The Case for Innovation in the Mining Industry

1 | The Case for Innovation in the Mining Industry

by Peter Bryant

Highlights • The current point in the mining ‘sawtooth’ cycle presents tremendous opportunities for innovation. The time is now for the mining industry to embrace technology and business model innovation.

• Collaboration with world-class leaders, especially those from outside the mining ecosystem, will help companies drive rapid and effective change.

• Mining companies must begin taking the necessary steps towards transformative change that builds competitive advantage, reverses the trends of the past and sets the industry on a new course.

The Case for Innovation paper was first published in 2011 and has been updated in 2015 to reflect the current business conditions and initiatives of the mining industry. The propositions of the original paper remain the same.

2 | The Case for Innovation in the Mining Industry

This white paper The case for innovation in the mining indus- We are seeing truly transformational initia- try has never been more compelling—wheth- tives from Anglo American with FutureSmart, examines the current er you believe the industry is in a rather sharp from BHP Billiton, and to a lesser extent Vale. state of technology and dip in a significant ‘sawtooth’ cycle or in the AngloGold Ashanti’s effort, while deserving midst of a bust—the imperative is the same. merit, is now stalled. innovation in the mining Despite record profits and still above-average industry and highlights prices compared to the lows of 2000, the indus- This white paper examines the current state of try is struggling to make profits and provide technology and innovation in the mining in- the internal and external the returns on capital that investors are seek- dustry and highlights the internal and external factors that have ing. This represents a large-scale destruction of factors that can invigorate a new approach. value over the last 15 years. undermined innovation We present a two-part model of (1) knowl- efforts. The last 10 years has seen a continued sustained edge-based analysis and planning and (2) a rise of operation expenses and capital develop- new operating platform. The former drives ment costs and a rapid decline in productivity. value creation while the latter turns value po- This trend is unsustainable especially against tential into reality. These are complementary other key structural challenges such as declin- activities that require different skills and man- ing grades and more stranded assets. agement approaches. Also, an analysis of energy efficiency and operating costs in a sample Those wanting to reverse these trends and be- mining company shows how opportunity for gin to capture the full value of their investments significant operational efficiencies exists even will need to realize important transformations when room for additional improvements is not in their business system including: rapid and apparent. accurate characterization of ore bodies; faster development of mines and speed of extraction; Given that deficiencies in knowledge acqui- and improved recovery rates and mine plan- sition, management, and planning are more ning. The degree of transformation required visible and commonly accepted, the opportu- can only be realized if we discover a new ap- nities for technology-driven improvement are proach to open pit and underground mining. better understood. The reality, however, is that many mining companies do not have the The Mining Company of the Future is the knowledge or resources to implement dramat- transformational paradigm that acts as the fo- ic technological solutions. Therefore, open in- cus for this innovation. Several mining compa- novation through collaboration and alliances nies have developed approaches to the Mining with world-leading partners in key areas are Company of the Future. Rio Tinto, the most proposed to achieve rapid and effective change. notable example, recognized the beginning of Open collaboration and alliances can help com- this super cycle in 2006 and invested accord- panies more rapidly develop and implement a ingly. The results: Rio Tinto has dramatical- new production, knowledge and planning plat- ly increased its output of iron ore, earning the form. Furthermore, as more companies suc- company record profits. However, Rio Tinto cessfully adopt Mining Company of the Future has been focusing primarily on the neces- initiatives, alliances will be further strength- sary area of optimizing and automating cur- ened as member companies become more rent mining methods, rather than developing competitive. Clearly, the mining industry has truly transformational approaches and new lagged behind others in technological advance- processes. ment but many examples of technological- ly- driven performance breakthroughs in other industries are a testament to the opportunities for transformation.

3 | The Case for Innovation in the Mining Industry

While innovations to the business model that it, a sawtooth cycle. Given trends in such areas result in more effective ways to secure rights as urbanization and population growth, the de- to resources, including the social license to op- mand trend for most mined commodities will erate, are an important part of the Mine of the be upwards, albeit with some troughs, as we are Future concept, this paper primarily focuses on now experiencing. technologies and innovations related to mining technology and mine operations. For further During the last decade established mining information on business model innovations that companies have struggled to expand profitable can influence the direction of technology inno- production and meet the surging demand from vation, please refer to the Kellogg Innovation emerging markets such as China, India, and Network’s Development Partner Framework others. by emailing [email protected] or visit: www.kinglobal.org/catalyst.php. Although the strong growth in demand ex- perienced by the sector might be assumed to Context have created a “golden era” for mining compa- The mining industry is in the midst of a severe nies, the sector has in fact faced a number of dip in what arguably remains a sustained-de- significant challenges in recent years that have mand growth cycle, often referred to as a super made the operating environment increasingly cycle or, as Rio Tinto more accurately refers to challenging.

