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COMPETENCE, COMPETITION &
THE CONTEXTUAL ENVIRONMENT:
Strategies & scenarios for rare
earths miners & explorers
John P. Sy...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Your business and the world
Actor
Macr...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Your business & the TURBULENT world
Ac...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths is a turbulent industry
0
...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths is a difficult industry
Fr...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Dealing with turbulence in rare earths...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
ASSET ORIENTATED
STRATEGY IN RARE EART...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Mine costs 101
Cost of mining = Cost o...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Cost examples in rare earths
Avalon Ra...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Low costs: “grade is king”?
0.000
2.00...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The problem with $/REO costs
Cummins R...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Two forms of rare earths: light & heav...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Some rare earths are “critical”
“Non-C...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths have different end uses
“C...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Targeting higher quality rare earths
A...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
High grade vs high quality mining
20.0...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The BCG “growth-share matrix”
Based on...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The BCG Box for mine projects
Based on...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Asset orientated rare earth strategies...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 1: The Cash Cow
Advantages
• ...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 2: The “Heavy” Problem Child
...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
SITUATION ORIENTATED
STRATEGY IN RARE ...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Targeting niche markets is difficult
L...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Recovering low grades problematic
RARE...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Making low grades saleable is tricky
0...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
1999 2000 2001 2002 2003 2004 2005 200...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Where are the “fast followers”?
0.00
2...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
A situation based rare earths strategy...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 3: The “Light” Problem Child
...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
DISRUPTIVE STRATEGY IN
RARE EARTHS
Com...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Where are all the stars?
0.00
2.00
4.0...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Where are all the stars?
20.00
30.00
4...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 4: Aiming for the Stars
Advan...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
UNCERTAINTY & RISK BASED
STRATEGY IN R...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Uncertainty kills projects
Expected
Mo...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Uncertainty in rare earths development...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earth value accretion is concave
...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Value accretion at Lynas was ‘concave’...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Uncertainty kills projects
Expected
Mo...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths as a by-product?
0.000
2.0...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Making concave commodities convex
Expl...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 5: the by-product cash cow
Ad...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Neutral risk to preferred risk
Typical...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Life cycle of a mine project
Concept E...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
‘Convex’ risk progression:
Project vs ...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Capital costs: What is affordable?
Kva...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Make the ‘concave’ problem a ‘convex’
...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
DELAYS risk peak
REDUCES
risk
Input of...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Convex to concave sequencing
Value ‘St...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 6: Pet Project (The “Cash Dog...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Strategy 7: do something else!
Advanta...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
STRATEGY IN CONTEXT FOR
RARE EARTHS
Co...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths growth-share matrix
Market...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Rare earths scenarios matrix
Increasin...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
The rare earth project scenarios matri...
Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia
Coursework: putting strategy into acti...
THANK YOU
For more information:
Centre for Exploration Targeting: www.cet.edu.au
Greenfields Research: www.greenfieldsrese...
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Strategies and scenarios in rare earths - Sykes - Oct 2014 - University of Western Australia / Curtin University / Greenfields Research

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Presentation for UWA Business School MBA.

