USING SCENARIOS TO GUIDE COPPER EXPLORATION TARGETING STRATEGIES John P. Sykes PhD Candidate Department of Mineral & Energy Economics Centre for Exploration Targeting, Curtin University
[email protected]
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 1 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Using Scenarios to Guide Copper Exploration Targeting Strategies
THE PROBLEM Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 2 of 34
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Explorers need to know the future of mining Pebble, Alaska
Pampa Escondida, Chile
Resolution, Arizona
Which of these will be a major mine in the next 10-20 years?
Udokan, Russia
Reko Diq, Pakistan
Kamoa, D.R. Congo
Images: foxnews.com; mining.com; arizonageology.blogspot.com; bgk-udokan.ru; dawn.com; investroshub.advfn.com Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 3 of 34
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Is this the future of copper mining? Socio-political issue?
Technical challenges?
One of the world’s largest copper and gold mines
Grasberg copper-gold mine, Indonesia
Economic questions?
Environmental problems?
Photo: Author Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 4 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Getting to the very long term future
Commodity price / marginal cost
But how do you get to here?
Output constraint
Capacity constraint
Constraint of current reserves
Quantity mined Based on Maxwell (2013) Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 5 of 34
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Find ‘economic’ & ‘accessible’ resources
DISCOVERED ACCESSIBLE RESERVE
(Behind) DISCOVERED but INACCESSIBLE UNECONOMIC
UNDISCOVERED INACCESSIBLE but ECONOMIC
UNDISCOVERED ACCESSIBLE RESERVE
(DISCOVERED ACCESSIBLE and ECONOMIC RESOURCE)
(UNDISCOVERED but ACCESSIBLE and ECONOMIC RESOURCE)
DISCOVERED ACCESSIBLE but UNECONOMIC
UNDISCOVERED UNECONOMIC but ACCESSIBLE
ECONOMIC FEASIBILITY
DISCOVERED ECONOMIC but INACCESSIBLE
UNDISCOVERED INACCESSIBLE and UNECONOMIC
GEOLOGICAL CERTAINTY Sykes & Trench (2014a, 2014b) Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 6 of 34
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31 August 2015
Radical change has occurred before United Kingdom
Chile
USA
Other
United Kingdom
70%
Decline of UK mining, rise of Americas
Resurrection of Chilean industry
60% 50% 40% 30% 20% 10%
Global Cu Mine Production (Kt)
Share of Global Cu Mine production
80%
USA
Other
14000.0
100% 90%
Chile
Resurrection of Chilean industry
12000.0 10000.0 8000.0 6000.0 4000.0
Decline of UK mining, rise of Americas
2000.0
0%
0.0 1800 1825 1850 1875 1900 1925 1950 1975 2000
1800 1825 1850 1875 1900 1925 1950 1975 2000 Data: Crowson, 2012
…in 1898.. Bingham Canyon… was something of a joke… only barren quartz rock flecked with a trace of copper. Nobody could make money out of so little. …the world’s most famous mining man [Chief Engineer for the Guggenheims] turned up his nose. It was ridiculed by the most respected mining journal of the day. …The shovels started… in June 1906. (Lynch, 2012) Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 7 of 34
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31 August 2015
…but change is very complex Data estimated from: Crowson, 2012
14.0
Cornwall (UK) Average
UK Average
Michigan (USA) Average
USA Average
Western World Average
World Average
12.0
Steam power Regime change Dynamite Better work practices
Low cost drilling
SXEW The corporation
Cu ore grade (%)
10.0
8.0
Change from high grade underground mining in UK to low grade open pits in USA
20th century copper mining technology, innovation & discovery package
Mechanisation
Porphyry geological model
6.0 Free trade
Flotation 4.0
Further low grade copper mining innovations
Airborne geophysics
Improved smelting & refining
Major public infrastructure
2.0 Forward contracts Globalisation Sources: Schodde, 2010; Lynch, 2012 & various personal communications to the author
1775 1800 1825 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
0.0
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 8 of 34
Computation
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Foxes rather than hedgehogs in this case "The fox knows many things but the hedgehog knows one big thing". - Archilocus / Isaiah Berlin
Ilbury & Sunter: The Mind of a Fox: Scenario Planning in Action (2011) Tetlock: Expert Political Judgment: How Good Is It? How Can We Know? (2006) Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 9 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Multiple working hypotheses of the future MULTIPLE HYPOTHETICAL RESERVES
DISCOVERED
HYPOTHETICA L RESERVE or UNDISCOVERED ACCESSIBLE RESERVE
ECONOMIC FEASIBILITY
ACCESSIBLE RESERVE
UNDISCOVERED
MULTIPLE HYPOTHETICAL RESERVES
MULTIPLE HYPOTHETICAL RESERVES
GEOLOGICAL CERTAINTY
Sykes & Trench (2014a)
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 10 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Using Scenarios to Guide Copper Exploration Targeting Strategies
THE METHODOLOGY Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 11 of 34
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31 August 2015
The Oxford Scenarios deductive methodology Contextual
Transactional
Company
Strategic landscapes: contextual linkages
Drivers from the past and future
Key contextual linkages?
