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'Uncertainty Advantage' new imperative for miners

Navigating uncertainty has always counted among leaders’ top priorities in the mining sector. But doing so has become harder than ever. Why? For mining (indeed, for all sectors), the nature of uncertainty has changed. Today, it comes from a wider array of sources, many involving as-yet-unknown risks.
'Uncertainty Advantage' new imperative for miners 'Uncertainty Advantage' new imperative for miners 'Uncertainty Advantage' new imperative for miners 'Uncertainty Advantage' new imperative for miners 'Uncertainty Advantage' new imperative for miners

Hans Kuipers, Tycho Mőncks and Alison Sander*

Plus, accelerants such as new technologies, human-induced climate change, and social media have stepped up the pace of uncertainty. Business as usual—commonly deployed strategies and capabilities—will not work under these conditions.

As many of today's uncertainties are unfamiliar, the traditional approaches cannot effectively measure a miner's exposure to an unknown risk. Nor can they assess the likelihood of a risk striking, and the impact if it does. What's more, traditional risk-management approaches tend to focus on short-term perils (such as price volatility)—neglecting longer-term uncertainties from profound shifts like the worsening impacts of man-made climate change.

To thrive under these conditions, mining companies need a fresh approach.

They have to understand and track these new sources of uncertainty. They must craft powerful strategic responses. And they should build their agility and resilience to execute those responses swiftly and effectively, as well as to recover from shocks that prove unavoidable.

We call this building an Uncertainty Advantage—a new imperative for miners, given the extreme volatility in value-creation performance the industry has experienced over the past decade.

With that in mind, let's take a closer look at the key components of building an Uncertainty Advantage.

Understand and track sources of uncertainty hitting the mining industry

Miners today face a plethora of emerging uncertainties. Many of these raise new types of risks that look nothing like yesterday's - but they also present new opportunities for companies that take steps to prepare for them:

•             Technology: Advances such as autonomous equipment and use of artificial intelligence, machine learning, and big data to find new ore deposits and optimise existing ones offer miners new ways to unlock value. But exploiting these advances also requires significant capital expenditures on technologies that haven't yet proven their mettle. That is risky if a technology fails to pay off as expected. Additionally, to get the most from these technologies, companies must find workers with new skills, retrain current employees, and find the right mix of human and digital capabilities in their supply chains. 

•             Workforce: Miners are finding it harder than ever to recruit talent to work at mine sites, let alone to attract workers who possess the technology skills in high demand around the globe. Millennials, swiftly making up the lion's share of the labour force, come with their own expectations. Recent BCG studies show that less than 2% of millennials consider working for natural-resource companies. With their skills in high demand across the board, young people can readily find their dream jobs in other sectors—leaving miners high and dry.

•             Sustainability: The year 2018 saw about 10,400 deaths as well as damages amounting to $160 billion from natural disasters around the globe, of which only $80 billion was covered by insurance.  Extreme weather events present especially serious risks for mining sites that were constructed under now-outdated assumptions about how powerful a punch anthropogenic climate change can deliver. In countries particularly vulnerable to natural disasters, radical new uncertainties accompanying climate change will inflict a hard-to-imagine degree of social, political, and economic instability. As extreme weather worsens, regulations aimed at managing the effects of climate change could reach new levels of strictness—along with much stiffer penalties for defying those regulations. All this will call into question mining companies' ability to continue operating successfully at some of their current locations.

•             Geopolitics: Tariff wars, unstable governments, politicisation of mines, the rise of nationalism, and other geopolitical dynamics may be shifting more quickly than miners realise. Additionally, in the near term, new regulations aimed at boosting citizens' direct share in mining value creation have intensified the uncertainty surrounding miners' operations and planning.

•             Discovery: The number of giant and major discoveries is shrinking, despite a multi-fold boost in spending. What's more, discoveries are generally lower grade and in increasingly remote locations, challenging miners' ability to secure access to economically viable deposits.

Many of these uncertainties are interrelated. And, within each category, uncertainties can vary with factors such as geography and timeframe.

Consider automation of equipment and operations. This approach offers long-term savings, minimises dangerous physical work, and helps miners that can't find workers to operate the equipment or perform those tasks. However, automation has the potential to trigger violent uprisings in local economies where people depend heavily on mining work to feed themselves and their families, especially where they have strong support from unions.