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Strategies and scenarios in rare earths - Sykes - Oct 2014 - University of Western Australia / Curtin University / Greenfields Research

  1. 1. COMPETENCE, COMPETITION & THE CONTEXTUAL ENVIRONMENT: Strategies & scenarios for rare earths miners & explorers John P. Sykes Email: johnpaul.sykes@postgrad.curtin.edu.au Director, Greenfields Research PhD Candidate, Department of Mineral & Energy Economics, Curtin University Adjunct Research Fellow, Centre for Exploration Targeting, Curtin University & The University of Western Australia Strategic Management of Resources’ Companies, The University of Western Australia Business School, Perth, Australia: 27th October 2014
  2. 2. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Your business and the world Actor Macroeconomics TRANSACTIONAL ENVIRONMENT (e.g. competition) CONTEXTUAL ENVIRONMENT (e.g. external events) International Finance International Commerce Energy Values Demography Legislation Geo-Political Trends Technology EcologyCLIENTS SUPPLIERS COMPETITORS REGULATORS INVESTORS EMPLOYEES NGO’sLOBBIES ACTOR (e.g. you & your business) Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times Ramirez et al., 2014, Oxford Scenarios Programme 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 2 of 57
  3. 3. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Your business & the TURBULENT world Actor Macroeconomics TRANSACTIONAL ENVIRONMENT (e.g. competition) CONTEXTUAL ENVIRONMENT (e.g. external events) International Finance International Commerce Energy Values Demography Legislation Geo-Political Trends Technology EcologyCLIENTS SUPPLIERS COMPETITORS REGULATORS INVESTORS EMPLOYEES NGO’sLOBBIES ACTOR (e.g. you & your business) Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times Ramirez et al., 2014, Oxford Scenarios Programme 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 3 of 57
  4. 4. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earths is a turbulent industry 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Metal Pages La Oxide 99% min FOB China (CN) / tonne “Arrest in Disputed Seas Riles China and Japan” The New York Times, 19th Sept 2010 “Japan-China row escalates over fishing boat collision” The Guardian, 9th Sept 2010 Data: Metal Pages Image:BBC 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 4 of 57
  5. 5. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earths is a difficult industry Frequency of delays at Australian rare earth projects 1999-2012 0 2 4 6 8 Mt Weld Dubbo Nolans Delay (years) Length of delays at Australian rare earth projects 1999-2012 0 2 4 6 8 10 12 14 16 Frequency Source: Sykes & Trench (2012) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 5 of 57
  6. 6. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Dealing with turbulence in rare earths Your environment Transactional environment Contextual environment Your assets and competencies Your competitors and resources available Things beyond your control Based on: Ramirez & Selsky, 2010, Business Planning for Turbulent Times Ramirez et al., 2014, Oxford Scenarios Programme 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 6 of 57
  7. 7. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia ASSET ORIENTATED STRATEGY IN RARE EARTHS Competence, competition & the contextual environment: Strategies & scenarios for rare earths miners & explorers 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 7 of 57
  8. 8. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Mine costs 101 Cost of mining = Cost of moving rock Ore throughput x REO grade x recovery = REO production (Ore throughput x cost per tonne of ore) / REO production = Cost per tonne REO 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 8 of 57
  9. 9. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Cost examples in rare earths Avalon Rare Metals – Thor Lake/Nechalacho Pre-Feasibility Study (June 2010) Deposit Resource: 175.93 Mt @ 1.43% TREO Proposed Mine Type: Underground Annual Ore Throughput: 720 Kt of ore Annual REO Production: 10,000 tonnes Proposed Mine Life: 18 years Operating Cost (ore): US$ 240 / tonne ore Operating Cost (REO): US$ 17,280 / tonne REO Start-up Capital Cost: US$ 810 million Rare Element Resources – Bear Lodge Preliminary Economic Assessment (Sept 2010) Deposit Resource: 17.5 Mt @ 3.46% TREO Proposed Mine Type: Open pit Annual Ore Throughput: 360 Kt of ore Annual REO Production: 10,400 tonnes Proposed Mine Life: 15 years Operating Cost (ore): US$ 245 / tonne ore Operating Cost (REO): US$ 8,480 / tonne REO Start-up Capital Cost: US$ 87 million ($240 x 720,000 t = $172,800,000) / 10,000 t = $17,280 ($245 x 360,000 t = $88,200,000) / 14,000 t = $8,480 Data: Avalon Rare Metals & Rare Element Resources 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 9 of 57