Clarify and cluster key drivers
Based on Ramirez et al., 2014
Deepen scenarios and prepare to engage
Play with different combinations
Combine axis to develop scenario framework
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 12 of 34
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31 August 2015
Explore polar outcomes and select independent pairs
The copper industry is a complex environment Geo-political trends
Contextual Environment (‘factors’)
“Driving forces”
International Finance Climate
Science
Commodity Prices
Legislation
Innovation Demographics
Competitors Financiers Lobbies Utilities
Transactional Environment (‘inter-actors’)
Exchange Rates
Conflict & Security
Social Values
Technology
Survey & appreciate
Macroeconomics
Energy Prices Water Availability
International Commerce
Local Regulators Consumables Suppliers
Environment
National Regulators
International Regulators
Investors
Equipment Suppliers
Employees
Natural Disasters
Industry Clients
Commodity Traders
Company
Control
NGOs
Template from: Ramirez et al., 2014 Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 13 of 34
Influence & co-design
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With many evolving trends 1940s COMMODITY DEMAND
FINANCIAL CRISES
SOCIAL TRENDS
1960s
1980s
1970s
1990s
World War II
Rise of Modern Environmentalism
Asian & .com Crises Rise of Sustainable Development Movement Better Work Practices
Decline of Unionism
Porphyry Model
Increasing Focus on ‘Social Licence’ Labour Cost Inflation Substantial Globalisation
Computers, Modelling & Scheduling
SXEW
Using Scenarios to Guide Copper Exploration Targeting Strategies Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
Global Financial Crisis
Low Costs in Developing World Eastern-bloc Privatisation
Cold War (Separation of East & West)
Airborne Geophysics
2010s
Chinese Industrialisation
Oil Crises
Resurgence of ‘Strategic Resources’ Concepts
POLITICAL TRENDS
Slide 14 of 34
2000s
Post-War European & Japanese Reconstruction
LABOUR TRENDS
TECHNO TRENDS
1950s
31 August 2015
But there are some commonalities ECONOMIC BOOM
BUST
TECHNOLOGY Technology drives lower costs
Technology lags cost inflation Broadly similar: increase/decrease in land availability either physically or conceptually
SOCIAL
Increased support for mining
Decreased support for mining
ENVIRONMENT More land becomes available
Decrease in restrictive regulation
Less land available
POLITICAL
Increasingly restrictive regulation
Template from: Ramirez et al., 2014 Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 15 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
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Using Scenarios to Guide Copper Exploration Targeting Strategies
THE SCENARIOS Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 16 of 34
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31 August 2015
The Scenarios Increased
COUNTING HOUSE
Decreased
PROSPECT AVAILABILITY ECONOMIC
Increased
MARGINS
CRUSADES
PEASANTS’ REVOLT
UNDER SEIGE Decreased
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 17 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
UNDER SIEGE Defending current operations with few new opportunities available •
Industry struggling with current profitability and with few future options for growth;
•
Falling commodity prices and falling productivity have reduced economic margins at existing operations;
•
A breakdown of the global order limits access to foreign projects and talent;
•
State mining companies, backed by governments concerned about the limited number of operating mines, are the main long term beneficiaries in this scenario;
•
The ‘declining-sum’ nature of the copper mining industry means that outside industries also benefit, particularly those willing to take over the long-term management of the copper supply chain.
