presenting in widescreen format

THE ROLE OF STRATEGIC CONSULTING IN THE RESOURCES INDUSTRIES OF AUSTRALIA AND INDONESIA John P. Sykes123 & Prof. Allan Trench124 1.

Centre for Exploration Targeting, The University of Western Australia 2. Business School, The University of Western Australia 3. Greenfields Research 4. CRU Group

Institute Technology of Bandung (ITB) visit to UWA Business School The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia 2nd May 2016 Image: Shutterstock

Aims • Compare & contrast the resources sectors of Australia & Indonesia; • 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); • Briefly discuss who and what is involved in strategic consultancy to the resources sector; • Compare and contrast the short- and long-term strategic approaches of the mining and petroleum sectors; • Discuss the future evolution of strategic consultancy to the resources sector. Image: Shutterstock The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia Slide 2 of 43

Institute Technology of Bandung (ITB) visit to UWA Business School

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Economically different… km2 Population: 255.5 million Density: 134.1 / km2 GDP: US$895.7 billion Per capita: US$3,500 Temp. (Jakarta): 25 to 33oC Rainfall (Jakarta): 1,855mm Area: 1,905,000

km2 Population: 24.1 million Density: 3.1 / km2 GDP: US$1.137 trillion Per capita: US$47,200 Temp. (Canberra): 0 to 28oC Rainfall (Canberra): 616mm Area: 7,692,000

Sources: Wikipedia; Images: Google Earth & Shutterstock

The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia Slide 3 of 43


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But resource-rich Key resources: Oil, gas, coal, gold, copper, nickel, bauxite, tin Key areas: Minas, Kalimantan, Grasberg, Sulawesi, Bintan, Bangka Share of GDP: $36 billion (4%) Employment: 34,000 (direct) Fraser Institute Rank: 50th

Key resources: Iron ore, coal, gold, alumina, oil, gas, nickel, diamonds Key areas: Pilbara, Bowen, Newcastle, North West Shelf, Cooper, WA Goldfields, Bendigo Share of GDP: $80 billion (7%) Employment: 158,000 direct (505,600 indirect) Fraser Institute Rank: 1st (WA) - 62nd (VIC)

Sources: Wikipedia, Government of Australia & Fraser Institute; Images: cumminscommentary.com & mining.com



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Oil & mining face economic problems Crude oil (US$/bbl)

Iron ore (US$/t)

140

200 180

120

160

100

140

80

120 100

60

80

40

60 40

20

20

Sources: Indexmundi



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0

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…have a track-record of disaster • Samarco

Images: Gizmodo & tpi.it



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…face global environmental issues

Images: newstalk.com & frontlineaction.org



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…an absence of local social licence

Images: bloomberg.com & frontlineaction.org



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…native land rights challenges

Images: londonminingnetwork.org & au.news.yahoo.com



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…struggle to develop downstream

Images: abc.net.au & asiabiztoday.com



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…& workforce diversity / quality issues

Images: thejakartapost.com & hagstromdrilling.com.au



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So who can help with the resource sectors’ strategic conundrums?

Image: Shutterstock



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Many can help, none really specialise Big strategy firms

Big accounting firms

Big technical firms

Local specialists

Market consultants

Image: Company websites, Shutterstock



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So how do we deal with this strategically in the resources sector?

Image: Shutterstock



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3 Basic strategies

Resource companies usually employ which generic strategy?

A. Low cost

B. Differentiation

C. Focus

The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia Image: Anne Hegerty – The Chase

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Which of the following major petroleum companies is the bestin-class operator?

A:

Exxon Mobil Mobil Exxon

Royal Dutch Shell

Total in the Resources Industries of Australia and Indonesia Don’t know! The Role of Strategic Consulting 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

Which of the following major petroleum companies is the bestin-class explorer? Exxon Mobil

B:

Royal RoyalDutch DutchShell Shell

Total in the Resources Industries of Australia and Indonesia Don’t know! The Role of Strategic Consulting Image: Who Wants To Be A Millionaire


Which of the following major mining companies is the best-inclass operator? Rio Tinto

BHP Billiton

D:

Glencore Don’t know! The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia know Image: Who Wants To Be A Millionaire


Which of the following major mining companies is the best-inclass explorer? Rio Tinto

BHP Billiton

D:

Glencore Don’t know! The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia know Image: Who Wants To Be A Millionaire


Which of the following major automobile companies is the bestin-class manufacturer?

A:

Toyota Toyota

Volkswagen

BMW in the Resources Industries of Australia and Indonesia Don’t know! The Role of Strategic Consulting Image: Who Wants To Be A Millionaire


Which of the following major mobile phone companies is the best-in-class innovator? Samsung

Nokia

C:

Applein the Resources Industries of Australia and Indonesia Don’t know! The Role of Strategic Consulting Image: Who Wants To Be A Millionaire


Suggest sources of competitive advantage for large diversified resource companies over smaller, less diversified resource companies… The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia

Source: Allan Trench, 18 Nov 2013, Strictly Boardroom – Large mining companies: capability lost, MiningNewsPremium.net Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com

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TYPICAL ANSWERS • • • • • • • • • • •

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

• • • • • • • • • • •

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? The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia

Source: Allan Trench, 18 Nov 2013, Strictly Boardroom – Large mining companies: capability lost, MiningNewsPremium.net Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com

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Evidence from the cost curve Theory suggests that low cost assets should be leveraged…

…however we find it’s the low cost assets that are unleveraged… …the owners of low cost assets seem determined to stay at the bottom of the cost curve and extract rents… …the low cost asset owners ride the cycle and try to switch horses / commodities as they go…

