The 21st Century presents a different social and economic landscape for mining companies than in decades past. Increased public awareness and media scrutiny have shone a spotlight on mining activities; while the resource sector is still not known as a particularly branding-intensive industry, major mining companies now have a more defined brand presence than ever before and must engage with public and market perceptions more proactively to protect the credibility of their names.
But how can a mining company manage its brand and what tangible value can be ascribed to a strong brand? This is the speciality of London-headquartered business valuation and strategy consultancy Brand Finance, which stakes its own name on the importance of brand value and its link to financial performance.
In February, Brand Finance published its Mining, Iron and Steel 25 league table for 2018, ranking the 25 strongest mining and metals brands in the world. The rankings saw BHP (newly re-branded from BHP Billiton) claim the top spot, demonstrating the brand’s strong recovery after the Samarco mine tailings disaster in Brazil at the end of 2015, and the success of its ‘Think Big’ marketing campaign. The world’s largest mining company, Glencore, meanwhile, slipped from first into second place despite a strong overall financial performance over the last year.
Here, Brand Finance Australia managing director Mark Crowe discusses the methods behind the company’s brand valuations, and some of the major movements in the mining brand league table in the last year.
Chris Lo (CL): How does Brand Finance calculate the value of mining brands?
Mark Crowe (MC): Brand Finance calculates the value of brands in its league tables using the Royalty Relief approach – a brand valuation method compliant with the industry standards set in ISO 10668. Royalty Relief is a proven and robust brand valuation methodology that is specifically recommended by the IVSC [International Valuation Standards Council] for use in IFRS [International Financial Reporting Standards] reporting.
This approach involves estimating the likely future revenues that are attributable to a brand by calculating a royalty rate that would be charged for its use, to arrive at a ‘brand value’ understood as a net economic benefit that a licensor would achieve by licensing the brand in the open market.
CL: What are the steps involved in this calculation?
MC: We calculate brand strength using a balanced scorecard of metrics assessing marketing investment, stakeholder equity and business performance. Brand strength is expressed as a Brand Strength Index (BSI) score on a scale of zero to 100.
We determine the royalty range for each industry, reflecting the importance of brand to purchasing decisions. In luxury, the maximum percentage is high; in the extractive industry, where goods are often commoditised, it is lower. This is done by reviewing comparable licensing agreements sourced from Brand Finance’s extensive database.
We then calculate royalty rate. The BSI score is applied to the royalty range to arrive at a royalty rate. For example, if the royalty range in a sector is 0%-5% and a brand has a BSI score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4%.
We determine brand-specific revenues by estimating a proportion of parent company revenues attributable to a brand, and forecast revenues using a function of historic revenues, equity analyst forecasts and economic growth rates. We then apply the royalty rate to the forecast revenues to derive brand revenues. Brand revenues are discounted post-tax to a net present value which equals the brand value.
CL: How do the drivers of brand value differ for the mining sector, when compared with other industries?
MC: Mining is a highly commoditised industry where the role of brand is not as prominent compared to, say, brands in consumer goods and retail. This is evident by the low brand value to enterprise value ratio in mining, which is typically around 3%-4%. This compares to a 20%-30% ratio for some of the world’s largest brands.
Brand however has an important strategic role, not so much in terms of sales, which are very much price-driven, but rather stakeholder relations beyond customers, including government, media and the wider public, especially those communities impacted by mining activity. A strong, well-regarded brand can achieve more favourable outcomes through the ability to influence the opinions of stakeholders whose support can be critical, for example in gaining licences and concessions that drive revenues and cost savings.
CL: What was it about BHP’s performance and ‘Think Big’ campaign that put it on the top spot of your 2018 league table?
MC: BHP’s ‘Think Big’ campaign followed on the re-branding from BHP Billiton to BHP, which focused on demonstrating the role of BHP in Australia’s economy and community, targeting some of the key stakeholders in mining. The re-branding appears to be paying off as BHP not only increased its brand value but also its brand strength, which is where the immediate impact of the campaign would be measured.
The re-branding revived the iconic name of BHP, which has a long heritage, particularly in the Australian market. The re-branding drove awareness and possibly perception through promoting the strong and favourable associations BHP enjoyed historically for building a bigger Australia, along with a reputation for innovation and ideas. In addition, the campaign has highlighted the contribution and commitment BHP has made to communities in which it operates.
CL: Why did Glencore lose brand value this year, despite its solid financial performance?
MC: The brand suffered a large erosion in brand strength from 62.9 to 55.3, caused in part by widespread mentions of Glencore in association with the Paradise Papers released in November. Even though Glencore performed well financially over the last year, the impact of the drop in brand strength saw its value drop by 11% to $3.7bn.
CL: What role do mergers, acquisitions and joint venture deals play in the value of mining brands?
MC: The mining industry has historically been quite active with M&As. The impact of such activity is highlighted this year through the merger between Baosteel and Wuhan Iron and Steel, which has resulted in China’s biggest steelmaker – Baowu Steel – and fuelled the fastest growth in the Brand Finance Mining, Iron & Steel 25 league table. Thanks to increased revenue, Baowu Steel’s brand value grew 103% to $2bn.
The proposed joint venture between Thyssenkrupp and Tata is likely to have a material impact on brand value over the next year.
CL: What tangible value can companies ascribe to well-considered corporate social and environmental responsibility policies?
MC: In assessing brand equity, we include measures for brand’s environmental, community and governance performance. The scores have a tangible impact on a brand’s strength which then has a significant influence on the brand’s value. Brand reputation and trust is paramount in negotiating mining leases, addressing government and community concerns while helping to promote an organisation’s environmental, corporate and social credentials.
CL: Are digital technologies like artificial intelligence and data analytics starting to play a larger role in developing mining brands?
MC: A strong and progressive brand needs to invest in new technologies and there is no doubt AI and data analytics are playing an increasingly important role in the mining sector. There is particular cause for disruption in mining as it requires an enormous amount of capital investment to operate successfully. The bulk of the work undertaken by mining machinery can be more effectively replaced by a technology with the ability to learn algorithms that are programmed for mineral prospecting and exploration.
A mining brand at the forefront of the charge in seizing the AI revolution is Rio Tinto, which uses driverless trucks, unmanned drilling rigs, and has already successfully tested its first fully autonomous train on the iron ore network in Pilbara, Western Australia.