•
The copper mining industry may feel that it is in the ‘Under Siege’ scenario presently: – Falling copper prices; – Asset write-downs; – Curtailment of capital investments, exploration, and research and development. Using Scenarios to Guide Copper Exploration Targeting Strategies
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Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
COUNTING HOUSE Focus on extracting economic rents from current operations •
A short term return to profitability, but a lack of long term options;
•
Resurgent economic growth increases commodity prices, whilst low gas, oil and coal prices reduce operating costs;
•
However, resource nationalism, environmental and social licence issues, and competition for resources limits the availability of new projects;
•
The major private mining companies are the main short-term beneficiaries as their already profitable assets further reinforce their advantage;
•
However, over the long-term industry outsiders begin to encroach;
•
This arises due to the continued failure to develop new projects, an echo of the recent boom.
•
The future becomes based on the running down of current assets and the present project pipeline, requiring higher commodity prices to be economic.
•
This is the conventional view of the future of copper mining, arising from the scientific and economic analyses.
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 19 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
CRUSADES Many exciting opportunities in new areas •
A profitable mining industry investing in a range of new ideas and projects, able to successfully transition into the future.
•
A profitable industry benefitting from a temporary period of increased commodity prices and reduced input costs.
•
Industry able to invest in technologies and innovations increasing abilities to discover and develop less energy and water intensive, targeted mining operations.
•
At the same time the mining industry participates in a global proliferation of multi-lateral agreements opening up the developing world to major mining investment.
•
The first movers in technology, innovation, and increasing environmental and social access to projects are the long term beneficiaries in this scenario.
•
At the beginning of the recent boom in copper prices existing operations were very profitable, and initially there seemed to be many new options for development and exploration, assisted by the latest phase of globalisation.
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 20 of 34
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31 August 2015
PEASANTS’ REVOLT Current plans not working, desperate switch to new ideas required •
A struggling mining industry, but one in which there are still many future options available that could provide a route to profitability.
•
Bulk mining operations fail in the face of lower commodity prices, higher input costs and increased environmental and social costs.
•
A radical switch to more targeted, less energy intensive mining is required.
•
As the mining industry struggles, outside industries are able to make significant advances into the industry, particularly by reforming the metals supply chain around a circular economy.
•
Reminder of the mining industry in the early 1990s, when the industry was enduring a 30 year spell of declining copper prices and increasing environmentalism, sapping long term investment in exploration and technology.
•
Global uncertainty was increasing as the Soviet Union collapsed, whilst a number of key mining economies were in decline. The mining industry was seen as ‘old industry’ as the high technology and internet industries began to establish themselves.
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 21 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
There are strategic analogies for the scenarios “Red Oceans”
“Blue Oceans”
vs
Mauborgne & Kim, Blue Ocean Strategy: How to Create Uncontested Market Space & Make Competition Irrelevant (2005)
“Sustainers”
“Disrupters”
vs
Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (1997)
Top left: J.M.W. Turner: Slavers, Throwing Overboard The Dead And Dying (1840); Bottom left: glycemicindex.com Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 22 of 34
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31 August 2015
Using Scenarios to Guide Copper Exploration Targeting Strategies
THE IMPLICATIONS Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 23 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Some are better prepared than others Company Type / Scenario
Under Siege
Counting House
Crusades
Peasants’ Revolt
Major
?
√
?
X
State
√
?
?
?
Junior
X
X
?
?
Outsider
√
?
