Mine 2020, PwC’s 17th annual review of global trends in the mining industry, described the top 40 mining companies as able to “resource the future”, highlighting their role in supporting the broader economy.
“As we move further into 2021, miners are taking a long-term view by reorganising their portfolios to fill forecasted supply deficits for the minerals and metals of the future,” says Alan Langridge, Technology and Expert Solutions Regional Director, APAC at Worley. He believes now is the right time for miners to position themselves for competitive advantage. “Interest rates are low, commodity prices are favourable, and the industry is entering a COVID-19 rebound,” he adds.
With many miners sitting on large orebodies, the temptation is to realise the greatest revenue in the fastest possible timeframe, while remaining financially optimised. But could there be a better strategy to create and realise value?
The problem with big projects
Owners of large projects tend to optimise purely on net present value (NPV). This means choosing a project that gives economies of scale, with low operating costs that result in the greatest long-term economic rewards.
“Large-scale, complex ventures can take many years to develop, even longer to achieve payback and usually involve significant upfront capital expenditure,” says Langridge. “While these projects provide big capital returns, the patience required to get to that point translates into higher risk, especially when orebodies are complex or difficult to assess and access from the surface. Some orebodies are large enough to warrant a project seeking to maximise NPV, but they often come with significant development challenges.”
That’s why, according to Langridge, we need an alternative to the straight choice between mega projects – and the associated risks – and leaving the product in the ground.
Thinking smaller than we’ve ever thought before
There’s a growing appreciation that a staged approach can facilitate earlier cash flow from operations, reduce risk, and still achieve solid financial returns based on a lower cost of entry. A mine that’s initially developed with the minimum viable features can lead to significant success, but it needs a different lens. It needs us to think small.
Langridge explains: “By thinking small and minimising a starter project, we can reduce initial costs, de-risk the project – and still enable a pathway to build a bigger mine in the future. Miners are no longer racing to get the highest overall return or the absolute maximum net present value. Or at least not right away.”
Instead, mining companies are pursuing development strategies that are acceptable on a corporate, social, financial and operational level; that are sustainable and present a reduced development risk from the outset, especially amid times of uncertainty or opportunity. As Langridge puts it: “This is particularly valid for orebodies that are large and deep, because they often require high capital expenditure before the orebody is completely understood. When a project minimises the amount of upfront capital costs, you can get a mine up and running sooner and more cost-effectively. And with less initial sunk capital, you can better manage market fluctuations and uncertainties that exist in mining projects.”
How to find the minimum viable point for your project
So, how do minimum viable projects maximise potential and still earn a return? According to Langridge, it’s about ensuring the pieces fit together, combined with making decisions for the here and now, without incurring future costs. “Establishing this point is an art form in itself,” says Langridge. “You need to consider the limitations of each input; from energy supply to orebody knowledge, mining plans, off-take requirements, procurement and logistics through to construction, commissioning operations and closure. A lot goes into it.”
Driving the minimum viable point even lower can require some unconventional thinking. “We investigate alternative development approaches,” says Langridge. “For example, shared infrastructure, different commercial strategies and partnering with other companies and operations. It’s worth considering every option to bring the investment down at the outset.”
A balancing act
Once the pieces of a minimum viable project fit together, the second driver is to determine an economically viable minimum size project. It takes a two-fold approach, explains Langridge – the technical and the financial. “If your minimum viable design results in one person with a bucket shovelling rock, you’re unlikely to make enough money to pay anyone or fund the project,” he cautions.
Although he has used an extreme example, he says miners will inevitably reach a point where a project simply becomes unfeasible. “It’s a trade-off between how small things can be depending on project components. The balancing act is part and parcel of this approach. It becomes a model where your small-scale operations pay for most of the costs you delayed initially, though you need a margin because there’s upfront capital costs. There’s a trade-off on how much is spent versus how much is owned, and how small the project can be while still being operable,” says Langridge.
When to build bigger
Minimum viable projects offer the flexibility to sustain a functioning mine while learning practical lessons before committing to grander projects. But what happens when conditions expedite an increase in production?
“If you’ve designed your initial mine and plant well, then you can scale it. And should market forecasts remain positive, then other parts of your project can expand in whatever manner makes sense,” says Langridge. “With the groundwork already in place, we can base this on actual market needs and financial and operational drivers, and not a set of assumed financial and operational drivers in the future.”
He continues: “You may be better off developing three expansions over the life of your project. Or, if the market changes in unexpected ways, you might be better off delaying the expansion.” However, scalability doesn’t necessarily mean slowing the project down. If anything, he says, it accelerates the development schedule. “Getting proven technology into the base design allows you to identify where to carry heightened risk, or alternatively, to get the project entry point up and running and then evolve and innovate,” explains Langridge.
“It also delays some of the decisions around investment in technologies to a point where hopefully the price is 20 – 30% cheaper because of advancements in manufacturing. And if what you implement is a value enhancement, then it’ll give you a return immediately because it’s on an operating site – it’s not just a theoretical evaluation.”
The minimum viable project model is well suited to periods of uncertainty
With favourable movements in most commodity prices, the minimum viable project model appeals to both small and large miners because it could enable a larger number of projects to come to fruition.
“A smaller investment to get a minimum viable project started provides the flexibility to respond to the next movements in markets,” explains Langridge. “This approach helps companies realise solutions that facilitate cash-flow sooner, minimise entry capital cost and allow a project to pay its own way. It’s basically taking the mindset of a junior and select mid-tier mining company and applying this to a much larger project.
“Minimum viable projects are an easier investment decision at a time like this. And they’re proof that thinking small is a good way to get big projects right.”