The hunt for high Alpha

By strict definition of financial terms, Alpha is the active return of an investment versus a benchmark, usually a market index. The decisions that you make that are different from others are your Alpha; what everyone else does is the benchmark. If your decisions are better than everyone else’s, then you’ve got a high Alpha, the value of your company is higher than its competitors and the rewards flow your way. Make poor decisions and you have negative Alpha and the rewards vanish.Miners have a number of ways to generate Alpha to set themselves apart from their competitors. Find great new resources and cost effectively exploit them. Make canny allocations of capital. Continually improve operation of their mines. Generating Alpha can’t be about operating the mines in the same way as everyone else – that is already priced into the market. There needs to be a process of continual improvement even as the ore grades decline, the mines gets deeper, costs increase and productivity growth falters.Well operated mines will already be operating at the limit of what is possible. Innovation in operations, which must readily translate into cost reductions or productivity improvements, are welcomed for the Alpha that they bring. But the hurdles are high; the innovations must demonstrate a strong ROI, based on strong references and case studies and be able to be implemented with minimal disruption. And to make things trickier, most mining companies don’t want to be the first customer of a new idea – they are happy to be second.Mining technology companies can also see the opportunity that the hunt for Alpha represents. Almost by definition mining technology companies come up with cost saving and productivity improving products that are new. This requires new thinking on how the products are described and sold to customers. Given the high hurdles in selling something new and potentially disruptive to conservative mining companies, it is not enough for a mining technology company to have an innovative product, it must also be innovative in how it commercialises its idea."By helping mining companies in the hunt for Alpha, the mining technology companies are creating their own high Alpha"Except in the case of a few very innovative miners, it is a hunt in reverse. The smaller company hunts the large one, with a strong focus on how it can deliver cost savings and productivity improvements. The commercialisation challenge can be just as complex and difficult as new technology development. The commercialisation team work like an organisational anthropologist and understand the network of relationships and power sharing between head office and the operational sites, as well as the motivations and rewards for the many people they need to influence and convince. They need to develop a deep understanding of the operating conditions of each mine site, so they can build a credible ROI to support new product adoption. And they need to have strong relationships with existing customers who are happy to host visits from prospects who want to see the products actually working. It is a lengthy and complex process that requires patience and focus, and will reap significant rewards with growth in sales faster than most other technology companies. By helping mining companies in the hunt for Alpha, the mining technology companies are creating their own high Alpha.This provides conditions for a perfect marriage. The fast growth of these high Alpha companies needs to be fuelled by fresh capital. And investors like us are always going to be attracted by the pheromones resulting from high-Alpha growth.Given the challenges the mining industry faces, and the new technologies that are becoming available, it seems like a very strong hypothesis that there will be many mining technology companies in this high-Alpha category.Our job then is to follow the hunt for high Alpha and see how good the mining technology company is at commercialisation. We need to find out how intimate they are with their customers, how well they understand who they are selling to and how they are going to create Alpha for their customers. If we can hunt that Alpha down, we can pick up the golden thread and buy some Alpha for our investors.Then go on the hunt for more.*Charles Gillies is a director of Jolimont Global Mining Systems, a specialised investment vehicle (backed by Jolimont Capital and Resource Capital Funds) that invests in high-growth mining equipment, technology and services (METS) companies. http://jolimontgms.com/

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