  10. 10. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Low costs: “grade is king”? 0.000 2.000 4.000 6.000 8.000 10.000 12.000 14.000 16.000 18.000 TotalRareEarthOxideGrade(%) Advanced light rare earth deposits Early stage light rare earth deposits Most advanced rare earth projects are the highest grade – early mover advantage NB: Beware equating grades with costs – orebody geometry, homogeneity, host rock etc all have an affect too (Kanakis, 2014) Data: Technology Metals Research 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 10 of 57
  11. 11. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia The problem with $/REO costs Cummins Range Resource Composition Metal Sept 2011 oxide price (US$/kg) Proportion in resource (%) Value of resource oxide blend (US$/kg) Lanthanum 110.00 27.3 30.03 Cerium 110.00 47.7 52.47 Praseodymium 248.50 4.8 11.93 Neodymium 309.17 15.2 46.99 Samarium 128.50 1.6 2.06 Europium 4,810.00 0.4 19.24 Gadolinium 192.50 1.0 1.93 Terbium 3,710.00 0.1 3.71 Dysprosium 2,290.00 0.5 11.45 Others - 1.4 - Total 100.0 US$179.80/kg 100 150 200 250 300 350 400 Thor Lake Dubbo Lake Hoidas Nolans Kvanefjeld Cummins Range Mt Weld Steenkampskraal Bayan Obo Bear Lodge Mountain Pass Resource oxide blend (US$/kg) Not all REO oxides are created equal !!! © Greenfields Research Ltd; Data: Metal Pages (prices), Technology Metals Research Data: Anova Metals & Technology Metals Research 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 11 of 57
  12. 12. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Two forms of rare earths: light & heavy “Heavy” REE • Europium • Gadolinium • Terbium • Dysprosium • Holmium • Erbium • Thulium • Ytterbium • Lutetium “Light” REE • Lanthanum • Cerium • Praseodymium • Neodymium • Promethium • Samarium Other REE • Scandium • Yttrium Sc 21 Y 39 La 57 Ce 58 Pr 59 Nd 60 Sm 62 Eu 63 Gd 64 Tb 65 Dy 66 Ho 67 Er 68 Tm 69 Yb 70 Lu 71 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 12 of 57
  13. 13. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Some rare earths are “critical” “Non-Critical” REE • Scandium • Lanthanum • Cerium • Praseodymium • Promethium • Samarium • Gadolinium • Holmium • Erbium • Thulium • Ytterbium • Lutetium “Critical” REE • Yttrium • Neodymium • Europium • Terbium • Dysprosium Sc 21 Y 39 La 57 Ce 58 Pr 59 Nd 60 Sm 62 Eu 63 Gd 64 Tb 65 Dy 66 Ho 67 Er 68 Tm 69 Yb 70 Lu 71 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 13 of 57
  14. 14. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earths have different end uses “Catalyst” REE • Lanthanum • Cerium “Magnet” REE • Praseodymium • Neodymium • Samarium • Gadolinium • Dysprosium Sc 21 Y 39 La 57 Ce 58 Pr 59 Nd 60 Sm 62 Eu 63 Gd 64 Tb 65 Dy 66 Ho 67 Er 68 Tm 69 Yb 70 Lu 71 “Specialist” REE • Scandium • Promethium • Holmium • Erbium • Thulium • Ytterbium • Lutetium “Phosphor” REE • Yttrium • Europium • Terbium 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 14 of 57
  15. 15. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Targeting higher quality rare earths Avalon Rare Metals – Thor Lake/Nechalacho Pre-Feasibility Study (June 2010) Deposit Resource: 175.93 Mt @ 1.43% TREO Proposed Mine Type: Underground Annual Ore Throughput: 720 Kt of ore Annual REO Production: 10,000 tonnes Proposed Mine Life: 18 years Operating Cost (ore): US$ 240 / tonne ore Operating Cost (REO): US$ 17,280 / tonne REO Basket value (REO): US$ 353,190 / tonne REO Profit Margin (REO): US$ 335,910 / tonne REO Start-up Capital Cost: US$ 810 million Rare Element Resources – Bear Lodge Preliminary Economic Assessment (Sept 2010) Deposit Resource: 17.5 Mt @ 3.46% TREO Proposed Mine Type: Open pit Annual Ore Throughput: 360 Kt of ore Annual REO Production: 10,400 tonnes Proposed Mine Life: 15 years Operating Cost (ore): US$ 245 / tonne ore Operating Cost (REO): US$ 8,480 / tonne REO Basket value (REO): US$ 147,920 / tonne REO Profit Margin (REO): US$ 139,440 / tonne REO Start-up Capital Cost: US$ 87 million Greater margin © Greenfields Research Ltd; Source: Avalon Rare Metals, Rare Element Resources Data: Avalon Rare Metals & Rare Element Resources 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 15 of 57
  16. 16. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia High grade vs high quality mining 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 TREOBasketValue(US$/kg) TREO Ore Value (US$/kg) High grade ‘low cost’ light rare earth projects Heavy rare earth ‘high quality’ rare earth projects Data: Technology Metals Research 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 16 of 57
  17. 17. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia The BCG “growth-share matrix” Based on: Boston Consulting Group MarketGrowth(targetingnewmarkets) Market Share (beating the competition) QUESTIONS Also known as “problem children”. High growth sector but large capital investment required. STARS Leading assets/products dominating fast growing markets, still requiring investment. DOGS/PETS Not profitable. Usually “pet projects” that provide a non-financial benefit i.e. synergies, labour retention etc CASH COWS High market share in slow growth industry – “milked” to fund other investments 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 17 of 57