Key forces and trends shaping the mining industry: 1. Despite Short-Term Fluctuations, There is Long-Term Sustained Demand for Commodities • This demand is driven by relentless urbanization, population growth and a rapidly growing middle class.

2. Environmental Concerns Continue to Mount • Existing mining methods and environmental footprint are becoming increasingly unaccept- able to society.

3. Growing Geo-Political Pressures & Community Activism • Increasing number of projects on hold due to community activism, currently estimated at $25Bn. • Increasing nationalism tendencies and government expropriations of close to $30Bn. • Social license to operate is being challenged.

4. Finding, Building, Operating and Closing a Mine Keeps Getting Harder • Costs have been increasing at a rate of 10-15% p.a. for the last ten years. • More assets stranded as they become uneconomic to mine under current mining methods, e.g. Olympic Dam. • Ore grades continue to decline. • Declining productivity at a rate of 10%+ p.a. for the last ten years.

5. Despite Enormous Challenges, the Industry has Consistently Underinvested in Technology & Innovation • Lower R&D / innovation investment rate than almost any other industry. • Mining suppliers remain wary of long-term investments and transformative innovation.

4 | The Case for Innovation in the Mining Industry

“Our industry is damned These issues feed investor uncertainty and have 2000) might suggest a very positive operating by the fact that our dramatically increased the risk profiles of proj- environment for mining companies, the reality ects. These risks in turn increase the cost of is somewhat tougher for both the industry and spending on innovation capital (particularly problematic in such a cap- its stakeholders. ital-intensive industry) and operational costs, is one-tenth of the leading to negative impacts on balance sheets Looking at the comparison of prices in March petroleum industry. If and income statements. 2015 to the lows of 2000 in Table 1, you will see an industry making similar margins and we don’t start to bring Therefore, whilst the overall picture of strong returns on capital with prices still 2-4x above innovation back…the demand and relatively high prices (when com- their lows of 15 years ago. This represents a pared with long-run averages and the lows of large-scale destruction of value and desperately major diversiﬁeds will be calls for a new approach. subsidiaries of General Table 1: Comparison of key commodities prices between Electric or some other 2000 and Feb 2015. conglomerate that still LOW FEB HIGHS YR. OF has innovation in their Commodity 2000 2015 HIGH vocabulary.” Iron Ore $ per ton 12.45 63 187 2011

Mark Cutifani, CEO of Anglo American Met Coal $ per ton 38 101 156 2008 Source: Is increasing mining R&D the only hope for saving a stalling Thermal Coal $ per ton 25 66 192 2008 industry? Mining-technology. com, 26 May 2014.

Gold $ per ounce 265 1175 1941 2011

Copper $ per ton 1427 5729 9881 2011

Source: Clareo Analysis

One of the challenges for mining companies the countries and communities in which mines is that no one “silver bullet” will address the are developed and operated. challenges the sector faces. Instead, companies need to recognize that a variety of actions will The change needed will require bold leadership be required and that these need to be under- from industry, and has the potential to put the pinned by a changed mindset that reevaluates sector on a path to a more prosperous future the role of mining companies in the societies in with a much stronger formal and social license which they operate. to operate. Better outcomes for everyone!

Because the industry is in some ways unique, Herein lies the significant opportunity—the this new mindset needs to reflect the specific rapid advances in such areas as big data; cheap characteristics, challenges and opportunities massive computer processing; sensors and ro- of the sector. Foremost among these is the po- botics; nanotechnology; and much more has tential for mining, if properly managed by both helped drive down the unit cost of production of companies and governments, to be a significant almost every item and raised productivity. The catalyst for the socioeconomic development of mining industry has an opportunity to embrace

5 | The Case for Innovation in the Mining Industry

and apply these technologies to help transform Software applications such as accounting and not only the current approaches but also devel- human resources systems are also covered op a whole new operating platform and enable under support services. Many transforma- a new business model. Taking advantage of new tive efforts within the mining industry focus approaches embodied in open innovation and primarily on supporting back office systems. the principles of the lean start up as applied by Although building the back office of mining other companies, such as GE, combined with a companies is an important part of the opera- new investment surge, could rapidly accelerate tion, it is unfortunate that an area contribut- this necessary transformation. ing little to actual value creation garners such Technology & the Mining attention.

