Good Companies Go Bad." Harvard Business Review 77 (4): 42-50.

Trench, Allan. 2007. "Strictly Boardroom: How to Grow a Resources Company – Consultant-Style." MiningNewsPremium.net, 20 August.

Trench, Allan, and Daniel Packey. 2012. Australia's Next Top Mining Shares : Understanding Risk and Value in Minerals Equities. Highett, Australia: Major Street Publishing.

World Commission on Environment and Development (WCED). 1987. Our Common Future. Oslo, Norway.

Acknowledgements

John P. Sykes acknowledges a Curtin International Postgraduate Research

Scholarship and the Centre for Exploration Targeting for funding this

research, as part of his PhD programme.

The Closure

(Sustainability) Problem Whilst there are many hundreds of thousands of closed

mines around the world, there are very few successfully

closed mines around the world. The US mine clean-up

superfund being evidence of this, where billions of dollars

are spent cleaning up old mine sites (Ali 2010, 187). The

large number of abandoned mines brings a further horizon

to the mine life cycle that has to be considered at the

exploration stage – closure. The philosophy of “beginning

with the end in mind” would mean finishing with the

successful closure of the mine. The ground and type of

deposit has important implications on the nature, cost and

viability of waste management and closure options of

mines, and thus the ‘mineability’ of a project. This issue has

been recognised by industry, governments,

environmentalists and local communities; and increasingly

mines are designed so they can be ‘closed’ essentially

wrapping them into the ‘mining’ stage, where cash flow is

still available for works related to closure.

From an engineering point of view though, this has created

its own unique challenge. Mines have to be closed in such

a way that their future impact on the environment is limited

“in perpetuity”. To emphasise the point, mining engineers

Todd Martin and Kimberly Morrison (2012) compare closed

mines to the Seven Ancient Wonders of the World. Several

thousand years later, only one of these unique feats of

engineering is still standing (The Great Pyramid of Giza) –

closed mines will have to last much longer than this, and

they will require considerably more stewardship than is

currently given to the Great Pyramid!

What makes a sustainable mine project?

Source: Otto & Cordes (2000)

2D McKelvey Reserve Box

RESOURCES

RESERVES

GEOLOGICAL CERTAINTY

EC

ON

OO

MIC

FE

AS

IBIL

ITY

3D ‘Sustainable Development”

Reserve Cube

GEOLOGICAL CERTAINTY

EC

ON

OO

MIC

FE

AS

IBIL

ITY

RESERVES

RESOURCES

Adding to the temporal dimension of mine closure is the concept of “sustainability”, which has become a

major issue in mining (Otto and Cordes 2000). The term refers not so much to the sustainability of resource

itself, but the economy around the mine, during operations and after the mine has closed. The United Nations

World Commission on Environment and Development defines “sustainability” as meeting “the needs of the

present without compromising the ability of future generations to meet their own needs” (1987). In this light,

increasingly society will not tolerate post-mining ghost towns and long-term environmental disasters (Ali

2010). To a certain extent though this offers a solution to the problem of closing mines “in perpetuity”, as a

viable economy after mining ends can sustain these maintenance costs, whereas an unviable economy will

not be able to sustain these costs, outside help will be required and the mine will become a net drain on the

future. In the end then an explorer must then look for a deposit that is not only ‘discoverable’, but

‘developable’, ‘mineable’ and ‘sustainable’. The concept has been demonstrated by Otto and Cordes (2000)

with their 3D “Sustainable Development” reserve box, adding a third dimension of “access” (referring to

sustainability) to the traditional 2D McKelvey box showing how economic and geological certainty combine to

create “resources” and “reserves”.

The Horizon Two (Development) Problem However, mining and exploration companies rarely follow the “Beginning with the End in Mind” or “attacking

on all horizons” strategy, with major mining companies increasingly focusing on the Horizon One operations,

leaving Horizon Three exploration for the junior mining industry (Cairns, Schodde, and Hronsky, 2010). Thus,

Horizon Two remains somewhat neglected. This is unfortunate as this stage has long been recognised by the

mining financial community as problematic, with Cook (2010) describing an “orphan period” during

development, after the excitement of discovery speculation , but before the stability of cash flow from mining.

As such, the ‘development’ stage is a particular area of concern with success dependent on a unique point in

space-time and thus this stage acts as a bottleneck for the whole industry. This bottleneck has also been

seen in other industries, highlighted by Geoffrey Moore (1999), in “Crossing the Chasm”, describing the

challenges of Horizon Two in the high tech industry, observing that this stage usually involves a significant

change in geography, technology or corporate focus. Similarities with the new geographic, technical and

corporate challenges that are presented to mine project owners are clear here. A strategy therefore arises in

targeting ‘developable’ mine projects, as these are the narrowest “search space”, so reduce the exploration

area most rapidly – overcoming the “active inertia (Sull 2009) problem.

The two periods of value adding observed by Cook (2010) represent the major periods of de-risking during

mine project development, described by Trench & Packey (2012). The first is geological de-risking during

exploration – essentially proving the deposit is physically there. The second period is “corporate de-risking”,

requiring the successful use of large amounts of capital to bring the deposit into production. Thus dealing with

this “corporate risk” is the difference between a mineral deposit and a mine. Horizon 1 or exploration can be

seen as ‘probability driven’, about increasing the odds of discovery. Horizon 2 or development would then be

‘corporate risk driven’ – about keeping the company solvent during development.

Guj (2013) therefore recommends two advancements to the standard use of Net Present Value for evaluating

mine projects that deal with these two types of risk. Firstly Expected Monetary Value, which factors in the

chances of success is particularly appropriate at the exploration stage. Whereas “Preferred Value” techniques

factor in a company’s ability to handle the risk of progressing through each development stage. This would

seem most useful at the development (Horizon 2) stage, when corporate risk is very high, potentially

providing a tool for targeting ‘developable projects.’

“Begin with the End in Mind” The “exploration search space” defined by Hronsky (2009) is enormous. It transcends not just three dimensions (go

further, go deeper) but further non-physical dimensions, such as changes in scientific understanding, commodity

prices or new technology, which change which deposits can and cannot be discovered and mined. With so many

possible ways of moving around and opening up the “exploration search space” explorationists risk falling into Donald

Sull’s (1999) “active inertia” trap of doing the same old thing, just more aggressively: a reactive, rather than proactive

strategy. To overcome this, an interpretation of Steven Covey’s (1989) work suggests that in order to narrow the

search space and perhaps open up new areas, explorationists should “Begin with the End in Mind”. In the context of

the mining industry the end is an operating mine, thus a successful exploration project is one that must not only be

‘discoverable’, but also ‘developable’ and ‘mineable’. This space is best envisaged as a Venn diagram, where the

circles overlap for a successful project.

These three stages of mine project development have been compared by Trench (2007) to McKinsey’s “Three

Horizons of Growth” (Baghai, Coley, and White 1999), where Horizon One represents operating mines, Horizon Two

developing mine projects and Horizon Three exploration for new deposits. McKinsey’s strategy advocates attacking

on all three horizons at once in a manner reminiscent of “beginning with the end in mind”.

Miners are perhaps most commonly accused of not considering the latter – long term greenfields exploration (Cairns,

Hronsky, and Schodde 2010), as the long temporal horizon is the least conducive with an ever shorter quarterly

outlook by investors (Hronsky 2009). bringing us back to the paradox of the very short term pressures of the finance

industry and the long-term approach needed by the exploration industry (Cairns, Hronsky, and Schodde 2010).