X
√
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 24 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
But there are no ‘one-size fits all’ strategies 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
√
?
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 25 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Commodity price / marginal cost
The future may not look like the past/present
Output constraint
Capacity constraint
Constraint of current reserves
Quantity mined Based on Maxwell (2013) Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 26 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Using Scenarios to Guide Copper Exploration Targeting Strategies
THE KEY LEARNINGS Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 27 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Key learnings from the scenarios •
The scenarios investigated the links between a complex range of geological, technological, economic, environmental and socio-political factors, in a manner not possible with conventional economic and scientific analytical techniques.
•
The conventional view of the future of copper mining – one of declining quality resources creating economic, environmental and socio-political problems for miners – was confirmed as a potential future.
•
However, different views of the future of the industry also arose.
•
This result suggests that the conventional view of the future of the copper mining industry may not be the one that evolves.
•
On a theoretical level this means that techniques for analysing the long term future of mineral industries need to consider a wider range of factors, such as technology, the environment and socio-politics.
•
Practically, minerals explorers therefore need to also incorporate these factors into their exploration targeting methodologies.
•
Scenarios therefore may be a useful scholarly tool for investigating the future of mineral resource industries; and a useful practical tool for minerals explorers in informing exploration targeting strategies.
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 28 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Where is the copper industry heading? •
The scenarios show the industry is not necessarily linked to the present or past.
•
The current industry is driven by the optimisation of existing assets; whilst future is driven by the availability of new prospects.
•
These new prospects may be similar to existing operations, or different.
•
An industry broadly similar to the present/recent one can be envisioned, but it is a zero-sum or declining-sum game, reinforcing the advantage of incumbent miners. Resource nationalism becomes prevalent in both these scenarios.
•
Conversely if the future is significantly different to the present mining industry, then the mining industry may be vulnerable to disruptive innovation from either smaller companies or outside industries.
•
The mining industry does not have to control the metal ‘raw materials’ industry. Recycling and scrap production is growing, alongside the concept of the circular economy.
•
Other industries, such as oil, high technology or logistics may be better positioned to supply metals such as copper in the future, if radical technological change takes place.
•
To a certain extent the junior exploration industry acts as a barrier to entry against potentially disruptive outsider firms. Using Scenarios to Guide Copper Exploration Targeting Strategies
Slide 29 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Can the copper industry change direction? •
Overall the general lack of flexibility and limited strategic options of the current major group of mines and projects in the copper industry suggests that a greater focus on the long term is required.
•
To avoid a zero- or declining-sum game, the industry has to invest in the long term, either as exploration, research & development, or increasing ‘accessibility’ via a stronger social licence to operate.
•
However, there is currently no strategic approach that is ‘future-proof’, so some strategic choices will have to be made, and potentially some strategic hedges (so called ‘real options’) placed (for companies with enough funds).
•
Key points of decision will include whether to pursue: – energy intensive or light operations; – open pit or underground operations; – water intensive or light operations; – social footprint light or intensive operations; – domestic-owned or foreign-owned projects; – mature or immature mineral districts; – developed or developing world locations; – mining or integrated value chain focus; – operating or future asset focus; – exploration or engineering focused skill sets.
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 30 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
Further research Scenarios need to be collaborative & iterative: •
Move into ‘group’ events to bring in broader range of expertise and improve quality;
•
Repeated events, drawing in new information and perspectives, and keeping up with the world;
•
Act as a kind of peer-review process;
•
Introduce more people into the conversation and helps integrate outcomes into industry thinking.
Future scenarios events and publications are therefore required: •
Individual scenario planning trial (Curtin HDR Seminar): Sept 2015;
•
CET PhD students group scenario planning trial: Nov-Dec 2015;
•
Perth PhD students group scenario planning trial: Feb-Mar 2016;
•
Expert group scenario planning trial: Jun-Jul 2016.