Company of the Future There is no doubt that substantial innovation Technology is a key foundation and enabler has taken place during the history of the min- of the Mine of the Future initiative. We sug- ing industry. Open pit mining, block caving, gest that technology must play a role in the long wall mining, draglines, sulfide flotation, following: and metal leaching are some notable exam- • Restoring agility and flexibility in the val- ples of breakthroughs that have dramatically ue chain changed productivity and reduced operating • Shifting from a cost reduction mindset to costs. Additionally, most productivity or cost one of value creation efficiencies in recent decades have also been • Increasing production and productivity driven by the incremental improvement of ex- • Reducing and eliminating waste isting technology such as larger, longer-lived, • Reducing the need for people, especially and more efficient shovels, haul trucks, the at remote sites and underground LHD, larger crushers, grinding mills, flotation • Improving ore body knowledge and the cells and better chemistry to improve process- planning process ing recoveries. • Improving recovery rates • Aligning the organization around strate- On the one hand, the trend toward increasing gic and tactical goals size and longevity of production equipment of- • Increasing the robustness of business, fers incremental benefits in the short term. On competitor and industry intelligence the other hand, it inherently limits innovation in the longer term because the longer equip- Technology & Innovation in the ment lifespan limits the volume supplied by Mining Industry manufacturers. When compared to the pace When talking about technology in the mining of innovation at other industries, such as auto- industry we are referring to: physical hardware, motive, aerospace or mobile phone technolo- operational procedures, organizational struc- gy, innovation in the mining industry has been tures, information systems, and management historically much slower. practices. Mining and processing technology includes both fixed and mobile machinery and Innovation in the mining industry has been equipment (e.g. drilling, blasting, loading and hampered by a historical collective focus on hauling equipment, crushers, conveyors and cost reductions as the primary mechanism for mills) as well as supporting technologies such business improvement. Also, industry consoli- as monitoring, control, and communications dation and cooperative purchasing agreements systems, planning and design tools and other have enabled the commoditization of key prod- support services. ucts and supplies, further hindering innovation efforts. Indeed, mining operations have almost exclusively acted as price-takers rather

6 | The Case for Innovation in the Mining Industry

than price-makers where risk taking has been have produced a generation of inward-look- discouraged. As a result, R&D spending within ing, self-reliant managers and executives who the industry is low1 when compared to any oth- have failed to fully grasp the benefits of modern er industry and even lower in terms of partner- technology and innovations. Understandably, ships with third-parties. for many of these executives, the concept of innovation produces a sense of panic, not Furthermore, some of the factors that have opportunity. mired product innovation have also had a det- rimental effect on other critical technology ar- The mining industry has yet to fully accept eas including design and planning systems and and embrace the strategic role of technology business applications in mining operations. and innovation in successful business planning Unfortunately, the increasing complexity of and execution. While we are beginning to see modern mine planning operations demands in- some shifts with the work undertaken by Rio creased business applications capabilities to re- Tinto in automation and remote operations as main competitive. well as Caterpillar’s and Komatsu’s work on automation and electric drive vehicles, some less Effective application of information technolo- obvious competitors are creating commodity- gy to drive transformation is generally rare in killing substitutes and alternatives. As of to- the mining industry. day, only limited inroads have been made into iron, copper and aluminum applications, but it

is only a matter of time before fibers, ceram- In 2010, CAE, an aeronautics modeling ics, composites, or nanotech deliver a signifi- firm, acquired Datamine Group, and in 2012 Dassault Systems acquired Gemcom cant economic blow to one of the core mining Software, representing their respective first products. steps in an aggressive push into the mining industry services sector. The good news is that after such a lengthy pe- riod of relative stagnation in technological ad- ERP offerings are typically based on templates vancement, the mining industry is ready for from other industries and do not provide par- technological transformation and advance- ticularly useful platforms for production, main- ment. Paths of high opportunity include tech- tenance and management functions. Generally, nology adoption from outside the mining most of their utility is limited to accounting industry, a shift towards a strategic focus on functionality. As a consequence, most software R&D and important collaborative efforts with solutions have been developed in an ad-hoc, suppliers, both existing and newer entrants to nonstrategic way as a response to emerging mining. Indeed, early movers in the mining challenges. industry are likely to build a significant competitive advantage over their competitors. It is Ultimately, the collective lack of R&D/ worth mentioning that Rio Tinto has become Innovation investment and inflexible fo- an industry leader through implementation of cus on short-term cost reductions instead of some of these progressive Mine of the Future longer-term value creation have largely de- initiatives, and the likes of AngloGold Ashanti stroyed any internal or supplier incentive that has had some successes, notably the use of reef might drive new breakthroughs. It is import- boring technology to dramatically extend the ant to point out that many of the challenges in- life of many mines. herent to the mining industry such as remote operations sites, difficult operating environ- ments, and (usually) tight economic conditions

