Senior Exploration Management Course
August 2012
Senior Exploration Management Course - August 2012
1
Course Overview
•
Mineral Exploration Principles, Philosophies and Culture
•
Mineral Exploration Strategy, Business Planning and Portfolio Management
•
People in Mineral Exploration
•
Commercial Risk Management
•
Mineral Exploration Targeting
•
Mineral Exploration Tactics
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Course Overview (cont.)
• Group Exercise - Exploration Strategy
• Group Exercise - Commercial Risk
• Group Exercise - Decision Analysis
• Team Presentations - Thursday
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Our Goals for this Course
• D
Deliver
li
the
th opportunity
t it to
t think
thi k about
b t and
d discuss
di
management principles and methods that facilitate
successful mineral exploration
• Focus on understanding key drivers and levers in
certain basic components of the exploration business
• Stimulate thinking and ideas -- there is no absolute
correct answer or approach
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Context for Participants
• The exploration management principles, drivers and
concepts that we cover in this Course are appropriate
for managers and prospective managers in companies
of all sizes
• The scale at which the material is received and the
scope for potential use of the material will necessarily
y depending
p
g on the background
g
and training
g of
vary
each participant and on the size of the company he/she
works for
• The diversity of the participants, and the sharing of
that diversity, make this a better Course for all of us
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Mineral Exploration Principles,
Philosophies and Culture
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Overview
•
Current Mining Industry Environment
•
Roles of Mineral Exploration
•
Value of Exploration and Exploration
Opportunities
•
Commodity Portfolio
•
Acquisition and Exploration: Buy or Explore?
•
Brownfield and Greenfield Exploration
Characteristics and Balance
•
Greenfield Exploration Philosophy
•
Exploration Industry Performance
•
The Importance of Culture
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Current Mining Industry Environment
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External Environment
• China is driving and will continue to drive global
metals demand (but with normal business cycles)
• Other emerging countries will have significant
impact on demand
• Long-term demand and price forecasts strong
• Governments taking note (higher taxes & royalties)
• Official Sector gold-buying
9
Senior Exploration Management Course - August 2012
Mackenzie (2010)
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Mackenzie (2012)
11
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Mick Davis, Merrill Lynch Conference, May 2012
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Walsh, 2012
13
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Walsh, 2011
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Albanese (2012)
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Albanese (2010)
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RBC Capital Markets Gold Conference, November 2011
17
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Scotia Capital Mining Conference, November 2011
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World Gold Council Report, August 2012
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Internal Environment
• Strong cash flows
• Rising costs (operating and capital)
• Grades dropping at flagship mines
• Fewer new discoveries (especially giant, high-quality
deposits)
• Project permit timeframes longer
• Shortage of qualified and experienced people
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Harding (2010)
21
Senior Exploration Management Course - August 2012
Harding (2010)
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Mick Davis, Merrill Lynch Conference, May 2012
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December, 2011
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25
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Masterman (2012)
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Barrick, TD Newcrest Conference, Jan. 2011
Ball, June 2012
27
Senior Exploration Management Course - August 2012
New Delays and Postponements
(Barrick)
PASCUA‐LAMA COST INCREASE
Due to lower than expected productivity and persistent inflationary and other cost pressures, as
previously disclosed, the company initiated a detailed review of the cost and schedule estimates
for Pascua‐Lama in the second quarter. Preliminary results currently indicate an approximate 50‐
60 percent increase in capital costs from the top end of the previously announced estimate of
$4.7‐$5.0 billion, with first production expected in mid‐2014. The company will provide a further
progress update with third quarter results.
PROJECTS IN FEASIBILITY AND PERMITTING
Barrick is evaluating its next tier of projects. Cerro Casale and Donlin Gold do not currently meet
our investment criteria, primarily due to their large initial capital investments, and under our
disciplined capital allocation framework we would not make a decision to construct them at this
time ………..
From Barrick Second Quarter Report 2012
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Implications for
Mineral Exploration
 Robust exploration spending to continue
• Need to replace resources
• Grades declining
 Need to find new high-quality deposits
• Innovative targeting
• Technology
T h l
• Effective Commercial Risk Management
 Need to find, develop and retain talented people
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Roles of Mineral Exploration
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Mineral Exploration in the
Mining Company Context
• Exploration is an essential component of most mining
operations and mining/processing complexes
– Maintain / expand resource base
• Provides high-risk / high-reward and relatively low cost
option for new business growth
– New discovery that supports existing commodity business units
– Discovery
Di
that
th t lleads
d to
t completely
l t l new business
b i
– Important component in assessment of acquisitions
– Speculative investment alternative (e.g. most Junior Exploration
Companies
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Corporate Growth Strategy
• Mining companies have a number of strategic options for
growing the business:
– Merge with or acquire similar producing companies
– Acquire advanced projects and build new mines
– Invest in mineral exploration to discover new deposits which
can be mined profitably (greenfield and/or brownfield)
– Diversify into non-mining businesses
• The growth path chosen will depend on a combination of:
–
–
–
–
–
Company balance sheet strength
Personalities of key leaders on Exco and Board
Shareholder composition and influence
Risk preference (in part related to above three)
Organizational capability
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Corporate Growth Strategy
(cont.)