  18. 18. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia The BCG Box for mine projects Based on: Boston Consulting Group MarketGrowth(targetingnewmarkets) Market Share (beating the competition) PROBLEM CHILD Challenging projects with scale, that could be stars in a high growth industry, assuming some structural changes. STARS World class assets with high grades and large scale. Will dominate future sector and be hugely profitable. PET PROJECTS Not profitable. Usually “pet projects” that provide a non-financial benefit i.e. synergies, labour retention etc CASH COWS High grade, small scale projects, which are quickly cash generative, allowing access to an industry and providing cash for investment elsewhere. 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 18 of 57
  19. 19. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Asset orientated rare earth strategies 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 TREOBasketValue(US$/kg) TREO Ore Value (US$/kg) Data: Technology Metals Research Based on: Boston Consulting Group PROBLEM CHILD STARS PET PROJECTS CASH COWS 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 19 of 57
  20. 20. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 1: The Cash Cow Advantages • Assets very competitive • Most already very advanced • Geology and technology already known • First mover advantage in geology as best assets picked first Disadvantages • Financial markets currently very tricky • First mover disadvantage – all R&D had to be done “in-house” • Currently not a viable strategy for non-first movers Gain market share via a low cost, high grade asset Examples: Molycorp, Lynas Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 20 of 57
  21. 21. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 2: The “Heavy” Problem Child Advantages • Attractive to the equity market • Seems to be a high growth market • No major incumbent competitors Disadvantages • Projects currently low grade • Process routes unknown – R&D intensive • Capital costs will be high • Development timeframe very lengthy • Debt financing will be very tricky Discover and develop a “heavy rare earth deposit” Examples: Northern Minerals, Hastings Rare Metals, Stans Energy, Tasman Metals, Quest Rare Minerals Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 21 of 57
  22. 22. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia SITUATION ORIENTATED STRATEGY IN RARE EARTHS Competence, competition & the contextual environment: Strategies & scenarios for rare earths miners & explorers 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 22 of 57
  23. 23. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Targeting niche markets is difficult Likely to be > 10 years for a new material Construction Finance PFS Off-take Permitting Metallurgy (Separation) Metallurgy (Extraction) BFS Metallurgy (Benification) Scoping Resources Exploration Likely to be > 10 years for a new mine Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 23 of 57
  24. 24. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Recovering low grades problematic RARE EARTHS 101 Resources x reserve recovery x mining recovery x grade x processing recovery x cracking recovery (x separation recovery) = LOM production 90% recoveries: 90% x 90% x 90% x 90% x 90% = 59% 75% recoveries: 75% x 75% x 75% x 75% x 75% = 24% 50% recoveries: 50% x 50% x 50% x 50% x 50% = 3% 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 24 of 57
  25. 25. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Making low grades saleable is tricky 0 5 10 15 20 25 30 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 ConcentratingFactor(multiple) Ore Grade (%) 96.7% 93.3% 90.0% 86.7% 83.3% 80.0% 76.7% 73.3% 70.0% 66.7% Percentages indicate equivalent mass loss to take ore to a 30% concentrate High grade light rare earth projects Low grade light rare earth projects Heavy rare earth projects 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 25 of 57
  26. 26. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 LYNAS: Mt Weld (Forecast 12 years from purchase to production) Project Farm In Resource Drilling Scoping Study Feasibility Study Peer Review Project Funding GFC Refinancing Construction PRODUCTION >>> ALKANE: Dubbo (Forecast 15 years from purchase to production) Project Purchase Feasibility Study Financing Definitive Feasibility Study GFC Definitive Feasibility Study Expanded FS Financing / Construction PRODUCTION >>> ARAFURA: Nolans (Forecast 12 years from purchase to production) Project Purchase Scoping Study Prefeasibility Study Feasibility Study GFC Feasibility Study Expanded Feasibility Study Financing / Construction PRODUCTION >>> Rare earths mines difficult to develop Second mover rare earth projects Shorter development time, and lower development cost Maturing new market outside of China Targeting 5-10 years from purchase to production? COMPARISON OF AUSTRALIAN RARE EARTH PROJECTS First mover rare earth projects Delays due to technical problems at feasibility stage Faced funding problems throughout due to lack of investor awareness Typical development timeframe will be 12-15 years Sources: Lynas Corporation; Alkane Resources; Arafura Resources 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 26 of 57