1 A study in 2007 found that mining industry expenditure on R&D has decreased from 1.1% of revenue in 1997 to 0.6% in 2002 and an updated study found in 2013 it was around 0.25 to 0.5%, and that R&D investments are in increasing competition for funding with exploration, also a risky venture, as well as with traditional business activities with less uncertain returns.

7 | The Case for Innovation in the Mining Industry

Cost & Efficiency in the use of natural gas in generation facilities. The Production Chain loss in electric power generation itself is enor- It may appear that applying new technologies mous. Only about 40% of the heat value of nat- to mining operations will not lead to a signif- ural gas is turned into power, even after heat icant increase in bottom-line profits. As it is, recovery. Electric power is further reduced by many existing operations represent the pinna- transmission losses associated with end use. cle of efficiency and cost-effectiveness, most As this table suggests, the stages of produc- mobile and fixed plants are generally well-man- tion that involve size reduction are somewhat aged and reasonably modern; plant capacity ex- more efficient than the ones that involve ma- pansion efforts have followed best practices; terial movement, though the numbers are still and shovels, trucks, rail and port infrastruc- not impressive. It should be noted that a fledg- tures have increased in size. As of today, most ling industry effort is underway to adopt more economies of scale have been realized and the efficient crushing methods to replace grossly latest efforts in 2014/15 will realize those final wasteful milling3 but no similar effort has been 20% of savings. seriously contemplated for mining.

Given that Daniel Jackling2 would have no Inefficiencies are further compounded by the problem recognizing the latest P&H electric increasing demand for finite nonrenewable re- shovel, it would be beneficial to examine the sources that is driving up prices for oil, coal, fundamental efficiency of the unit process- and other fuels, although recently through the es we take for granted in the industry. Table 2 ‘fracking revolution’ these prices have declined gives a summary of the energy consumption for by 30%-50%. Additionally, the associated costs size reduction and transportation (both later- of maintenance (including sustaining and real and vertical) compared to the actual produc- placement capital) and labor, which usually tive output actually carried out at each stage of accounts for 60% of the total operating cost, mining and processing. must also be considered. Indeed, the low energy efficiency of current processes is incon- The energy inefficiencies are both stagger- gruent with many companies’ stated focus on ing and pervasive. In the case of diesel power, sustainable development and carbon reduction which accounts for close to half of energy con- in particular. sumption, 30 to 40% of actual energy is converted to a productive output. This means that The current life-of-enterprise project plan, when accounting for mechanical losses and with its accompanying cost structure that is friction, only 12% of the energy is actually be- employed by many companies, will continue to ing converted to measurable work (moving the be used for at least the next 20 years. However, machine and load). In reality, it is estimated one would think that the incentive to invest in that only 3% is actually used for haulage. This developing cheaper, less labor-intensive alter- is based on simple calculation of the weights of natives would be enormous, and by this we do payload and vehicle and the time spent haul- not just mean automating current approaches ing rock. Likewise, the 5% estimate for rail is like trucks. Also, removing people from haz- based on similar factors. The other half of the ardous operating conditions would bring sig- total energy consumption is derived from the nificant health and safety improvements.

2 The father of open pit mining, responsible for initial development of the Bingham Canyon Mine in 1904. 3 High Pressure Rolls Crushing is estimated to be about 10 times more efficient than SAG milling, which uses 1-2% of energy consumed to reduce particle size.