• Corporate
p
strategy
gy in mining,
g, if robustly
y developed,
p , will
consider the role of mineral exploration in the business and its
relationship to other growth options
• The integration of corporate strategy and exploration strategy
will drive decisions regarding:
– Desired commodity portfolio
– Balance between acquisition and exploration
– Balance between greenfield and brownfield exploration
– Approach to opportunity generation in exploration
– Risk preference and manageability
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Value of Exploration and
Exploration Opportunities
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Important Concepts in this Course
(and not commonly discussed in mineral
exploration literature)
– Expected Monetary Value (EMV)
– Probability of Success & Base Rate
– Risk Preference
– Long-Term Option Value
– Exploration Search Space
– False Positives & False Positive Rate
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Exploration Business Value
• B
Bottom
tt
li
line: Exploration
E l
ti is
i a business
b i
that
th t requires
i
positive return on investment
• A relatively modest return may be acceptable in certain
circumstances, e.g. sustaining a resource base
• But, the goal of most companies and individuals that invest
in exploration is a very high return on the investment
• Giant greenfield discovery
• Unlock significant hidden value in existing asset
• Junior stock speculation
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Risk is High
If economic metals / minerals might be present,
present
 How likely is it that we can find them?
 At what cost?
 Can we realize acceptable value after discovery?
The value of mineral exploration opportunities must
reflect (i.e. discount) their typically high risk
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Understanding the Value of
Exploration Opportunities
• M
Monetary
t
valuations
l ti
off exploration
l
ti opportunities
t iti typically
t i ll
have a very high uncertainty
• There are several approaches used to assign value to
exploration opportunities:
• Cost-input method
• Comparative transactions method
• Imputed value method
• Net present value estimation
• Expected monetary value
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Discounting for Risk
• Net Present Value (NPV) calculation accounts for
the time value of money but not the probability of a
successful outcome
• Expected Monetary Value (EMV) is a useful concept
for assessing the risk-discounted value of
exploration opportunities in the context of the
probability of exploration success and
advancement
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The EMV Method
• Thi
This method
th d calculates
l l t an “Expected
“E
t d
Monetary Value” (EMV)
• Usually based on a Decision Tree of an
expected exploration program
• In theory, the most logically correct way to
value an exploration opportunity
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The EMV Formula
Ps
$ NPV
?
Pf
EMV =
$ Costs
{Ps * (reward NPV- cost)} - {Pf * failure costs}
Ps = probability of discovery
NPV = net present value of discovery
Pf = probability of failure = (1 - Ps)
Failure costs include present exploration +/- divestment costs
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What does EMV really mean?
• EMV is the weighted average of all probable outcomes for
an exploration project:
– These include the small probability of discovery of a very
valuable deposit and the high probability of expenditure of
the exploration budget with no success
• Another way of thinking about EMV:
– If we explore a large number of projects with a similar risk
profile, it should represent the overall average project result
• If EMV >0, then if we explore enough similar projects we
should eventually make a positive return
• If EMV <0, then the more similar projects we explore, the
more likely it is that we will destroy value
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Assigning Probabilities
•
The greatest uncertainty with application of the EMV
method is assigning Psuccess values
•
In practice, can often establish reasonable general Psuccess
values:
– based on established base-rates either in the province of
interest or, in the case of early stage projects, a province
considered to be similar
– This can help us value a portfolio of similar opportunities
•
Much more difficult to establish meaningful Psuccess that
relates to individual opportunities
•
Academic and industry studies of exploration success
rates give us some guidelines
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Mineral Exploration Base Rate
• The Base Rate is how often
often, on average,
average what we are looking
for actually occurs in the instances we examine
• Mineral exploration has a low base rate; what we test for (an
ore deposit) is only rarely present in the population that we test
(targets)
• Intuitive judgment in human beings has been shown to be
generally poor in low base rate situations
– We tend to neglect the base rate when making intuitive judgments
• Important that we understand the quantitative implications of
the low base rate in mineral exploration
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(Low - Risk Countries: 1985-2003)
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McCuaig 2010
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WMC Resources
Historical P Success 1955-2001
Bauxite
Iron Ore
Ni Laterite
Ni Mafic Intrusion
Coal
Ni Komatiite
Uranium
Cu Fe-Oxide
Cu Porphyry
Au Orogenic
Diamonds
Pb/Z
Pb/Zn
Au Epithermal
Other
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
From Suchomel (2003)
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Risk Preference
• Risk Preference relates to risks associated with commerce
• Utilit
Utility Th
Theory seeks
k tto understand
d
t d th
the issue
i
off risk-preference
i k
f
and how it affects decisions such as the price we are prepared
to pay for an asset
– In most cases we will not be risk-neutral when making decisions
but rather be influenced by our risk preference
• Risk preference is influenced by:
– Extent of financial assets
– Goals: short, medium and long term
– Capacity / patience to manage risk
• Utility Theory concepts:
– Certainty equivalent value
– Risk discount
– Risk tolerance
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EMV and Market Valuations
• In theory,
theory because EMV is a measure of the value of an
exploration opportunity, it should also establish the
price at which we would buy or sell the opportunity
• In practice, market valuations are often significantly
lower than EMVs for early-stage projects because of
risk preference
• For certain advanced-stage projects, market valuations
may be significantly higher than EMV also because of
risk preference
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Mark
ket Valuation/EMV
Typical Profile for a Successful
Exploration Project
Everyone wants
to buy here
1.0
Exploration
provides an entry
here
0
Early Stage Project
Advanced Stage Project
Significant Drill Hole
Intersection
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Practical Implications for
Mineral Exploration
• Inevitably, the market strongly undervalues early-stage
exploration projects relative to EMV
• In theory, this creates a market inefficiency and the potential
for this inefficiency to be exploited by a patient investor with
a risk preference characterized by a higher risk tolerance (i.e.