...whilst high cost assets should remain unleveraged…

...whilst high cost assets are highly leveraged… ...whilst high cost asset owners are desperate to borrow, and buy an asset further down the cost curve… ...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 Source: Allan Trench, 21 Dec 2015, Strictly Boardroom – Gearing up for mining’s future leaders, MiningNewsPremium.net



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Suggest ways a government can raise extra revenue in a country from its minerals sector… The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia

Source: Allan Trench & John Sykes, 04 May 2015, Strictly Boardroom – The forgotten economic potential of new mineral discovery, MiningNewsPremium.net Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com

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TYPICAL ANSWERS • • • • • • • • • • •

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

• 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? The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia

Source: Allan Trench & John Sykes, 04 May 2015, Strictly Boardroom – The forgotten economic potential of new mineral discovery, MiningNewsPremium.net Image: “Countdown” in “The IT Crowd” sourced from breannadrew.wordpress.com

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Best-in-class operator? Miners appear to be “sustainers”… Bigger, Bigger, Bigger…

…and now automated!

…the oil industry seems a bit more disruptive?

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



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Best-in-class employer? 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.

The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia Source: WIMnet, International Mining Geology Conference, 2014 & Toro Energy; Images: Toro Energy

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Business model innovator? Total Returns to Shareholders (1986-2003) Per Cent (US$ Real Rate of Return) 40 30 20

There is a bit of a track record of this in mining…

10 0 -10 -20 -30 -40 -50

Franco Nevada Barrick Sons of Gwalia Delta

34% 28% 18% 17%

First global mining royalty company Financial management/M&A Miner in the third cost quartile A mining company that didn’t mine

…with mixed Renegades occupy the first four places……and are nowhere else to be seen!! results!

Source: Allan Trench, 2015, Strategic Management of Resource Companies course, UWA Business School; Images: nicholsoncartoons.com.au



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Faster-cheaper project developer? The petroleum industry seems to do this… V A L U E

Front End Loading 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

…the mining industry much less so… if at all?



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More frequent discoverer of mines?

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



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The X-Files approach to exploration 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, openminded, 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 Role of Strategic Consulting in the Resources Industries of Australia and Indonesia Image: popsugar.com 02-May-16 Source: Allan Trench, Jon Hronsky & John Sykes, 25 Jan 2016, Strictly Boardroom – The X-Files in mineral exploration: Building the perfect team, MiningNewsPremium.net

Measuring exploration efficiency …but ultimately a game of declining returns…

The petroleum industry seems to do this…

…the mining industry much less so (if at all?)… Source: Allan Trench, 2015, Strategic Management of Resource Companies course, UWA Business School



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Opening up new ‘search space’

Source: T. Campbell McCuaig, Pietro Guj, Jon Hronsky & Richard Schodde, 2009, Exploration Targeting in a Business Context, CET, UWA



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…an oil industry speciality

Original surface oil discoveries

Deep offshore discoveries – Gulf of Mexico Oil sands discoveries – Canada Shale gas discoveries – USA New geographic discoveries – Alaska Images: hubbertpeak.com & Google Earth



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…but the mining industry does a bit

Source: Jon Hronsky & David Groves, 2008, Science of targeting: definition, strategies, targeting and performance management, Australian Journal of Earth Sciences



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The great socio-economic miner?

Labour Relations

Natural Disasters

Social Unrest

Infrastructure

Civil Unrest

Corruption

Green Tape

Red Tape

Land Claims

Land Access

Resource Nationalism

Geographical (Country) Risk

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



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Not a lot of progress so far…

Images: justmeint.wordpress.com; logodatabase.net; bhpbillitonwatch.net; Financial Times



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This is all getting complicated! Steam power 14.0

Cu ore grade (%)

12.0 10.0 8.0 6.0 4.0 2.0 0.0

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

Better work practices

Dynamite

Flotation Further low grade copper mining innovations

New geographies

Low cost drilling

Mechanisation

Airborne geophysics

Regime change

Forward contracts

Free trade Improved smelting & refining

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

The Role of Strategic Consulting in the Resources Industries of Australia and Indonesia Institute Technology of Bandung (ITB) visit to UWA Business School

The corporation

20th century copper mining technology, innovation & discovery package

Globalisation

Slide 39 of 43

SXEW

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Porphyry geological model

Major public infrastructure Computation

Thinking about the short & long term ECONOMIC MARGINS

Increased COUNTING HOUSE

PROSPECT

AVAILABILITY

PEASANTS’ REVOLT

Decreased

Increased

CRUSADES

UNDER SEIGE

Decreased 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



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Robust strategy over short & long term? 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

√

?

Sources: John Sykes, 2015, Using scenarios to guide copper exploration targeting strategies, Curtin Business School HDR Students Colloquium



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Final thoughts • • •

•

•

The resources sector faces short-term economic problems; Combined with long-term sociopolitical and environmental 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; Consultants have a key role in implementing this;

•

•

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! Image: Shutterstock



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References Recent Peer Reviewed Papers

NEW Strictly (Mining) Boardroom II Book Out May 2016

•

Sykes, J.P., Wright, J.P., & Trench, A., (2016), Discovery, supply and demand: From Metals of Antiquity to Critical Metals, Applied Earth Science

•

Sykes, J.P., Wright, J.P., Trench, A., & Miller, P., (2016), 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), NonTechnical Risks and Their Impact on the Mining Industry, AusIMM Monograph 30: Mineral Resources and Ore Reserve Estimation, Second Edition, Chapter 7 Image: Shutterstock



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presenting in widescreen format

presenting in widescreen format

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