8 | The Case for Innovation in the Mining Industry

A healthier approach to Table 2–Sample Mine Energy Consumption The following table compares the typical energy consumption at a mine company to the actual the knowledge-based side productive output. of the mining business

WORK VALUABLE would be to recognize its Activity ENERGY SOURCE ENERGY DONE WORK DONE complementary role to Drilling and 63,000 TANFO 101TJ 20% 20% operations. blasting

Mining 11,000 MWh 40TJ 40% 5%

Haulage 79 Mi Diesel 2,844 TJ 12% 3%

Processing and 313,000 MWh 1,127 TJ 15% 10% handling

Rail 115 Mi Diesel 4,140 TJ 12% 5%

244,000 MWh 878TJ 20% 2% Ports 172,000 MWh 619TJ n/a 0% Infrastructure

Transportation 50,000 MWh 180TJ n/a 0% losses

Generation 1,485,000 MWh 5,346 TJ n/a 0% losses

Total 15,275 TJ 2.9%

Source: Clareo and Chris Carter - Chief Consultant, Rio Tinto.

A New Production Platform Even though energy losses and non-productive Although technology can certainly improve costs cannot be eliminated, mining compa- operations in the mining field, its true benefits nies can vastly improve. In fact, the aerospace, can be realized when it is applied to a “platform” telecommunications, oil and gas exploration approach or our proposed “New Production and production sectors have driven meaning- Platform” that encompasses all major phases of ful productivity advances by increasing their the operation such as mine development, drill- R&D spending and product cycles times in re- ing and extracting, processing, transportation, sponse to intense competition. This has been as well as the provision of utilities. especially apparent in the intensity and rate of innovation that has unleashed fracking in the In some cases, elements of the production USA—the nature of the innovations, the tim- platform may already exist (for example, both ing and rate catching most, if not all industry Nordberg and Krupp have developed large, leaders and pundits by surprise! In 5 years the fully mobile crushing plants) but it is certain USA has been transformed from a laggard in that others will require R&D resources. oil production to becoming the number one producer in the world surpassing Saudi Arabia, and in the process, dislocating many well-held norms of the industry.

9 | The Case for Innovation in the Mining Industry

The general characteristics of our proposed Commercial incentives for such an open col- approach are the following: laboration can be significant. An effective alliance can profit from sales and implementa- • Increased energy efficiency–less waste tion (including contract operations and main- • Continuous rather than batch operations tenance) of the new production platform at a • Less movement of equipment global and inevitably industry-wide scale. And • Increased preventative maintenance and mining companies within the alliance may not self healing only experience increased efficiencies and pro- • Increased reliability and availability ductivity from the new production platform • Faster operation but would also have the opportunity to devel- • Automation and remote operations op future business within the consortia. When to reduce labor costs compared to industry standards, this innova- • Flexible vs. fixed tive approach certainly has a greater degree of • Less waiting and queuing risk, but companies can mitigate some of these • Increased instrumentation and risks with an initial, low-cost discovery phase monitoring leveraging Minimum Viable Product and other • Rapid mobilization Lean Start Up principals. • Scalability • Removal of less to zero waste It is time to modernize mining and reinvig- • Able to mine lower grade resources at orate the entire industry by overturning ex- low cost isting production paradigms and perceived constraints. This will be achieved one company Generally, mining companies may not have all at a time. Rio Tinto’s commitment and success the resources necessary to design, construct is certainly driving other companies to action and implement a new production platform, but and now the current state the industry finds it- they can either leverage outside industry ex- self in leaves companies with no real choice! pertise or third parties with relevant knowledge and capabilities. In fact, we suggest that Deposit Knowledge & Planning a commercial mining technology alliance or Operations are the most visible aspects of the consortia, formalized through appropriate- mining industry and they are the means by ly constructive arrangements, is the quickest, which most of the value is realized—ideally at most effective way to drive results. The main minimum cost and with minimum permanent components of this platform might include: impact. But many other, less tangible functions, such as knowledge-based strategy and planning • Major global industrial engineering com- are very important and essential parts of value pany (e.g. Krupp, MAN) creation. However, as we have seen, investment • Major global logistics company (e.g. in systems and technology to support deposit Kuehne + Nagel) knowledge acquisition and planning has been • Major global O&G Services provider (e.g. minimal. Baker Hughes) • Specialist technology solution providers Indeed, the greater proportion of resources al- (e.g. Schneider Electric) located to the operations side of the business has led to a greater perceived notion of impor- We have seen glimpses of the success this can tance of operations over other business areas. have with Rio Tinto, albeit a more proprietary Also, in contrast to the operating side, poor approach, and the AngloGold Ashanti tunnel performance in knowledge and planning func- bore drill that was a more open collaboration. tions are difficult to estimate and rarely contemplated. Therefore, it is no surprise that in