  27. 27. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Where are the “fast followers”? 0.00 2.00 4.00 6.00 8.00 10.00 0.0 200.0 400.0 600.0 800.0 1000.0 1200.0 TREOGrade(%) Ore (Mt) Major early stage light rare earth projects Major late stage light rare earth projects Heavy rare earth projects Early stage light rare earth projects 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 27 of 57
  28. 28. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia A situation based rare earths strategy 0.00 2.00 4.00 6.00 8.00 10.00 1.0 10.0 100.0 1000.0 TREOGrade(%) Ore (Mt) PROBLEM CHILDREN CASH COWS PET PROJECTS STARS 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 28 of 57
  29. 29. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 3: The “Light” Problem Child Advantages • Metallurgy / processing better known • Possibilities to leverage scale • Second mover advantage in development timeframe • First movers success may make these projects more attractive for debt financing Disadvantages • Unattractive to the equity market • Capital costs still likely to be high • Light rare earths market has less attractive fundamentals Develop a large, good grade light rare earth deposit Examples: Rare Element Resources, Arafura Resources, Peak Resources, Frontier Rare Earths Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 29 of 57
  30. 30. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia DISRUPTIVE STRATEGY IN RARE EARTHS Competence, competition & the contextual environment: Strategies & scenarios for rare earths miners & explorers 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 30 of 57
  31. 31. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Where are all the stars? 0.00 2.00 4.00 6.00 8.00 10.00 1.0 10.0 100.0 1000.0 TREOGrade(%) Ore (Mt) PROBLEM CHILDREN CASH COWS PET PROJECTS STARS 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 31 of 57
  32. 32. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Where are all the stars? 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 TREOBasketValue(US$/kg) TREO Ore Value (US$/kg) Data: Technology Metals Research Based on: Boston Consulting Group PROBLEM CHILD STARS PET PROJECTS CASH COWS 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 32 of 57
  33. 33. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 4: Aiming for the Stars Advantages • Potential to a new Bayan Obo or Ionic Clay? • Lower short term cash burn • First movers may provide an exit strategy • Examples of exploration success in rare earths exist Disadvantages • Won’t provide cash flow • May miss the best years of the market • Exploration generally unattractive for equity investors currently Find a world class rare earth deposit Examples: Tantalus Rare Metals, TUC Resources, Namibia Rare Earths, Vale Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 33 of 57
  34. 34. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia UNCERTAINTY & RISK BASED STRATEGY IN RARE EARTHS Competence, competition & the contextual environment: Strategies & scenarios for rare earths miners & explorers 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 34 of 57
  35. 35. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Uncertainty kills projects Expected Monetary Value (EMV) $ Net Present Value (NPV) $ Costs Probability of Success (Ps) Probability of Failure (Pf) EMV = ( Ps x [ NPV – Cost ] ) – ( Pf x Cost ) Based on: Centre for Exploration Targeting 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 35 of 57
  36. 36. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Uncertainty in rare earths development Producers (2) Development (2) Feasibility (2) Prefeasibility (10) Advanced Exploration (43) Early Exploration (164)26% 23% 20% 100% 100% 26% 6% 1% 1% 1% Data: Infomine 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 36 of 57
  37. 37. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earth value accretion is concave Exploration Scoping Feasibility Development Mining ValueRecognition Convex minerals: • Gold • Tin • Copper • Nickel sulphide Concave minerals: • Lead & Zinc • Nickel laterite • Vanadium • Rare earths Based on: Trench & Packey (2012) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 37 of 57