lower risk of gambler’s ruin)
• In principle, companies that have a higher risk tolerance
should have a significant long
long-term
term competitive advantage in
early-stage exploration if they choose to exercise it
• Very large companies typically have a competitive advantage
over moderate-sized companies in making high-cost
acquisitions; therefore exploration / discovery may be
critically important for medium-sized organizations
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Commodity Portfolio
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Commodity Portfolio
The commodity portfolio in a mining company is usually
established
t bli h d by
b the
th Exco
E
/B
Board
d as partt off the
th Corporate
C
t
Strategy
• Need to understand basic business parameters of
commodities as well as key ore deposit styles, economics and
exploration characteristics, e.g.

Diamonds can produce good cash flow,
flow but are very hard to find

Nickel is a more difficult business to enter than copper and
quality nickel sulphide deposits are harder to find than porphyry
copper deposits

Bulk Commodities have distinct economic drivers
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Target Deposit Types and
Corporate Size Thresholds
• Only certain mineralization styles have the capacity to meet
corporate size thresholds
• Need analyze size distribution and economic
characteristics of major ore-types of commodity of interest
• First, need to translate economic value measures (NPV,
IRR) into threshold geological parameters (e.g. tonnes,
grade)
d )
• Then need to evaluate which deposit types are most likely
to meet these thresholds
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Deposit Size-Frequency
Distributions
• Mineral deposit
p
size-frequency
q
y data typically
yp
y show a
geometric distribution, approximating a power-law
distribution, at all scales (global, province, district)
• This has two very important implications:
1.
Large deposits will be rare but contain most of the value
2.
In any province (for a given exploration search-space) which
has been
h
b
reasonably
bl well-sampled
ll
l d by
b previous
i
exploration,
l
ti
the known endowment distribution is a guide to future
endowment
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Overall Decline in Exploration ROI
Base Metals
From Schodde (2012), 34th International Geological Congress
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Geometric Size Distribution:
St Ives Gold Camp Example
Gold Endowment (koz) at St Ives
2000
Junction
1500
Victory
1000
Argo
500
Revenge
Leviathan
35 Deposits
8.1 moz Au
0
Endowment = Current Reserves + Cumulative Production
Source : WMC Dec 1999
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Bulk Commodities Are Different
• Bulk commodities primarily include iron ore, coal, bauxite
(nickel laterites share many
many, but not all,
all attributes)
• Bulk commodities are typically near-surface and exhibit
significant lateral extent and continuity
• Economic value of these deposits strongly leveraged to
infrastructure-related factors (i.e. discovery step does not
generate most of value):
– Particularly ports, railways and energy supply
• The inventory of known undeveloped deposits can be
considered to form a queue from those widely perceived to
be most likely to be developed in the near future to those
least likely
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Creating Value in
Bulk Commodity Exploration
Population of undeveloped bulk
commodity deposits
Entry Cost
Move rapidly to here
Acquire
q
cheaply
p y here
Perceived Likely Time to Development
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Mackenzie, 2011
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Mackenzie, 2011
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Acquisition and Exploration:
Buy or Explore?
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Acquisition and Exploration
• Acquisition and Exploration are complementary
components of the corporate development function of
an integrated mining business
• Collectively they target the entire spectrum (project risk
vs. entry cost) of entry points into new opportunities
• Exploration has a critical role in adding value to the
acquisition process
• Acquisition may unlock significant exploration potential
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High
h
A Spectrum of Entry Points for
New Opportunities
Project Risk
P
many low-quality
projects
Low
projects
don’t
exist
Low
Example: corporate
risk tolerance limit
Cost of Entry
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High
66
Comparison of
Resource Acquisition Strategies
Exploration Target Size
Category
Target Risk
Potential
Return
Entry Cost
Greenfield
High
Very High
Low
(challenging
cover/environment)
(large deposits
found early)
(can target large
areas)
Brownfield
Mine-site
Acquisition
Secondary
Evaluation
Large
Medium
Medium
Moderate
Low
(residual
endowment)
(local knowledge +
infrastructure)
(usually smaller
deposits)
(local infrastructure)
Small
Low
Low-Mod
Low
(ore body
extensions)
(well understood)
(favourable
economics)
(mine infrastructure)
Variable
Low
Low
Very High
(parameters well
constrained)
(need discovery
success)
(market value;
competition)
Variable
High
Low
Moderate-High
(usually large)
(significant flaw(s) to
overcome)
(need tech.
breakthrough)
(new tech, etc.)