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Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
31 August 2015
References Main Reference: • Sykes, J.P. (2015) Using the Oxford Scenarios deductive methodology to understand the long-term future of copper mining and guide minerals exploration targeting strategies, Curtin Business School Higher Degree by Research Students’ Colloquium Other References: • Christensen, C., (2012) The Innovator’s Dilemma – When New Technologies Cause Great Firms To Fail, Boston: Harvard Business Review Press. • Kim, W.C., & Mauborgne, R., (2005) Blue Ocean Strategy – How to Create Uncontested Market Space and Make the Competition Irrelevant, Boston: Harvard Business Press. • Lynch, M., (2012) Mining in World History, London: Reaktion Books. • Maxwell, P., (2013) Chapter 6 – Mineral Supply – Exploration, Production, Processing and Recycling. In Monograph 29: Mineral Economics – Australian and Global Perspectives, edited by Maxwell, P., & Guj, P., 67-78. Carlton, Victoria: The Australasian Institute of Mining and Metallurgy. • Ramirez, R, Khong, C & Selin, C. (2014) Oxford Scenarios Programme. 28 April-1 May, Oxford: Said Business School (University of Oxford). PDF lecture notes. • Schodde, R, (2010) The key drivers behind resource growth: an analysis of the copper industry over the last 100 years. 3 March, Phoenix, USA: MEMS Conference – Mineral and Metal Markets over the Long Term. • Sunter, C., & Ilbury, C., (2011) The Mind of a Fox – Scenario Planning in Action, Cape Town: Human & Rousseau. • Sykes, J.P., & Trench, A. (2014a) Chapter 14 – Finding the Copper Mine of the 21st Century: Conceptual Exploration Targeting for Hypothetical Copper Reserves. In Special Publication Number 18: Building Exploration Capability for the 21st Century, edited by Kelley, K.D., & Golden, H.C., 273300. Boulder: Society of Economic Geologists. • Sykes, J.P., & Trench, A. (2014b) Resources versus Reserves – Towards a Systems-based Understanding of Exploration and Mine Project Development and the Role of the Mining Geologist. In Mining Geology through the Value Chain: Proceedings of the Ninth International Mining Geology Conference held in Adelaide, South Australia, 18-20 August 2014, 243-270. Carlton, Victoria: Australasian Institute of Mining and Metallurgy (AusIMM) and Australian Institute of Geoscientists (AIG). • Tetlock, P.E., (2006) Expert Political Judgment – How Good Is It? How Can We Know?, Princeton: Princeton University Press.
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Contact:
[email protected]
Acknowledgements:
Thank You
PhD Committee: Daniel Packey, Allan Trench & Bryan Maybee Funding: Centre for Exploration Targeting (Curtin University & University of Western Australia) Colleagues: Department for Mineral & Energy Economics (Curtin University) and Centre for Exploration Targeting (Curtin University & University of Western Australia)
Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 33 of 34
Curtin Business School Higher Degree by Research Colloquium, Perth, Australia
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Biography John Sykes is undertaking a PhD in Mineral Economics, within the Department of Mineral & Energy Economics at Curtin Graduate School of Business, and the Centre for Exploration Targeting, a joint venture between Curtin University and the University of Western Australia. The PhD research is entitled “Finding the copper mine of the future: Exploration targeting for copper mines, not copper resources.” Before moving to Australia to undertake this PhD, John ran his own mineral economics consultancy, Greenfields Research in London. He started his career as a consultant in copper mining and smelting at CRU Group, and briefly as a gold exploration geologist in the Brazilian Amazon. John has a Master of Science with Honours in Geology from the Royal School of Mines, Imperial College London, and a Masters of Science in Geophysical Hazards from University College London. He is a Fellow of the Geological Society of London; Chartered Scientist; Member of the Institute of Materials, Minerals and Mining; Member of Australasian Institute of Mining and Metallurgy; a student member of the Society of Economic Geologists; and the International Vice President of the Royal School of Mines Association. Using Scenarios to Guide Copper Exploration Targeting Strategies Slide 34 of 34
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John visiting OZ Minerals’ Prominent Hill copper mine in South Australia, 2014.