  38. 38. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Value accretion at Lynas was ‘concave’ -15.00 -12.50 -10.00 -7.50 -5.00 -2.50 0.00 2.50 5.00 7.50 10.00 12.50 15.00 Apr01 Jul01 Oct01 Jan02 Apr02 Jul02 Oct02 Jan03 Apr03 Jul03 Oct03 Jan04 Apr04 Jul04 Oct04 Jan05 Apr05 Jul05 Oct05 Jan06 Apr06 Jul06 Oct06 Jan07 Apr07 Jul07 Oct07 Jan08 Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Lynas vs ASX vs Cerium Rare earth resource announced HofA with Gansu Rare Earths for downstream plant Purchase of Mt Weld completed Pilot plant work completed successfully Scoping Study completed Feasibility Study completed Downstream agreement with Rhodia Downstream plant moved to Malaysia Mining approved by WA govt & mine contract awarded GFC: financing problems China Non- Ferrous deal announced More permit approvals China Non- Ferrous deal cancelled Rare earth prices soar – not reflected in share price Off-take contracts awarded Permit approvals in Malaysia Based on: Sykes & Trench (2012) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 38 of 57
  39. 39. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Uncertainty kills projects Expected Monetary Value (EMV) $ Net Present Value (NPV) $ Costs Probability of Success (Ps) Probability of Failure (Pf) EMV = ( 0.2 x [ 500 – 5 ] ) – ( 0.8 x 5 ) = 95 Based on: Centre for Exploration Targeting 20% 80% $500 million $5 million $99 million $4 million Should I proceed with the Feasibility Study? NB: The numbers are fake, but realistic for a rare earths project at the decision point for undertaking a Feasibility Study. YES: EMV is positive, thus you should proceed, but the ‘uncertainty ‘ is currently costing around $400 million. Strategic focus should be on increasing the chance of success, rather than optimising the final project. 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 39 of 57
  40. 40. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earths as a by-product? 0.000 2.000 4.000 6.000 8.000 10.000 12.000 14.000 16.000 18.000 TotalRareEarthOxideGrade(%) By-Product TREO Equivalent Grade Total Rare Earth Oxide (TREO) Grade Data: Technology Metals Research 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 40 of 57
  41. 41. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Making concave commodities convex Exploration Scoping Feasibility Development Mining ValueRecognition Convex minerals: • Gold • Tin • Copper • Nickel sulphide Concave minerals: • Lead & Zinc • Nickel laterite • Vanadium • Rare earths Based on: Trench & Packey (2012) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 41 of 57
  42. 42. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 5: the by-product cash cow Advantages • Primary commodity provides hedge against rare earth uncertainty • Potentially easier to finance • Potential earlier cash flow • Rare earths extraction remains an “option” Disadvantages • Metallurgy likely to be complicated • Won’t work as a co-product or rare earth “as a by-product” operation • Difficult to achieve scale • May be unattractive to equity markets Extract rare earths as a by-product Examples: Greenland Minerals, Pele Mountain Resources, Alkane Resources, CBMM Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 42 of 57
  43. 43. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Neutral risk to preferred risk Typical risk profile of an investor or a firm: potential losses seem much worse than the potential gain as you approach “ruin” Source: Maxwell & Guj, 2013, AusIMM Mineral Economics Monograph 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 43 of 57
  44. 44. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Life cycle of a mine project Concept Exploration Discovery Economics Development Mining Value Time EXPLORATION MINING High Risk – High Potential Lowered risk Full Value Speculation Orphan Period Speculators Leave Institutional Investment Based on: Marketoracle 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 44 of 57
  45. 45. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia ‘Convex’ risk progression: Project vs Corporate Project/Technical risk versus Corporate Risk in the Minerals Sector Project Risk Corporate Risk Increasingrisk Exploration Feasibility Development Production De-commissioning A high chance of project related problems at this stage, but little at stake so not of concern to the overall company A lower chance of project related problems at this stage, but if they do occur they could be life-threatening to the company Based on: Trench & Packey (2012) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 45 of 57
  46. 46. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Capital costs: What is affordable? Kvanefjeld (Greenland Minerals & Energy) Mt Weld (Lynas) Mountain Pass (Molycorp) Zandkopsdrift (Frontier Rare Earths) Nolans Bore (Arafura Resources) Dubbo (Alkane Resources) Strange Lake (Quest Rare Minerals) Eco Ridge (Pele Mountain Resources) Hastings (Hastings Rare Metals) Bear Lodge (Rare Element Resources) Sarfartoq (Hudson Resources) Thor Lake (Avalon Rare Metals) Kipawa-Zeus (Matamec Explorations) Market Capitalisation (equiv. US$10 million) Project Capital Cost (equiv. US$100 million) Data: Company websites & Google Finance NB: Values are for 2012, not current! 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 46 of 57