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Modified from Bartrop and Guj (2009)
67
Creating Value by Buying:
Key Issues
• Genuine undervalued, advanced-stage assets are rare:
– industry/commodity downturns
– high-risk jurisdictions
– corporate technology/capability advantage
• Brownfield exploration success is usually critical to make
purchases pay-off
• Beware of flawed projects masquerading as low-risk, cheap
purchase opportunities - particularly during market upturns
• Although market downturns may present undervalued
opportunities, non-diversified or smaller companies may not
have the balance sheet strength to take advantage of these
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Over Valued
Under Value
ed
Relative Asset Valuation
Market Cycles and Asset
Valuations
Acquisitions
very high risk
Optimum time
for acquisitions
“Bust”
“Boom”
Commodity-Price Driven Cycles
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Scotia Capital Mining Conference, November 2011
70
December, 2011
71
Senior Exploration Management Course - August 2012
McKeith, December, 2011
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Flawed Projects
• Typically have long capital pay-back periods
• Original investors often lose money
• Projects have little margin for error
• Low grades limit mining options (high energy costs)
• High sensitivity to metals prices
• Often involve unproven technology
• Commercial Risk Management Issues
• Commercial risks poorly identified / planned for
• Community expectation management difficult
• Start and stop nature damages company credibility
• Ultimate project failure causes lasting damage
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The Trend toward “Discoveries” That Won’t Become Mines
McKeith (2009)
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Overall Decline in Exploration ROI
Base Metals
From Schodde (2012), 34th International Geological Congress
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Impact of Corporate Size
As a company
p y grows
g
it is forced to:
• Seek increasingly larger minimum targets
• Forego development of small, but potentially profitable,
projects
• Confront decreasing probability of discovering larger and
larger deposits
• Look for project acquisitions and eventually mergers
• Re-assess (rationalize?) risk preference
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McQuaig, 2010
• Taken to extreme, the largest companies must find multiple
orebodies or clusters (camps)
• Tendency is to turn to acquisition rather than exploration
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Long-Term Option Value (1)
• The full size and hence production potential of many, if
not most, world-class deposits is not recognized at the
point of initial discovery and mine development
• Successful exploration in the near-mine environment
provides options for production expansion with
incrementally less capital investment
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Long-Term Option Value (2)
• Major deposits with long
long-term
term option value underpin the
long term value growth of a mining company
• It is important for large mining companies to focus
exploration on the deposit types likely to have this longterm embedded option value
• These deposits would not necessarily have higher Net
Present Values at the point of discovery than other
deposits without such embedded option value
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Irarrazaval (2010)
THE LOS BRONCES DISTRICT
Abanico and Farellones Formation andesite
volcanic wall rocks
San
Francisco
F
i
batholith
Pre-mineral San Francisco batholith (12 – 8
Ma) and quartz diorite porphyry (<7 Ma)
Syn-mineral porphyry – breccia complex
(7.5 – 4.5 Ma)
>0.5% Cu envelope over 9 km long
>0.5% Cu
La Copa
diatreme
Andesitic
volcanic
wall rocks
Porphyry –
breccia
complex
P t i
Post-mineral
lL
La C
Copa di
diatreme
t
b
breccia
i
complex (4.1 Ma)
Contained copper exceeds 200 Mt
Los
Sulfatos
N
2 km
Quartz diorite
porphyry (<7 Ma)
80
Mackenzie (2011)
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Key Issues for Integrated
Business Development (1)
• Resource availability: in sectors that have underinvested in exploration, few viable acquisition
opportunities remain
• Relationship between corporate risk preference and
both available opportunities and competition
– may
y necessitate an exploration-focused
p
approach
pp
• Acquisition strategy must adjust to market cycles
• Exploration must be funded at stable, critical mass levels
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Key Issues for Integrated
Business Development (2)
• Geoscience-related technical due-diligence is critical in
acquisition (helps avoid flawed projects)
– Exploration provides skills and resources
• Exploration can help with recognition of the upside that is
q
(e.g.