10 | The Case for Innovation in the Mining Industry

“The mining industry most mining operations the planning func- Big operating and capital costs and thin mar- tion has been placed under the operations or- gins have characterized the mining industry. urgently needs to get a ganization resulting in an unbalanced focus on But in this current cycle, poor performance grip on its challenges… cost reductions and less productive incentive related to lack of investment in knowledge schemes. Indeed, in our experience in the min- management and substandard planning has and innovation is the ing industry, we have seen the following: negatively affected the record of the last 10 key.” years peaking in 2008-2011. The result is that • Late blast hole assays that result in im- the industry in 2015 is experiencing poor mar- Tony O’Neill, Group proper ore and waste separation gins when prices are still 2-4x the lows experi- Director Technical and • Incomplete metallurgical test work result- enced just 15 years ago, in 2000! Even though Sustainability, ing in performance shortcomings intellectual capital and planning costs are small Anglo American • Insufficient evaluation drilling results in comparison to operating costs, their lever- that lead to poor mine design and unex- age on business results and profits is enormous. pected ore shortages at start up Just think what a 2% improvement in recovery • Relatively unsophisticated planning soft- rates, due to superior solutions, would mean ware that cannot handle the necessary to the bottom line—it dwarfs any upside from complexity, producing suboptimal ap- efficiency! proximations and simplifications • Insufficient district-wide information ef- Finally, the lack of investment has not only forts, resulting in suboptimal that limits been limited to the mining companies them- development strategy efforts resulting in selves. Innovation investment by suppliers has sub optimal decision making also suffered. For example, the total pool of • Optimistic or pessimistic assessments of third-party mining software providers gener- market demand that creates redundant in- ates less than $500M in annual software rev- vestment or missed opportunities enue (as distinct from consulting revenue) and • Unforeseen competitor actions that ne- ERP vendors offer cut price mining solutions gate or pre-empt a mining company’s based on thinly disguised oil and gas templates. strategies It is apparent that both software and ERP vendors have commoditized software solutions, a In addition to limited dedicated resources, particularly unfortunate approach to devel- knowledge and planning-related functions also oping intellectual products for the mining suffer from a lack of continuity. For example, industry. staff turnover is typically high because of limited recognition, reward and advancement oppor- A healthier approach to the knowledge-based tunities. Also, there are no effective knowledge side of the mining business would be to recog- management systems in place to capture and re- nize its complementary role to operations and tain essential capabilities and technical know- that different human resource capabilities and how. However, pockets of effectiveness have systems are required to achieve greater levels emerged in specialist areas with the advent of of effectiveness. Management and incentives database add-ons for mining software applica- clearly require different approaches given the tions, affordable GIS tools for geographic in- focus on value creation rather than the value formation, and advanced visualization. We realization emphasis of operations. recognize the advancements made in the last few years but they still lag significantly what is The role of technology in improving knowl- possible even within the realms of today’s tech- edge and providing a foundation for sound nology. Unfortunately, these are the exception strategy and planning efforts is much clearer rather than the rule as critical knowledge is fre- than the equivalent case for operations. The quently lost because of staff attrition. deficiencies of the current system are visible