  47. 47. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Make the ‘concave’ problem a ‘convex’ solution Increasingrisk Exploration Feasibility Development Production De-commissioning Source: Trench & Sykes 2013 ‘Concave’ Project Risk ‘Convex’ Project Risk Corporate Risk Solve concave problems early: • Experienced management? • Technological (not geological) focus? • Inform the investing public? 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 47 of 57
  48. 48. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia DELAYS risk peak REDUCES risk Input of extra capital: • Strategic investor? • Take advantage of fashions? Exploration Development Production Extra funding delays risk accrual Based on: Trench & Sykes (2013) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 48 of 57
  49. 49. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Convex to concave sequencing Value ‘Staircase’ becomes: • ‘Convex’ project first i.e. gold then rare earths • Raise money from a fashionable commodity Based on: Trench & Sykes (2013) 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 49 of 57
  50. 50. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 6: Pet Project (The “Cash Dog”) Advantages • Quick to implement, whilst market still attractive • Cash generative • Simple & cost effective • Lower risk Disadvantages • Not a long term solution • May be more trouble than it’s worth • Not many obvious opportunities • Rare earths not conducive to “quick & easy” development • May not be attractive to equity markets Do something quick and easy, then move on Examples: India Rare Earths? Tin smelter slags? Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 50 of 57
  51. 51. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Strategy 7: do something else! Advantages • Hedge against rare earth market risk • Potential for faster development & cash flow • Maybe cheaper / easier / lower risk • Wider range of opportunities available Disadvantages • May be unattractive to “rare earth” focused investors • Skills may not transfer as planned • Loss of focus • Spreading resources too thinly Get involved in a different commodity Examples: Alkane Resources, Kimberley Rare Earths, Avalon Rare Metals Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 51 of 57
  52. 52. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia STRATEGY IN CONTEXT FOR RARE EARTHS Competence, competition & the contextual environment: Strategies & scenarios for rare earths miners & explorers 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 52 of 57
  53. 53. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earths growth-share matrix Market Share (beating the competition) MarketGrowth(addingtothecompetition) 6) CASH DOG 1) CASH COW 4) FIND A STAR! 2) HEAVY PROBLEM CHILD 3) LIGHT PROBLEM CHILD 5) BY-PRODUCT CASH COW 7) DO SOMETHING ELSE! Based on: Boston Consulting Group 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 53 of 57
  54. 54. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Rare earths scenarios matrix Increasing shortage of light rare earths Increasingshortageofheavyrareearths SURPLUS Negative for all rest of world (ROW) rare earth mine developers Positive for all ROW rare earth consumers LIGHT SHORTAGE Positive for “light” rare earth mine projects. Negative for “heavy” rare earth mine projects. SHORTAGE Positive for all rest of world (ROW) rare earth mine developers Negative for all ROW rare earth consumers HEAVY SHORTAGE Positive for “heavy” rare earth mine projects. Negative for “light” rare earth mine projects. Based on: Boston Consulting Group; Oxford Scenarios Programme 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 54 of 57
  55. 55. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia The rare earth project scenarios matrix CASH COW BY- PRODUCT CASH COW HEAVY PROBLEM CHILD LIGHT PROBLEM CHILD FIND A STAR CASH DOG DO SOMETHING ELSE! SHORTAGE        HEAVY SHORTAGE        LIGHT SHORTAGE        SURPLUS        Based on: Oxford Scenarios Programme 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 55 of 57
  56. 56. Strategic Management of Resources’ Companies, UWA Business School, Perth, Australia Coursework: putting strategy into action Now implement the strategy- scenario grid: • Assign probabilities to each of the scenarios • Define the parameters of the target asset for each scenario • Determine where your assets fit into these strategies • Determine the entrance & implementation cost of each strategy • Select a blend of strategies that cover as many scenarios as possible for the resources & time available 27 Oct 2014 Competence, Competition and the Contextual Environment: Strategies and scenarios for rare earths miners and explorers Slide 56 of 57
  57. 57. THANK YOU For more information: Centre for Exploration Targeting: www.cet.edu.au Greenfields Research: www.greenfieldsresearch.com Contact information: John P. Sykes: johnpaul.sykes@postgrad.curtin.edu.au
  • JohnSykes

    Mar. 2, 2015

Presentation for UWA Business School MBA.

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