( g long-term
g
critical to drive successful acquisition
option value)
• Acquisition can provide access to significant exploration
potential
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Brownfield and Greenfield Exploration
Characteristics and Balance
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Key Characteristics of
Brownfield Exploration
•
Base-rate probability of success typically around 5% (this is
significantly
g
y higher
g
than g
greenfield base rates because of p
proximity
y to
known mineralisation and increased understanding of geology which
makes predictive concepts more robust)
•
Because of the existing infrastructure, (1) the success size-threshold
is smaller in brownfield exploration and (2) a much larger proportion
of the exploration budget is spent “in the ground”
•
The brownfield exploration search space is often more dynamic
(requires frequent re-evaluation
re evaluation so that opportunities are not missed)
•
Brownfield exploration is much more responsive to increases in
expenditure than greenfield exploration
•
Persistent exploration in a brownfield domain results in progressively
decreasing discovery size and increasing discovery cost (unless there
is a major expansion in the search space)
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Key Characteristics of
Greenfield Exploration
•
Base-rate probability of success is in the range of 0.1% - 1.0%
•
To pay for itself, greenfield exploration must focus on high-value
opportunities with long-term option value
•
Long timeframe from discovery to development -- on average a 10-year
time lag between discovery and production for a good-quality
greenfield discovery
•
Greenfield exploration cannot be “turned on” when it is needed -requires a sustained long-term effort at an appropriate base-level
•
Greenfield success does not necessarily correlate with significant
increases in expenditure
•
Technical excellence is paramount, particularly at the area selection /
project generation stage -- neither excellent project execution nor
innovative exploration technology will produce success if
unprospective targets are selected initially
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Brownfield and Greenfield
Sensitivity to Expenditure
1.00
Program Psuccess
P
B
Brownfield:
fi ld
Avg. Project Ps = 5%
0.80
0.60
0.40
Greenfield:
Avg. Project Ps = 0.5%
0.20
0.00
0
10
20
30
40
50
Number of Projects Explored (=$)
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Managing Brownfield and Greenfield
Exploration as an Integrated Portfolio
We believe there is a strong case for managing
Brownfield and Greenfield exploration as an
integrated portfolio. This requires:
– Understanding the key differences
– A commitment to both and a model for balancing effort
between them
– Knowing when to stop brownfield exploration
– Consistent base-level funding for greenfield exploration
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Brownfield and Greenfield
Dynamic Interaction
•
Brownfield exploration is much more responsive to
increases in expenditure than greenfield
•
Only brownfield exploration can provide an effective
shorter-term response to a sudden realization of a
“crisis” in ore supply, assuming that the brownfields are
p
at that time
not depleted
•
Only greenfield exploration offers the potential for a
longer-term more stable response to ore supply
inadequacy, but greenfield presents greater risk and
requires much greater lead time and planning
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Dynamics of Brownfield / Greenfield
Interaction
Time Horizon
of Ore Shortage
(No Exploration Success))
Greenfield
Greenfields
Exploration
Brownfield
Near
Mine
Exploration
0
Feasibility
&
Time Horizon
of Ore Shortage
(With Near Mine Success)
Development
Feasibility
& Development
5
10
15
YEARS
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Brownfield:
Knowing When to Quit
Nickel Metal (kt)
300
Otter / Juan
Long
Current Endowment
(Reserves + Cumulative
Production)
200
Initial Reserves
Lunnon
Durkin
100
F t
Foster
Carnilya
0
1965
1970
1975
1980
1985
1990
1995
2000
Year of Discovery
Compiled by Richard Schodde
91
Average EMV
of Remaining Opportunitties
A Model for the Strategic Management of
Exploration in a Maturing Province / Camp
BOOM PHASE
Focus resources
F
on province/camp
STRATEGIC
PHASE
Decision to persist
or refocus elsewhere
depends on corporate
strategy
VALUE
DESTRUCTION
PHASE
Get out or get new
technology
(e.g. risk preference)
Average EMV of
Opportunities elsewhere
+
With New
Technology
0
_
TIME
Discovery
of Province / Camp
92
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Key Principles of Successful
Brownfield Exploration
•
Match the program/budget to the life-of-mine plan –
understand and address any production “cliffs”
cliffs
•
Regular reviews with external (both to the operation and the
company) expertise
•
Continually re-assess search space assumptions
•
Invest in understanding the geology of the ore environment
(before you need to) – this work is relatively very low cost but
has long lead times
•
Monitor discovery cost trends – be prepared to stop or invest
in expanding the search space
•
In a multi-site company, understand where each site is on the
Opportunity-Urgency matrix
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Key Principles of Successful
Greenfield Exploration
• Greenfield cannot be “turned on” when it is needed
– requires a long-term effort sustained at an appropriate baselevel
– time is the greatest enemy of greenfield - our present
business culture is not geared toward medium to long term
investment
• Technical excellence is paramount, particularly at the
project
j
generation
g
stage,
g leading
g to the creation of new
search spaces
– much more about the quality of the thinking than the dollars
spent
• To pay for itself, greenfield must focus on those highvalue opportunities with long-term option value
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Managing the Balance:
Conclusions (1)
•
Greenfield exploration should be maintained over the long
pp p
base-level
term at an appropriate
•
Successful greenfield exploration requires the highest
calibre innovative technical thinking
•
The depletion of brownfield opportunities must be closely
monitored (discovery cost trends are a good measure)
•
Do not persist too long in depleted brownfield camps: sell,
stop or invest in technology to expand the search space
•
A portfolio of undepleted brownfield opportunities provides
maximum strategic flexibility to respond to ore shortages or
expansion opportunities
•
Be sensitive to the impact of market, technological and
infrastructural changes on the brownfield search space