Plus, greater use of technologies poses increased cybersecurity risks, and automated operations are vulnerable to power outages inflicted by extreme weather events.

Just understanding these new uncertainties and their interconnections is not enough; miners must also track them closely to identify the ‘tipping point' at which decisive action needs to be taken. That way, companies can better gauge their exposure, estimate the likelihood of a risk materialising, and distinguish between highly dangerous and more manageable risks. 

Craft strategic responses

Using scenarios and simulations, mining companies can de-average their approach to the new uncertainties facing them, and build strategies for responding effectively. The more diverse their options for responding—hedging, risk sharing, insuring certain risks, rebalancing their portfolio to minimize exposure to the new uncertainties—the better they can craft robust strategies for managing multiple manifestations of uncertainty.

Some mining companies are already doing this. Take Rio Tinto. Through its Mine of the Future programme, it has built one of the world's largest robotic installations and deployed the world's first autonomous long-distance railway network for transporting iron ore to ports in Western Australia.

BHP Billiton plans to deploy giant autonomous cargo ships in the next decade. And Roy Hill is using automated blast-hole drilling to maximise efficiency and enhance safety.

By taking such action early these companies are gathering extensive volumes of data from their automated equipment and operations, which helps them optimise equipment usage. Equally important, they are preparing themselves to survive the labour shortages expected at some of these sites.

Indeed, by automating some processes and equipment, miners may find it easier to attract young people who would rather focus on more strategic work—like managing relations with governments and communities near the company's mine sites.

To manage macroeconomic uncertainties, miners can formulate strategies that centre on anticipating recessions and pivot their portfolio toward metals likely to be in demand.

Research from BCG's latest Value Creation in Mining report suggests that, toward this end, leading miners have become more prudent in their cash-allocation practices. Some are focusing on the most economically attractive projects in their pipeline. Others are allocating cash to merger and acquisition activities versus engaging in high-risk brownfield developments.

Consider Northern Star Resources, an Australian gold producer which grew by acquiring junior companies and mines divested by Newmont Mining and Barrick Gold. Most recently, it purchased Sumitomo's Pogo mine in Alaska. By using its cash to strategically time acquisitions of smaller holdings over several years, Northern Star boosted its enterprise value 16-fold during 2013-2018—and has delivered an average total shareholder return (TSR) of almost 70% per year during this period. This is even more stunning when compared to the negative TSR of -4% afflicting the overall metals and mining peer group during the same time frame.

Build agility and resilience

To execute their strategies and quickly recover from shocks that prove unavoidable, mining companies must build their agility and resilience. This effort should be the job of the whole company—including the board of directors and the senior leadership team. Miners should not leave it to particular functions such as a ‘risk' department, which often resides in the finance group and hence might evaluate uncertainties from an overly narrow perspective.

A key element of building agility and resilience involves strengthening specific capabilities. Proactive risk response and recovery—not just prevention—is crucial. Most important, miners must design procedures for dealing with uncertainties—such as defining clear ‘tipping points' that trigger a response.

For example, if a specific technology innovation (such as robotics) is successfully implemented by several top competitors, the mining company can view this as a trigger for considering investments in the technology. Forward-thinking miners will also actively stress-test and simulate uncertainty-embracing behaviours—such as setting up climate-secure data centres and training a top team in cyber-resiliency—so organizational ‘muscle memory' kicks in the moment a challenge arises.

For mining executives today, developing an organisation-wide ability to respond effectively to new uncertainties counts among their toughest leadership challenges. But we believe companies can gain an Uncertainty Advantage - if they understand and track the new risks hitting their industry, craft the right strategic responses, and strengthen their agility and resilience.

The payoff is that they will advance from merely reacting to and coping with uncertainty to actually thriving under conditions where others fail.

*Hans Kuipers (Kuipers.Hans@bcg.com)  is a managing director and partner at Boston Consulting Group,. Tycho Mőncks (Moencks.Tycho@bcg.com) is a partner at BCG and can be reached at Moencks, and Alison Sander (Sander.Alison@bcg.com) is the director at BCG's Centre for Sensing & Mining the Future.

 

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