11 | The Case for Innovation in the Mining Industry

At the opening and accepted. A better approach would include characterized by low R&D spending, antago- the following elements: nistic supplier relationships, inward industry keynote at the 2015 focus and a continuing trend towards fewer, SME Conference in • Timely, near real time, acquisition of de- larger, longer-lived components. Even though posit knowledge the industry may have been able to continue Denver a participant • Safe, efficient and effective collection of experiencing efficiency and productivity gains complete deposit data in the past, we seem to have reached the pin- challenged the Mine of • Holistic deposit modeling nacle of current technologies. Indeed, bigger • Value-maximizing mine and process trucks and shovels represent an improvement the Future panelists, design over smaller versions and deliver marginal cost • Maximum economic resource extraction and production benefits, but they still depend “If the industry • Value-maximizing development strategy on grossly wasteful energy conversion and hu- • Comprehensive industry monitoring and man supervision at every stage. is made up of fast analysis • Accurate competitor information It is these kinds of underlying fundamen- followers, who will be • Rapid scenario evaluation tal paradigms that must be challenged if we • Governance and compliance functionality are to develop innovations that bring sustain- the leader?” able competitive advantage. In his 1985 book, As with the case for a new production plat- Innovation and Entrepreneurship: Practices and form, we suggest that most companies do not Principles, Peter Drucker suggests that one of currently possess the necessary in-house skills, the seven fundamental sources of innovation and we propose a second series of open collabo- opportunities is the inadequacy in an underly- ration through alliances or the consortia model ing process that is taken for granted. If we look that would address these shortcomings. Some at the current state of the mining industry, how of the major players would include: many of these could we find? There are enormous opportunities for innovation in the min- • Deposit knowledge acquirers and modeling industry! ers (e.g. Schlumberger, Baker Hughes) • Industry planning software vendors (e.g. In general, industry innovations are developed Mintec, Vulcan) by internal R&D groups focusing on new and • Knowledge management providers (e.g. existing product development, academic re- IBM, HP ) search institutions, VC-backed inventors and • New age companies (e.g. Planetary entrepreneurs, or even by customers, as well as Resources) through extended ecosystems and networks enabled by open innovation. But today, even the Given the increasingly competitive landscape most innovative companies like Apple are turn- and opportunities for large-scale productiv- ing to a broad external ecosystem for design ity gains, the development and implementa- and production. The reason is that maintain- tion of an advanced “Knowledge and Planning ing an entrepreneurial environment becomes Platform” across the industry should provide much more challenging as companies grow. substantial commercial incentive to all parties. As smaller entrepreneurial firms become large corporations, the focus tends to shift from in- A Better Approach to Innovation novation to risk management and preserva- Even though some of the approaches that we tion of the core business. Although focusing have described in this document cannot be eas- on the core business is a necessary and expect- ily replicated, continuous innovation is the key ed way to preserve shareholder value, compa- to long-term advantage! But as we have seen, nies often succumb to smaller, more nimble innovation in the mining industry has been startups. Furthermore the transformative and

12 | The Case for Innovation in the Mining Industry

One particularly exciting disruptive innovation we largely associate with Based on benchmarking of R&D/Innovation CPG industries is now upon capital intensive investments in other industries, mining com- aspect of innovation in and long cycle time industries. Witness SpaceX panies should contemplate increasing their the mining industry in the space arena. By challenging conven- R&D investments to 1-2% of revenues from tional thinking, they are doing what a Boeing the current anemic 0.25-0.6%. It would also is the opportunity to would do, but with a fraction of the time and be very beneficial for such investment by key directly adopt existing resources! suppliers in joint projects to increase spending from the current 1% to 3-4%. These levels innovations from other As large companies try to balance these dynam- of investment are consistent with approach- industries. ics, they are increasingly developing close ties es in the oil and gas industry. Also by taking with innovators and supporting research that the consortia approach of open collaboration, may produce direct benefits to the company. we can see shared investment, shared risk and shared upside. Furthermore we encourage the BP is a good example of a company that has majors to open these consortia to innovative ju- been developing external ecosystems to boost nior miners. its innovation efforts. For example, BP created an independent group to develop, build, and The company that establishes an early leader- manage coalitions, or ecosystems, made up of ship position in building an industry alliance outside organizations that systematically in- will be in a strong position to drive a strategic novate around BP’s needs. One such coalition agenda that will be closely aligned with its stra- brought together Rockwell, ARA (military in- tegic needs, even in the presence of competitors tegrator), OTI, Emerson, Intel, and Cross-bow inside the alliance. There is a big first-mover to help BP develop its next-generation remote opportunity to capture a significant share of monitoring and management system. the value created by the partnership.

The trend towards partnerships or ecosys- One particularly exciting aspect of innovation tem development has resulted in a geographic in the mining industry is the opportunity to concentration of technology start-up com- directly adopt existing innovations from oth- panies, and forward-thinking industry play- er industries. Traditionally, the mining indus- ers have deliberately relocated close to these try has had an unfortunate tendency to believe innovation centers. Silicon Valley is the first that its business has little in common with oth- and best-known example, but others have rap- ers. But if other industries have applied tech- idly developed across the globe, usually cen- nologies from seemingly unrelated disciplines tered around leading research and academic (e.g. NASA technology for sports apparel), why institutions such Stanford and MIT, combined can’t the mining industry do the same? Mining with readily available venture capital (VCs companies that are able to do so will be in a or Corporate Venture Capital) and willing much stronger position to extract the most val- entrepreneurs. ue being driven by the macro demand trends.