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Managing the Balance:
Conclusions (2)
•
It makes good business sense to manage brownfield and
greenfield exploration as an integrated portfolio
–
Consistency in processes and procedures
–
Flexibility in response to both changing business
conditions and exploration results
–
Raises the quality of both portfolios
–
Ability to provide staff with a variety of experience and
opportunity
•
Must avoid “us and them” syndrome
•
Requires excellent relationships with senior operations
managers
•
Corporate and Exploration strategies and goals must be
well-developed and clear
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Goodyear (2006)
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Greenfield Exploration Philosophy
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Understanding the
Exploration Search Space
• Certain business activities, notably mineral exploration and
pharmaceuticals,
h
ti l involve
i
l searching
hi a defined
d fi d parameter
t space
• We refer to this parameter space as The Exploration Search Space
• The Exploration Search Space is the given set of conditions that
constrain economically-effective outcomes of the search process
• The parameters that define the Exploration Search Space relate to
one or more of the following categories:
– target ore-type (detectability, economics)
– cover conditions
– available detection technology
– political/commercial environment (capacity to manage risk)
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Three Critical
Business Implications
1. Any given Exploration Search Space will become exhausted
over time, resulting in smaller and higher cost discoveries
2. The largest deposits in any Exploration Search Space are
usually found early because they usually have the most
obvious signatures
3. The most important discontinuities in the exploration
business are those which significantly expand the
p
Search Space
p
Exploration
– New technology (extraction and exploration)
– New concepts (often linked to technology)
– Higher metal prices
– Improved commercial risk management capability and/or new
geographies (often linked to changes in risk profile)
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The Exploration Search Space and
Targeting Strategies
• Any targeting strategy must be based on an
understanding of the degree of depletion of the
relevant Exploration Search Space (i.e. “exploration
maturity”) for the target province, district, or camp
• In this context, there are two end-member targeting
strategies:
– Elephant
El h t Country
C
t
– First Mover
• The choice depends on corporate strategy, exploration
strategy and risk preference
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Greenfield Opportunity
Generation
• Discussions about “Mineral Exploration Philosophy” are
usually
ll centered
t
d around
d the
th different
diff
t approaches
h to
t
greenfield opportunity generation
• In general, there are two approaches to greenfield
opportunity generation:
– Empirical Focus (described in various ways such as “boot
leather and drilling”)
– Conceptual Focus (described by terms such as “models-driven”
models-driven
or “conceptual targeting”)
• A best-practice approach should seek to understand and
incorporate the most useful elements of each broad approach
and apply them at appropriate scales
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Empirical Approach
An empirical approach to greenfield opportunity generation may
exhibit
hibit th
these characteristics:
h
t i ti
– Focus on basic field observations and data collection and analysis
– Strong focus on local knowledge and intelligence
– Strong culture of “individual” geoscientists (i.e. “savvy
explorationists” or “lucky individuals”)
– Commonly organized as autonomous local groups with numerous
field offices
– Relatively limited communication or collaboration between groups
– Often many JV’s with junior companies
– Tendency to be “first mover” in newly opening jurisdictions and
preference for “elephant country” in more established jurisdictions
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Conceptual Approach
A conceptual approach to greenfield opportunity generation
may exhibit these characteristics:
– Focus on understanding mineral systems in a holistic manner
and recognizing expressions of these systems in various scales
of data
– Emphasis on predicting where valuable mineral deposits should
occur
– Culture of integrated teams across geoscience disciplines
– Strong culture of collaboration,
collaboration communication and teamwork
– Tendency toward centralized teams with minimal field offices
– Portfolio often weighted toward 100%-owned projects
– Tend to be “first movers” in covered areas or new search spaces
-- usually not a strong focus on existing “elephant country”
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Contrasting Approaches
• Exploration Managers tend to have a strong preference
– Viewpoint typically driven by career experiences or aspects of
personal work preference (e.g. “doing lots of deals”)
– Often can be a surprisingly emotional issue
• Managers need to be aware of their personal biases when
developing exploration strategy
– Corporate and exploration strategies are the context for
determining the best approach(es) to greenfield opportunity
generation, not the reverse
• What are your preferences / biases?
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External Environment Influence
• Although individuals and organizations may have style
preferences for exploration strategy
strategy, in some cases
influences of the external environment will over-ride these,
for example,
– In a situation (usually temporary) where there is intense junior
interest in a particular commodity, it may make sense for the
major’s strategy to be more focused on evaluating the
outcomes of such work
– On the other hand, for commodities with limited undeveloped
resources and relatively little junior interest (e.g. NiS,
Diamonds, U at various times) a major company has no real
choice but to focus on a greenfield project generation-driven
strategy
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Majors and Juniors:
Possible Modes of Engagement
• PROACTIVE
– Major runs its own active greenfield exploration programs
• INTERACTIVE
– Major supports selective juniors to carry out greenfield
exploration
– Major maintains close links and provides technical as well
p
as appropriate
pp p
as financial expertise
• REACTIVE
– Major only responds to significant exploration results from
junior when these are publicly reported
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What about Luck?
• The role of luck in success in a high-risk business like
mineral exploration is obvious
• However, we also know that some people are consistently
“luckier” than others
• Are there underlying principles that relate to luck?
y
g Richard Wiseman ((“The Luck Factor”))
• British Psychologist
spent 10 years studying people who describe themselves as
either lucky or unlucky and succeeded in identifying four key
behaviors that separate lucky from unlucky people
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Four Luck Behaviors
1. Lucky people are more likely to notice something
unusual and the opportunity that it might represent, and
unlucky people are more likely to suffer from “inattentive
blindness”
2. Lucky people have open body language, which tends to
attract opportunities
3. Lucky people tend to act on their intuition
4. Lucky people see the new opportunities presented by
negative events
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Persistence: A Commonly
Misunderstood Virtue
• Many discussions of successful exploration focus on
the persistence of people or organizations
– How many mines around the world are called
“Perseverance”?
• It is clearly true that persistence is important in
disco er b
discovery,
butt it is criticall
critically important that we
e
understand what is meant by persistence
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Persistence
• Persistence as a virtue IS NOT:
– Continuing to explore the same piece of ground for
every increasingly smaller / high-risk target
• Persistence as a virtue IS:
– Following up a positive indication of mineralization until
p
(e.g.
( g Fipke
p and the Slave Diamond
it has been explained
discoveries)
– Pursuing a program, continuing to learn from
experience and feeding that learning back into the
targeting and exploration of each new project
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Persistence
Suchomel (2006)
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Seek Balance
“What matters most in exploration is not whether the exploration
strategy is empirically or conceptually based,
based for in practice
practice, it
will usually be found to be a blend of both. What matters is what
the mind makes of the evidence, whether empirical or
conceptual, and what we do about the evidence.
The unique opportunities to make discoveries come infrequently,
and can come unexpectedly. They are fragile opportunities where
imminent success can be turned into failure through
g lack of
courage and lack of timely action.”
Roy Woodall, Sept. 2004
Former Director of Exploration,
WMC Resources
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Exploration Industry Performance
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Brownfield-Greenfield Balance
• In recent years many companies have focused on
brownfield exploration because of higher metals prices
and better short-term return potential
• This trend has been exacerbated by an overall declining
rate of return on greenfield investment
– Due to the increasing maturity of traditional Exploration
Search Space, the number of significant discoveries has
decreased while exploration costs have increased
– Some large mining companies abandoned greenfield
exploration and assumed that Junior companies would fill the
gap
– But the Junior company market “model” supports secondary
evaluation, not a broad greenfield approach
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Masterman (2012)
117
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Overall Decline in Exploration ROI
Gold
McKeith (2009)
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Overall Decline in Exploration ROI
Base Metals
From Schodde (2012), 34th International Geological Congress
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Overall Decline in Exploration ROI
Base Metals
From Schodde (2012), 34th International Geological Congress
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Who is doing the Greenfield
Exploration?
Greenfield now
flat at 30% per
MEG
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Bimodal Performance in
Greenfield Exploration
• Historically, success in greenfield mineral exploration is
strongly bimodal – there has been a small number of
organizations and individuals that are very successful and a
large number have had virtually no success
• The most successful companies and individuals seem to be
able to sustain success for a significant period of time (i.e.,
10-20 years)
• There are very few formal studies on the characteristics and
conditions that produce and sustain success in mineral
exploration (e.g. McKinsey Study, 1975)
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Industry Greenfield
Performance Characteristic
Select few =
repeated major
discovery
Good explorers =
occasional discovery
& technical success
Most of industry = no success
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Summary:
Key Success Factors
•
Confidence and trust shown by Executives and Board toward
exploration
l
ti
•
Strong exploration leadership that values collaboration, innovation
and risk-taking
•
Ability to be early to enter new exploration search space
•
Consistent level of funding over minimum of 10 years (related to
point 1)
•
High-performance teams characterized by technical excellence,
innovation and continuity
•
Learning organization….effective use of learning and feedback
loops from projects tested to new target generation efforts
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Discontinuity in Thinking
• Major discoveries seem to happen when discontinuous
thi ki
thinking
occurs:
– First entry in new country or region
– Test terranes (rocks) not thought to be prospective
– Recognize new deposit style (outside the “conventional” models)
– First to drill deeper
– First use of new technology (less common)
• This thinking is fostered in an environment that values
technical preparation, curiosity and willingness to take risk
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Why do Most Companies Fail?
•
Poor leadership / lack of commitment (e.g. start and stop
mentality)
•
Non-existent or poorly-conceived strategy
•
Poor understanding of key mineral exploration business
drivers and pitfalls (e.g. base rate, search space, falsepositives)
•
Lack of appropriate skill sets / capabilities
•
High turnover in technical staff
•
Lack of review / feedback; no learning so mistakes are
repeated
•
Lack culture of success / consistent poor behaviors
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Industry Greenfield
Performance Characteristic
Select few =
repeated major
discovery
Leadership clearly understands exploration drivers
Continuous improvement culture
“S t ” approach
“System”
h
Teamwork-oriented
Good explorers =
occasional discovery
& technical success
Leadership supports exploration in good times
Strategy exists but not well understood
Ad hoc processes - reactionary
Autonomous - minimal knowledge sharing
Most of industry = no success
Leadership essentially gambling
No clear strategy, opportunity-oriented, reactionary
Processes (if exist) not followed
Individual-oriented; poor decision-making
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The Importance of Culture
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Organizational Culture
What is it?