What is missing in the mining industry is the This of course requires a belief that the indus- spark that will jump-start a new cycle of inno- try is in a super cycle and not a typical “boom vation. We believe that the alliance/consortia and bust” cycle, something that this author has approach suggested for the New Production believed since 2006. If companies truly embrace Platform and the Knowledge and Planning this cycle and accept that a bold, new approach Platform will meet this need. However, com- is required, they will be more likely to provide panies must also focus on their own long-term the sustained investment required to make the goals and preserve their competitive advantage. “New Production Platform” and “Knowledge and Planning Platform” realities and to take their rightful place as industry leaders.

13 | The Case for Innovation in the Mining Industry

The Next Steps • Make organizational changes at the The purpose of this paper is to provide funda- highest levels that reflect the strategic mental facts and arguments endorsing trans- importance of the new platforms and formation, not to present the blueprint for technology and innovation in general. achieving the necessary transformation. We • Build the necessary partnerships and alli- realize that deliberately undertaking a trans- ances based upon open collaboration and formative change initiative in the mining in- shared investment and risk. dustry will not be easy or straightforward, but • Pilot implementations of technolog- here are suggested first steps necessary to pre- ical advances, using the principals of pare lay the groundwork for this transforma- Minimum Viable Product and Lean tive change: Startup.

• Design and implement a strategic ap- Applying these suggestions is sure to bring proach to innovation. many benefits to your organization, but in or- • Look outside the mining industry to gain der to create a lasting, sustainable advantage, a fresh perspectives and insights. holistic approach to innovation is required. We • Encourage a value creation culture to re- are certain that the New Production Platform, place the cost-cutting focus so that en- New Knowledge and Planning Platform and lightened decisions are made concerning the Innovation Approach presented in this pa- production and longer term spending. per are the most effective ways to do so.

14 | The Case for Innovation in the Mining Industry

Acknowledgments Special thanks to the significant contributions Peter is a leading authority on business innova- of Chris Carter, Chief Consultant at Rio Tinto tion especially around social license and tech- and Alan Klein of Manitu Systems. nology, in the resource and energy sector. He is a frequent speaker on this topic and has advised About the Author many leading resource and energy companies Peter Bryant, Senior Fellow, Kellogg including BP, Castrol, Rio Tinto, Iron Ore Co., Innovation Network and Partner, Clareo BHP Billiton, Peabody Energy, AngloGold Ashanti, Anglo American and Barrick Gold. Peter Bryant is an executive business strategist Also he is the Co-Chair, along with the CEO with more than 30 years of experience devel- of Anglo American, of a transformative ini- oping and driving high-growth strategies for tiative for the resources sector to redefine the companies in the US, Asia Pacific and Europe. business and technology approaches of the re- He has advised executive teams at a range of en- source companies. Peter has been involved with terprises, from emerging businesses to Global the mining industry since 1982 when he visited Fortune 500 companies. He has held senior his first mine, the MIM Holdings mine at Mt. leadership roles, at global companies, includ- Isa, to implement a new financial management ing General Electric and Computer Associates. system on behalf of GE.

In addition to his corporate experience, Peter is Mr. Bryant holds a Bachelor of Commerce and a serial entrepreneur, has been CEO/President Administration from Victoria University in for two emerging technology companies, Co- Wellington, New Zealand. He holds a CA from Founder of an enterprise software services the NZ Institute of Chartered Accountants company, and he continues to be an active ad- and is a Fellow of the Australian Institute visor to startups and a mentor for accelera- of Company Directors. Peter also serves on tors Clean Launch, Founders, and Innovation the Board of Advisors of the resources ven- Pavilions. He also co-authored The Growth ture fund Chrsyalix and the World Economic Champions–The Battle for Sustained Innovation Forum’s Mining 2050 initiative. Leadership, published in 2012.

About Clareo Clareo is a strategy-consulting firm designed to inspire and achieve transformational change for enterprising businesses. Our clients benefit from our extensive network of thought leaders and experts, including Clareo’s association with the Kellogg Innovation Network at Northwestern University. Clients range from blue-chip firms to start-ups and include Kraft, Rio Tinto, Barrick Gold, Exelon, Johnson Controls, Baker Hughes, Anglo American, AngloGold Ashanti, Dingo Software, Alticor, and Fulton Innovation. For more information, visit www.clareopartners.com

Contact the Author Peter Bryant Partner [email protected]