• Values and beliefs
• Commitments
• Processes and procedures
• Ultimately, the individual and collective thought
processes and behaviors of employees
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Organizational Culture
• Achievement of the g
goals of an organization
g
requires
q
a culture
that is consistent with and that supports those goals
• The process of developing such a culture is as valuable as the
culture itself, and is an important step in helping people align
with those goals
• A strong, positive culture can and will supplant the need for
command and control management
• Such a culture is especially critical in an organization in which
individuals must act independently often because they are
remote from management
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Organizational Culture
• A strong,
g positive
p
organizational
g
culture
– Imparts a sense of freedom
– Creates an atmosphere of trust
– Promotes both individual and team confidence -- a key
ingredient in successful mineral exploration
• Once implemented,
implemented such a culture
– Becomes self-sustaining
– Supports resourcing -- people who work in a positive
culture are less likely to look elsewhere for work
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Effective Organizational CultureKey Tenets
• Values
– Standards for doing the right things right in our
organization
• Incentives
– Designed to achieve appropriate behaviors and results
– Aligned and consistent with our Values
• Accountabilities and Responsibilities
– Properly assigned
– Clear and clearly understood
• Communication
– Clear, consistent, timely
– Oriented at the proper scale
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Accountability and Responsibility
• Accountability
y
– You own it
– If it doesn’t happen, your heart will bleed
• Responsibility
– You have the obligation to do it
– You have the authority to see that it is done
– You cause it to be done
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Organizational CultureBehaviors
Organizational culture is primarily about thought
processes and behaviors
 Collaboration -- team members communicate openly and listen to
and engage others fairly and readily
 Learning and commitment to technical excellence and innovation
 Shared responsibility for team success and failure
 Duty to adhere to high personal standards
 Commitment to compliance with Company policies
 Genuine feeling of obligation to the Company and other project
stakeholders (behave like an owner)
 Others?
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Behaviors - The Trust Model
• Credibility
• Capability
• Disclosure
y y
• Loyalty
• Authenticity
• Inclusiveness
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Managing Culture
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Managing Culture
• E
Establish
bli h the
h gap between
b
current and
d desired
d i d
behavior
• Interpret prevailing mythologies so as to make
predictions
• Test through consultation
• Doing 100 small things often, consistently and with
deliberate intent
From Macdonald Associates Consultancy
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Teamwork Model
Leader Accountability
Member Accountability
Explains
Context and Purpose
Understands
Identifies
Critical issues
Contributes
Seeks and Listens
Contributions
Listens and provides
Makes
Decisions
Supports
Clarifies
Assigns
Task assignment
Monitors
Task execution
Provides
Coaching
Accepts coaching
Review
Demands review
Provides feedback
Collaborates
From Macdonald Associates Consultancy
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Exploration “System” Concept
An Exploration System is
• A tool set – a way of doing business that is comprised of processes ,
procedures and behaviors
• Is how we work on a day-to-day basis to fulfill the Mission and achieve
the Objective that is defined by the Exploration Strategy
So it is
• Designed to facilitate movement of geologic ideas through formation
and testing to exit, discovery, development or sale
And it should be documented, but ultimately it
• Must be “second nature”
• Directs the way we work and behave routinely as members of our
Exploration Group
• Defines the Culture of our Exploration Group
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Why an Exploration System?
• Align group efforts on achieving Exploration’s goals
• Better decision
decision-making
making
– Informed and economically literate
– Faster
– Consistent
– transparent
•
•
•
•
•
•
•
Acquire the right projects, advance them faster
Reject poor projects earlier
Common language, processes and procedures
Proactive portfolio management
Proactive risk management
Better reporting – more efficient, informative and timely
Measurement, feedback and learning
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Characteristics of an
Effective Exploration System
 Knowledgeable exploitation of competitive advantage
 Standard procedures and common language/terminology
 Informed and economically literate decision making
 Recorded / efficiently reported outcomes and lessons learned
 Continuous improvement
 Consistency, objectivity and transparency
 Constructive behaviors
 Efficiency -- less delay, lower opportunity cost, more value per $
of risk capital
 Value adding results that drive rigorous, loyal compliance
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Industry Greenfield Performance
Characteristic
Leadership clearly understands exploration drivers
Continuous improvement culture
“S t ” approach
“System”
h
Teamwork-oriented
Select few =
repeated major
discovery
These companies have an Exploration System culture
Good explorers =
occasional discovery
& technical success
Leadership supports exploration in good times
Strategy exists but not well understood
Ad hoc processes - reactionary
Autonomous - minimal knowledge sharing
Most of industry = no success
Leadership essentially gambling
No clear strategy, opportunity-oriented, reactionary
Processes (if exist) not followed
Individual-oriented; poor decision-making
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